Preliminary Note Regarding Forward-Looking Statements

Statements in this report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In addition, we expect to make such forward-looking statements in future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval. These forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, capital structure and other financial items; (2) statements of plans and objectives of ResCare or our management or Board of Directors; (3) statements of future actions or economic performance, including development activities; (4) statements of assumptions underlying such statements; and (5) statements about the limitations on the effectiveness of controls. Words such as "believes", "anticipates", "expects", "intends", "plans", "targeted", and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Some of the events or circumstances that could cause actual results to differ from those discussed in the forward-looking statements are discussed in the " Risk Factors" section in Part II, Item 1A of this Report and in our 2006 Annual Report on Form 10-K. Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made.

The following Management's Discussion and Analysis ("MD&A") section is intended to help the reader understand ResCare's financial performance and condition. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes. All references in this MD&A to "ResCare", "our company", "we", "us", or "our" mean Res-Care, Inc. and unless the context otherwise requires, its consolidated subsidiaries.

Overview of Our Business

We receive revenues primarily from the delivery of residential, support, training and educational services to various populations with special needs. We have three reportable operating segments: (i) Community Services; (ii) Job Corps Training Services and (iii) Employment Training Services. Management's discussion and analysis of each segment is included below. Further information regarding our segments is included in Note 8 of the Notes to Condensed Consolidated Financial Statements.

Revenues for our Community Services operations are derived primarily from state Medicaid programs, other government agencies, commercial insurance companies and from management contracts with private operators, generally not-for-profit providers, who contract with state government agencies and are also reimbursed under the Medicaid program. Our services include social, functional and vocational skills training, supported employment and emotional and psychological counseling for individuals with intellectual or other disabilities. We also provide respite, therapeutic and other services

on an as-needed basis or hourly basis through our periodic in-home services programs that are reimbursed on a unit-of-service basis.

Reimbursement varies by state and service type, and may be based on a variety of methods including flat-rate, cost-based reimbursement, per person per diem, or unit-of-service basis. Generally, rates are adjusted annually based upon historical costs experienced by us and by other service providers, or economic conditions and their impact on state budgets. At facilities and programs where we are the provider of record, we are directly reimbursed under state Medicaid programs for services we provide and such revenues are affected by occupancy levels. At most facilities and programs that we operate pursuant to management contracts, the management fee is negotiated with the provider of record.

We operate vocational training centers under the federal Job Corps program administered by the Department of Labor (DOL) through our Job Corps Training Services operations. Under Job Corps contracts, we are reimbursed for direct facility and program costs related to Job Corps center operations, allowable indirect costs for general and administrative costs, plus a predetermined management fee. The management fee takes the form of a fixed contractual amount plus a computed amount based on certain performance criteria. All of such amounts are reflected as revenue, and all such direct costs are reflected as facility and program costs. Final determination of amounts due under Job Corps contracts is subject to audit and review by the DOL, and renewals and extension of Job Corps contracts are based in part on performance reviews.

We operate job training and placement programs that assist disadvantaged job seekers in finding employment and improving their career prospects through our Employment Training Services operations. These programs are administered under contracts with local and state governments. We are typically reimbursed for direct facility and program costs related to the job training centers, allowable indirect costs plus a fee for profit. The fee can take the form of a fixed contractual amount (rate or price) or be computed based on certain performance criteria. The contracts are funded by federal agencies, including the DOL and Department of Health and Human Services.

Application of Critical Accounting Policies

Our discussion and analysis of the financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

We continually review our accounting policies and financial information disclosures. A summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in our Form 10-K filing for the year ended December 31, 2006. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three months of 2007, there were no material changes in the accounting policies and assumptions.

Results of Operations

                                   Three Months Ended
                                        March 31
                                   2007           2006
                                 (Dollars in thousands)
Revenues:
Community Services (1)         $    244,609     $ 211,967
Job Corps Training Services          41,679        39,837
Employment Training Services         46,661        55,218
Other                                 5,546         5,289
Consolidated                   $    338,495     $ 312,311

Operating income:
Community Services (1)         $     28,396     $  24,268
Job Corps Training Services           4,078         4,262
Employment Training Services          3,070         4,437
Other (2)                               117           649
Total Operating Expenses (3)        (14,990 )     (13,752 )
Consolidated                   $     20,671     $  19,864

Operating margin:
Community Services (1)                 11.6 %        11.4 %
Job Corps Training Services             9.8 %        10.7 %
Employment Training Services            6.6 %         8.0 %
Other (2)                               2.1 %        12.3 %
Total Operating Expenses               (4.4 )%       (4.4 )%
Consolidated                            6.1 %         6.4 %

(2) Three months ended March 31, 2007 includes a $0.3 million goodwill impairment charge related to our charter schools reporting unit.

(3) Represents corporate general and administrative expenses, other operating (income) and expenses.

Consolidated

Consolidated revenues for the first quarter of 2007 increased 8% over the same period in 2006. The increase is primarily related to acquisitions completed in 2006 and 2007 and organic growth. Revenues are more fully described in the segment discussions.

Consolidated operating income for the first quarter of 2007 increased 4% compared to the same period in 2006, due primarily to revenue growth in the Community Services segment, which was partially offset by reduced revenues in the Employment Training Services segment. Operating margin decreased from 6.4% in the first quarter of 2006 to 6.1% in the comparable 2007 period. The decrease in margin was primarily attributed to incremental share-based compensation expense of $1.3 million, the $0.3 million goodwill impairment charge and contract non-renewals occurring after the first quarter of 2006 in the Employment Training Services segment, which were partially offset by a greater amount of

higher margin periodic in-home services business. As a percentage of total revenues, total operating expenses were 4.4% in the first quarter of 2007 and 2006.

Net interest expense increased $0.1 million for the first quarter of 2007 compared to the same period in 2006. This increase was attributable to increased average borrowing levels.

Our effective income tax rate for the first quarter of 2007 is 36.7%, as compared to 39.5% in 2006. The decrease in the effective rate is primarily due to the reenactment of the Work Opportunity Tax Credit in December 2006, which was not included in the 2006 first quarter tax rate.

Community Services

Community Services revenues increased by 15% in the first quarter of 2007 over the same period in 2006. This increase was due primarily to acquisitions in 2006 and 2007, which were primarily in the periodic in-home services. Periodic in-home services revenues increased $12.3 million, or 25.7%, from the year earlier quarter. Operating margin increased from 11.4% in the first quarter of 2006 to 11.6% in the same period in 2007 due primarily to the higher margin periodic in-home services business and reduced insurance and legal costs, which were partially offset by $0.7 million of share-based compensation expense allocations.

Job Corps Training Services

Job Corps Training Services revenues increased 5% for the first quarter 2007 over the same period in 2006 due principally to contractual and spending increases. Operating margins decreased from the comparable period in 2006 due to higher administration costs being allocated in 2007 versus 2006.

Employment Training Services

Employment Training Services revenues decreased 16%, or $8.6 million, in the first quarter of 2007 over the same period in 2006 due primarily to contract non-renewals and concessions in modifications to existing contracts, which were generally effective July 1, 2006. Operating income for this segment decreased $1.4 million over the year earlier period, due to revenue shortfalls mentioned above, higher costs to initiate the New York Back to Work program, and $0.1 million of share-based compensation expense allocations.

Other

Our Other segment reflects activity for operating schools and international job training and placement agencies. Revenues from the segment increased $0.3 million, or 5%, over the same period in 2006 due primarily to higher enrollments. Operating income decreased $0.5 million due primarily to a $0.3 million goodwill impairment charge related to our charter schools. We also incurred higher costs in ramping up our international operation in Haiti.

Discontinued Operations

The discontinued operations relate to the Community Services segment's exit from the District of Columbia and the state of New Mexico, which were effective on March 31, 2006 and October 31, 2006, respectively.

Net loss from discontinued operations was $0.1 million in the first quarter of 2007 compared to $2.2 million for the same period a year ago. The net loss from discontinued operations for the first quarter of 2007 includes pretax operational losses of $0.4 million, and favorable adjustments of $0.2 million to our exit cost accrual, offset by a tax benefit of $0.1 million.

The 2006 net loss from discontinued operations includes pretax operational losses of $1.4 million, a pretax charge of $1.5 million for an exit cost accrual, and $0.7 million impairment charge for impaired leaseholds and furniture, offset by a tax benefit of $1.4 million.

Financial Condition, Liquidity and Capital Resources

Total assets increased 4% in 2007 over 2006. This increase was primarily due to growth from prior year and current year acquisitions. Goodwill and other intangible assets increased $15.9 million and $6.1 million, respectively, from December 31, 2006, as a result of the acquisitions completed during the first quarter of 2007.

Cash and cash equivalents were $7.1 million at March 31, 2007, as compared to $5.5 million at December 31, 2006. Cash provided from operations for the quarter was $22.6 million compared to $3.3 million used in operating activities for the three months ended March 31, 2006. The increase in 2007 from 2006 was primarily the result of the 2006 first quarter funding of the accounts receivable and other working capital requirements for the January 3, 2006 Workforce Services acquisition.

Net accounts receivable at March 31, 2007 increased to $199.7 million, compared to $197.7 million at December 31, 2006 due to timing of payments related to Job Corps contracts and the organic growth and acquisitions in the Community Services segment. Days revenue in net accounts receivable were 51 days at March 31, 2007 compared with 52 days at December 31, 2006. The decrease in the number of days is attributable to higher collections in our Employment Training Services segment.

Capital expenditures were consistent with our historical experience, comprised principally of maintenance capital expenditures, with a less significant amount expended for strategic systems. We invested $5.1 million in the first quarter of 2007 on purchases of property and equipment. We also used $21.0 million on acquisitions.

Our financing activities during the quarter included net borrowings on the revolver of $60.0 million, offset by payments of debt and capital lease obligations of $55.6 million. Stock option exercise activity resulted in $0.6 million in proceeds.

Our capital requirements relate primarily to our plans to expand through selective acquisitions and the development of new facilities and programs, and our need for sufficient working capital for general corporate purposes. Since most of our facilities and programs are operating at or near capacity, and budgetary pressures and other forces are expected to limit increases in reimbursement rates we receive, our ability to continue to grow at the current rate depends directly on our acquisition and development activity. We have historically satisfied our working capital requirements, capital expenditures and scheduled debt payments from our operating cash flow and utilization of our credit facility.

As of March 31, 2007, we had irrevocable standby letters of credit in the principal amount of $48.9 million issued primarily in connection with our insurance programs.

We have a $200 million revolving credit facility, which can be increased to $250 million at our option. The credit facility expires on October 3, 2010 and will be used primarily for working capital purposes, letters of credit required under our insurance programs and for acquisitions. The credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries' assets.

As of March 31, 2007, we had $91.1 million available under the revolver with an outstanding balance of $60.0 million. Outstanding balances bear interest at 1.38% over the London Interbank Offered Rate (LIBOR) or other bank developed rates at our option. As of March 31, 2007, the weighted average interest rate was 6.73%. Letters of credit had a borrowing rate of 1.38% as of March 31, 2007. The commitment fee on the unused balance was .30%. The margin over LIBOR and the commitment fee are determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

The credit facility contains various financial covenants relating to net worth, capital expenditures and rentals and requires us to maintain specified ratios with respect to our interest and leverage. We are in compliance with our debt convenants as of March 31, 2007. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon the maintenance of continued profitability and/or reductions of amounts borrowed under the facility, and continued cash collections.

Operating funding sources are approximately 70% through Medicaid reimbursement, 12% from the DOL and 18% from other payors. We believe our sources of funds through operations and available through the credit facility described above will be sufficient to meet our working capital, planned capital expenditure and scheduled debt repayment requirements for the next twelve months.

We had no significant off-balance sheet transactions or interests in 2007.

Impact of Recently Issued Accounting Pronouncements

See Note 12 of the Notes to Condensed Consolidated Financial Statements.