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", "targets", 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 2008 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 complements, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes. All references in 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, training, educational and support services to various populations with special needs. Our programs include an array of services provided in both residential and non-residential settings for adults and youths with intellectual, cognitive or other developmental disabilities, and youths who have special educational or support needs, are from disadvantaged backgrounds, or have severe emotional disorders, including some who have entered the juvenile justice system. We also offer, through drop-in or live-in services, personal care, meal preparation, housekeeping and transportation to the elderly in their own homes. Additionally, we provide services to welfare recipients, young people and people who have been laid off or have special barriers to employment, to transition into the workforce and become productive employees.

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 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 to individuals with special needs and to older people in their homes. These services are provided on an as-needed basis or hourly basis through our periodic in-home services programs.

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. Through ResCare HomeCare, we also provide in-home services to seniors on a private pay basis. We are concentrating growth efforts in the home care private pay business to further diversify our revenue streams.

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.

Outlook

We provide a variety of vital human services and derive a significant portion of our revenue from state and federal government sources. Historically, strong demand for the services we provide continues during cyclical economic downturns such as the ongoing crisis in the financial markets and general recessionary environment. Despite cost containment efforts, many states are dealing with budget deficits or shortfalls as a result of current economic conditions, including their Medicaid budgets that fund a significant portion of the services we provide.

States continue to evaluate the impact of the federal stimulus plan on their budgets for human services. In general, we believe the stimulus will be advantageous to the states. We are actively working with state governments and at the federal level, and will continue to monitor developments. ResCare may also benefit from opportunities for additional services and contracts as a result of the stimulus plan.

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 of America (U.S. GAAP). The preparation of these financial statements requires us to make estimates and assumptions 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 could differ from those 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 2008 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 three months of 2009, there were no material changes in the critical accounting policies and assumptions.

Results of Operations



                                   Three Months Ended
                                        March 31
                                   2009           2008
                                 (Dollars in thousands)
Revenues:
Community Services             $    281,423     $ 268,872
Job Corps Training Services          40,587        41,695
Employment Training Services         55,066        53,075
Other (1)                            13,751        11,757
Consolidated                   $    390,827     $ 375,399

Operating income:
Community Services             $     32,107     $  29,583
Job Corps Training Services           3,176         3,085
Employment Training Services          4,603         4,918
Other (1)                              (881 )         835
Total Operating Expenses (2)        (15,642 )     (14,772 )
Consolidated                   $     23,363     $  23,649

Operating margin:
Community Services                     11.4 %        11.0 %
Job Corps Training Services             7.8 %         7.4 %
Employment Training Services            8.4 %         9.3 %
Other (1)                              (6.4 )%        7.1 %
Total Operating Expenses (2)           (4.0 )%       (3.9 )%
Consolidated                            6.0 %         6.3 %

(2) Represents corporate general and administrative expenses, as well as other operating (income) and expenses related to the corporate office.

Consolidated

Consolidated revenues for the quarter ended March 31, 2009 increased $15.4 million, or 4.1%, over the same period in 2008. This increase was primarily related to acquisitions in the Community Services and Other segments, as well as new contracts in the Employment Training Services segment. Revenues are more fully described in the segment discussions.

Consolidated operating income, which includes corporate general and administrative expenses, for the quarter ended March 31, 2009, was $23.4 million compared to $23.6 million over the same period in 2008. Consolidated operating margins were 6.0% and 6.3% for the quarterly periods in 2009 and 2008, respectively, due primarily to lower operating margins in the Employment Training Services segment.

Net interest expense decreased $0.3 million for the first quarter of 2009 over the same period in 2008. The decreases were attributable to lower rates. Our effective income tax rate for the three months ended March 31, 2009 was 36.6% as compared to 36.5% over the same period in 2008.

Community Services

Community Services revenues for the quarter ended March 31, 2009 increased by $12.6 million, or 4.7%, over the same period in 2008. This increase was due primarily to acquisition growth, which was partially offset by softness in the HomeCare business. Operating margin increased from 11.0% in the first quarter of 2008 to 11.4% in the same period in 2009 due primarily to effective cost containment.

Job Corps Training Services

Job Corps Training Services revenues for the quarter ended March 31, 2009 decreased $1.1 million, or 2.7%, from the same period in 2008 primarily due to decreased spending. Operating margin increased from 7.4% in the first quarter of 2008 to 7.8% in the same period in 2009 primarily due to a reduction in general and administrative expenses related to travel and professional services. In January 2009, we were informed the contract to operate the Pittsburgh Job Corps center had been awarded to another operator through the re-bidding process. Annual revenues for this contract are approximately $17 million. Our contract expires on June 30, 2009. We were informed in April 2009 the contract to operate the Treasure Island Job Corps center had been awarded to another operator through the re-bidding process. Annual revenues are approximately $17 million. Our contract expires on May 31, 2009.

Employment Training Services

Employment Training Services revenues increased $2.0 million, or 3.8%, in the quarter ended March 31, 2009 over the same period in 2008, due primarily to the Indiana contract and the addition of new contracts which were partially offset by lost contracts in Florida due to the state taking services in-house during 2008 and the timing of performance incentives. Operating margin decreased from 9.3% in the first quarter of 2008 to 8.4% in the same period in 2009, due primarily to the timing of performance incentives.

Other

A portion of our business is dedicated to alternative education and international job training and placement agencies. Revenues increased from $11.8 million in the 2008 first quarter to $13.8 million in the same period in 2009 primarily due to the acquisition of Care Resources. Operating income decreased from $0.8 million in the first quarter of 2008 to an operating loss of $0.9 million for the same period in 2009 due primarily to out-of-period adjustments within the international business totaling $1.8 million related to foreign exchange losses and amortization on intangible assets, offset by current quarter foreign exchange gains of $0.5 million.

Total Operating Expenses

Total operating expenses represent corporate general and administrative expenses, as well as other operating income and expenses. Total operating expenses increased $0.9 million, or 5.9%, for the quarter ended March 31, 2009, compared to the same period in 2008 principally due to an increase in payroll-related expenses of $0.5 million.

Financial Condition, Liquidity and Capital Resources

Total assets decreased $7.9 million, or 1.0%, in 2009 over balances at December 31, 2008. This was primarily due to decrease of $5.0 million for prepaid taxes and insurance, $1.4 million foreign exchange effect on goodwill, and approximately $1.0 million increase of amortization on other intangible assets.

Cash and cash equivalents were $14.2 million at March 31, 2009, as compared to $13.6 million at December 31, 2008. Cash provided from operations for the three months ended March 31, 2009 was $27.6 million compared to $20.8 million for the three months ended March 31, 2008. The increase is primarily due to the favorable changes

to accounts receivable, other assets and accounts payable totaling $12.4 million, with an offset for the settlement payment for the Omega case during the first quarter of 2009.

Net accounts receivable at March 31, 2009 decreased to $230.7 million, compared to $231.0 million at December 31, 2008. Days of revenue in net accounts receivable were 50.5 days at March 31, 2009 compared with 51.1 days at December 31, 2008.

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 flows and borrowings under our revolving credit facility.

The capital markets remain under duress due to the ongoing financial crisis and may impede our ability to expand and grow our business if credit conditions remain tight or our access to these markets becomes limited. State budgetary pressures from the financial crisis may put further pressure on reimbursement rates and limit our ability to receive rate increases. We expect to begin negotiating new terms for our $250 million senior secured revolving credit facility during the second half of 2009 and anticipate facing significant rate and pricing increases, as well as more restrictive debt covenants over the terms in place currently. Some members of our bank lending group, due to pressure from the financial crisis, may have more limited lending capacity than reflected in the current credit facility or may not have the ability to participate in a new credit facility. We may see a significant change in lender participation as a result or credit availability as a result.

Capital expenditures were consistent with our historical experience. We invested $3.2 million during the first three months of 2009 on purchases of property and equipment. We also used $1.7 million on acquisitions during the first three months of 2009 compared to $10.4 million during the same period of 2008.

Our financing activities included a net payment of debt and capital lease obligations of $21.5 million for the first three months of 2009. This compares to a net payment of debt and capital lease obligations of $1.1 million for the same period in 2008. Stock option exercise activity resulted in $0.2 million in proceeds for the 2009 period versus $0.7 million in 2008.

The 2007 amendment to our senior secured revolving credit facility increased our borrowing capacity by $50 million to a total of $250 million. Additional capacity of $50 million remains in place, subject to certain limitations in our $150 million 7.75% Senior Notes due 2013, which allows us to expand our total borrowing capacity to $300 million. 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, 2009, we had $115.1 million available under the revolver with an outstanding balance of $83.0 million. Outstanding balances bear interest at 1.63% over the London Interbank Offered Rate (LIBOR) or other bank developed rates at our option. As of March 31, 2009, the weighted average interest rate was 2.58%. As of March 31, 2009, we had irrevocable standby letters of credit in the principal amount of $51.9 million issued primarily in connection with our insurance programs. Letters of credit had a borrowing rate of 1.75% as of March 31, 2009. The commitment fee on the unused balance was 0.35%. 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 March 31, 2009 and we believe we will continue to be in compliance with our bank

covenants over the next twelve months. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon continued profitability, reductions of amounts borrowed under the facility and continued cash collections.

Operating funding sources were approximately 62% through Medicaid reimbursement, 10% from the DOL and 28% 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 2009 or 2008.

Impact of Recently Issued Accounting Pronouncements

See Note 9 of the Notes to Condensed Consolidated Financial Statements.