8-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                    ---------


                                    FORM 8-K

                                 CURRENT REPORT

                     Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934


Date of Report (Date of earliest event reported): October 30, 2001



                                 RES-CARE, INC.
               (Exact Name of Registrant as specified in Charter)


   Kentucky                         0-20372                 61-0875371
 (State or other                (Commission                (IRS Employer
  jurisdiction of                File Number)              Identification No.)
  incorporation)


10140 Linn Station Road, Louisville, Kentucky       40223
(Address of principal executive offices)          (Zip code)


                                 (502) 394-2100
              (Registrant's telephone number, including area code)

                                       N/A
         (Former name or former address, if changed since last report.)







                    INFORMATION TO BE INCLUDED IN THE REPORT

         Items 1, 2, 3, 4, 6 and 8 are not applicable and are omitted from this
Report.

Item 5.  Other Events

The Registrant expects to enter into a new revolving credit facility, which
would replace its existing revolving credit facility. Reference is made to
Exhibits 99.1, 99.2, 99.4 and 99.5 attached hereto. The information contained in
Exhibits 99.1, 99.2 and 99.4 is qualified by, and should be read in conjunction
with, the information contained in Exhibit 99.5. The Registrant undertakes no
obligation to update this information, including any forward-looking statements,
to reflect subsequently occurring events or circumstances.

Item 7.  Financial Statements, Pro Forma Financial Information and Exhibits

(a)      Exhibits

99.1     Management's Discussion and Analysis of Financial Condition and Results
         of Operations of Registrant.

99.2     Business of Registrant.

99.3     Certain Information that may be Disclosed to Prospective Investors in a
         Private Placement.*

99.4     Information Regarding Forward-Looking Statements of Registrant.

99.5     Risk Factors Affecting Registrant.

------

*        Furnished pursuant to Regulation FD and not filed pursuant to the
         Securities Exchange Act of 1934, as amended.

Item 9.  Regulation FD Disclosure.

The Registrant intends to raise approximately $150 million through a private
placement of Senior Notes due 2008. Proceeds from the offering will be used to
repay certain indebtedness of the Registrant and for general corporate
purposes. The notes have not been registered under the Securities Act of 1933
or any state securities laws and may not be offered or sold in the United
States absent registration or

                                      -2-



an applicable exemption from the registration requirements of the Securities Act
of 1933 and applicable state securities laws. This current report on Form 8-K
does not constitute an offer to sell or the solicitation of an offer to buy the
Notes.

The information filed under this Item 9 and Exhibit 99.3 is being furnished
pursuant to Regulation FD and not filed pursuant to the Securities Exchange Act
of 1934, as amended. None of this information may be incorporated by reference
into any other filings the Registrant has made or may make pursuant to the
Securities Act of 1933, as amended, or into any other documents unless such
portion of this Current Report on Form 8-K is expressly and specifically
identified in such filing as being incorporated by reference therein. In
addition, the furnishing of the information in this Report and in the attached
Exhibit 99.3 is not intended to, and does not, constitute a determination or
admission that the information is material, or that you should consider this
information before making an investment decision with respect to any security of
the Registrant. The information contained in Exhibit 99.3 is qualified by, and
should be read in conjunction with, the information contained in Exhibits 99.4
and 99.5. The Registrant undertakes no obligation to update this information,
including any forward-looking statements, to reflect subsequently occurring
events or circumstances.

                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                    RES-CARE, INC.



Date: October 31, 2001              By  /s/ Ronald G. Geary
                                       --------------------------------
                                       Ronald G. Geary
                                       Chairman, CEO and President




                                      -3-

EX-99.1

                                                                    Exhibit 99.1

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in our prior
periodic reports. In addition, see Exhibit 99.4.

OVERVIEW

     We receive revenues primarily from the delivery of residential, training,
educational and support services to populations with special needs. We have two
reportable operating segments: (i) disabilities services and (ii) youth
services. Management's discussion and analysis of each segment follows. Further
information regarding each of these segments, including the required disclosure
of certain segment financial information, is included in our prior periodic
reports.

     Revenues for our disabilities services operations are derived primarily
from state government agencies under the Medicaid reimbursement system 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 system. We also provide respite, therapeutic and other services on an
as-needed or hourly basis through our periodic/in-home services programs that
are reimbursed on a unit-of-service basis. Reimbursement methods vary by state,
and service type, and have historically been based on a flat rate or cost-based
reimbursement system on a per person, per diem or per unit-of-service basis.
Generally, rates are adjusted annually based primarily upon historical costs
experienced by us and by other service providers, and on inflation. 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
reimbursement is affected by occupancy levels. At most facilities and programs
that we operate pursuant to management contracts, the management fee is
negotiated based upon the reimbursement amount expected to be earned by the
provider of record, which is affected by occupancy levels. Under certain
management contracts, we are paid a fixed fee regardless of occupancy levels.

     We operate 15 vocational training centers under the federal Job Corps
program administered by the DOL. Under the Job Corps program, we are reimbursed
for direct costs related to Job Corps center operations and allowable indirect
costs for general and administrative expenses, plus a prenegotiated management
fee, normally a fixed percentage of facility and program expenses. All of such
amounts are reflected as revenue, and all such direct costs are reflected as
facility and program expenses. 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.

     In 1996, we began operating other programs for at-risk and troubled youths.
Most of the youth services programs are funded directly by federal, state and
local government agencies, including school systems. Under these contracts, we
are typically reimbursed based on fixed contract amounts, flat rates or
cost-based rates.

     Expenses incurred under federal, state and local government agency
contracts for disabilities services and youth services, as well as management
contracts with providers of record for such agencies, are subject to examination
by agencies administering the contracts and services.

     Our revenues and net income may fluctuate from quarter-to-quarter, in part
because annual Medicaid rate adjustments may be announced by the various states
inconsistently and are usually retroactive to the beginning of the particular
state's fiscal reporting period. We expect that future adjustments in
reimbursement rates in most states will consist primarily of cost-of-living
adjustments, adjustments based upon reported historical costs of operations, or
other negotiated increases. However, in some cases states have revised their
rate-setting methodologies, which has resulted in rate decreases as well as rate
increases. Current initiatives at the federal or state level may materially
change the Medicaid system as it now exists. Retroactively calculated
contractual adjustments are estimated and accrued in the periods the related

                                        1


services are rendered and recorded as adjustments in future periods as final
adjustments are received. Because the cumulative effect of rate adjustments may
differ from previously estimated amounts, net income as a percentage of revenues
for a period in which an adjustment occurs may not be indicative of expected
results in succeeding periods. Future revenues may be affected by changes in
rate-setting structures, methodologies or interpretations that may be proposed
or are under consideration in states where we operate. Also, some states have
considered initiating managed care plans for persons currently in Medicaid
programs. At this time, we cannot determine the impact of such changes, or the
effect of various federal initiatives that have been proposed.

RESULTS OF OPERATIONS

  SIX MONTHS ENDED JUNE 30, 2001 AND 2000

     For the six months ended June 30, 2001, revenues were $440.8 million, a
3.9% increase over the same period for 2000. This represents a continuation of
the lower growth rates experienced beginning in the second half of 2000 and a
significantly lower growth rate than in recent years as we have shifted our
focus from acquisition-related growth to internally generated growth as well as
infrastructure enhancements. For the six months ended June 30, 2001 and 2000,
EBITDAR, or earnings before net interest expense, income taxes, depreciation,
amortization, facility rent and special charges, was $41.5 million and $51.7
million, respectively. For the same periods, EBITDA, or earnings before net
interest expense, income taxes, depreciation, amortization and special charges,
was $27.2 million and $39.0 million, respectively.

     Operating results for the first half of 2001 as compared to the same period
of 2000 reflect increased costs from a highly competitive labor market. We are
continuing several initiatives to manage these labor cost increases, including
enhanced recruitment and retention programs in order to reduce the need for
overtime and temporary staffing, evaluating and monitoring staff patterns and
negotiating improved reimbursement rates from certain states. As a result of our
initiatives, the second quarter of 2001 reflects improvements in labor costs as
a percent of revenue as compared to the fourth quarter of 2000 and the first
quarter of 2001. Additionally, results for the first six months of 2001 were
negatively impacted by increased energy and insurance costs. As a result of
decreasing availability of coverage at historical rates, we entered into certain
new insurance programs in December 2000 providing for significantly higher self-
insured retention limits and higher deductibles, resulting in higher estimated
costs for our business insurance programs in 2001 compared to 2000.

     The consolidated results for the first six months of 2001 were negatively
impacted by certain special charges. Operating income for the first quarter of
2001 included a charge of $1.6 million related to the write-off of certain
assets and costs associated with the cessation of certain operations in
Tennessee, and the write-off of $134,000 in deferred debt issuance costs
resulting from the amended and restated credit agreement.

     As a percentage of total revenues, corporate general and administrative
expenses for the six months ended June 30, 2001, were 3.5%. For the same period
in 2000, these expenses were 3.2% of total revenues. This relative increase was
due primarily to expanding the management infrastructure during 2001 and the
effect of rent expense resulting from the sale and leaseback of the corporate
office building in December 2000. The change in management structure includes
the addition of the positions of executive vice president and of vice president
and chief financial officer of the division for persons with disabilities.

     Net interest expense decreased to $9.8 million in the first half of 2001
compared to $11.0 million for the same period in 2000. This decrease resulted
primarily from reduced utilization of the existing credit facility and the
reduction in indebtedness under that facility paid with proceeds from the sale
and leaseback transactions completed during the second quarter of 2001 and
December 2000.

     The effective income tax rates were 43.5% and 41.5% for the first half of
2001 and 2000, respectively. The higher estimated annual rate of 43.5% used in
2001 is a result of a fixed level of nondeductible goodwill amortization
combined with lower projected profitability in 2001 as compared to 2000.

                                        2


     During the second quarter of 2001, we entered into various transactions for
the sale of certain real properties in which we conduct operations. Proceeds
from the sales were approximately $19.7 million in the second quarter and were
used to reduce indebtedness under our existing credit facility. The assets are
being leased back from the purchasers over terms ranging from five years to 15
years. The leases are being accounted for as operating leases and contain
certain renewal options at lease termination and purchase options at amounts
approximating fair value. The transactions resulted in gains of approximately
$3.0 million which will be amortized over their lease terms.

 Disabilities Services

     Results for the disabilities services segment for the six months ended June
30, 2001, as compared to the same period in 2000 were significantly impacted by
the slowed growth and labor cost pressures described above. Revenues increased
by 2.8% to $343.5 million for the six months ended June 30, 2001 compared to the
same periods in 2000, due primarily to rate adjustments and the expansion of
existing programs. Segment profit as a percentage of revenue for the first six
months of 2001 declined to 7.4% compared to 10.0% for the same period in 2000.
EBITDAR totaled $46.0 million for the first half of 2001 compared to $53.3
million for the same period in 2000, before general corporate expenses. As
discussed above, competitive labor market conditions have resulted in higher
labor costs and reduced margins and EBITDAR. Labor cost as a percentage of
segment revenue for 2001 as compared to 2000 have increased to 62.8% from 61.2%
for the six month periods. Higher utility and insurance costs also negatively
impacted the segment's profitability for the period. For the six month periods,
utilities increased approximately $849,000, while insurance costs increased
approximately $3.5 million.

 Youth Services

     Youth services revenues increased by 7.8% to $97.3 million for the six
months ended June 30, 2001, compared to the same period in 2000, primarily from
increased student levels at the Treasure Island Job Corps Center in California,
offset somewhat by reduced census at the Youthtrack operation in Colorado. For
the six months ended June 30, segment profit as a percentage of revenues
declined from 10.7% in 2000 to 8.3% in 2001. EBITDAR totaled $10.5 million for
the first half of 2001 compared to $11.8 million for the same period in 2000,
before general corporate expenses. These decreases were due primarily to reduced
census and higher labor, utility and insurance costs as a percentage of segment
revenues.

 YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

     Revenues for 2000 increased to a record $865.8 million, or 5.0% over 1999.
This represents, however, a significantly lower growth rate than in recent years
as we have shifted our focus from acquisition-related growth to
internally-generated growth. Revenues grew 17.3% in 1999 over 1998 primarily due
to revenues generated from operations that we added in 1998. EBITDAR for 2000,
1999 and 1998 was $99.0 million, $106.0 million and $92.7 million, respectively.
EBITDA for 2000, 1999 and 1998 was $73.8 million, $80.2 million and $70.9
million, respectively.

     Our operating results for 2000 reflect increased costs from a highly
competitive labor market. We are continuing several initiatives to manage these
labor cost increases, including improved recruitment and retention programs,
evaluating and monitoring staff patterns and negotiating improved reimbursement
rates from certain states. The consolidated results for 2000 were also
negatively impacted by certain special charges. Operating income for 2000
included a charge of $1.8 million related to the write-off of costs associated
with the terminated management-led buyout and a charge of $1.7 million related
to our 2000 restructuring plan, which we implemented in the third quarter of
2000. Operating results of each segment are discussed below.

     Operating results for 1999 were negatively impacted by an additional
provision for doubtful accounts of $8.0 million. We are continuing the process
of implementing a new comprehensive accounts receivable system. As a result,
improvements in monitoring and collection of accounts receivable have been
realized during 2000, and management expects continued improvement throughout
2001. Also in 1999, we recorded

                                        3


a charge of approximately $2.5 million as a result of higher claims incurred as
we transitioned to a new employee medical plan with a fixed level of
self-insurance exposure.

     Contribution margins have been negatively impacted by the increased
insurance costs described above. The increase in insurance costs is an
industry-wide issue affecting long-term care providers. These cost increases,
however, are expected to be offset by benefits from the restructuring plan
implemented in 2000, efforts to control labor costs and initiatives seeking
improved rates from various states.

     As a percentage of total revenues, corporate general and administrative
expenses were 3.2%, 3.4% and 3.9% in 2000, 1999 and 1998, respectively. Savings
achieved from the 2000 restructuring plan contributed to the decrease in 2000
while the decrease in 1999 primarily reflected savings resulting from the
PeopleServe merger.

     In connection with the merger with PeopleServe, we recorded a pretax
merger-related charge of $20.5 million in 1999. This consisted primarily of $7.3
million in severance and employee-related costs (principally related to the
elimination of PeopleServe's corporate offices and various other administrative
costs), $2.8 million in lease termination costs, $3.0 million in information
system conversion and integration costs and $4.5 million in transaction costs,
including investment banking, legal, accounting and other professional fees and
transaction costs. Through December 31, 2000, approximately $20.1 million of the
charge had been utilized through $15.1 million in cash payments (principally
severance and transaction costs), $4.7 million in asset write-downs (relating
principally to the discontinued PeopleServe information systems) and $300,000 in
adjustments to the reserve in 2000 resulting from revised estimates of costs
associated with the closure of duplicate facilities. We believe the remaining
balance of accrued merger-related costs of $400,000 at December 31, 2000,
reflects our remaining cash obligations.

     Interest expense increased $3.5 million in 2000 compared to 1999 and $4.4
million in 1999 compared to 1998. These increases resulted from increased
utilization of the existing credit facility primarily for working capital and,
to some extent, higher interest rates.

     Our effective income tax rates were 42.9%, 51.0% and 40.3% in 2000, 1999
and 1998, respectively. The higher effective rate in 1999 is attributable to
nondeductible amortization of goodwill recorded in the PeopleServe merger and
nondeductible portions of the merger-related charge. The rate for 2000 was
negatively impacted by reduced earnings combined with a fixed level of
nondeductible goodwill amortization, offset to an extent by increased estimated
jobs tax credits.

 Disabilities Services

     The disabilities services segment was the most significantly impacted by
the slowed growth and labor cost pressures described above. Disabilities
services revenues increased by 4.0% in 2000 compared to a 14.7% increase in 1999
over 1998. Revenues increased in 2000 due primarily to rate adjustments and the
expansion of existing programs while acquisition growth primarily fueled the
increase in 1999. Segment profit as a percentage of revenue declined to 9.4% in
2000 compared to 10.8% in 1999 and 11.7% in 1998. EBITDAR for this segment,
before general corporate expenses totaled $103.9 million in 2000, $111.7 million
in 1999 and $101.3 million in 1998. As discussed above, tight labor market
conditions have resulted in higher labor costs and reduced margins. Labor costs
as a percentage of segment revenues, were approximately 61.5%, 60.0% and 57.8%
in 2000, 1999 and 1998, respectively. During 1999, results for the disabilities
division were negatively affected by the additional allowance for doubtful
accounts of $8.0 million ($0.19 per share after tax) described above. Also
during 1999, operating results for the disabilities services division were
negatively affected by an incremental charge of approximately $2.3 million
related to the transition to a new employee medical plan.

 Youth Services

     Youth services revenues increased by 9.0% in 2000 over 1999 and 28.5% in
1999 over 1998, resulting primarily from the addition of the Treasure Island Job
Corps Center in early 1999, increased occupancy at our AYS operations, and a
full year of operations for a Youthtrack program acquired in the fourth quarter

                                        4


of 1998. Segment profit as a percentage of revenues declined to 9.9% in 2000
compared to 10.4% in 1999, while 1999 margins decreased from 11.1% in 1998 due
principally to increased costs associated with the start-up of the Treasure
Island Job Corps Center and higher labor costs. EBITDAR for this segment, before
general corporate expenses totaled $22.9 million in 2000, $21.7 million in 1999,
and $18.2 million in 1998.

LIQUIDITY AND CAPITAL RESOURCES

 HISTORICAL

     For the first half of 2001, cash used in operating activities was $5.3
million compared to cash provided of $304,000 for the same period of 2000. This
decrease was primarily related to an increase in accounts receivable in certain
states in which we are deploying our new comprehensive billing system coupled
with decreases in accrued expenses for certain required payments. This was
offset to some extent by an increase in trade payables.

     For the first half of 2001, cash provided by investing activities was $18.5
million compared to cash used of $14.8 million in the same period of 2000. This
shift in cash flows from investing activities is primarily due to the
acquisition of formerly leased homes in 2000 versus the sale and leaseback of
certain properties during 2001.

     For the first half of 2001, cash used in financing activities was $38.4
million compared to cash provided of $17.4 million in the same period of 2000.
The first half of 2000 included borrowings for the acquisition of formerly
leased homes, while 2001 reflects the repayment of debt with cash provided
primarily from proceeds from the sale and leaseback transactions in December
2000 and during 2001.

     At June 30, 2001, we had $21.2 million available under our existing credit
facility and $8.3 million in cash and cash equivalents. As of that date, we had
borrowings under our existing credit facility of approximately $93.7 million and
outstanding irrevocable standby letters-of-credit of approximately $25.3
million, for a total of $119.0 million. Of this amount, $60.2 million
represented term indebtedness which require quarterly installments totaling $7.5
million for the remainder of 2001, and $17.0 million in 2002. Standby letters of
credit and borrowings totaling $58.8 million were drawn against an $80.0 million
revolving credit facility as of June 30, 2001. The letters of credit were issued
in connection with workers' compensation insurance and certain facility leases.
The existing credit facility matures in January 2003. As of June 30, 2001, we
were in compliance with all financial covenants related to the existing credit
facility.

     Days revenue in accounts receivable were 64 days at June 30, 2001, compared
to 59 days at December 31, 2000. Accounts receivable were $155.6 million and
$142.8 million at June 30, 2001 and December 31, 2000, respectively. The
increase in days is attributable primarily to slower collections on certain
accounts receivable from the DOL and a temporary slowing of collections while
deploying our new accounts receivable system at certain operations. We continue
to expand implementation of our comprehensive accounts receivable system to
operations in various states, which is expected to facilitate improvements in
collections. As of June 30, 2001, approximately 60% of our operations were
utilizing the new system, with the remainder of the targeted operations expected
to be completed by the end of 2001.

     Our capital requirements relate primarily to the working capital needed for
general corporate purposes and our plans to expand through the development of
new facilities and programs. We have historically satisfied our working capital
requirements, capital expenditures and scheduled debt payments from our
operating cash flow and utilization of our existing credit facility. Cash
requirements for the acquisition of new business operations have generally been
funded through a combination of these sources, as well as the issuance of
long-term obligations and common stock.

 AFTER THE OFFERING

     In connection with the offering of Senior notes due 2008, we will incur
substantial amounts of debt. Assuming that the offering had occurred on June 30,
2001, we would have had total debt of $276.2 million (not including unused
commitments) and shareholders' equity of $182.7 million. Subject to restrictions
in

                                        5


our new credit facility and the indenture governing the notes, we may incur more
debt for working capital, capital expenditures, acquisitions and other purposes.

     On September 10, 2001, we entered into a commitment letter with National
City Bank to provide us with an $80 million revolving credit facility (including
a $50 million letter of credit sublimit). The new credit facility will expire on
September 30, 2004 and bears interest equal to the greater of (i) the
administrative agent's base rate from time to time in effect plus the applicable
base rate margin in effect as such time or (ii) the applicable federal funds
rates plus  1/2%, such margin to be determined from time to time in accordance
with a pricing grid based on our leverage ratio. We expect the average interest
rate for 2001 under the new agreement to approximate 6.4%. Borrowings under the
new credit agreement will be secured by some of our assets, including accounts
receivable, inventory, certain owned real property and equipment, other
intangible assets and stock in subsidiaries. The new facility also contains
various financial covenants relating to indebtedness, capital expenditures,
acquisitions and dividends and requires us to maintain specified ratios with
respect to total net funded debt to EBITDA, EBITDA to interest expense and cash
flow from operations. Our ability to achieve the thresholds provided for in the
financial covenants will largely depend upon our maintenance of continued
profitability and/or reductions of amounts borrowed under the new credit
facility.

     We believe that the cash generated from operations, together with amounts
under the new credit facility, will be sufficient to meet our working capital,
capital expenditure and other cash needs for the next twelve months. We cannot
assure you, however, that this will be the case.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Although we are exposed to changes in interest rates as a result of our
outstanding variable rate debt, we do not currently use any derivative financial
instruments related to our interest rate exposure. At June 30, 2001, and
December 31, 2000, a hypothetical 100 basis point change in interest rates on
the average balance of the outstanding variable rate debt would have resulted in
a change of approximately $1.0 million and $1.3 million, respectively, in annual
income before income taxes. The estimated impact assumes no changes in the
volume or composition of debt related to this offering. We believe that our
exposure to market risk will not result in a material adverse effect on our
consolidated financial condition, results of operations or liquidity.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS 142. We must adopt the provisions of SFAS 141
immediately, and the provisions of SFAS 142 effective January 1, 2002.

     As of the date of adoption, we expect to have unamortized goodwill in the
amount of approximately $209.0 million, which will be subject to the transition
provisions of SFAS 141 and SFAS 142. Amortization expense related to goodwill
was approximately $8.0 million and $4.0 million for the year ended December 31,
2000 and the six months ended June 30, 2001, respectively. Because of the
extensive effort needed to comply with adopting the new rules and in
anticipation of final implementation guidance, it is not practicable to
reasonably estimate the impact of adopting these statements on our financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.

     In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 will require entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, we are required to
capitalize the

                                        6


cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. SFAS
143 is effective for fiscal years beginning after June 15, 2002, and we will
adopt it effective January 1, 2003. We have not yet determined the impact SFAS
143 will have on our results of operations or financial condition.

                                        7

EX-99.2

                                                                    Exhibit 99.2

                                    BUSINESS

GENERAL

     Founded in 1974, we are the nation's largest private provider of
residential, training, educational and support services to populations with
special needs, including persons with developmental and other disabilities and
at-risk and troubled youths. At June 30, 2001, we provided services to
approximately 26,500 persons with special needs in 32 states, Washington, D.C.,
Canada and Puerto Rico. We believe that we provide high quality services on a
more cost effective basis than traditional state-run programs. We are a leading
provider of services for special needs populations because of our proven
programs, operating procedures, financial resources, economies of scale and
experience working with special needs populations and governmental agencies. We
have two reportable operating segments: DPD and DYS. For the twelve months ended
June 30, 2001, we derived approximately 83% of our total revenue directly from
state programs or agencies and approximately 15% directly from the DOL and the
U.S. Department of the Interior.

INDUSTRY OVERVIEW

     The markets for services for special needs populations in the United States
are large, growing, highly fragmented and backed by powerful advocacy groups.
Providing services for special needs populations that we serve constitutes a
$65.6 billion market, of which $25.6 billion is funding for mental retardation
or other developmental disabilities, or MR/DD, services according to the State
of the States Report, and approximately $40.0 billion is funding for youth
services according to data from the National Center for Education Statistics and
the National Association of State Budget Officers. We believe that we are well
positioned to benefit from favorable demographics and positive current industry
trends. We expect our industry to experience strong growth rates due to the
following:

     - Pressure to Reduce Waiting Lists:  The Arc, a national organization and
       advocacy group for persons with MR/DD, estimated that in 1997 individuals
       with MR/DD on waiting lists for placements in one or more residential,
       day/vocational or other community-based service programs were seeking
       approximately 218,000 placements. Many states have received court orders
       requiring them to address long waiting lists. As a result, many states
       are allocating incremental funding to provide for group home placements
       or for new programs like periodic/in-home services.

     - Increased Medicaid Funding:  MR/DD services are funded mainly by state
       Medicaid programs, for which funding has increased at an
       inflation-adjusted average annual rate of approximately 11% over the last
       two decades, according to the State of the States Report. By the end of
       2001, we expect reimbursement rates in the states in which we provide
       MR/DD services to have increased at an average annualized rate of
       approximately 3%.

     - Privatization Trend:  State and local government agencies have
       historically provided MR/DD and youth services. However, in recent years,
       there has been a trend throughout the United States toward privatization
       of service delivery functions for special needs populations as
       governments at all levels face continuing pressure to control costs and
       improve the quality of programs. For example, the State of the States
       Report indicates that the percentage of individuals with MR/DD receiving
       residential services in state-run institutions declined from
       approximately 51.5% in 1977 to approximately 12.7% in 1998.

     - Strong Potential Demand for Services for Persons with
       Disabilities:  Estimates of the number of individuals in the United
       States with some form of MR/DD range from 3.2 million, according to the
       State of the States Report, to 7.5 million, according to The Arc.
       However, the State of the States Report estimates that only approximately
       416,000 persons with MR/DD live in staffed facilities or supported-living
       settings. The report estimates that approximately 1.9 million persons
       with MR/DD live with family caregivers, and 25% of these family
       caregivers are parents aged 60 or

                                        1


       older. When family caregivers are no longer capable of providing for
       their dependents with MR/ DD, states must provide these services for
       them.

     - Vocal Advocacy Groups:  The rise of advocacy groups, often led by the
       parents or guardians of individuals with MR/DD along with social workers
       and civil rights lawyers, has resulted in long-term trends toward an
       increasing emphasis on training and education as well as an increase in
       community-based settings for residential services, all designed to
       promote a higher quality of life and greater independence.

     - Legislation and Litigation Promoting Increased Community-Based
       Living:  In June 1999, the U.S. Supreme Court, in Olmstead v. L.C., held
       that states must provide individuals with MR/DD the choice to be placed
       in community-based settings when deemed appropriate by medical
       professionals and placement can be reasonably completed within state
       budgets. We believe that this ruling will accelerate the transfer of the
       nation's approximately 45,000 people currently residing in state
       institutional facilities to community-based settings.

     - Expanding Job Corps Program:  The federal Job Corps program, which is
       currently funded at $1.5 billion per year, has grown significantly since
       its inception in 1964. The program provides training for approximately
       70,000 students each year at 119 centers throughout the United States and
       Puerto Rico and is projected by the DOL to increase to 123 centers over
       the next two years. In addition, federal funding for this program has
       never been reduced since its inception. The U.S. Bureau of the Census
       forecasts that the juvenile population will grow by 8% between 1995 and
       2015. The U.S. Bureau of the Census estimates that 20% of the
       approximately 70 million children under the age of 18 in the United
       States currently live in households under the poverty level.

BUSINESS SEGMENTS

 DISABILITIES SERVICES

     We are the nation's largest private provider of services for individuals
with MR/DD. At June 30, 2001, we served more than 17,000 individuals in 29
states, Washington, D.C., and Canada. We provide our services mainly in
community-based group homes and, to a lesser extent, in other facilities run by
us and in the homes of individuals with MR/DD. At June 30, 2001, approximately
94% of our disabilities services clients resided in community settings, either
in our group homes or in their own or their family homes. As of that date, we
served approximately 4,800 clients in their family homes. Because most of our
clients with MR/DD require services over their entire lives and many states have
extensive waiting lists of people requiring services, we have consistently
experienced occupancy rates of at least 97% since 1996.

     We base our programs predominantly on individual habilitation plans
designed to encourage greater independence and development of daily living
skills through individualized support and training. We design these programs to
offer individuals specialized support not generally available in larger state
institutions and traditional long-term care facilities such as nursing homes. We
also provide respite, therapeutic and other services on an as-needed or hourly
basis through our periodic/in-home services programs. In each of our programs,
services are administered by our employees and contractors, such as qualified
mental retardation professionals, or QMRPs, service coordinators, physicians,
psychologists, therapists, social workers and other direct service staff. We
staff our group homes and other facilities 24 hours a day, seven days per week
and provide social, functional and vocational skills training, supported
employment and emotional and psychological counseling or therapy as needed for
each individual. We also provide these services through our periodic/in-home
services program.

 Social Skills Training

     Our social skills training focuses on problem solving, anger management and
adaptive skills to allow individuals with disabilities to interact with others
in the residential setting and in the community. We emphasize contact with the
community at large as appropriate for each individual. The desired outcome is to
enable each individual to participate in home, family and community life as
fully as possible.

                                        2


     Many individuals with developmental and other disabilities require
behavioral intervention services. We provide these services through
psychiatrists, psychologists and behavioral specialists, some of whom serve as
consultants on a contract basis. All of our operations utilize a non-aversive
approach to behavior management that we have pioneered and which is designed to
avoid consequences involving punishment or extreme restrictions on individual
rights. Behavior management techniques are employed by an interdisciplinary team
and direct service staff rather than through psychotropic medications. Although
we try to minimize the use of medications whenever possible, it is occasionally
necessary to use them. We administer medication in strict compliance with
federal and state regulations, and any medication is paid directly by Medicaid
or other third-parties.

 Functional Skills Training

     Our functional skills training program encourages mastery of personal
skills and the achievement of greater independence. As needed, individual
habilitation plans may focus on basic skills training in such areas as personal
hygiene and dressing, as well as more complex activities such as shopping and
the use of public transportation. We encourage individuals to participate in
daily activities such as housekeeping and meal preparation. We design individual
habilitation plans to recognize and build upon each individual's ability.

 Vocational Skills Training and Day Programs

     We provide extensive vocational training or specialized day programs for
most individuals we serve. Some individuals are able to be placed in
community-based jobs, either independently or with job coaches, or may
participate as part of a work team contracted for a specific service such as
cleaning, sorting or maintenance. Clients not working in the community may be
served through vocational workshops or day programs appropriate for their needs.
We often contract with third parties to provide these services. Our philosophy
is to enable all persons served to perform productive work in the community or
otherwise develop vocational skills based on their individual abilities. Clients
participating in specialized day programs may be older or have physical or
health restrictions that prevent them from being employed or participating in
vocational programs. Specialized day programs may include further training in
daily living skills, community integration or specialized recreation activities.

 Counseling and Therapy Programs

     Our counseling and therapy programs address the physical, emotional and
behavioral challenges of individuals with MR/DD or acquired brain injury, or
ABI. Our goals include the development of enhanced physical agility and
ambulation, acquisition of adaptive skills for both personal care and work, as
well as the development of coping skills and the use of alternative,
responsible, and socially acceptable interpersonal behaviors. Individualized
counseling programs may include group and individual therapies. We provide
occupational and physical therapies and therapeutic recreation based on the
assessed needs of the individual.

     At each of our operations, we provide comprehensive individualized support
and training programs that encourage greater independence and the development of
personal and vocational skills commensurate with the particular individual's
capabilities. As the individual progresses, we create new programs to encourage
greater independence, self-respect and the development of additional personal or
vocational skills.

 YOUTH SERVICES

     Our youth services division is comprised of the Job Corps program and other
youth services programs, each under the direction of a vice-president. Programs
in our youth services division include a variety of educational and vocational
training programs and comprehensive programs for behavior change, including
individual, group and family counseling, and training in social and independent
living skills. These programs emphasize self-esteem, academic achievement,
empathy development, critical thinking and

                                        3


problem solving, anger management and coping strategies, substance abuse
treatment and relapse prevention.

 Job Corps Program

     We are the nation's second largest operator of Job Corps centers with 15
centers serving approximately 6,900 students, or about 15.3% of total Job Corps
enrollees as of June 30, 2001. Since 1976, we have been operating programs for
disadvantaged youths through the federal Job Corps program, which provides for
the educational and vocational skills training, health care, employment
counseling and other support necessary to enable disadvantaged youths to become
responsible working adults.

     The Job Corps program, which is funded and administered by the DOL, is
designed to address the severe unemployment problem faced by disadvantaged
youths throughout the country. The typical Job Corps student is a 16- to 24-year
old high school dropout who reads at the seventh grade level, comes from a
disadvantaged background, has not held a regular job, and was living in an
environment characterized by a troubled home life or other disruptive condition.
Each center offers training in several vocational areas depending upon the
particular needs and job market opportunities in the region. Students are
required to participate in basic education classes to improve their academic
skills and to complement their vocational training. High school equivalency
classes are available so that students can obtain GED certificates or, in
certain circumstances, high school diplomas. Upon graduation or other departure
from the program, each student is referred to the nearest Job Corps placement
agency for assistance in finding a job or enrolling in a school or training
program. According to Job Corps reports, more than 75% of the students
completing the program have obtained jobs, joined the military or continued
their education or training elsewhere.

     We also provide, under separate contracts with the U.S. Department of
Interior or the primary operator, certain administrative, counseling,
educational, vocational and other support services for several Job Corps centers
we do not operate.

 Other Youth Services Programs

     We are among the nation's largest private providers of services to
disadvantaged or at-risk youths, serving approximately 2,300 youths in 11
states, Washington, D.C. and Puerto Rico as of June 30, 2001. In December 1995,
we began a strategic initiative to expand our DYS beyond the Job Corps program
and develop services that are designed to address the specific needs of at-risk
and troubled youths to enable each youth to be a more productive member of the
community. The youths targeted to be served through our strategic initiative
range from youths who have special educational or support needs, to youths who
exhibit a variety of behavioral and emotional disorders and in some instances
have been diagnosed with mental retardation or other developmental disability,
to pre-adjudicated and adjudicated youths who have entered the juvenile justice
system. Special needs and at-risk youth programs operated through our AYS
subsidiary include secure detention centers, residential treatment programs,
emergency shelters, alternative schools and foster care programs. We plan to
selectively expand the services provided to these youths. Programs offered for
troubled youths through our Youthtrack subsidiary include secure and
staff-secure detention programs, long-term treatment programs, secure
transportation, day treatment programs and monitoring, and transition and
after-care programs.

     Our programs include a variety of educational and vocational training
programs and comprehensive programs for behavior change, including individual,
group and family counseling and training in social and independent living
skills. These programs emphasize self-esteem, academic achievement, empathy
development, critical thinking and problem solving, anger management and coping
strategies, substance abuse treatment and relapse prevention. We design programs
to: (i) increase self-control and effective problem-solving; (ii) teach youths
how to understand and consider other people's values, behaviors and feelings;
(iii) show youths how to recognize the effects of their behavior on other people
and why others respond to them as they do; and (iv) enable youths to develop
alternative, responsible, interpersonal behaviors. Although some youths in our
programs require both drug therapy and treatment for use or abuse of drugs, our
goal is to minimize or eliminate the use of medication whenever possible. When
appropriate, medication is prescribed by independent physicians and may be
administered by our personnel
                                        4


in accordance with applicable federal and state regulations. We believe that the
breadth of our services and our history of working with youths make us
attractive to local, state and federal governmental agencies.

OPERATIONS

 DISABILITIES SERVICES

     Our DPD operations are organized under six geographic regions for MR/DD
services, along with separate business units for periodic services and ABI
operations. In general, each cluster of group homes, supported living program or
larger facility is overseen by an administrator. In addition, a program manager
supervises a comprehensive team of professionals and community-based consultants
who participate in the design and implementation of individualized programs for
each individual served. QMRPs work with direct service staff and professionals
involved in the programs to ensure that quality standards are met and that
progress towards each individual's goals and objectives is monitored and
outcomes are achieved. Individual habilitation plans are reviewed and modified
by the team as needed. These operations utilize community advisory boards and
consumer satisfaction surveys to solicit input from professionals, family
members and advocates, as well as from the neighboring community, on how to
continue to improve service delivery and increase involvement with the
neighborhood or community.

     Our direct service staff has the most frequent contact with, and generally
is recruited from, the community in which the facility or program is located. We
screen these staff members to meet certain qualification requirements, and they
receive orientation, training and continuing education.

     The provision of disabilities services is subject to complex and
substantial state and federal regulation, and we strive to ensure that our
internal controls and reporting systems comply with Medicaid reimbursement and
other program requirements, policies and guidelines. We design and implement
programs, often in coordination with appropriate state agencies, in order to
assist the state in meeting its objectives and to facilitate the efficient
delivery of quality services. We devote management and personnel resources to
keeping abreast of new laws, regulations and policy directives affecting the
quality and reimbursement of the services we provide. In addition, we believe we
have developed expertise in accurately monitoring eligibility for Medicaid and
other benefits and in processing reimbursement claims.

     We have developed a model of ongoing program evaluation and quality
management which we believe provides critical feedback to measure the quality of
our various operations. Each operation conducts its own quality assurance
program, the Best in Class 2000 performance management system. We review Best in
Class 2000 performance results on an on-going basis. Management and operational
goals and objectives are established for each facility and program as part of an
annual budget and strategic planning process. A weekly statistical reporting
system and quarterly statement of progress provide management with relevant and
timely information on the operations of each facility. Survey results from
governmental agencies for each operation are recorded in a database and summary
reports are reviewed by senior management. We believe the Best in Class 2000
system is a vital management tool to evaluate the quality of our programs and
has been useful as a marketing tool to promote our programs because it provides
more meaningful information than is usually provided by routine monitoring by
governmental agencies. All disabilities services senior staff participate in a
performance-based management system that evaluates individual performance based
on critical job function outcomes. Additionally, we demonstrate our commitment
to the professional development of our employees by offering classes and
training programs, as well as tuition reimbursement benefits.

 YOUTH SERVICES

 Job Corps Program

     We operate our Job Corps centers under contract with the DOL, which
provides the facilities and equipment. We are directly responsible for the
management, staffing and administration of our Job Corps centers. Our typical
Job Corps operation consists of a three-tiered management staff structure. The
center director has the overall responsibility for day-to-day management at each
facility and is assisted by several senior staff managers who typically are
responsible for academics, vocational training, social skills, safety
                                        5


and security, health services and behavior management. Managers are assisted by
front line supervisors who have specific responsibilities for such areas as
counseling, food services, maintenance, finance, residential life, recreation,
property, purchasing, human resources and transportation.

     An outcome performance measurement report for each center, issued by the
DOL monthly, measures two primary categories of performance: (i) education
results, as measured by GED/HSD achievement and/or vocational completion and
attainment of employability skills; and (ii) placement of graduates. The results
from these categories are then combined into an overall performance rating. The
DOL ranks centers on a 100-point scale. We review performance standards reports
and act upon them as appropriate to address areas where improvement is needed.
Among multiple-center operators, we are the highest ranked operator. We have won
the National Job Corps Association Member of the Year award, which is given to
the highest quality operator in the program, in two of the last three years.

 Other Youth Services Programs

     We design our youth programs to provide consistent, high quality and
cost-effective education and treatment to address the needs of the various
segments of the special needs, at-risk and troubled youth populations. We
generally are responsible for the overall operation of our facilities and
programs, including management, general administration, staff recruitment,
security and supervision of the youths in our programs.

     We have assembled an experienced team of managers, counselors and staff
that blends program expertise with business and financial experience. We believe
that our recruitment, selection and training programs develop personnel capable
of implementing our systems and procedures. Our staff includes teachers,
counselors, mental health professionals, juvenile justice administrators and
licensed clinicians.

     Our internal policies require our teachers, counselors, security and other
direct service staff to complete extensive training. Core training includes
courses in our major program components, such as behavior change education,
positive peer culture, nonviolent crisis intervention, discipline and
limit-setting, anger management and social skills training. We also require
continuing education for all staff. We demonstrate our commitment to employees'
professional development by offering classes and training programs, as well as
tuition reimbursement benefits. We have also implemented our Best in Class 2000
system at a majority of our youth services programs.

     We recognize that, in the operation of programs for at-risk and troubled
youths, a primary consideration is to protect the safety of the staff and youths
within a facility, as well as the neighboring community. Thus, our programs
emphasize security, risk assessment and close supervision by responsible and
well-trained staff.

FACILITIES AND PROGRAMS

     The following tables set forth information as of June 30, 2001 regarding
our disabilities services and youth services operations, respectively:

 DIVISION FOR PERSONS WITH DISABILITIES



                                                             CONTRACT     INITIAL OPERATION
LOCATION                          TYPES OF PROGRAMS        CAPACITY(1)       IN LOCATION
--------                     ---------------------------   ------------   -----------------
                                                                 
Alabama....................  Group Homes                          24            1998
Arizona....................  Periodic Services,                1,255            1998
                             Supported Living
California.................  Larger Facilities, Group            965            1995
                             Homes
Colorado...................  Supported Living, Group             359            1992
                             Homes
Delaware...................  Group Homes                          22            1999


                                        6




                                                             CONTRACT     INITIAL OPERATION
LOCATION                          TYPES OF PROGRAMS        CAPACITY(1)       IN LOCATION
--------                     ---------------------------   ------------   -----------------
                                                                 
Florida....................  Larger Facilities, Group            350            1983
                             Homes, ABI, Supported
                             Living
Georgia....................  Supported Living, Periodic        2,393            1997
                             Services, Group Homes
Illinois...................  Larger Facilities, ABI,             112            1995
                             Group Homes
Indiana....................  Larger Facilities, Group          1,492            1983
                             Homes, Supported Living
Iowa.......................  ABI                                   9            1998
Kansas.....................  Supported Living, Day               574            1995
                             Programs, Group Homes
Kentucky...................  Larger Facilities, Group            673            1978
                             Homes, Supported Living,
                             Day Programs
Louisiana..................  Group Homes, Supported              479            1984
                             Living
Maryland...................  Group Homes                          19            1999
Missouri...................  Supported Living, ABI,              456            1997
                             Group Homes
Nebraska...................  Group Homes, Supported              280            1992
                             Living, Day Program,
                             Periodic Services
Nevada.....................  Group Homes                         270            1999
New Jersey.................  Supported Living, Group             138            1997
                             Homes
New Mexico.................  Supported Living, Group             252            1994
                             Homes
North Carolina.............  Periodic Services,                1,633            1997
                             Supported Living, Group
                             Homes
Ohio.......................  Larger Facility, Group            1,108            1995
                             Homes, Supported Living
Oklahoma...................  Supported Living                    211            1995
Ontario, Canada............  ABI                                  48            1999
Pennsylvania...............  Supported Living                     20            1997
South Carolina.............  Periodic Services                   200            1998
Tennessee..................  Group Homes                          24            1993
Texas......................  Larger Facilities, Group          3,457            1993
                             Homes, Supported Living,
                             Day Programs, ABI
Virginia...................  Supported Living                      6            1999
Washington.................  Supported Living                     71            1998
Washington, D.C............  Group Homes                         223            1999
West Virginia..............  Group Homes, Supported              564            1987
                             Living
                                                              ------
Total......................                                   17,687
                                                              ======


                                        7


---------------

(1) Contract capacity includes, in the case of licensed facilities, the number
    of persons covered by the applicable license or permit, and generally in
    other cases, the number of persons covered by the applicable contract.
    Contract capacity does not include capacity for day programs.

 DIVISION FOR YOUTH SERVICES



                                                            CONTRACT     INITIAL OPERATION
LOCATION                          TYPES OF PROGRAMS        CAPACITY(1)      IN LOCATION
--------                     ---------------------------   -----------   -----------------
                                                                
Arizona....................  Job Corps (2 centers)            1,038            1997
                             Residential, Alternative
                             School, Charter School
California.................  Job Corps                          850            1999
Colorado...................  Residential,                       634            1996
                             Non-Residential, Secure,
                             Day Treatment, Apartment
                             Living
Florida....................  Job Corps, Residential             528            1983
Georgia....................  Residential, Alternative            82            1997
                             School
Indiana....................  Foster Care, Residential           153            1997
Kentucky...................  Residential, Alternative         2,187            1996
                             School, Foster Care, Job
                             Corps
Maryland...................  Residential                         21            1997
Mississippi................  Alternative School                  79            1998
New Jersey.................  Job Corps                          530            1995
New York...................  Job Corps (2 centers)              520            1986
Ohio.......................  Foster Care                         55            1997
Oklahoma...................  Job Corps                          650            1997
Pennsylvania...............  Job Corps                          800            1997
Puerto Rico................  Job Corps (3 centers),             915            1990
                             Secure Treatment
Tennessee..................  Alternative School,                132            1997
                             Shelter, Wilderness Program
Utah.......................  Residential                         23            1998
Virginia...................  Job Corps (2 centers)              550            1997
Washington, D.C............  Residential                         45            1999
                                                              -----
  Total....................                                   9,792
                                                              =====


---------------

(1) Contract capacity includes, in the case of licensed facilities, the number
    of persons covered by the applicable license or permit, and generally in
    other cases, the number of persons covered by the applicable contract.

CONTRACTS

 CONTRACTS WITH STATE AGENCIES

     Federal and state agencies regulate contracts for participation as a
provider of services in Medicaid programs. Within a given state we generally
have multiple provider contracts covering individual group homes, facilities or
clusters of clients. Although the contracts have a stated term of one year and
generally may be terminated without cause on 60-days notice, the contracts are
typically renewed annually if we have complied with licensing, certification,
program standards and other regulatory requirements. Serious deficiencies can
result in delicensure or decertification actions by these agencies. As provider
of record, we

                                        8


contractually obligate ourselves to adhere to the applicable federal and state
regulations regarding the provision of services, the maintenance of records and
submission of claims for reimbursement under Medicaid and pertinent state
medical assistance programs. Pursuant to provider agreements, we agree to accept
the payment received from the government entity as payment in full for the
services administered to the individuals and to provide the government entity
with information regarding our owners and managers, as well as to comply with
requests and audits of information pertaining to the services we render.
Provider agreements can be terminated at any time for non-compliance with
federal, state or local regulations. Reimbursement methods vary by state and
service type and can be based on a flat-rate or cost-based reimbursement system
on a per person, per diem or per unit-of-service basis. See Exhibit 99.1.

     State and local government entities regulate contracts for our youth
services programs, excluding Job Corps. Contracts generally have one-year terms,
subject to annual renewal, or cover individuals for specific terms. The contract
rate is also accepted as payment in full for services rendered.

 MANAGEMENT CONTRACTS

     Management contracts with state agencies or other providers of record
typically require us to manage the day-to-day operations of facilities or
programs. Most of these contracts are long-term (generally two to five years in
duration, with several contracts having 30-year terms) and are subject to
renewal or re-negotiation provided that we meet program standards and regulatory
requirements. Except in West Virginia, in which contracts cover individual
homes, most management contracts cover groups of two to 16 facilities. Depending
upon the state's reimbursement policies and practices, management contract fees
are computed on the basis of a fixed fee per individual, which may include some
form of incentive payment, a percentage of operating expenses (cost-plus
contracts), a percentage of revenue or an overall fixed fee paid regardless of
occupancy. Historically, our Medicaid provider contracts and management
contracts have been renewed or satisfactorily renegotiated. We believe our
experience in this regard is consistent with the overall experience of other
operators in the disabilities services business.

 JOB CORPS CONTRACTS

     Contracts for Job Corps centers are awarded pursuant to a rigorous bid
process. After successfully bidding, we operate Job Corps centers under
comprehensive contracts negotiated with the DOL. Pursuant to those contracts, we
are reimbursed for all facility and program costs related to Job Corps center
operations and allowable indirect costs for general and administrative expenses,
plus a prenegotiated management fee, which is typically a fixed percentage of
facility and program expense.

     The contracts cover a five-year period, consisting of an initial two-year
term with three one-year renewal terms exercisable at the option of the DOL. The
contracts specify that the decision to exercise an option is based on an
assessment of: (i) the performance of the center as compared to its budget; (ii)
compliance with federal, state and local regulations; (iii) qualitative
assessments of center life, education, outreach efforts and placement record;
and (iv) the overall rating received by the center. Shortly prior to the
expiration of the five-year contract period (or earlier if the DOL elects not to
exercise a renewal term), the contract is re-bid, regardless of the operator's
performance. The current operator may participate in the re-bidding process. In
situations where the DOL elects not to exercise a renewal term, however, it is
unlikely that the current operator will be successful in the re-bidding process.
It is our experience that there is usually an inverse correlation between the
performance ratings of the current operator and the number of competitors who
will participate in the re-bidding process, with relatively fewer competitors
expected where performance ratings are high.

     We operate 15 Job Corps centers under 14 separate contracts with the DOL in
South Bronx and Brooklyn, New York; Miami, Florida; Edison, New Jersey; Puerto
Rico (3); Pittsburgh, Pennsylvania; Monroe, Virginia; Guthrie, Oklahoma; Phoenix
and Tucson, Arizona; Marion, Virginia; Morganfield, Kentucky and San Francisco,
California. Of the five-year periods covered by our Job Corps contracts, one
expires in 2001, one in 2002, two in 2003, three in 2004 and five in 2005. We
intend to selectively pursue additional centers through the Request for
Proposals, or RFP, process.

                                        9


     We also provide, under separate contracts with the U.S. Department of
Interior or the primary operator, administrative, counseling, educational,
vocational and other support services for several Job Corps centers we do not
operate.

MARKETING AND DEVELOPMENT

     We focus our marketing activities on initiating and maintaining contacts
and working relationships with state and local governments and governmental
agencies responsible for the provision of the types of disabilities services and
youth services we offer, and identifying other providers who may consider a
management contract arrangement or other relationship with us.

     Our Chief Development Officer directs our marketing efforts for
disabilities services and youth services, except Job Corps. Responsibility for
marketing activities also extends to other of our officers and officers of our
subsidiaries. Senior management reviews marketing activities on a regular basis.

     In our pursuit of government contracts, we contact governments and
governmental agencies in geographical areas in which we operate and in other
geographic areas in which we have identified expansion potential. Contacts are
made and maintained by both regional operations personnel and corporate
development personnel and supported as appropriate by other senior management.
We target new areas based largely on our assessment of the need for our
services, the reimbursement system, the receptivity to out-of-state and
proprietary operators, expected changes in the service delivery system (i.e.,
privatization or downsizing), the labor climate and existing competition.

     We also seek to identify service needs or possible changes in the service
delivery or reimbursement system of governmental entities that may be driven by
changes in administrative philosophy, budgetary considerations, pressure or
legal actions brought by advocacy groups. As we identify needs or possible
changes, we attempt to work with and provide input to the responsible
governmental personnel and to work with provider associations and consumer
advocacy groups. If an RFP results from this process, we then determine whether
and on what terms we will respond and participate in the competitive process.

     With regard to identifying other providers who may be management contract
or other transaction candidates, we attempt to establish relationships with
providers through presentations at national and local conferences, memberships
in national and local provider associations, direct contact by mail, telephone
or personal visits and follow up with information packets.

     In some cases, we may be contacted directly and requested to submit
proposals or become a provider in order to provide services to address specific
problems. These circumstances may include an emergency takeover of a troubled
operation or the need to develop a large number of community placements within a
certain time period.

REFERRAL SOURCES

     We receive substantially all of our clients with MR/DD from third-party
referrals. State or regional agencies maintain lists of people who receive
services, including waiting lists of people who desire services. Generally,
state or local case management systems make family members of persons with MR/DD
aware of available residential or alternative living arrangements. Governmental
or private agencies operate case management systems. Our ABI services receive
referrals from doctors, hospitals, private and workers' compensation insurers
and attorneys. In either case, where it is determined that some form of MR/DD or
ABI service is appropriate, a referral to one or more providers of these
services is then made to family members or other interested parties. We
generally receive referrals or placements of individuals to our AYS and
Youthtrack programs through state or local agencies or entities responsible for
these services. Individuals are recruited to our Job Corps programs largely
through private contractors. We also have contracts directly with the DOL to
recruit students to our own centers. Our reputation and prior experience with
agency staff, case workers and others in positions to make referrals to us are
important for building and maintaining census in our operations.

                                        10


COMPETITION

     A number of competitive factors affect our provision of disabilities
services and youth services, including range and quality of services provided,
cost effectiveness, reporting and regulatory expertise, reputation in the
community, and the location and appearance of facilities and programs. The
markets for disabilities services and youth services are highly fragmented, with
no single company or entity holding a dominant market share. We compete with
other for-profit companies, not-for-profit entities and governmental agencies.

     Individual states remain a major provider of MR/DD services, primarily
through the operation of large institutions. Not-for-profit organizations are
also active in all states and range from small agencies serving a limited area
with specific programs to multi-state organizations. Many of these organizations
are affiliated with advocacy and sponsoring groups such as community mental
health and mental retardation centers and religious organizations.

     The other youth services business in which we engage is one that other
entities may easily enter without substantial capital investment or experience
in management of education or treatment facilities. In addition, some
not-for-profit entities may offer education and treatment programs at a lower
cost than we do in part due to government subsidies, foundation grants, tax
deductible contributions or other financial resources not available to
for-profit companies.

     Currently, only a limited number of companies actively seek Job Corps
contracts because the bidding process is highly specialized and requires a
significant investment of personnel and other resources over a period of several
months. The three largest Job Corps center operators, Management in Training
Corporation, Global Associates/Career Systems and us, operate approximately
one-half of the privately-operated centers. Competition for Job Corps contracts
has increased as the DOL has made efforts to encourage new providers to operate
Job Corps centers, particularly small businesses.

     Some proprietary competitors operate in multiple jurisdictions and may be
well capitalized. We also compete in some markets with smaller local companies
that may have a better understanding of the local conditions than we do and may
be better able to gain political and public acceptance. This competition may
adversely affect our ability to obtain new contracts and complete transactions
on favorable terms. We face significant competition from all of these providers
in the states in which we operate, and we expect to face similar competition in
any state that we may enter in the future.

     Professional staff retention and development is a critical factor in the
successful operation of our business. The competition for talented professional
personnel, such as therapists and QMRPs, is intense. The demands of providing
the requisite quality of service to persons with special needs contribute to a
high turnover rate of direct service staff, leading to increased overtime and
the use of outside consultants and other personnel. Consequently, we place a
high priority on recruiting, training and retaining competent and caring
personnel. In some tight labor markets, we have experienced difficulty in hiring
direct service staff. This has resulted in higher labor costs to us in recent
years. In addition, we typically use a standard professional service agreement
for provision of services by certain professional personnel, which is generally
terminable on 30 or 60-day notice.

GOVERNMENT REGULATION AND REIMBURSEMENT

     Our operations are subject to compliance with various federal, state and
local statutes and regulations. Compliance with state licensing requirements is
a prerequisite for participation in government-sponsored health care assistance
programs, such as Medicaid. The following summary describes material regulatory
considerations applicable to us:

 Funding Levels

     Federal and state funding for our disabilities services business is subject
to statutory and regulatory changes, administrative rulings, policy
interpretations, intermediary determinations and governmental funding
restrictions, all of which may materially increase or decrease program
reimbursement. Congress

                                        11


has historically attempted to curb the growth of federal funding of these
programs, including limitations on payments to programs under the Medicaid
program. Although states in general have historically increased rates to
compensate for inflationary factors, some have curtailed funding due to state
budget deficiencies or other reasons. In these instances, providers acting
through their state health care trade associations may attempt to negotiate or
employ legal action in order to reach a compromise settlement. Our future
revenues may be affected by changes in rate-setting structures, methodologies or
interpretations that may be proposed, or are under consideration in, states
where we operate.

 Reimbursement Requirements

     To qualify for reimbursement under Medicaid programs, our facilities and
programs are subject to various requirements of participation and other
requirements imposed by federal and state authorities. In order to maintain a
Medicaid or state contract, we must meet certain statutory and regulatory
requirements. These participation requirements relate to client rights, quality
of services, facilities and administration. Long-term providers, like us, are
subject to periodic unannounced inspection by state authorities, often under
contract with the appropriate federal agency, to ensure compliance with the
requirements of participation in the Medicaid or state program.

 Licensure

     In addition to the requirements for participation in the Medicaid program
we must meet, our facilities and programs are usually subject to annual
licensing and other regulatory requirements of state and local authorities.
These requirements relate to the condition of the facilities, the quality and
adequacy of personnel and the quality of services. State licensing and other
regulatory requirements vary from jurisdiction to jurisdiction and are subject
to change.

 Regulatory Enforcement

     From time to time, we receive notices from regulatory inspectors that, in
their opinion, there are deficiencies relating to our compliance with various
regulatory requirements. We review these notices and take corrective action as
appropriate. In most cases, we and the reviewing agency agree upon the steps to
be taken to bring the facility or program into compliance with regulatory
requirements, and from time to time, we or one or more of our subsidiaries may
enter into agreements with regulatory agencies requiring us to take certain
corrective action in order to maintain licensure. Serious deficiencies, or
failure to comply with any regulatory agreement, may result in the assessment of
fines or penalties and/or decertification or delicensure actions by the Health
Care Financing Administration or state regulatory agencies, as appropriate.

 Acquisitions and Additions

     Each state in which we currently operate has adopted laws or regulations
that generally require that a state agency approve us as a provider, and some
require a determination that a need exists prior to the addition of beds or
services.

 Cross Disqualifications and Delicensure

     In some circumstances, conviction of abusive or fraudulent behavior with
respect to one facility or program may subject other facilities and programs
under common control or ownership to disqualification from participation in the
Medicaid program. Executive Order 12549 prohibits any corporation or facility
from participating in federal contracts if it or its principals (including but
not limited to officers, directors, owners and key employees) have been
debarred, suspended, or declared ineligible, or have been voluntarily excluded
from participating in federal contracts. In addition, some state regulations
provide that all facilities licensed with a state under common ownership or
control are subject to delicensure if any one or more of such facilities are
delicensed.

                                        12


 Potential Criminal or Civil Sanctions

     The Social Security Act, as amended by the Health Insurance Portability and
Accountability Act of 1996, or the Health Insurance Act, provides for the
mandatory exclusion of providers and related persons from participation in the
Medicaid program if the individual or entity has been convicted of a criminal
offense related to the delivery of an item or service under the Medicaid program
or relating to neglect or abuse of residents. Furthermore, individuals or
entities may be, but are not required to be, excluded from the Medicaid program
under some circumstances including, but not limited to, the following:
convictions relating to fraud; obstruction of an investigation of a controlled
substance; license revocation or suspension; exclusion or suspension from a
state or federal health care program; filing claims for excessive charges or
unnecessary services or failure to furnish medically necessary services; or
ownership or control by an individual who has been excluded from the Medicaid
program, against whom a civil monetary penalty related to the Medicaid program
has been assessed, or who has been convicted of a crime described in this
sentence. The illegal remuneration provisions of the Social Security Act make it
a felony to solicit, receive, offer to pay, or pay any kickback, bribe, or
rebate in return for referring a resident for any item or service, or in return
for purchasing, leasing or ordering any good, service or item, for which payment
may be made under the Medicaid program. Other provisions in the Health Insurance
Act proscribe false statements in billing and in meeting reporting requirements
and in representations made with respect to the conditions or operations of
facilities. A violation of the illegal remuneration statute is a felony and may
result in the imposition of criminal penalties, including imprisonment for up to
five years and/or a fine of up to $25,000. Furthermore, a civil action to
exclude a provider from the Medicaid program could occur. There are also other
civil and criminal statutes applicable to the industry, such as those governing
false billings and anti-supplementation restrictions and the new health care
offenses contained in the Health Insurance Act, including health care fraud,
theft or embezzlement, false statements and obstruction of criminal
investigation of health care offenses. Criminal sanctions for these new health
care criminal offenses can be severe. Sanctions for health care fraud, for
example, include imprisonment for up to 20 years. The agencies administering the
Medicaid program have increased their criminal and civil enforcement activity in
the prevention of program fraud and abuse, including the payment of illegal
remuneration.

 Environmental Laws

     Certain federal and state laws govern the handling and disposal of medical,
infectious, and hazardous waste or impose liability on owners and operators of
real estate. Our failure to comply with those laws or the regulations
promulgated under them could subject us to fines, criminal penalties, and other
enforcement actions. As the owner or operator of real property, we could have
potential liability for any contamination discovered at these sites. We are not
aware of any risks of potential contamination at real property we own or operate
that could result in our incurring material liability as a result of
contamination.

 OSHA

     Federal regulations promulgated by the Occupational Safety and Health
Administration impose additional requirements on us including those protecting
employees from exposure to elements such as blood-borne pathogens. We cannot
predict the frequency of compliance, monitoring, or enforcement actions to which
we may be subject as regulations are implemented, and we cannot assure you that
these regulations will not adversely affect our operations.

INSURANCE

     We maintain professional and general liability, auto, workers' compensation
and other business insurance coverages. As a result of decreasing availability
of coverage at historical rates, we entered into new risk management programs
pertaining to these coverages in December 2000 which were renewed as of July 1,
2001 through June 30, 2002, with some of these programs providing for
significantly higher self-insured retention limits and higher deductibles. The
most significant change occurred in our program for professional and general
liability coverages. The program in place before December 2000 provided coverage
after a deductible of $10,000 per occurrence and claims limits of $1.0 million
per occurrence up to a

                                        13


$3.0 million annual aggregate limit, plus varying amounts of excess coverage.
The new program provides for a $250,000 deductible per occurrence and claims
limits of $5.0 million per occurrence up to a $6.0 million annual aggregate
limit. Additionally, we revised the program for auto insurance to increase the
deductible under the program in place before December 2000 from $0 to $250,000
per occurrence. Furthermore, we revised the program for workers' compensation
insurance to increase the deductible under the program in place before December
2000 from $250,000 to $500,000 per occurrence. Umbrella coverages are in place
for the auto and property insurance programs. The risk management programs for
professional and general liability do not provide for umbrella coverages. As a
result, we estimate the cost for our new business insurance programs to be
approximately $10 million more in fiscal year 2001 than in fiscal year 2000. All
of our business insurance programs are due for renewal July 1, 2002. We have
implemented additional risk management initiatives and believe our insurance
coverages and self-insurance reserves are adequate for our current operations.
However, we cannot assure you that any potential losses on asserted claims will
not exceed our insurance coverages and self-insurance reserves or that our
insurance costs will not further increase.

EMPLOYEES

     As of June 30, 2001, we employed approximately 30,000 people. As of that
date, we were subject to collective bargaining agreements with approximately
1,200 of our employees. We have not experienced any work stoppages and believe
we have good relations with our employees.

PROPERTIES

     As of June 30, 2001, we owned approximately 110 properties and operated
facilities and programs at approximately 2,300 leased properties. Other
facilities and programs are operated under management contracts.

LEGAL PROCEEDINGS

     From time to time, we (or a provider with whom we have a management
agreement), become a party to legal and/or administrative proceedings involving
state program administrators and others that, in the event of unfavorable
outcomes, may adversely affect our revenues and period-to-period comparisons.

     In September 1997, a lawsuit, styled Cause No. 98-00740, Nancy Chesser v.
Normal Life of North Texas, Inc., and Normal Life, Inc. District Court of Travis
County, Texas was filed against a Texas facility operated by the former owners
of Normal Life, Inc. and Normal Life of North Texas, Inc., one of our
subsidiaries, asserting causes of action for negligence, intentional infliction
of emotional distress and retaliation regarding the discharge of residents of
the facility. In May 2000, a judgment was entered in favor of the plaintiff
awarding the plaintiff damages, prejudgment interest and attorneys' fees
totaling $4.8 million. In October 2000, we and American International Specialty
Lines Insurance Company, or AISL, entered into an agreement whereby any
settlement reached in Chesser and a related lawsuit also filed in the District
Court of Travis County, Texas would not be dispositive of whether the claims in
those suits were covered under the policies issued by AISL. AISL thereafter
settled the suits and filed a Complaint for Declaratory Judgment against Normal
Life of North Texas, Inc. and Normal Life, Inc. in the U.S. District Court for
the Northern District of Texas, Dallas Division. In the Complaint, AISL seeks a
declaration of what insurance coverage is available to us in the lawsuits. It is
our position that the lawsuits initiated coverage under the primary policies of
insurance, thus affording adequate coverage to settle the lawsuits within
coverage and policy limits. This declaratory judgment action is currently
scheduled for trial in December 2001. We do not believe it is probable that the
ultimate resolution of this matter will have a material adverse effect on our
consolidated financial condition, results of operations or liquidity.

     In August 1998, with the approval of the State of Indiana, we relocated
approximately 100 individuals from three of our larger facilities to
community-based settings. In June 1999, in a lawsuit styled Omega Healthcare
Investors, Inc. v. Res-Care Health Services, Inc., the owner of these facilities
filed suit against

                                        14


us in the U.S. District Court for the Southern District of Indiana, alleging in
connection therewith breach of contract, conversion and fraudulent concealment.
We, on the advice of counsel, believe that the amount of damages sought by the
plaintiffs is approximately $21 million. It appears the claims for compensatory
damages may be duplicative. We believe that this lawsuit is without merit and
will defend it vigorously. We do not believe it is probable that the ultimate
resolution of this matter will have a material adverse effect on our
consolidated financial condition, results of operations or liquidity.

     In July 2000, AISL filed a Complaint for Declaratory Judgment against us
and one of our subsidiaries in the U.S. District Court for the Southern District
of Texas, Houston Division. In the Complaint, AISL seeks a declaration of what
insurance coverage is available to us in Cause No. 299291-401; In re: Estate of
Trenia Wright, Deceased, et al. v. Res-Care, Inc., et al., which was filed in
Probate Court No. 1 of Harris County, Texas (the Lawsuit). Subsequent to the
filing, we and AISL entered into an agreement whereby any settlement reached in
the Lawsuit would not be dispositive of whether the claims in the Lawsuit were
covered under the policies issued by AISL. AISL thereafter settled the Lawsuit.
It is our position that the Lawsuit initiated coverage under the primary
policies of insurance in more than one policy year, thus affording adequate
coverage to settle the lawsuit within coverage and policy limits. This
declaratory judgment action is currently scheduled for trial in December 2001.
We do not believe it is probable that the ultimate resolution of this matter
will have a material adverse effect on our consolidated financial condition,
results of operations or liquidity.

     In October 2000, we and one of our subsidiaries, Res-Care Florida, Inc.,
f/k/a Normal Life Florida, Inc., entered into an agreement with AISL to resolve
through binding arbitration a dispute as to the amount of coverage available to
settle a lawsuit that had previously been filed in Pinellas County Circuit
Court, Florida and subsequently settled after we entered into the agreement.
AISL contends that a portion of the settlement reached was comprised of punitive
damages and, therefore, not the responsibility of AISL. It is our position that
the settlement was an amount that a reasonable and prudent insurer would pay for
the actual damages alleged and that AISL had opportunities to settle all claims
within available coverage limits. This binding arbitration, which was originally
scheduled for September 2001, has been rescheduled for January 2002. We do not
believe it is probable that the ultimate resolution of this matter will have a
material adverse effect on our consolidated financial condition, results of
operations or liquidity.

     On September 4, 2001, in a case styled Nellie Lake, Individually as an
Heir-at-Law of Christina Zellner, deceased; and as Personal Representative of
the Estate of Christina Zellner v. Res-Care, Inc., et al., in the U.S. District
Court for the District of Kansas at Wichita, a jury awarded noneconomic damages
to Ms. Lake in the amount of $100,000, the statutory maximum, as well as $5,000
for economic loss. In addition, the jury awarded the Estate of Christina Zellner
$5,000 of noneconomic damages and issued an advisory opinion recommending an
award of $2.5 million in punitive damages. The judge, however, is not required
to award the amount of punitive damages recommended by the jury. The judge is
free to award whatever amount he finds reasonable under the circumstances, and
may also conclude that no punitive damages are to be awarded. A hearing on the
issue of punitive damages was held in the last week of September 2001, but the
judge has yet to issue a ruling. Based on the advice of counsel, we intend to
appeal any award of punitive damages ultimately entered, based on numerous
appealable errors at trial. We do not believe it is probable that the ultimate
resolution of this matter will have a material adverse effect on our
consolidated financial condition, results of operations or liquidity.

     In addition, we are a party to various other legal and/or administrative
proceedings arising out of the operation of our facilities and programs and
arising in the ordinary course of business. We believe that most of these claims
are without merit. Furthermore, many of these claims may be covered by
insurance. We do not believe the results of these proceedings or claims,
individually or in the aggregate, will have a material adverse effect on our
consolidated financial condition, results of operations or liquidity.

                                        15

EX-99.3

                                                                    Exhibit 99.3

                             SUMMARY INFORMATION

     This summary highlights the information contained elsewhere in this report.
Because this is only a summary, it does not contain all of the information that
may be important to you. We encourage you to read this entire report and the
documents to which we refer you. You should read the following summary together
with the more detailed information and historical and pro forma financial
information, including the notes relating to that information, appearing
elsewhere in this report. For convenience, throughout this report, the words
"ResCare," "we," "us," "our" or similar words refer to Res-Care, Inc., and all
of its subsidiaries except where the context otherwise requires.

                                  OUR COMPANY

     Founded in 1974, we are the nation's largest private provider of
residential, training, educational and support services to populations with
special needs, including persons with developmental and other disabilities and
at-risk and troubled youths. At June 30, 2001, we provided services to
approximately 26,500 persons with special needs in 32 states, Washington, D.C.,
Canada and Puerto Rico. We believe that we provide high quality services on a
more cost effective basis than traditional state-run programs. We are a leading
provider of services for special needs populations because of our proven
programs, operating procedures, financial resources, economies of scale and
experience working with special needs populations and governmental agencies. We
have two reportable operating segments: our Division for Persons with
Disabilities, or DPD, and our Division for Youth Services, or DYS. For the
twelve months ended June 30, 2001, we derived approximately 83% of our total
revenues directly from state programs or agencies and approximately 15% directly
from the U.S. Departments of Labor and the Interior. For the twelve months ended
June 30, 2001, we had revenues of $882.3 million, EBITDAR of $88.8 million and
EBITDA of $62.0 million (as these terms are defined in note 2 of our "Summary
Consolidated Financial Information").

                                  OUR INDUSTRY

     The markets for services for special needs populations in the United States
are large, growing, highly fragmented and backed by powerful advocacy groups.
Providing services for special needs populations that we serve constitutes a
$65.6 billion market, of which $25.6 billion is funding for mental retardation
or other developmental disabilities, or MR/DD, services according to a July 2000
study by the Department of Disability and Human Development of the University of
Illinois at Chicago ("State of the States Report"), and approximately $40.0
billion is funding for youth services according to data from the National Center
for Education Statistics and the National Association of State Budget Officers.
We believe that we are well positioned to benefit from favorable demographics
and positive current industry trends. We expect our industry to experience
strong growth rates due to the following:

     - Pressure to Reduce Waiting Lists:  The Arc, a national organization and
       advocacy group for persons with MR/DD, estimated that in 1997 individuals
       with MR/DD on waiting lists for placements in one or more residential,
       day/vocational or other community-based service programs were seeking
       approximately 218,000 placements. Many states have received court orders
       requiring them to address long waiting lists. As a result, many states
       are allocating incremental funding to provide for group home placements
       or for new programs like periodic/in-home services.

     - Increased Medicaid Funding:  MR/DD services are funded mainly by state
       Medicaid programs, for which funding has increased at an
       inflation-adjusted average annual rate of approximately 11% over the last
       two decades, according to the State of the States Report. By the end of
       2001, we expect reimbursement rates in the states in which we provide
       MR/DD services to have increased at an average annualized rate of
       approximately 3%.
                                        1


     - Privatization Trend:  State and local government agencies have
       historically provided MR/DD and youth services. However, in recent years,
       there has been a trend throughout the United States toward privatization
       of service delivery functions for special needs populations as
       governments at all levels face continuing pressure to control costs and
       improve the quality of programs. For example, the State of the States
       Report indicates that the percentage of individuals with MR/DD receiving
       residential services in state-run institutions declined from
       approximately 51.5% in 1977 to approximately 12.7% in 1998.

     - Strong Potential Demand for Services for Persons with
       Disabilities:  Estimates of the number of individuals in the United
       States with some form of MR/DD range from 3.2 million, according to the
       State of the States Report, to 7.5 million, according to The Arc.
       However, the State of the States Report estimates that only approximately
       416,000 persons with MR/DD live in staffed facilities or supported-living
       settings. The report estimates that approximately 1.9 million persons
       with MR/DD live with family caregivers, and 25% of these family
       caregivers are parents aged 60 or older. When family caregivers are no
       longer capable of providing for their dependents with MR/ DD, states must
       provide these services for them.

     - Vocal Advocacy Groups:  The rise of advocacy groups, often led by the
       parents or guardians of individuals with MR/DD along with social workers
       and civil rights lawyers, has resulted in long-term trends toward an
       increasing emphasis on training and education as well as an increase in
       community-based settings for residential services, all designed to
       promote a higher quality of life and greater independence.

     - Legislation and Litigation Promoting Increased Community-Based
       Living:  In June 1999, the U.S. Supreme Court, in Olmstead v. L.C., held
       that states must provide individuals with MR/DD the choice to be placed
       in community-based settings when deemed appropriate by medical
       professionals and placement can be reasonably completed within state
       budgets. We believe that this ruling will accelerate the transfer of the
       nation's approximately 45,000 people currently residing in state
       institutional facilities to community-based settings.

     - Expanding Job Corps Program:  The federal Job Corps program, which is
       currently funded at $1.5 billion per year, has grown significantly since
       its inception in 1964. The program provides training for approximately
       70,000 students each year at 119 centers throughout the United States and
       Puerto Rico and is projected by the U.S. Department of Labor, or DOL, to
       increase to 123 centers over the next two years. In addition, federal
       funding for this program has never been reduced since its inception. The
       U.S. Bureau of the Census forecasts that the juvenile population will
       grow by 8% between 1995 and 2015. The U.S. Bureau of the Census estimates
       that 20% of the approximately 70 million children under the age of 18 in
       the United States currently live in households under the poverty level.

                                  OUR BUSINESS

     We provide an array of services in residential and non-residential settings
for adults and youths with MR/DD and disabilities caused by acquired brain
injury and for youths who have special educational or support needs, are from
disadvantaged backgrounds or have severe emotional disorders.

DISABILITIES SERVICES

     We are the nation's largest private provider of services for individuals
with MR/DD. At June 30, 2001, we served more than 17,000 individuals in 29
states, Washington, D.C. and Canada. We base our programs predominantly on
individual habilitation plans designed to encourage greater independence and
development of daily living skills through individualized support and training.
We design these programs to offer individuals specialized support not generally
available in larger state institutions and traditional long-term care facilities
such as nursing homes. We provide our services mainly in community-based group
homes and, to a lesser extent, in other facilities run by us and in the homes of
individuals with MR/DD.

                                        2


At June 30, 2001, approximately 94% of our disabilities services clients resided
in community settings, either in our group homes or in their own family homes.
As of that date, we served approximately 4,800 clients in their family homes. In
each of our programs, services are administered by our employees and
contractors, such as qualified mental retardation professionals, service
coordinators, physicians, psychologists, therapists, social workers and other
direct service staff. We staff our group homes and other facilities 24 hours a
day, seven days per week and provide social, functional and vocational skills
training, supported employment and emotional and psychological counseling or
therapy as needed for each individual. We also provide respite, therapeutic and
other services on an as-needed or hourly basis through our periodic/in-home
services programs. Because most of our clients with MR/DD require services over
their entire lives and many states have extensive waiting lists of people
requiring services, we have consistently experienced occupancy rates of at least
97% since 1996.

     We derive our disabilities services revenues primarily from state
government agencies under the Medicaid reimbursement system 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 system. Medicaid is a partnership between the federal and state
governments, whereby the federal government matches a percentage of the
expenditures made by a given state. Each state uses some of these Medicaid funds
to provide services to its MR/DD population. For the twelve months ended June
30, 2001, we generated revenues of $690.1 million, EBITDAR of $96.6 million, and
EBITDA of $73.5 million in DPD, before general corporate expenses.

YOUTH SERVICES

 JOB CORPS PROGRAM

     We are the nation's second largest operator of Job Corps centers with 15
centers serving approximately 6,900 students, or about 15.3% of total Job Corps
enrollees as of June 30, 2001. Founded in 1964, the federal Job Corps program is
funded and administered by the U.S. Department of Labor and provides educational
and vocational skills training, health care, employment counseling and other
support necessary to enable disadvantaged individuals to obtain employment.
These programs operate 24 hours a day, seven days a week at 119 centers
throughout the United States and Puerto Rico and offer vocational training to
meet job opportunities in a given region. Approximately 70% of Job Corps centers
are privately operated, and a Job Corps contract term is generally five years,
including renewals. Under our Job Corps contracts, we are reimbursed for all
facility and program costs related to Job Corps center operations and allowable
indirect costs for general and administrative expenses, plus a prenegotiated
management fee, normally a fixed percentage of facility and program expense. For
the twelve months ended June 30, 2001, we generated revenues of $132.0 million,
EBITDAR of $14.6 million and EBITDA of $14.4 million in our Job Corps program,
before general corporate expenses.

 OTHER YOUTH SERVICES PROGRAMS

     We are among the nation's largest private providers of services to
disadvantaged or at-risk youths, serving approximately 2,300 youths in 11
states, Washington, D.C. and Puerto Rico as of June 30, 2001. Our youth programs
are designed to provide consistent, high quality and cost-effective education
and treatment to address the needs of the various segments of the special needs,
at-risk and troubled youth population. Our programs include secure detention
centers, residential treatment programs, emergency shelters, charter schools,
alternative schools and foster care programs designed to address the specific
needs of at-risk and troubled youths. For the twelve months ended June 30, 2001,
these programs generated revenues of $60.2 million, EBITDAR of $7.0 million and
EBITDA of $4.4 million, before general corporate expenses.

                                        3


                             COMPETITIVE STRENGTHS

     We believe that we are well positioned to take advantage of industry trends
and that our strong competitive position is attributable to a number of factors,
including the following:

 MARKET LEADING POSITION

     We are the nation's largest private provider of services to populations
with special needs. At June 30, 2001, we provided services to approximately
26,500 persons with special needs in 32 states, Washington, D.C., Canada and
Puerto Rico. Based on revenues, we are currently three times the size of our
nearest for-profit competitor in disabilities services. We are also the second
largest Job Corps program operator. Our market leading position is strengthened
by the following:

     - Close, long-standing relationships with state and local agencies as well
       as advocacy groups, and an understanding of various state and federal
       regulations and reimbursement and billing systems;

     - A compelling value proposition to our customers resulting from our
       corporate mission and supported by our economies of scale;

     - Significant barriers to entry, which we have overcome by our size,
       geographic scope, operating infrastructure and our long term
       relationships with government agencies;

     - Our proactive implementation of a comprehensive compliance program, which
       we believe is the first such program in our industry; and

     - Best in Class 2000, our internal quality management system, which we are
       making available to state agencies and other small providers as a model
       quality management system for the industry.

 RECURRING AND STABLE REVENUES

     Our revenues are recurring and stable for the following reasons:

     - We estimate that the average age of our clients with MR/DD is 40 years.
       Individuals with MR/ DD generally require our services for their entire
       lives and have a life expectancy of approximately 70 years;

     - Our clients with MR/DD rarely lose their Medicaid eligibility (although
       clients need to requalify on a periodic basis) and their length of stay
       with us is measured in years, rather than months;

     - We have consistently experienced occupancy rates of at least 97% since
       1996 as a result of strong demand for disabilities services due to long
       state waiting lists;

     - We are reimbursed for our services by Medicaid agencies and other
       government entities in 32 states, as well as by the Department of Labor
       and Department of the Interior, therefore mitigating our reimbursement
       exposure to any one payor;

     - Medicaid funding for disabilities services has risen at an
       inflation-adjusted average annual rate of approximately 11% per year from
       1977 to 1998; and

     - The length of our Job Corps contracts currently averages five years.

 ESTABLISHED RELATIONSHIPS WITH GOVERNMENTAL AGENCIES AND ADVOCACY GROUPS

     We maintain strong relationships with state and local governments and have
developed a reputation as a high quality service provider capable of efficiently
transitioning large numbers of individuals with MR/ DD off waiting lists or from
state institutions and into group homes or other community-based settings. We
believe that our experience and corporate resources enable us to service this
incremental business more successfully than smaller disabilities services
providers. We also have the infrastructure and expertise to accommodate
individuals with MR/DD in their family homes. We are working with advocates and
others

                                        4


to develop funding and find placements for individuals with MR/DD on
state-compiled waiting lists, as well as to enhance the funding available for
existing clients.

 QUALITY SERVICES PROVIDER

     Our size enables us to draw upon the significant experience of our
operations and apply best practices throughout all of our facilities, thereby
improving the quality of our operations. We have spent years developing quality
assurance systems that can address the particular challenges in providing
supports to individuals in the community and in scattered settings. Best In
Class 2000 is our quality management system that establishes the fundamental
expectations we have of our employees and our operations. Best in Class 2000
defines best-practice standards to ensure that we provide high quality services.
We have begun to offer Best In Class 2000 to state agencies and other small
providers with which we work as a model for their quality assurance programs.
The quality of our disabilities services operations is evident in our low level
of deficiencies compared to national averages in facilities subject to Medicaid
survey. We have served the federal Job Corps program since 1976 and won the
National Job Corps Association Member of the Year award, which is given to the
highest quality operator in the program, in two of the last three years. We
believe that our size also enables us to execute our employee training and
development programs effectively and efficiently.

 EXPERIENCED MANAGEMENT TEAM

     Our management team has successfully developed us into the leading
independent provider of services to special needs populations. Our senior
management team of seven executives, led by President and CEO Ronald G. Geary,
has over a century of combined health care experience and 73 years of experience
working with people with special needs. Under Mr. Geary's leadership, we have
grown revenues at a compounded annual growth rate of approximately 30% from $65
million in 1990 to approximately $866 million in 2000 principally due to
acquisitions and internal growth. The presidents of our DPD and DYS operating
divisions have 22 and 28 years of experience in their respective fields. In
addition to our senior leadership, our senior operations personnel have a broad
range of health care experience. We believe that our management team has
excellent depth and breadth and a strong ability to adapt to changing market
conditions.

                               BUSINESS STRATEGY

     Our strategy is to enhance our leading, established market position and to
increase revenue and cash flow by capitalizing on our position as the largest
provider of residential, training, educational and support services to
populations with special needs. Our business strategy focuses on the pursuit of
the following key initiatives:

 ADD NEW GROUP HOMES TO REGIONAL CLUSTERS

     Our current growth strategy is primarily to add new group homes to our
regional clusters where we have existing infrastructure and where Medicaid rates
are attractive, and to selectively pursue other opportunities to provide
services. We plan to achieve this goal, in part, by leveraging our relationships
with various government agencies. According to The Arc, in 1997 individuals with
MR/DD on waiting lists for placements in one or more residential, day/vocational
or other community-based service programs were seeking approximately 218,000
placements. We are working with advocates and others to develop funding and find
placements for these individuals, as well as to enhance the funding available
for individuals with MR/DD.

 INCREASE REVENUES THROUGH EXPANSION OF SERVICES

     We plan to continue to build upon our market leadership position as a
provider of disabilities services and of training and support services for
disadvantaged youths and other special needs populations by

                                        5


expanding the services that we provide to our clients. In particular, we are
focused on growing our periodic/in-home services and our Job Corps and other
youth services programs.

     - Periodic/In-Home Services.  We began our periodic/in-home services to
       individuals with MR/DD in 1997 and serve approximately 4,800 individuals
       today. We believe this represents a significant avenue for growth that
       leverages our existing infrastructure. In addition, these services
       provide stable margins and require limited capital, providing favorable
       returns to us. Periodic services are disabilities services provided in
       the family homes of clients with MR/DD and, as such, require minimal
       capital investment. We believe that these services are in high demand
       from family caregivers and in some cases are used as an interim measure
       by state governments to provide relief to these families. According to a
       customer satisfaction survey we had conducted by an independent surveyor,
       recipients of our periodic services expressed a high degree of
       satisfaction.

     - Job Corps and Other Youth Services Programs.  We will continue to pursue
       Job Corps and other youth services program contracts as they are put out
       for bid by the U.S. Department of Labor and various states. We believe
       that these opportunities are favorable to our business because of the
       stable reimbursement and low capital investment.

 IMPROVE OPERATIONAL EFFICIENCIES AND REDUCE COSTS

     We are continually focused on improving operations in order to both reduce
costs and improve quality. We are leveraging new technologies into tangible
operating efficiencies, improved accounts receivable collection and
cost-effective operations. Currently, we are implementing both an accounts
receivable tracking and billing system, as well as a time and attendance
information system.

     - Accounts Receivable Tracking and Billing System.  We have largely
       completed the installation of the system and have converted 84% of our
       historical information. This system enables us to streamline the billing
       process by automatically populating required data fields, removing many
       manual steps required to properly send bills and therefore improve the
       timing and collection of accounts receivable. We believe that this system
       will enable us to produce complete and accurate bills on a more timely
       and more frequent basis and thereby reduce our days sales outstanding and
       improve cash flow.

     - Time and Attendance System.  The challenge of monitoring our
       approximately 30,000 full-time and part-time employees as well as
       vacation, overtime and temporary labor costs prompted us to find an
       appropriate time and attendance system. We have begun testing such a
       system and plan to install it during the next 16 months. We believe that
       this system will enable us to more efficiently staff our facilities and
       reduce unnecessary overtime and temporary staffing.

     - Increased Accountability at Core Office Level.  In anticipation of the
       implementation of our new information systems, we have created and
       implemented new labor/hour tracking procedures that enable core office
       administrators to monitor direct service hours on a weekly basis. We
       believe these tracking procedures aided in the stabilization and slight
       reduction in total labor hours and costs we experienced in the second
       quarter of 2001. In addition, by improving the oversight of the accounts
       receivables procedures at the local level, we reduced days sales
       outstanding from 66 days at June 30, 2000 to 64 days at June 30, 2001,
       representing increased cash flow of nearly $5 million.

                                        6


                              RECENT DEVELOPMENTS

     On September 10, 2001, we entered into a commitment letter with National
City Bank to provide us with an $80.0 million revolving credit facility
(including a $50.0 million letter of credit sublimit). We expect to complete a
definitive credit agreement relating to this facility so as to replace our
existing credit facility in November 2001. We expect the termination of our
existing credit facility, if completed, to result in an extraordinary loss, net
of tax, of approximately $1.4 million.

RECENT UNAUDITED FINANCIAL RESULTS

     On October 31, 2001 we reported that revenues for the third quarter of 2001
increased to $224.8 million compared with $218.2 million for the year-earlier
period. Earnings before interest, taxes, depreciation, amortization, facility
rent and special charges (EBITDAR) for the third quarter of 2001 was $23.6
million compared with $24.5 million for the year-earlier period, and earnings
before interest, taxes, depreciation, amortization and special charges (EBITDA)
for the third quarter of 2001 was $15.8 million compared with $18.5 million for
the year-earlier period. In July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142 which, effective
January 1, 2002, will require that goodwill no longer be amortized, but instead
be tested for impairment annually. For the third quarter of 2001, amortization
of goodwill approximated $2.0 million.

     Net income for the third quarter of 2001 was $3.5 million, compared with
net income of $3.1 million for the year-earlier period. EBITDAR, EBITDA and
operating income for the third quarter of 2001 included a bequest to one of our
operations, offset by a discretionary contribution made to one of our pension
plans, resulting in a net increase to EBITDAR, EBITDA and operating income of
approximately $0.6 million. Excluding a restructuring charge, net income for the
year-earlier period amounted to $4.0 million. As of September 30, 2001, net
accounts receivable were $157.8 million, with net days sales outstanding of 64
days.



                                                       THREE MONTHS ENDED         NINE MONTHS ENDED
                                                          SEPTEMBER 30              SEPTEMBER 30
                                                     -----------------------   -----------------------
                                                        2000         2001         2000         2001
                                                     ----------   ----------   ----------   ----------
                                                                        (Unaudited)
                                                      (In thousands, except share and per share data)
                                                                                
STATEMENT OF INCOME DATA:
Revenues...........................................   $218,246     $224,759     $642,484     $665,529
Facility and program expenses......................    192,632      201,684      564,097      599,604
                                                      --------     --------     --------     --------
Facility and program contribution..................     25,614       23,075       78,387       65,925
Operating expenses:
     Corporate general and administrative..........      7,079        8,182       20,572       23,723
     Depreciation and amortization.................      5,642        5,186       16,635       16,038
     Special charges...............................      1,673           --        3,670        1,729
     Other (income) expense........................         66         (924)         304         (834)
                                                      --------     --------     --------     --------
Total operating expenses, net......................     14,460       12,444       41,181       40,656
                                                      --------     --------     --------     --------
Operating income...................................     11,154       10,631       37,206       25,269
Interest, net......................................      5,926        4,383       16,932       14,187
                                                      --------     --------     --------     --------
Income before income taxes.........................      5,228        6,248       20,274       11,082
Income tax expense.................................      2,169        2,718        8,413        4,821
                                                      --------     --------     --------     --------
Net income.........................................   $  3,059     $  3,530     $ 11,861     $  6,261
                                                      ========     ========     ========     ========


                                        7




                                                              SEPTEMBER 30,
                                                                  2001
                                                              -------------
                                                           
BALANCE SHEET DATA:
ASSETS
Cash and cash equivalents...................................    $  9,107
Accounts and notes receivable, net..........................     157,749
Other current assets........................................      27,850
                                                                --------
     Total current assets...................................     194,706
                                                                --------
Property and equipment, net.................................      62,109
Excess of acquisition cost over net assets acquired, net....     210,864
Other assets................................................      34,088
                                                                --------
     Total assets...........................................    $501,767
                                                                ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities.........................................    $105,778
Other long-term liabilities.................................       7,084
Long-term debt..............................................     204,190
Shareholders' equity........................................     184,715
                                                                --------
     Total liabilities and shareholders' equity.............    $501,767
                                                                ========




                                                      THREE MONTHS ENDED    NINE MONTHS ENDED
                                                         SEPTEMBER 30         SEPTEMBER 30
                                                      ------------------   -------------------
                                                       2000       2001       2000       2001
                                                      -------   --------   --------   --------
                                                                          
CASH FLOW DATA:
Cash provided by operating activities...............  $15,205   $ 12,955   $ 15,493   $  7,639
Cash flows from investing activities:
  Purchases of property and equipment...............   (3,531)    (3,588)   (18,381)    (7,044)
  Acquisitions of businesses........................     (305)        --     (2,307)        --
  Proceeds from sales of assets.....................       --      3,663      2,042     25,629
                                                      -------   --------   --------   --------
     Cash provided by (used in) investing
       activities...................................   (3,836)        75    (18,646)    18,585
                                                      -------   --------   --------   --------
Cash flows from financing activities:
  Net (repayments) borrowings of long-term debt.....   (4,335)   (12,263)    12,556    (50,862)
  Proceeds received from exercise of stock
     options........................................       --         88        520        330
                                                      -------   --------   --------   --------
     Cash (used in) provided by financing
       activities...................................   (4,335)   (12,175)    13,076    (50,532)
                                                      -------   --------   --------   --------
Increase (decrease) in cash and cash equivalents....  $ 7,034   $    855   $  9,923   $(24,308)
                                                      =======   ========   ========   ========


                                        8


                                  THE NOTES


Issuer........................   Res-Care, Inc.

Notes Offered.................   $150,000,000 aggregate principal amount of
                                 Senior Notes to be placed pursuant to Rule
                                 144A.

Maturity......................   7 years.

Optional Redemption...........   Non-callable for 4 years.

Equity Clawback...............   Up to 35% of principal with proceeds of
                                 qualified equity offerings.

Change of Control.............   Investor put at 101% of principal plus accrued
                                 and unpaid interest.

Restrictive Covenants.........   Standard high yield.

Use of Proceeds...............   Repay certain indebtedness and general
                                 corporate purposes.

                                        9


                   SUMMARY CONSOLIDATED FINANCIAL INFORMATION

     The following summary consolidated financial information should be read in
conjunction with our historical consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this report and our prior filings of periodic
reports.

     Some of the summary consolidated financial information for and as of each
of the years ended December 31, 1998, 1999 and 2000 set forth below have been
derived from our audited consolidated financial statements. Some of the summary
consolidated financial information for and as of the six months ended June 30,
2001 and 2000, and the twelve months ended June 30, 2001 set forth below have
been derived from our unaudited condensed consolidated financial statements. In
our opinion, the unaudited condensed consolidated financial statements from
which the data below is derived contain all adjustments, which consist only of
normal recurring adjustments, necessary to present fairly our financial position
and results of operations as of the applicable dates and for the applicable
periods. Historical results are not necessarily indicative of the results to be
expected in the future.

     In June 1999, we completed a merger with PeopleServe, Inc., which was
accounted for as a pooling-of-interests. Accordingly, the summary consolidated
financial information has been restated for all periods presented to include the
financial condition and results of operations of PeopleServe. Statistical
information included in "Operating Data" for years prior to the merger has not
been restated to reflect the operations of PeopleServe.

     The summary pro forma and as adjusted consolidated financial information
reflect our sale of $150 million principal amount of notes and the application
of the estimated net proceeds therefrom. The pro forma and as adjusted
financial data  are not necessarily indicative of the operating results that
actually would have occurred if the offering had been effective on the dates
indicated, nor are they necessarily indicative of future operating results.



                                                                                                            TWELVE
                                                                                     SIX MONTHS ENDED       MONTHS
                                                      YEAR ENDED DECEMBER 31,            JUNE 30,            ENDED
                                                   ------------------------------   -------------------    JUNE 30,
                                                     1998       1999       2000       2000       2001        2001
                                                   --------   --------   --------   --------   --------   -----------
                                                       (Dollars in thousands)           (Unaudited)       (Unaudited)
                                                                                        
STATEMENT OF INCOME DATA:
Revenues.........................................  $702,914   $824,479   $865,796   $424,238   $440,770    $882,328
Facility and program expenses....................   604,760    716,469    763,576    371,465    397,920     790,031
                                                   --------   --------   --------   --------   --------    --------
Facility and program contribution................    98,154    108,010    102,220     52,773     42,850      92,297
Operating expenses:
    Corporate general and administrative.........    27,590     27,726     28,111     13,493     15,541      30,159
    Depreciation and amortization................    18,561     21,107     22,308     10,993     10,851      22,166
    Special charges (1)..........................        --     20,498      4,149      1,997      1,729       3,881
    Other (income) expenses......................      (307)        40        270        239         90         121
                                                   --------   --------   --------   --------   --------    --------
Total operating expenses, net....................    45,844     69,371     54,838     26,722     28,211      56,327
                                                   --------   --------   --------   --------   --------    --------
Operating income.................................    52,310     38,639     47,382     26,051     14,639      35,970
Interest, net....................................    13,894     18,750     22,559     11,005      9,804      21,358
                                                   --------   --------   --------   --------   --------    --------
Income from continuing operations before income
  taxes..........................................    38,416     19,889     24,823     15,046      4,835      14,612
Income tax expense...............................    15,484     10,153     10,647      6,244      2,103       6,506
                                                   --------   --------   --------   --------   --------    --------
Income from continuing operations................    22,932      9,736     14,176      8,802      2,732       8,106
Gain from sale of unconsolidated affiliate, net
  of tax.........................................        --        534         --         --         --          --
Cumulative effect of accounting change, net of
  tax............................................        --     (3,932)        --         --         --          --
                                                   --------   --------   --------   --------   --------    --------
Net income.......................................  $ 22,932   $  6,338   $ 14,176   $  8,802   $  2,732    $  8,106
                                                   ========   ========   ========   ========   ========    ========


                                        10




                                                                                                            TWELVE
                                                                                     SIX MONTHS ENDED       MONTHS
                                                      YEAR ENDED DECEMBER 31,            JUNE 30,            ENDED
                                                   ------------------------------   -------------------    JUNE 30,
                                                     1998       1999       2000       2000       2001        2001
                                                   --------   --------   --------   --------   --------   -----------
                                                       (Dollars in thousands)           (Unaudited)       (Unaudited)
                                                                                        
OTHER STATEMENT OF INCOME DATA:
EBITDAR (2)......................................  $ 92,655   $106,043   $ 98,975   $ 51,729   $ 41,547    $ 88,793
EBITDAR margin (2)...............................     13.2%      12.9%      11.4%      12.2%       9.4%       10.1%
EBITDA (2).......................................  $ 70,871   $ 80,244   $ 73,839   $ 39,041   $ 27,219    $ 62,017
EBITDA margin (2)................................     10.1%       9.7%       8.5%       9.2%       6.2%        7.0%
Depreciation and amortization....................  $ 18,561   $ 21,107   $ 22,308   $ 10,993   $ 10,851    $ 22,166
Facility rent (3)................................    21,784     25,799     25,136     12,688     14,328      26,776
Maintenance capital expenditures (4).............    10,734     12,166      9,322      4,202      3,211       8,331

OPERATING DATA:
Number of facilities.............................     1,379      2,350      2,400      2,400      2,400       2,400
Disabilities Services Segment:
    Total revenue................................  $570,626   $654,553   $680,629   $334,003   $343,475    $690,101
    Persons served...............................    11,952     15,927     16,561     16,820     17,320      17,320
    Capacity utilized............................     97.4%      98.2%      97.9%      98.0%      97.9%       97.9%
Youth Services Segment:
    Total revenue................................  $132,288   $169,926   $185,167   $ 90,235   $ 97,295    $192,227
    Persons served...............................     8,395      8,340      9,410      8,448      9,186       9,186
    Capacity utilized............................     97.9%      82.2%      96.4%      90.7%      93.8%       93.8%

SELECTED HISTORICAL RATIOS: (2)(5)(6)(7)
Ratio of EBITDAR to interest and facility rent...      2.5x       2.3x       2.0x       2.1x       1.7x        1.8x
Ratio of EBITDA to interest expense..............      4.6x       4.0x       3.1x       3.4x       2.5x        2.7x
Ratio of total adjusted debt to EBITDAR..........      4.7x       4.7x       4.8x         --         --        5.0x
Ratio of total debt to EBITDA....................      3.7x       3.6x       3.7x         --         --        3.8x
Percentage of total debt to total
  capitalization.................................     62.6%      64.1%      60.5%      64.1%      56.3%       56.3%
Ratio of earnings to fixed charges...............      2.7x       1.7x       1.8x       2.0x       1.3x        1.5x

SELECTED PRO FORMA RATIOS: (2)(5)(6)
Ratio of EBITDAR to interest and facility rent...        --         --         --         --         --        1.7x
Ratio of EBITDA to interest expense..............        --         --         --         --         --        2.4x
Ratio of total adjusted net debt to EBITDAR......        --         --         --         --         --        5.0x
Ratio of total net debt to EBITDA................        --         --         --         --         --        3.7x
Percentage of total net debt to total
  capitalization.................................        --         --         --         --         --       49.8%




                                                                                                  JUNE 30, 2001
                                                                     DECEMBER 31,              --------------------
                                                           --------------------------------                   AS
                                                             1998        1999        2000       ACTUAL     ADJUSTED
                                                           --------    --------    --------    --------    --------
                                                                (Dollars in thousands)             (Unaudited)
                                                                                            
BALANCE SHEET DATA:
Working capital..........................................  $ 75,486    $102,141    $122,305    $ 95,144    $151,076
Total assets.............................................   493,793     523,131     536,106     497,359     542,232
Total debt, including capital leases.....................   258,762     291,713     272,277     233,753     276,202
Total adjusted debt (5)..................................   433,034     498,105     473,365     463,001     490,410
Shareholders' equity.....................................   154,587     163,384     178,123     181,097     182,554
Days sales outstanding...................................        60          62          59          64          64


---------------

(1) Special charges for the year ended December 31, 2000 include the following:
    (1) a charge of $1.8 million ($1.1 million net of tax, or $0.04 per share)
    related to the write-off of costs associated with the terminated
    management-led buyout, (2) a charge of $1.7 million ($1.0 million net of
    tax, or $0.04 per share) related to our 2000 restructuring plan and (3) a
    charge of $0.6 million for the settlement of a lawsuit. Special charges for
    the six months ended June 30, 2001 include a charge of approximately $1.6
    million ($0.9 million net of tax, or $0.04 per share) for costs associated
    with the exit from Tennessee. Special charges for the six months ended June
    30, 2000 include the charge related to the terminated management-led buyout.
    Special charges for 1999 include the charge of $20.5 million ($13.7 million
    net of tax, or $0.55 per share) recorded in connection with the PeopleServe
    merger.

                                        11


(2) EBITDA is defined as earnings from continuing operations before depreciation
    and amortization, net interest expense, income taxes and special charges.
    EBITDAR is defined as EBITDA before facility rent. EBITDA margin and EBITDAR
    margin are defined as EBITDA and EBITDAR, respectively, divided by total
    revenues. EBITDA and EBITDAR are commonly used as analytical indicators
    within the health care industry, and also serve as measures of leverage
    capacity and debt service ability. EBITDA and EBITDAR should not be
    considered as measures of financial performance under accounting principles
    generally accepted in the United States, and the items excluded from EBITDA
    and EBITDAR are significant components in understanding and assessing
    financial performance. EBITDA and EBITDAR should not be considered in
    isolation or as alternatives to net income, cash flows generated by
    operating, investing or financing activities or other financial statement
    data presented in the consolidated financial statements as indicators of
    financial performance or liquidity. Because EBITDA and EBITDAR are not
    measurements determined in accordance with accounting principles generally
    accepted in the United States and are thus susceptible to varying
    calculations, EBITDA and EBITDAR as presented may not be comparable to other
    similarly titled measures of other companies.

(3) Facility rent is defined as land and building lease expense less
    amortization of any deferred gain on applicable sale and leaseback
    transactions.

(4) Maintenance capital expenditures represent purchases of fixed assets
    excluding land, buildings and acquisitions of businesses.

(5) Total adjusted debt is defined as total debt plus annual facility rent times
    a multiple of eight.

(6) Total net debt is defined as total debt net of cash and cash equivalents.
    Total adjusted net debt is defined as total adjusted debt net of cash and
    cash equivalents.

(7) For the purpose of determining the ratio of earnings to fixed charges,
    earnings are defined as income before income taxes, plus fixed charges.
    Fixed charges consist of interest expense on all indebtedness and
    amortization of capitalized debt issuance costs.

                                        12


                                 CAPITALIZATION

     The following table sets forth our capitalization as of June 30, 2001, on
an actual basis and as adjusted to give effect to the offering and the
anticipated application of the estimated net proceeds. You should read this
table in conjunction with the consolidated financial statements and the related
notes to the consolidated financial statements included in this report. See
"Unaudited Pro Forma Consolidated Financial Data", "Selected Consolidated
Historical Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."



                                                                    JUNE 30, 2001
                                                                    -------------
                                                                ACTUAL      AS ADJUSTED
                                                              ----------   -------------
                                                              (Unaudited, in thousands)
                                                                     
Cash and cash equivalents...................................   $  8,252       $ 47,625
                                                               ========       ========
Total debt (including current maturities):
  Revolving credit facility.................................   $ 93,697       $     --
  Obligations under capital leases..........................      8,151          8,151
       % Senior Notes due 2008 offered hereby...............         --        150,000
  6% Convertible subordinated notes due 2004................    107,763         97,909
  5.9% Convertible subordinated notes due 2005..............     19,613         15,613
  Other debt................................................      4,529          4,529
                                                               --------       --------
       Total debt...........................................    233,753        276,202
                                                               --------       --------
Shareholders' equity:
  Common stock..............................................     47,856         47,856
  Additional paid-in capital................................     29,158         29,158
  Retained earnings.........................................    104,083        105,540
                                                               --------       --------
       Total shareholders' equity...........................    181,097        182,554
                                                               --------       --------
       Total capitalization.................................   $414,850       $458,756
                                                               ========       ========


                                        13


           UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

     The following unaudited pro forma condensed consolidated financial
information is based on our historical consolidated financial statements
included elsewhere in this report, adjusted to give pro forma effect to the
following, which we collectively referred to as the "transactions": (1) the
issuance of the notes, (2) the repayment of amounts outstanding under our
existing credit facility and (3) the redemption of $14.0 million in face value
of our convertible subordinated notes.

     The unaudited pro forma condensed consolidated balance sheet data as of
June 30, 2001 gives effect to the transactions as if they had occurred on June
30, 2001. The unaudited pro forma consolidated statements of income data for the
year ended December 31, 2000 and the six months ended June 30, 2001 give effect
to the transactions as if they had occurred at the beginning of the respective
periods. The unaudited pro forma condensed adjustments are based upon available
information and certain assumptions that we believe are reasonable under the
circumstances. The unaudited pro forma condensed consolidated financial
statements do not purport to represent what our results of operations or
financial condition would actually have been had the transactions occurred on
such dates, nor do they purport to project our results of operations or
financial condition for any future period or date. The information set forth
below should be read together with the other financial information contained in
sections entitled "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our consolidated financial statements included elsewhere in
this report or in our prior filings of periodic reports.



                                                               ACTUAL
                                                              JUNE 30,    PRO FORMA
                                                                2001     ADJUSTMENTS    PRO FORMA
                                                              --------   -----------    ---------
                                                                        (In thousands)
                                                                               
BALANCE SHEET DATA:
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  8,252    $ 39,373(1)   $ 47,625
  Other current assets......................................   179,331                   179,331
                                                              --------                  --------
     Total current assets...................................   187,583                   226,956
Other assets................................................   309,776       5,500(2)    315,276
                                                              --------                  --------
     Total assets...........................................  $497,359                  $542,232
                                                              ========                  ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities, excluding current maturities of
  long-term debt............................................  $ 74,913         967(3)   $ 75,880
Long-term debt (including current maturities):
  Credit facility with banks................................    93,697     (93,697)(4)        --
  6% convertible subordinated notes due 2004................   107,763      (9,854)(5)    97,909
  5.9% convertible subordinated notes due 2005..............    19,613      (4,000)(6)    15,613
  Senior notes due 2008.....................................        --     150,000(7)    150,000
  Obligations under capital leases..........................     8,151                     8,151
  Notes payable and other...................................     4,529                     4,529
                                                              --------                  --------
     Total long-term debt...................................   233,753                   276,202
Other long-term liabilities.................................     7,596                     7,596
                                                              --------                  --------
     Total liabilities......................................   316,262                   359,678
Shareholders' equity........................................   181,097       1,457(8)    182,554
                                                              --------                  --------
     Total liabilities and shareholders' equity.............  $497,359                  $542,232
                                                              ========                  ========


                                        14




                                  YEAR ENDED DECEMBER 31, 2000          SIX MONTHS ENDED JUNE 30, 2001
                              ------------------------------------   ------------------------------------
                                          PRO FORMA                              PRO FORMA
                               ACTUAL    ADJUSTMENTS     PRO FORMA    ACTUAL    ADJUSTMENTS     PRO FORMA
                              --------   -----------     ---------   --------   -----------     ---------
                                                            (In thousands)
                                                                              
STATEMENT OF INCOME DATA:
Revenues....................  $865,796                   $865,796    $440,770                   $440,770
Facility and program
  expenses..................   763,576                    763,576     397,920                    397,920
                              --------                   --------    --------                   --------
Facility and program
  contribution..............   102,220          --        102,220      42,850          --         42,850
Operating expenses..........    54,838                     54,838      28,211                     28,211
                              --------                   --------    --------                   --------
Operating income............    47,382          --         47,382      14,639          --         14,639
Interest, net...............    22,559       2,012(9)      24,571       9,804       2,332(9)      12,136
                              --------                   --------    --------                   --------
Income before income
  taxes.....................    24,823      (2,012)        22,811       4,835      (2,332)         2,503
Income tax expense..........    10,647        (802)(10)     9,845       2,103        (930)(10)     1,173
                              --------                   --------    --------                   --------
Income from continuing
  operations................  $ 14,176    $ (1,210)      $ 12,966    $  2,732    $ (1,402)      $  1,330
                              ========    ========       ========    ========    ========       ========
Basic and diluted earnings
  per share.................  $   0.58    $  (0.05)      $   0.53    $   0.11    $  (0.06)      $   0.05
                              ========    ========       ========    ========    ========       ========


---------------

 (1) Cash and cash equivalents -- to reflect adjustments to record the following
     (in thousands):

                                                           
To record the proceeds from the issuance of the 10.5% senior
  notes.....................................................  $150,000
To record the repayment of amounts outstanding under the
  existing credit facility..................................   (93,697)
To record the redemption of a portion of the 5.9%
  convertible subordinated notes............................    (3,080)
To record the redemption of a portion of the 6% convertible
  subordinated notes........................................    (8,350)
To record the payment of transaction fees associated with
  the issuance of the 10.5% senior notes....................    (5,500)
                                                              --------
                                                              $ 39,373
                                                              ========



 (2) To record the deferred financing costs related to the issuance of the
     senior notes.

 (3) To record the liability for income taxes on the gain on the redemption of
     the convertible subordinated notes.

 (4) To record the repayment of amounts outstanding under the existing credit
     facility with banks.

 (5) To record the repayment of a portion of the outstanding 6% convertible
     subordinated notes due 2004. The pro forma adjustment assumes redemption of
     the 6% notes at 84.7% of face value.

 (6) To record the repayment of a portion of the outstanding 5.9% convertible
     subordinated notes due 2004. The pro forma adjustment assumes redemption of
     the 5.9% notes at 77.0% of face value.

 (7) To record the issuance of the 10.5% senior notes.

 (8) To record the gain on redemption of the convertible subordinated notes of
     $2,424 (in thousands), net of applicable income taxes of $967 (in
     thousands).

 (9) Adjustments to reflect the expected increase in interest expense resulting
     from the issuance of the senior notes at an annual yield equal to 10.5%,
     amortization of the related senior note issuance costs, the repayment of
     the indebtedness under the existing credit facility with banks and the
     redemption of portions of the convertible subordinated notes.



                                                               YEAR ENDED     SIX MONTHS
                                                              DECEMBER 31,       ENDED
                                                                  2000       JUNE 30, 2001
                                                              ------------   -------------
                                                                     (In thousands)
                                                                       
To record interest on senior notes at 10.5%.................    $15,750         $7,875
To record amortization of senior note issuance costs........        786            393
To eliminate interest on the existing credit facility which
  will be repaid............................................    (13,688)        (5,518)
Interest on convertible subordinated notes which will be
  repaid....................................................       (836)          (418)
                                                                -------         ------
                                                                $ 2,012         $2,332
                                                                =======         ======


(10) To record the tax impact of the pro forma adjustments described in note (9)
     above using a statutory tax rate of 39.88%.

                                        15


                SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     The following selected historical consolidated financial data should be
read in conjunction with our historical consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report or in our prior
filings of periodic reports.

     Some of the selected historical consolidated financial data for and as of
each of the years ended December 31, 1996, 1997, 1998, 1999 and 2000 set forth
below have been derived from our audited consolidated financial statements. Some
of the selected historical consolidated financial data for and as of the six
months ended June 30, 2001 and 2000 set forth below have been derived from our
unaudited condensed consolidated financial statements. In our opinion, the
unaudited condensed consolidated financial statements from which the data below
is derived contain all adjustments, which consist only of normal recurring
adjustments, necessary to present fairly our financial position and results of
operations as of the applicable dates and for the applicable periods. Historical
results are not necessarily indicative of the results to be expected in the
future.

     In June 1999, we completed a merger with PeopleServe, Inc. and in January
1997, we acquired the partnership interests in Premier Rehabilitation Centers.
Both transactions were accounted for as poolings-of-interests. Accordingly, our
selected historical consolidated financial data has been restated for all
periods presented to include the financial condition and results of operations
of PeopleServe and Premier. Statistical information included in "Operating Data"
for years prior to the mergers has not been restated to reflect the operations
of PeopleServe and Premier.

     The selected as adjusted historical consolidated financial data assumes
that the offering was effective as of the beginning of the periods presented and
assumes an interest rate of 10.5%. The as adjusted amounts may not be indicative
of the results that actually would have occurred if the offering had been
effective on the dates indicated, nor are they necessarily indicative of future
operating results.



                                                                                                            SIX MONTHS ENDED
                                                                  YEAR ENDED DECEMBER 31,                       JUNE 30,
                                                    ----------------------------------------------------   -------------------
                                                      1996       1997       1998       1999       2000       2000       2001
                                                    --------   --------   --------   --------   --------   --------   --------
                                                       (Dollars in thousands, except per share data)           (Unaudited)
                                                                                                 
STATEMENT OF INCOME DATA:
Revenues..........................................  $315,589   $468,108   $702,914   $824,479   $865,796   $424,238   $440,770
Facility and program expenses.....................   279,568    405,977    604,760    716,469    763,576    371,465    397,920
                                                    --------   --------   --------   --------   --------   --------   --------
Facility and program contribution.................    36,021     62,131     98,154    108,010    102,220     52,773     42,850
Operating expenses:
   Corporate general and administrative...........     9,813     20,061     27,590     27,726     28,111     13,493     15,541
   Depreciation and amortization..................     6,104      9,808     18,561     21,107     22,308     10,993     10,851
   Special charges (1)............................        --         --         --     20,498      4,149      1,997      1,729
   Other (income) expenses........................        (4)        46       (307)        40        270        239         90
                                                    --------   --------   --------   --------   --------   --------   --------
Total operating expenses, net.....................    15,913     29,915     45,844     69,371     54,838     26,722     28,211
                                                    --------   --------   --------   --------   --------   --------   --------
Operating income..................................    20,108     32,216     52,310     38,639     47,382     26,051     14,639
Interest, net.....................................     3,368      5,598     13,894     18,750     22,559     11,005      9,804
                                                    --------   --------   --------   --------   --------   --------   --------
Income from continuing operations before income
 taxes............................................    16,740     26,618     38,416     19,889     24,823     15,046      4,835
Income tax expense................................     5,918     10,987     15,484     10,153     10,647      6,244      2,103
                                                    --------   --------   --------   --------   --------   --------   --------
Income from continuing operations.................    10,822     15,631     22,932      9,736     14,176      8,802      2,732
Gain from sale of unconsolidated affiliate, net of
 tax..............................................        --         --         --        534         --         --         --
Cumulative effect of accounting change, net of
 tax..............................................        --         --         --     (3,932)        --         --         --
                                                    --------   --------   --------   --------   --------   --------   --------
Net income........................................  $ 10,822   $ 15,631   $ 22,932   $  6,338   $ 14,176   $  8,802   $  2,732
                                                    ========   ========   ========   ========   ========   ========   ========
Basic earnings per share:
   From continuing operations.....................  $   0.54   $   0.69   $   0.96   $   0.40   $   0.58   $   0.36   $   0.11
   Net income.....................................      0.54       0.69       0.96       0.26       0.58       0.36       0.11
Diluted earnings per share:
   From continuing operations.....................      0.52       0.68       0.90       0.39       0.58       0.36       0.11
   Net income.....................................      0.52       0.68       0.90       0.25       0.58       0.36       0.11


                                        16




                                                                                                            SIX MONTHS ENDED
                                                                  YEAR ENDED DECEMBER 31,                       JUNE 30,
                                                    ----------------------------------------------------   -------------------
                                                      1996       1997       1998       1999       2000       2000       2001
                                                    --------   --------   --------   --------   --------   --------   --------
                                                       (Dollars in thousands, except per share data)           (Unaudited)
                                                                                                 
OTHER STATEMENT OF INCOME DATA:
EBITDAR(2)........................................  $ 33,582   $ 55,374   $ 92,655   $106,043   $ 98,975   $ 51,729   $ 41,547
EBITDAR margin(2).................................     10.6%      11.8%      13.2%      12.9%      11.4%      12.2%       9.4%
EBITDA(2).........................................  $ 26,212   $ 42,024   $ 70,871   $ 80,244   $ 73,839   $ 39,041   $ 27,219
EBITDA margin(2)..................................      8.3%       9.0%      10.1%       9.7%       8.5%       9.2%       6.2%
Depreciation and amortization.....................  $  6,104   $  9,808   $ 18,561   $ 21,107   $ 22,308   $ 10,993   $ 10,851
Facility rent(3)..................................     7,370     13,350     21,784     25,799     25,136     12,688     14,328
Maintenance capital expenditures(4)...............     7,297     10,518     10,734     12,166      9,322      4,202      3,211
OPERATING DATA:
Number of facilities..............................       421        524      1,379      2,350      2,400      2,400      2,400
Disabilities Services Segment:
   Total revenue..................................  $274,025   $405,495   $570,626   $654,553   $680,629   $334,003   $343,475
   Persons served.................................     4,899      6,628     11,952     15,927     16,561     16,820     17,320
   Capacity utilized..............................     97.9%      98.2%      97.4%      97.0%      97.4%      98.0%      97.9%
Youth Services Segment:
   Total revenue..................................  $ 41,564   $ 62,613   $132,288   $169,926   $185,167   $ 90,235   $ 97,295
   Persons served.................................     2,605      5,323      8,395      8,340      9,410      8,448      9,186
   Capacity utilized..............................     97.6%      97.6%      97.9%      82.2%      96.4%      90.7%      93.8%
SELECTED HISTORICAL RATIOS:(2)(5)(6)
Ratio of EBITDAR to interest and facility rent....      3.0x       2.8x       2.5x       2.3x       2.0x       2.1x       1.7x
Ratio of EBITDA to interest expense...............      6.7x       6.4x       4.6x       4.0x       3.1x       3.4x       2.5x
Ratio of total adjusted debt to EBITDAR...........      3.9x       4.8x       4.7x       4.7x       4.8x         --         --
Ratio of total debt to EBITDA.....................      2.7x       3.7x       3.7x       3.6x       3.7x         --         --
Percentage of total debt to total
 capitalization...................................     48.0%      55.7%      62.6%      64.1%      60.5%      64.1%      56.3%
Ratio of earnings to fixed charges................      3.7x       3.5x       2.7x       1.7x       1.8x       2.0x       1.3x
BALANCE SHEET DATA:
Working capital...................................  $ 39,475   $106,001   $ 75,486   $102,141   $122,305   $119,758   $ 95,144
Total assets......................................   190,029    344,301    493,793    523,131    536,106    551,098    497,359
Total debt, including capital leases..............    71,105    156,316    258,762    291,713    272,277    309,053    233,753
Shareholders' equity..............................    77,117    124,325    154,587    163,384    178,123    172,758    181,097
Days sales outstanding............................        58         58         60         62         59         67         64




                                                               YEAR ENDED      SIX MONTHS
                                                              DECEMBER 31,   ENDED JUNE 30,
                                                                  2000            2001
                                                              ------------   --------------
                                                                       
AS ADJUSTED DATA:(6)
As adjusted income from continuing operations...............    $12,966          $1,330
As adjusted diluted earnings per share from continuing
  operations................................................       0.53            0.05
As adjusted ratio of earnings to fixed charges..............       1.7x            1.1x


---------------

(1) Special charges for the year ended December 31, 2000 include the following:
    (1) a charge of $1.8 million ($1.1 million net of tax, or $0.04 per share)
    related to the write-off of costs associated with the terminated
    management-led buyout, (2) a charge of $1.7 million ($1.0 million net of
    tax, or $0.04 per share) related to our 2000 restructuring plan and (3) a
    charge of $0.6 million for the settlement of a lawsuit. Special charges for
    the six months ended June 30, 2001 include a charge of approximately $1.6
    million ($0.9 million net of tax, or $0.04 per share) for costs associated
    with the exit from Tennessee. Special charges for the six months ended June
    30, 2000 include the charge related to the terminated management-led buyout.
    Special charges for 1999 include the charge of $20.5 million ($13.7 million
    net of tax, or $0.55 per share) recorded in connection with the PeopleServe
    merger.

(2) EBITDA is defined as earnings from continuing operations before depreciation
    and amortization, net interest expense, income taxes and special charges.
    EBITDAR is defined as EBITDA before facility rent. EBITDA margin and EBITDAR
    margin are defined as EBITDA and EBITDAR, respectively, divided by total
    revenues. EBITDA and EBITDAR are commonly used as analytical indicators
    within the health care industry, and also serve as measures of leverage
    capacity and debt service ability. EBITDA and EBITDAR should not be
    considered as measures of financial performance under accounting principles
    generally accepted in the United States, and the items excluded from EBITDA
    and EBITDAR are significant components in understanding and assessing
    financial performance. EBITDA and EBITDAR should not be considered in
    isolation or as alternatives to net income, cash
                                        17


    flows generated by operating, investing or financing activities or other
    financial statement data presented in the consolidated financial statements
    as indicators of financial performance or liquidity. Because EBITDA and
    EBITDAR are not measurements determined in accordance with accounting
    principles generally accepted in the United States and are thus susceptible
    to varying calculations, EBITDA and EBITDAR as presented may not be
    comparable to other similarly titled measures of other companies.

(3) Facility rent is defined as land and building lease expense less
    amortization of any deferred gain on applicable sale and leaseback
    transactions.

(4) Maintenance capital expenditures represent purchases of fixed assets
    excluding land, buildings and acquisitions of businesses.

(5) Total adjusted debt is defined as total debt plus annual facility rent times
    a multiple of eight.

(6) For the purpose of determining the ratio of earnings to fixed charges,
    earnings are defined as income before income taxes, plus fixed charges.
    Fixed charges consist of interest expense on all indebtedness and
    amortization of capitalized debt issuance costs.

                                        18

EX-99.4

                                                                    Exhibit 99.4

                           FORWARD-LOOKING STATEMENTS

     This report contains numerous forward-looking statements about our
financial condition, results of operations, cash flows, dividends, financing
plans, business strategies, capital or other expenditures, competitive
positions, growth opportunities, plans and objectives of management, markets
for debt securities and other matters. The words "estimate," "project,"
"intend," "expect," "believe," "forecast," and similar expressions are intended
to identify these forward-looking statements, but some of these statements may
use other phrasing. In addition, any statement in this report that is not a
historical fact is a "forward-looking statement." Such forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to differ materially from historical results or from any
results expressed or implied by such forward-looking statements. In addition to
the specific risk factors described in Exhibit 99.5, important factors that
could cause actual results to differ materially from those suggested by the
forward-looking statements include, but are not limited to:

     - changes in reimbursement rates, policies or payment practices by
       third-party payors, whether initiated by the payor or legislatively
       mandated;

     - the loss of major customers or contracts with federal or state government
       agencies;

     - impairment of our rights in our intellectual property;

     - increased or more effective competition;

     - changes in laws or regulations applicable to us or failure to comply with
       existing laws and regulations;

     - future health care or budget legislation or other health reform
       initiatives;

     - increased exposure to professional negligence liability, workers'
       compensation and health insurance claims;

     - changes in company-wide or business unit strategies;

     - the effectiveness of our advertising, marketing and promotional programs;
       and

     - increases in interest rates.

     Many of these factors are beyond our ability to control or predict, and
readers are cautioned not to put undue reliance on such forward-looking
statements. Except as required by law, we expressly disclaim any obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.

EX-99.5

                                                                    Exhibit 99.5

                                  RISK FACTORS

     You should carefully consider the risks described below in addition to the
other information discussed in this report. Additional risks and uncertainties
not currently known to us or that we currently consider to be immaterial may
also materially and adversely affect our business operations. If any of the
following risks actually occur, we could be materially adversely affected.

RISKS RELATING TO OUR BUSINESS

CHANGES IN FEDERAL, STATE AND LOCAL REIMBURSEMENT POLICIES COULD ADVERSELY
AFFECT OUR REVENUES, CASH FLOWS AND PROFITABILITY.

     Our revenues and operating profitability depend on our ability to maintain
our existing reimbursement levels, to obtain periodic increases in reimbursement
rates to meet higher costs and demand for more services, and to receive timely
payment from applicable governmental agencies. If we do not receive or cannot
negotiate increases in reimbursement rates at approximately the same time as our
costs of providing services increase, our revenues and profitability could be
adversely affected. Changes in how federal and state governmental agencies
operate reimbursement programs can also affect our operating results and
financial condition. Government reimbursement, group home credentialing and
MR/DD client Medicaid eligibility and service authorization procedures are often
complicated and burdensome, and delays can result due to, among other reasons,
documentation errors or delays. These reimbursement issues occasionally cause us
to resubmit claims for repayment and are primarily responsible for our aged
receivables. Approximately 21% of our accounts receivable have aged 360 or more
days as of June 30, 2001. Changes in the manner in which state agencies set
reimbursement rates, interpret program policies and procedures, and review and
audit billings and costs could also affect our business, results of operations,
financial condition and our ability to meet obligations under our indebtedness.

LABOR SHORTAGES COULD REDUCE OUR MARGINS AND PROFITABILITY AND ADVERSELY AFFECT
THE QUALITY OF OUR CARE.

     Our labor costs have a significant impact on our profitability. A variety
of factors, including labor shortages, local competition for workers, turnover,
changes in minimum wages or other direct personnel costs, strikes or work
stoppages, can increase our labor costs and reduce our operating margins. If
conditions in labor markets make it difficult to fill professional and direct
service staff positions, we may have to enhance our wage and benefit packages to
compete in the hiring and retention of qualified personnel. We also may have to
increase overtime pay, enhance our recruitment, retention and training programs,
and use temporary personnel and outside clinical consultants to meet staffing
needs. Difficulties in attracting and maintaining a sufficient number of
qualified personnel could adversely affect the quality of our care. If we are
not successful in maintaining and effectively utilizing our personnel, the
resulting increases in our labor costs or impacts on our quality of care would
reduce our profitability.

IF WE CANNOT MAINTAIN OR IMPROVE OUR CONTROLS AND PROCEDURES FOR MANAGING OUR
BILLING AND COLLECTING, OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION
AND ABILITY TO SATISFY OUR OBLIGATIONS UNDER OUR INDEBTEDNESS COULD BE ADVERSELY
AFFECTED.

     The collection of accounts receivable is among our most significant
management challenges and requires continual focus and involvement by members of
our senior management team. Many of our accounts receivable controls have been
managed through manual procedures, so we are expending significant effort and
resources to implement new billing and collection systems. The limitations of
state management systems and procedures, such as the inability to receive
documentation or disperse funds electronically, may limit any benefits we derive
from our new systems. We can provide no assurance that we will be able to
maintain our current levels of collectibility and days sales outstanding in
future periods. If we cannot maintain or improve our controls and procedures for
managing our billing and collecting, we

                                        1


may be unable to collect certain accounts receivable, which could adversely
affect our business, results of operations, financial condition and ability to
satisfy our obligations under our indebtedness.

OUR INSURANCE COVERAGE AND SELF-INSURANCE RESERVES MAY NOT COVER FUTURE CLAIMS.

     During the last year, changes in the market for insurance, particularly for
professional and general liability coverage, have made it more difficult to
obtain insurance coverage at reasonable rates. As a result, our insurance
program for the current year provides for higher deductibles, lower claims
limits and higher self-insurance retention reserves than in previous years. Our
professional and general liability coverage provides for a $250,000 deductible
per occurrence, and claims limits of $5 million per occurrence up to a $6
million annual aggregate limit. Our previous program generally provided coverage
after a deductible of $10,000 per occurrence and claims limits of $1 million per
occurrence up to a $3 million annual aggregate limit, plus varying amounts of
excess coverage. Our workers' compensation coverage provides for a $500,000
deductible per occurrence, and claims up to statutory limits, as compared to a
$250,000 deductible per occurrence under our previous policy. We have limited
historical data on which to estimate our reserves, which increases the
difficulty of establishing adequate reserves for all of our insurance programs.
If losses on asserted claims exceed our current insurance coverage and accrued
reserves, our business, results of operations, financial condition and ability
to meet obligations under our indebtedness could be adversely affected.

WE WILL HAVE A SUBSTANTIAL AMOUNT OF DEBT, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND COULD PREVENT US
FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.

     At June 30, 2001, our total long-term debt (including current maturities),
after giving effect to the offering and the application of the net proceeds from
the offering, accounted for approximately 60% of our total capitalization. In
addition, subject to restrictions in the indenture covering the notes and the
indentures covering our two series of convertible notes, we may incur additional
indebtedness.

     The degree to which we are leveraged could have important consequences,
including:

     - making it more difficult for us to satisfy our obligations under the
       notes or other indebtedness, which could result in an event of default
       under the notes or our other debt;

     - requiring us to dedicate a substantial portion of our cash flow from
       operations to make required payments on indebtedness, thereby reducing
       the availability of cash flow for working capital, capital expenditures
       and other general corporate purposes;

     - limiting our ability to obtain additional financing in the future;

     - limiting our flexibility in planning for, or reacting to, changes in our
       business and the industry in which we operate;

     - impairing our ability to withstand a downturn in our business or in the
       economy generally; and

     - placing us at a competitive disadvantage against other less leveraged
       competitors.

     The occurrence of any one of these events could have a material adverse
effect on our business, financial condition and results of operations, as well
as our ability to satisfy our obligations under the notes.

WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE
OBLIGATIONS.

     Our ability to generate sufficient cash flow from operations to make
scheduled payments on our debt obligations will depend on our future financial
performance, which will be affected by a range of economic, competitive and
business factors, many of which are outside of our control. If we do not
generate sufficient cash flow from operations to satisfy our debt obligations,
including payments on the notes, we may have to undertake alternative financing
plans, such as refinancing or restructuring our debt, selling assets, reducing
or delaying capital investments or seeking to raise additional capital. We
cannot assure you that any

                                        2


refinancing would be possible, that any assets could be sold, or, if sold, of
the timing of the sales and the amount of proceeds realized from those sales, or
that additional financing could be obtained on acceptable terms, if at all. Our
inability to generate sufficient cash flow to satisfy our debt obligations, or
to refinance our obligations on commercially reasonable terms, would have a
material adverse effect on our business, financial condition and results of
operations, as well as on our ability to satisfy our obligations under the
notes.

OUR INDUSTRY IS SUBJECT TO SUBSTANTIAL GOVERNMENTAL REGULATION.

     We must comply with comprehensive government regulation of our business,
including statutes, regulations and policies governing the licensing of our
facilities, the quality of our service, the revenues we receive for our
services, and reimbursement for the cost of our services. If we fail to comply
with these laws, we can lose contracts and revenues, thereby harming our
financial results. State and federal regulatory agencies have broad
discretionary powers over the administration and enforcement of laws and
regulations that govern our operations. A material violation of a law or
regulation could subject us to fines and penalties and in some circumstances
could disqualify some or all of the facilities and programs under our control
from future participation in Medicaid reimbursement programs. Furthermore,
future regulation or legislation affecting our programs may require us to change
our operations significantly or incur increased costs.

EVENTS THAT HARM OUR REPUTATION WITH GOVERNMENTAL AGENCIES AND ADVOCACY GROUPS
COULD REDUCE OUR REVENUES AND OPERATING RESULTS.

     Our success in obtaining new contracts and renewals of our existing
contracts depends upon maintaining our reputation as a quality service provider
among governmental authorities, advocacy groups for persons with developmental
disabilities and their families, and the public. We also rely on governmental
entities to refer individuals to our facilities and programs. Negative
publicity, changes in public perception, the actions of consumers under our care
or investigations with respect to our industry, operations or policies could
increase government scrutiny, increase compliance costs, hinder our ability to
obtain or retain contracts, reduce referrals, discourage privatization of
facilities and programs, and discourage consumers from using our services. Any
of these events could have a material adverse effect on our financial results
and condition.

OUR OPERATIONS MAY SUBJECT US TO SUBSTANTIAL LITIGATION.

     Our management of residential, training, educational and support programs
for our clients exposes us to potential claims or litigation by our clients or
other persons for wrongful death, personal injury or other damages resulting
from contact with our facilities, programs, personnel or other clients.
Regulatory agencies may initiate administrative proceedings alleging violations
of statutes and regulations arising from our programs and facilities and seeking
to impose monetary penalties on us. We could be required to pay substantial
amounts of money in damages or penalties arising from these legal proceedings,
and some awards of damages or penalties may not be covered by any insurance. If
our third-party insurance coverage and self-insurance reserves are not adequate
to cover these claims, it could have a material adverse effect on our business,
results of operations, financial condition and ability to satisfy our
obligations under our indebtedness.

WE MAY NOT REALIZE ANTICIPATED FINANCIAL BENEFITS FROM OUR IMPLEMENTATION OF NEW
INFORMATION SYSTEMS.

     Our financial results depend on timely billing of payor agencies,
effectively managing our collections, and efficiently utilizing our personnel to
manage our labor costs. We are implementing a new comprehensive billing and
collections system and an interactive time and attendance system that we believe
will improve our management of these functions, improve our collections
experience, and reduce our operating expenses. Our financial results and
condition may be adversely affected if we do not realize

                                        3


the anticipated benefits from our investment in these new information systems or
if we encounter delays or errors during system implementation.

WE DEPEND ON GOVERNMENT FUNDING FOR VIRTUALLY ALL OF OUR REVENUES.

     We derive virtually all of our revenues from federal, state and local
governmental agencies, including state Medicaid programs. Our revenues therefore
are determined by the size of the governmental appropriations for the services
we provide. Budgetary pressures, as well as economic, industry, political and
other factors, could influence governments not to increase (and possibly to
decrease) appropriations for these services, which could reduce our margins
materially. Future federal or state initiatives could institute managed care
programs for persons we serve or otherwise make material changes to the Medicaid
system as it now exists. Federal, state and local governmental agencies
generally condition their contracts with us upon a sufficient budgetary
appropriation. If a governmental agency does not receive an appropriation
sufficient to cover its contractual obligations with us, it may terminate a
contract or defer or reduce our compensation. The loss of, or reduction of,
compensation under our contracts could have a material adverse effect on our
operations.

OUR INABILITY TO RENEW OUR EXISTING CONTRACTS WITH GOVERNMENTAL AGENCIES AND TO
OBTAIN ADDITIONAL CONTRACTS WOULD ADVERSELY AFFECT OUR REVENUES.

     We derive virtually all of our revenues from contracts with federal, state
and local governments and governmental agencies. If we cannot maintain and renew
our existing service contracts on favorable terms and obtain new contracts, our
ability to grow our business will be substantially impaired. Many of our
contracts are subject to government procurement rules and procedures, which may
change from time-to-time. Government contracts are generally subject to audits
and reviews involving an assessment of our performance under the contract, our
reported costs and our compliance with applicable laws and regulations. The
results of an audit or review could cause the termination of a license, reducing
our ability to continue or renew a related contract. Some contracts are subject
to competitive bidding, and our clients generally may terminate their contracts
with us for cause and upon other specified conditions. Although we typically
have multiple contracts within each state, the loss of significant contracts, or
their renewal on less favorable terms, could adversely affect our revenues and
profitability.

IF DOWNSIZING AND PRIVATIZATION IN OUR INDUSTRY DO NOT CONTINUE, OUR BUSINESS
MAY NOT CONTINUE TO GROW.

     Our growth depends on the continuation of trends in our industry toward
providing services to individuals with MR/DD in smaller, community-based
settings, increasing the percentage of individuals with MR/DD served by
non-governmental providers, and increasing the percentage of the market for MR/
DD programs served by well-capitalized, for-profit providers. The continuation
of these trends, and therefore our future success, is subject to a variety of
political, economic, social and legal pressures, including the desire of
governmental agencies to reduce costs and improve levels of service, budgetary
constraints, and pressure brought by advocacy groups to change existing service
delivery systems. A reversal in the downsizing and privatization trends could
reduce the demand for our services, which could adversely affect our revenues
and profitability.

WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, WHICH CAN ADVERSELY AFFECT OUR
RESULTS.

     We compete with other for-profit companies, not-for-profit entities, and
governmental agencies for contracts. Competitive factors may favor other
providers, thereby reducing our success in obtaining contracts, which in turn
would hinder our growth. Non-profit providers may be affiliated with advocacy
groups, health organizations, or religious organizations who have substantial
influence with legislators and government agencies. States may give preferences
to non-profit organizations in awarding contracts. Non-profit providers also may
have access to government subsidies, foundation grants, tax deductible
contributions and other financial resources not available to us. Governmental
agencies and non-profit providers may be subject to limits on liability that do
not apply to us. In some markets, smaller local

                                        4


companies may have a better understanding of local conditions and may be better
able to gain political and public influence than we can. The competitive
advantages enjoyed by other providers may decrease our ability to procure
contracts and limit our revenues.

OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY.

     Our quarterly results of operations may fluctuate significantly due to a
variety of factors, including the timing of Medicaid rate adjustments by the
various states in which we operate, the cumulative effect of rate adjustments
differing from previous estimates, the timing of acquisitions or the opening of
new programs and other matters. Results for any particular quarter may not be
indicative of future quarterly or annual results.

WE MAY DECIDE TO MAKE ACQUISITIONS OR INVESTMENTS IN THE FUTURE THAT COULD TURN
OUT TO BE UNSUCCESSFUL.

     We may in the future pursue acquisitions of businesses or the establishment
of joint venture arrangements that could expand our business. The negotiation of
potential acquisitions or joint ventures as well as the integration of an
acquired or jointly developed business could cause diversion of our management's
time and resources. In addition, we may fail to successfully integrate acquired
businesses with our operations or successfully realize the intended benefits of
any acquisition or joint venture.

RISKS RELATING TO THE OFFERING

THE NOTES ARE EFFECTIVELY SUBORDINATED TO OUR SECURED INDEBTEDNESS AND
STRUCTURALLY SUBORDINATED TO THE LIABILITIES OF OUR SUBSIDIARIES THAT DO NOT
GUARANTEE THE NOTES.

     The notes will be our unsecured obligations and will be effectively
subordinated to our secured indebtedness. The effect of this subordination is
that if we or a subsidiary guarantor are involved in a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding or upon a default in payment
on, or the acceleration of, any indebtedness under our existing credit agreement
or other secured indebtedness, our assets and those of the subsidiary guarantors
that secure indebtedness will be available to pay obligations on the notes only
after all indebtedness under the credit agreement and other secured indebtedness
have been paid in full from those assets. We may not have sufficient assets
remaining to pay amounts due on any or all of the notes then outstanding. The
notes will also be structurally subordinated to all existing and future
obligations, including indebtedness, of our subsidiaries that do not guarantee
the notes, and the claims of creditors of these subsidiaries, including trade
creditors, will have priority as to the assets of these subsidiaries.

THE RESTRICTIONS IMPOSED BY OUR EXISTING INDEBTEDNESS MAY LIMIT OUR ABILITY TO
OPERATE OUR BUSINESS.

     Our existing credit facility prohibits us from prepaying certain of our
other indebtedness, requires us to comply with specified financial ratios and
tests, and restricts our ability to:

     - incur additional indebtedness or issue preferred or redeemable stock;

     - pay dividends and make other distributions;

     - enter into certain mergers or consolidations;

     - enter into sale and leaseback transactions;

     - create liens; and

     - sell and otherwise dispose of assets.

     We expect our new credit facility to include similar restrictive covenants.
We cannot assure you that these restrictions will not adversely affect our
ability to finance our future operations or capital needs or engage in other
business activities that may be in our interest. We also cannot assure you that
we will be able to continue to comply with these covenants and ratios. If we
commit a breach of any of these

                                        5


covenants, ratios or tests, we could be in default under one or more of the
agreements governing our indebtedness, which could require us to immediately pay
all amounts outstanding under those agreements or prohibit us from making draws
on our existing credit facility. If payments of our outstanding indebtedness
were to be accelerated, we cannot assure you that our assets would be sufficient
to repay our indebtedness.

WE MAY BE UNABLE TO RAISE FUNDS NECESSARY TO REPURCHASE THE NOTES UPON A CHANGE
OF CONTROL.

     Upon a change of control, we will be required to offer to repurchase all
outstanding notes at 101% of the principal amount thereof plus accrued and
unpaid interest and liquidated damages, if any, to the date of repurchase.
However, we cannot assure you that we will have sufficient funds available at
the time of a change of control to make the required repurchases or that
restrictions in our credit facility will allow us to make these required
repurchases. Notwithstanding these provisions, we could enter into certain
transactions, including certain recapitalizations, that would not constitute a
change of control but would increase the amount of debt outstanding at such
time.

THERE IS NO PUBLIC MARKET FOR THE NOTES, AND THERE ARE RESTRICTIONS ON THE
RESALE OF THE NOTES.

     We have not registered the notes under the Securities Act. Accordingly, the
notes may only be offered or sold pursuant to an exemption from the registration
requirements of the Securities Act or pursuant to an effective registration
statement. We are required to commence an exchange offer for the notes, or to
register resales of the notes under the Securities Act, within certain time
periods. However, there is no existing market for the notes and, although the
notes are expected to be eligible for trading on The PORTAL Market(SM), we
cannot assure the liquidity of any markets that may develop for the notes, the
ability of holders of the notes to sell their notes or the prices at which
holders would be able to sell their notes. Future trading prices of the notes
will depend on many factors, including, among others, our ability to effect the
exchange offer, prevailing interest rates, our operating results and the market
for similar securities. The initial purchasers have advised us that they
currently intend to make a market in the notes. However, they are not obligated
to do so and any market making may be discontinued at any time without notice.
We do not intend to apply for listing of the notes on any securities exchange.

FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.

     Under the applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, the notes and the subsidiary
guarantees could be voided, or claims in respect of the notes or the subsidiary
guarantees could be subordinated to all of our other debts or the debts of those
guarantors, if, among other things, our company or any guarantor, at the time it
incurred the indebtedness evidenced by the notes or its subsidiary guarantee:

     - received or receives less than reasonably equivalent value or fair
       consideration for incurring such indebtedness; and

     - was or is insolvent or rendered insolvent by reason of such occurrence;
       or

     - was or is engaged in a business or transaction for which the assets
       remaining with our company or such guarantor constituted unreasonably
       small capital; or

     - intended or intends to incur, or believed or believes that it would
       incur, debts beyond its ability to pay such debts as they mature.

     In addition, the payment of interest and principal by us pursuant to the
notes or the payment of amounts by a guarantor pursuant to a subsidiary
guarantee could be voided and required to be returned to the person making such
payment, or to a fund for the benefit of our creditors or such guarantor, as the
case may be.

                                        6


     The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, our company or a guarantor would be considered
insolvent if:

     - the sum of its debts, including contingent liabilities, were greater than
       the saleable value of all its assets at a fair valuation;

     - the present fair saleable value of its assets were less than the amount
       that would be required to pay its probable liability on its existing
       debts, including contingent liabilities, as they become absolute and
       mature; or

     - it could not pay its debts as they become due.

     To the extent a subsidiary guarantee is voided as a fraudulent conveyance
or held unenforceable for any other reason, the holders of the notes would not
have any claim against that subsidiary and would be creditors solely of us and
any other subsidiary guarantors whose guarantees are not held unenforceable.

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