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 that 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. Private operators are 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 or hourly basis reimbursed by unit-of-service.

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.

Also in the Community Services segment, ResCare has a growing business through ResCare HomeCare, which offers personalized services to seniors and individuals of all ages, physical conditions and cognitive abilities recovering from illness, injury, surgery, living with a chronic disability or dealing with the natural process of aging. We provide professional nursing, personal care and support, homemaking, respite and other services in the home, the hospital or long-term care facilities to augment the institutional care. Pay can be through insurance, contracts with hospitals, long-term care facilities or private pay from individuals and their families receiving the care.

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. All of such amounts are reflected as revenue, and all such direct costs are reflected as facility and program costs. 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 2006 Annual Report on Form 10-K. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first nine months of 2007, there were no material changes in the accounting policies and assumptions.

Results of Operations



                                 Three Months Ended         Nine Months Ended
                                    September 30               September 30
                                 2007         2006          2007          2006
                                             (Dollars in thousands)
Revenues:
Community Services (1)         $ 270,354    $ 238,618    $   781,856    $ 672,406
Job Corps Training Services       40,074       39,404        122,626      118,733
Employment Training Services      50,904       48,344        147,087      158,848
Other                              3,266        4,017         14,547       15,063
Consolidated                   $ 364,598    $ 330,383    $ 1,066,116    $ 965,050

Operating income (loss):
Community Services (1)         $  28,355    $  28,017    $    83,094    $  77,552
Job Corps Training Services        3,891        4,350         12,001       12,732
Employment Training Services       6,001        3,393         13,436       12,254
Other (2)                           (487 )       (483 )          990        1,325
Total Operating Expenses (3)     (15,035 )    (13,857 )      (45,137 )    (41,435 )
Consolidated                   $  22,725    $  21,420    $    64,384    $  62,428

Operating margin:
Community Services (1)              10.5 %       11.7 %         10.6 %       11.5 %
Job Corps Training Services          9.7 %       11.0 %          9.8 %       10.7 %
Employment Training Services        11.8 %        7.0 %          9.1 %        7.7 %
Other (2)                          (14.9 %)     (12.0 %)         6.8 %        8.8 %
Total Operating Expenses            (4.1 %)      (4.2 %)        (4.2 %)      (4.3 %)
Consolidated                         6.2 %        6.5 %          6.0 %        6.5 %

(2) Nine months ended September 30, 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 quarter ended September 30, 2007 increased 10.4% over the 2006 quarter. This increase was primarily related to acquisitions and organic growth in the Community Services segment, as well as new contracts in the Employment Training Services segment. Consolidated revenues for the nine months ended September 30, 2007 increased 10.5% over the same period in 2006. The increase is primarily related to acquisitions and organic growth in the Community Services segment, which were partially offset by 2006 Employment Training Services contract non-renewals and

unfavorable modifications to existing contracts, generally effective July 1, 2006. Revenues are more fully described in the segment discussions.

Consolidated operating income for the quarter ended September 30, 2007 increased 6.1% over the same period in 2006, primarily due to revenue increases. Operating margin decreased to 6.2% for the 2007 quarter compared to 6.5% for the 2006 quarter. The decrease in operating margin was primarily attributed to higher share-based compensation and insurance related costs and low margins on the ramp up and integration of our Kelly Home Care Services acquisition in March 2007.

Consolidated operating income for the nine months ended September 30, 2007 increased 3.1% over the same period in 2006, while operating margin decreased to 6.0% for the 2007 nine month period compared to 6.5% for the nine months of 2006. The margin decrease was primarily attributed to incremental share-based compensation expense of $4.0 million, higher insurance-related costs of $1.1 million, a $0.3 million goodwill impairment charge in the quarter ended March 31, 2007 related to our charter schools, and the lower overall margins associated with our Kelly Home Care Services acquisition. Included in consolidated operating income are total operating expenses, which represent corporate general and administrative expenses, other operating income and expenses. As a percentage of total revenue, the expenses were 4.1% and 4.2% in the quarter and nine months ended September 30, 2007, respectively, and 4.2% and 4.3% for the same periods in 2006.

Net interest expense was $4.5 million for the quarters ended September 30, 2007 and 2006. Net interest expense increased $0.6 million for the nine months ended September 30, 2007, compared to the same period in 2006. The increase for the nine month period in 2007 was primarily attributable to increased average borrowing levels due to acquisitions.

Our effective income tax rate for the quarter and nine months ended September 30, 2007 is 36.7%, as compared to 36.6% and 38.5% for the quarter and nine months ended September 30, 2006, respectively. The 2006 effective rates were primarily higher due to the reenactment of the Work Opportunity Tax Credit in December 2006, which was not included in the quarterly or nine month 2006 tax rates. The 2006 effective tax rates were partially reduced for the reversal of certain income tax reserves upon the expiration of the applicable statute of limitations for certain tax filing positions, which was recorded in the third quarter of 2006.

Community Services

Community Services revenues for the quarter and nine months ended September 30, 2007 increased by 13.3% and 16.3%, respectively, over the same periods in 2006. These increases were due primarily to acquisitions in 2006 and 2007. Operating margin decreased from 11.7% in the third quarter of 2006 to 10.5% in the same period in 2007 and from 11.5% to 10.6% for the nine months ended September 30, 2007, over the comparable period in 2006. The decreased margin percentages were primarily due to incremental share-based compensation expense of $0.4 million in the quarter and $2.0 million in the nine month period. Also, higher insurance related costs of $2.3 million in the quarter and $4.6 million in the nine month period, as well as the lower overall margins associated with our Kelly Home Care Services acquisition and pharmacy business contributed to the lower 2007 margin.

Job Corps Training Services

Job Corps Training Services revenues increased 1.7% and 3.3%, respectively, for the quarter and nine months ended September 30, 2007, over the same periods in 2006 due principally to contractual and spending increases. Operating margin decreased from 11.0% in the third quarter of 2006 to 9.7% in the same period in 2007 and from 10.7% to 9.8% for the nine months ended September 30, 2007, over the comparable period in 2006. These decreases were primarily due to higher administration costs being allocated in 2007 versus 2006, which were included in corporate general and administrative expenses in the prior year.

Employment Training Services

Employment Training Services revenues increased 5.3% in the quarter ended September 30, 2007 over the same period in 2006, due primarily to new 2007 contracts in Arizona and Indiana, coupled with 2006 contract non-renewals and concessions in modifications to existing contracts, which were generally effective July 1, 2006. Revenues for the nine months ended September 30, 2007 decreased 7.4% from the same period in 2006 due primarily to the higher 2006 revenues prior to the effective dates of contract non-renewals and concessions in modifications to existing contracts. Operating margin increased from 7.0% in the third quarter of 2006 to 11.8% in the same period in 2007, due primarily to performance incentives on certain projects, as well as lower than expected start-up costs for certain contracts. Operating margin increased from 7.7% in the nine months ended September 20, 2006 to 9.1% in the same period in 2007. This increase was primarily related to the factors noted above for the quarter ended September 30, 2007, partially offset by increased share-based compensation expense.

Other

Our Other segment reflects activity for operating schools and international job training and placement agencies. Revenues from the segment decreased 18.7% and 3.4% for the quarter and nine months ended September 30, 2007 compared to the same periods in 2006, due primarily to a lost contract in Florida, which was effective July 1, 2007. Operating income was flat for the quarter ended September 30, 2007, versus the same period in 2006. Operating income decreased $0.3 million, or 25.3% in the nine months ended September 30, 2007 versus the same period in 2006, due primarily to a $0.3 million goodwill impairment charge related to our charter schools, which was recorded in March 2007.

Corporate General and Administrative Expenses

Corporate general and administrative expenses for the quarter ended September 30, 2007 were $15.0 million, or 4.1% of total revenues, compared to $13.9 million, or 4.2% of total revenues, for the same period in 2006. The increase in expenses for the third quarter of 2007 was primarily related to corporate office relocation expenses of $0.5 million and higher compensation accruals. Expenses for the nine months ended September 30, 2007 were $45.1 million, or 4.2% of total revenues, compared to $41.4 million, or 4.3% of total revenues, for the same period in 2006. The 2007 dollar increase resulted primarily from $1.6 million of incremental share-based compensation expense, $1.0 million of corporate office relocation expenses, as well as higher compensation related accruals.

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 third quarter of 2007 and $0.4 million for the nine months ended September 30, 2007, compared to $0.1 million and $2.6 million for the same periods a year ago. The net loss from discontinued operations for the nine months ended September 30, 2007 includes pretax operational losses of $0.7 million, offset by favorable adjustments of $0.1 million to our exit cost accrual, and a tax benefit of $0.2 million.

The net loss from discontinued operations for the nine months ended September 30, 2006, includes pretax operational losses of $2.0 million, a pretax charge of $1.6 million for an exit cost accrual, and $0.6 million impairment charge for impaired leaseholds and furniture, offset by a tax benefit of $1.6 million.

Financial Condition, Liquidity and Capital Resources

Total assets increased 7.1% in 2007 over balances at December 31, 2006. This increase was primarily due to growth from prior year and current year acquisitions. Goodwill and other intangible assets increased $29.2 million and $5.7 million, respectively, from December 31, 2006, as a result of the acquisitions completed during the first nine months of 2007.

Cash and cash equivalents were $9.8 million at September 30, 2007, as compared to $5.5 million at December 31, 2006. Cash provided from operations for the nine months ended September 30, 2007 was $67.0 million compared to $22.7 million for the nine months ended September 30, 2006. The increase in 2007 from 2006 was primarily the result of the 2006 funding of the accounts receivable and other working capital requirements for the January 3, 2006 Workforce Services acquisition, as well as increases in net income, depreciation and share-based compensation.

Net accounts receivable at September 30, 2007 increased to $201.0 million, compared to $197.7 million at December 31, 2006 due to the organic growth and acquisitions in the Community Services segment. Days revenue in net accounts receivable were 49.5 days at September 30, 2007 compared with 51.9 days at December 31, 2006. The decrease in the number of days is attributable to higher collections in our Employment Training Services and Community Services segments.

Capital expenditures were higher than our historical experience due primarily to increased leasehold improvements related to the relocation of our corporate office. We invested $16.2 million in the first nine months of 2007 on purchases of property and equipment compared to $11.7 million in the same period in 2006. We also used $33.4 million on acquisitions.

Our financing activities during the first nine months of 2007 included net payments on the revolver of $15.0 million, as well as net payments of debt and capital lease obligations of $0.4 million. This compares to net borrowings on the revolver in the same period for 2006 of $59.5 million, primarily due to the Workforce Services acquisition. Stock option exercise activity resulted in $2.1 million in proceeds for the 2007 period versus $6.7 million in 2006.

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 September 30, 2007, we had irrevocable standby letters of credit in the principal amount of $55.8 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 September 30, 2007, we had $104.2 million available under the revolver with an outstanding balance of $40.0 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 September 30, 2007, the weighted average interest rate was 7.14%. Letters of credit had a borrowing rate of 1.38% as of September 30, 2007. The commitment fee on the unused balance was 0.3%. 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 covenants as of September 30, 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 62% through Medicaid reimbursement, 12% from the DOL and 26% 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.