UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 0-20372

RES-CARE, INC.

(Exact name of registrant as specified in its charter)

KENTUCKY	61-0875371
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
9901 Linn Station Road
Louisville, Kentucky	40223-3808
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12-b of the Act (Check one):

Large accelerated filer: o  Accelerated filer: x  Non-accelerated filer: o  Smaller reporting company: o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x.

The number of shares outstanding of the registrant’s common stock, no par value, as of April 15, 2008 was 29,237,275.

INDEX

RES-CARE, INC. AND SUBSIDIARIES

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – March 31, 2008 and December 31, 2007
	Condensed Consolidated Statements of Income – Three Months Ended March 31, 2008 and 2007
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2008 and 2007
	Notes to Condensed Consolidated Financial Statements – March 31, 2008
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.	Other Information
Item 6.	Exhibits
SIGNATURES
EXHIBITS

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PART I.FINANCIAL INFORMATION

Item 1.Financial Statements

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

	March 31		December 31
	2008		2007
ASSETS
Current assets:
Cash and cash equivalents	$	16,764	$	10,809
Accounts receivable, net of allowance for doubtful accounts of $16,076 in 2008 and $15,831 in 2007	212,544		206,529
Refundable income taxes	—		2,465
Deferred income taxes	18,894		17,959
Non-trade receivables	8,081		9,445
Prepaid expenses and other current assets	12,249		12,365
Total current assets	268,532		259,572
Property and equipment, net	83,153		83,336
Goodwill	455,398		443,623
Other intangible assets, net	32,891		32,412
Other assets	13,886		15,600
Total assets	$	853,860	$	834,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	48,570	$	54,650
Accrued expenses	99,660		90,496
Current portion of long-term debt	2,888		3,238
Current portion of obligations under capital leases	74		82
Accrued income taxes	3,892		1,559
Total current liabilities	155,084		150,025
Long-term liabilities	31,044		33,465
Long-term debt	219,662		219,681
Obligations under capital leases	619		810
Deferred gains	4,275		4,479
Deferred income taxes	22,116		19,212
Total liabilities	432,800		427,672
Minority interests	—		2
Shareholders’ equity:
Preferred shares, authorized 1,000,000 shares, no par value, except 48,095 shares designated as Series A with stated value of $1,050 per share, 48,095 shares issued and outstanding in 2008 and 2007	46,609		46,609
Common stock, no par value, authorized 40,000,000 shares, issued 29,744,871 in 2008 and 29,779,435 in 2007, outstanding 29,233,810 in 2008 and 29,161,293 in 2007	50,487		50,412
Additional paid-in capital	87,809		86,079
Retained earnings	233,620		221,574
Accumulated other comprehensive income	2,535		2,195
Total shareholders’ equity	421,060		406,869
Total liabilities and shareholders’ equity	$	853,860	$	834,543

See accompanying notes to condensed consolidated financial statements.

2

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31
	2008			2007
Revenues	$	375,399		$	338,495
Facility and program expenses	337,175			304,742
Facility and program contribution	38,224			33,753
Corporate general and administrative expenses	14,575			12,971
Operating income	23,649			20,782
Interest expense, net	4,594			4,537
Income from continuing operations before income taxes	19,055			16,245
Income tax expense	6,955			5,954
Income from continuing operations	12,100			10,291
Loss from discontinued operations, net of tax	(54		)	(139		)
Net income	12,046			10,152
Net income attributable to preferred shareholders	1,738			1,457
Net income attributable to common shareholders	$	10,308		$	8,695
Basic earnings (loss) per common share:
From continuing operations	$	0.36		$	0.31
From discontinued operations	(0.00		)	(0.00		)
Basic earnings per common share	$	0.36		$	0.31
Diluted earnings (loss) per common share:
From continuing operations	$	0.36		$	0.31
From discontinued operations	(0.00		)	(0.00		)
Diluted earnings per common share	$	0.36		$	0.31
Weighted average number of common shares:
Basic	28,338			28,027
Diluted	28,528			28,365

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	March 31
	2008			2007
Cash flows from operating activities:
Net income	$	12,046		$	10,152
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	5,236			4,676
Impairment charge	—			332
Amortization of discount and deferred debt issuance costs on notes	292			269
Share-based compensation	1,096			1,560
Deferred income taxes, net	1,969			1,224
Excess tax benefit from share-based compensation	(1,349		)	(281		)
Provision for losses on accounts receivable	1,569			1,348
Changes in operating assets and liabilities	(62		)	3,057
Cash provided by operating activities	20,797			22,337
Cash flows from investing activities:
Purchases of property and equipment	(3,969		)	(5,096		)
Acquisitions of businesses	(10,400		)	(20,958		)
Proceeds from sale of assets	25			55
Cash used in investing activities	(14,344		)	(25,999		)
Cash flows from financing activities:
Long-term debt repayments	—			(55,525		)
Borrowings of long-term debt	—			40,000
Short-term (repayments) borrowings – three months or less, net	(1,068		)	20,000
Payments on obligations under capital lease, net	(20		)	(95		)
Debt issuance costs	(99		)	—
Excess tax benefit from share-based compensation	738			281
Proceeds received from exercise of stock options	730			568
Employee withholding payments on share-based compensation	(779		)	—
Cash (used in) provided by financing activities	(498		)	5,229
Increase in cash and cash equivalents	5,955			1,567
Cash and cash equivalents at beginning of period	10,809			5,541
Cash and cash equivalents at end of period	$	16,764		$	7,108

See accompanying notes to condensed consolidated financial statements.

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RES-CARE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

(Unaudited)

Note 1.Basis of Presentation

Res-Care, Inc. is a human service company that provides residential, therapeutic, job training and educational supports to people with developmental or other disabilities, to youth with special needs, to adults who are experiencing barriers to employment and to older people who need home care assistance. All references in this Quarterly Report on Form 10-Q to “ResCare”, “our company”, “we”, “us”, or “our” mean Res-Care, Inc. and, unless the context otherwise requires, its consolidated subsidiaries.

The accompanying condensed consolidated financial statements of ResCare have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for comprehensive annual financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial condition and results of operations for the interim periods have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year.

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

For further information refer to the consolidated financial statements and footnotes thereto in our annual report on Form 10-K for the year ended December 31, 2007.

Note 2.Reclassifications

Certain prior period amounts have been reclassified to conform to the current presentation.

Note 3.Acquisitions

We completed three acquisitions during the first quarter of 2008. Aggregate consideration for these acquisitions was approximately $10.9 million, including $0.5 million of notes issued. These acquisitions are expected to generate annual revenues of approximately $9.7 million. The operating results of the acquisitions are included in the condensed consolidated financial statements from the date of acquisition.

The aggregate purchase price for these acquisitions was allocated as follows:

Property and equipment	$	158
Other intangibles	1,433
Goodwill	9,381
Other assets	20
Liabilities assumed	(73		)
Aggregate purchase price	$	10,919

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The allocations of purchase price are preliminary and will be subjected to further analysis during the remainder of 2008. The other intangible assets will be amortized up to ten years and consist primarily of customer relationships, covenants not to complete and company name valuation.

Note 4.Goodwill

A summary of changes to goodwill during the three months ended March 31, 2008 are as follows:

			Job Corps		Employment
	Community		Training		Training
	Services		Services		Services		Other (2)		Total
Balance at December 31, 2007	$	332,482	$	7,589	$	60,457	$	43,095	$	443,623
Goodwill added through acquisitions	8,295		—		—		1,086		9,381
Adjustments to previously recorded goodwill (1)	1,731		—		—		663		2,394
Balance at March 31, 2008	$	342,508	$	7,589	$	60,457	$	44,844	$	455,398

(1)Adjustments to previously recorded goodwill primarily relate to earn-out payments, translation adjustments and other purchase price adjustments. Earn-out payments are generally determined at specific future dates based on the terms of the purchase agreement.

(2)Other is comprised of international and school operations.

Note 5.Comprehensive Income

The following table sets forth the computation of comprehensive income:

	Three Months Ended
	March 31
	2008		2007
Net income	$	12,046	$	10,152
Foreign currency translation adjustments arising during the period	340		(22		)
Comprehensive income	$	12,386	$	10,130

Note 6.Debt

Long-term debt and obligations under capital leases consist of the following:

	March 31		December 31
	2008		2007
7.75% senior notes due 2013, net of discount of approximately $0.8 million in 2008 and 2007	$	149,238	$	149,203
Senior secured credit facility	69,300		69,300
Obligations under capital leases	693		892
Notes payable and other	4,012		4,416
	223,243		223,811
Less current portion	2,962		3,320
	$	220,281	$	220,491

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Note 7.Earnings Per Share

The following data shows the amounts used in computing earnings per common share and the effect on income and the weighted average number of shares of dilutive potential common stock.

	Three Months Ended
	March 31
	2008			2007
Income from continuing operations	$	12,100		$	10,291
Attributable to preferred shareholders	1,746			1,477
Attributable to common shareholders	$	10,354		$	8,814
Loss from discontinued operations, net of tax	$	(54	)	$	(139	)
Attributable to preferred shareholders	(8		)	(20		)
Attributable to common shareholders	$	(46	)	$	(119	)
Net income	$	12,046		$	10,152
Attributable to preferred shareholders	1,738			1,457
Attributable to common shareholders	$	10,308		$	8,695
Weighted average number of common shares used in basic earnings per common share	28,338			28,027
Effect of dilutive securities:
Stock options	157			305
Restricted stock	33			33
Weighted average number of common shares and dilutive potential common shares used in diluted earnings per common share	28,528			28,365
Basic earnings (loss) per common share:
From continuing operations	$	0.36		$	0.31
From discontinued operations	(0.00		)	(0.00		)
Basic earnings per common share	$	0.36		$	0.31
Diluted earnings (loss) per common share:
From continuing operations	$	0.36		$	0.31
From discontinued operations	(0.00		)	(0.00		)
Diluted earnings per common share	$	0.36		$	0.31

There were no average shares excluded from the computation of diluted earnings per common share for the three months ended March 31, 2008 and 2007.

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Note 8.           Segment Information

The following table sets forth information about reportable segment operating results and assets:

			Job Corps		Employment
	Community		Training		Training		All			Consolidated
Three months ended March 31:	Services		Services		Services		Other (1)			Totals
2008
Revenues (2)	$	268,872	$	41,695	$	53,075	$	11,757		$	375,399
Operating income (2)	29,583		3,085		4,918		(13,937		)	23,649
Total assets	564,387		30,905		133,552		125,016			853,860
Capital expenditures	1,774		—		207		1,988			3,969
Depreciation and amortization (2)	2,375		—		467		2,390			5,232
2007
Revenues (2)	$	244,609	$	41,679	$	46,661	$	5,546		$	338,495
Operating income (2)	27,784		2,917		3,070		(12,989		)	20,782
Total assets	517,888		35,982		131,600		68,064			753,534
Capital expenditures	2,419		—		154		2,523			5,096
Depreciation and amortization (2)	2,315		—		502		1,850			4,667

(1)All Other is comprised of our international operations, schools and corporate general and administrative expenses.

(2)Amounts for both Community Services and the Consolidated Totals have been restated to exclude the operations of Washington, D.C. and New Mexico, which were discontinued effective March 31, 2006 and October 31, 2006, respectively.

Note 9.           Share-Based Compensation

A summary of changes to outstanding shares during the three months ended March 31, 2008 follows:

			Restricted Stock
			Performance-		Service-
	Options		Based		Based
Outstanding at December 31, 2007	550,580		393,741		435,163
Exercised/issued	(113,131	)	(60,000	)	(15,783	)
Forfeited/cancelled	—		—		(9,425	)
Outstanding at March 31, 2008	437,449		333,741		409,955

Total share-based compensation expense by type of award was as follows:

	Three Months Ended
	March 31
	2008		2007
Stock options	$	—	$	16
Restricted stock, service-based	664		940
Restricted stock, performance-based	432		604
Total share-based compensation expense	1,096		1,560
Tax effect	426		605
Share-based compensation expense, net of tax	$	670	$	955

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Note 10.         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 that, in the event of unfavorable outcomes, may adversely affect revenues and period to period comparisons.

In July 2000, American International Specialty Lines Insurance Company, or AISL, filed a Complaint for Declaratory Judgment against us and certain of our subsidiaries in the U.S. District Court for the Southern District of Texas, Houston Division. In the Complaint, AISL sought a declaration of what insurance coverage was available to ResCare in the case styled 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). After the filing, we entered into an agreement with AISL whereby any settlement reached in the Lawsuit would not be dispositive of whether the claims in the Lawsuit were covered under the insurance policies issued by AISL. AISL thereafter settled the Lawsuit for $9.0 million. It is our position that: (i) the Lawsuit initiated coverage under policies of insurance in more than one policy year, thus affording adequate coverage to settle the Lawsuit within coverage and policy limits, (ii) AISL waived any applicable exclusions for punitive damages by its failure to send a timely reservation of rights letter and (iii) the decision by the Texas Supreme Court in King v. Dallas Fire Insurance Company, 85 S.W.3d 185 (Tex. 2002) controls. Prior to the Texas Supreme Court’s decision in the King case, summary judgment was granted in favor of AISL but the scope of the order was unclear. Based on the King decision, the summary judgment was set aside. Thereafter, subsequent motions for summary judgment filed by both AISL and ResCare were denied. The case was tried, without a jury, in late December 2003. On March 31, 2004, the Court entered a judgment in favor of AISL in the amount of $5.0 million. It is our belief that the Court improperly limited the evidence ResCare could place in the record at trial and the type of claims it could present. Accordingly, an appeal of the Court’s decision has been filed with the Fifth Circuit Court of Appeals and a supersedes bond has been filed with the Court of $6.0 million. Oral arguments were held on August 31, 2005. We have not made any provision in our condensed consolidated financial statements for the potential liability that may result from final adjudication of this matter, as we do not believe it is probable that an unfavorable outcome will result from this matter. Based on the advice of counsel, we do not believe it is probable that the ultimate resolution of this matter will result in a material liability to us nor have a material adverse effect on our condensed consolidated financial condition, results of operations or liquidity.

In October 2005, a lawsuit was filed in Fulton County, Georgia Court styled Freddie Fitts v. Res-Care, Inc., et al. The lawsuit seeks unspecified damages for permanent injuries received by Mr. Fitts in an October 2003 automobile accident involving one of our vehicles. In February 2006, we transferred the case to the U.S. District Court, Northern District of Georgia, Atlanta Division. We have made provisions in our condensed consolidated financial statements for the final adjudication of this matter. We have admitted liability for the accident and trial has been set on the issue of damages only for June 2008. We do not believe that the ultimate resolution of this matter will have a material adverse effect on our condensed consolidated financial condition, results of operations or liquidity.

In January 2006, a lawsuit was filed in San Mateo County Superior Court styled Conservatorship of the Person and Estate of Theresa Rodriguez v. Res-Care, Inc, Res-Care California, Inc. dba RCCA Services, et al. The lawsuit alleges violations of the Elder and Dependent Adult Abuse Act, Breach of Fiduciary Duty, Negligence and Unfair Business Practices as a result of Ms. Rodriguez being severely burned in May 2004 one week after the replacement of a water heater at a group home in California where she resided. Plaintiff also seeks attorneys’ fees and punitive damages against RCCA Services.  Settlement discussions have

9

been unsuccessful.  A Motion to Disqualify the initial Judge was granted and trial has tentatively been set for May 2008. We have made provisions in our condensed consolidated financial statements for the final adjudication of this matter. Furthermore, we have preserved our rights for indemnity against the plumbing installers/manufacturers of the water heater. We do not believe that the ultimate resolution of this matter will have a material adverse effect on our condensed consolidated financial condition, results of operations or liquidity.

In January 2007, the U.S. Court of Appeals for the Seventh Circuit reversed a Summary Judgment we had received from the U.S. District Court, Southern District of Indiana, in Omega Healthcare Investors, Inc. v. Res-Care Health Services, Inc. In the case, Omega was initially seeking $3.7 million for breach of contract in the closing of a facility in 1999 located in Lexington, Kentucky. The Court of Appeals issued a ruling granting judgment for Omega and remanded the proceedings to the District Court to establish the actual amount of damages. A Petition for Writ of Certiorari filed with the U.S. Supreme Court in April 2007, was denied. The District Court has set a June 2008 trial date. We have made a provision in our condensed consolidated financial statements for the final adjudication of this matter. We do not believe that the ultimate resolution of this matter will have a material adverse effect on our condensed 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, generally, these claims are without merit. Further, many of such 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 condensed consolidated financial condition, results of operations or liquidity.

Note 11.         Impact of Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with limited exceptions. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with earlier adoption permitted. In February 2008, the FASB issued FASB Staff Position No. 157-2 which defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The partial adoption of SFAS 157 did not have a material effect on the condensed consolidated financial statements. We are currently evaluating the provisions for non-financial assets and liabilities.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (SFAS 159). SFAS 159 provides entities with the option to report selected financial assets and liabilities at fair value. Business entities adopting SFAS 159 will report unrealized gains and losses in earnings at each subsequent reporting date on items for which the fair value option has been elected. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.

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SFAS 159 requires additional information that will help investors and other financial statement users to understand the effect of an entity’s choice to use fair value on its earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. We did not elect the fair value option for any of our existing financial instruments as of March 31, 2008, and we have not determined whether or not we will elect this option for financial instruments which may be acquired in the future.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R), replacing SFAS No. 141, Business Combinations (SFAS 141). SFAS 141R retains the fundamental requirements of purchase method accounting for acquisitions as set forth previously in SFAS 141. However, this statement defines the acquirer as the entity that obtains control of a business in the business combination, thus broadening the scope of SFAS 141 which applied only to business combinations in which control was obtained through transfer of consideration. SFAS 141R also requires several changes in the way assets and liabilities are recognized and measured in purchase accounting including expensing acquisition-related costs as incurred, recognizing assets and liabilities arising from contractual contingencies at the acquisition date, and capitalizing in-process research and development. SFAS 141R also requires the acquirer to recognize a gain in earnings for bargain purchases, or the excess of the fair value of net assets over the consideration transferred plus any noncontrolling interest in the acquiree, a departure from the concept of “negative goodwill” previously recognized under SFAS 141. SFAS 141R is effective for us beginning January 1, 2009, and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51 (SFAS 160). SFAS 160 applies to all companies that prepare consolidated financial statements but will only affect companies that have a noncontrolling interest in a subsidiary or that deconsolidate a subsidiary. SFAS 160 clarifies that noncontrolling interests be reported as a component separate from the parent’s equity and that changes in the parent’s ownership interest in a subsidiary be recorded as equity transactions if the parent retains its controlling interest in the subsidiary. The statement also requires consolidated net income to include amounts attributable to both the parent and the noncontrolling interest on the face of the income statement. In addition, SFAS 160 requires a parent to recognize a gain or loss in net income on the date the parent deconsolidates a subsidiary, or ceases to have a controlling financial interest in a subsidiary. SFAS 160 is effective for us beginning January 1, 2009, and will apply prospectively, except for the presentation of disclosure requirements, which must be applied retrospectively. We do not expect the adoption of SFAS 160 will have a material impact on our consolidated financial position, results of operations and cash flows.

Note 12.         Subsidiary Guarantors

The Senior Notes are jointly, severally, fully and unconditionally guaranteed by our 100% owned U.S. subsidiaries. There are no restrictions on our ability to obtain funds from our U.S. subsidiaries by dividends or other means. The following are condensed consolidating financial statements of our company, including the guarantors. This information is provided pursuant to Rule 3 – 10 of Regulation S-X in lieu of separate financial statements of each subsidiary guaranteeing the Senior Notes. The following condensed consolidating financial statements present the balance sheet, statement of income and cash flows of (i) Res-Care, Inc. (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) the guarantor subsidiaries, (iii) the non-guarantor subsidiaries, and (iv) the eliminations necessary to arrive at the information for our company on a

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consolidated basis. The condensed consolidating financial statements should be read in conjunction with the accompanying condensed consolidated financial statements.

12

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2008

(In thousands)

			Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.		Subsidiaries			Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	4,547	$	4,095		$	8,122		$	—		$	16,764
Accounts receivable, net	39,759		168,987			3,798			—			212,544
Deferred income taxes	18,884		—			10			—			18,894
Non-trade receivables	1,135		7,205			688			(947		)	8,081
Prepaid expenses and other current assets	6,371		5,718			160			—			12,249
Total current assets	70,696		186,005			12,778			(947		)	268,532
Property and equipment, net	36,727		45,755			671			—			83,153
Goodwill	85,705		325,220			44,473			—			455,398
Other intangible assets, net	4,439		28,452			—			—			32,891
Investment in subsidiaries	593,579		—			—			(593,579		)	—
Other assets	9,561		4,191			134			—			13,886
	$	800,707	$	589,623		$	58,056		$	(594,526	)	$	853,860
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	25,359	$	19,871		$	3,340		$	—		$	48,570
Accrued expenses	46,614		51,800			1,246			—			99,660
Current portion of long-term debt	395		2,493			947			(947		)	2,888
Current portion of obligations under capital leases	13		61			—			—			74
Accrued income taxes	3,463		—			429			—			3,892
Total current liabilities	75,844		74,225			5,962			(947		)	155,084
Intercompany	32,526		(75,772		)	43,246			—			—
Long-term liabilities	29,192		1,852			—			—			31,044
Long-term debt	218,413		1,249			—			—			219,662
Obligations under capital leases	31		588			—			—			619
Deferred gains	1,520		2,755			—			—			4,275
Deferred income taxes	22,121		—			(5		)	—			22,116
Total liabilities	379,647		4,897			49,203			(947		)	432,800
Minority interests	—		—			—			—			—
Total shareholders’ equity	421,060		584,726			8,853			(593,579		)	421,060
	$	800,707	$	589,623		$	58,056		$	(594,526	)	$	853,860

13

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2007

(In thousands)

				Guarantor		Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries		Subsidiaries			Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	1,379		$	3,724	$	5,706		$	—		$	10,809
Accounts receivable, net	39,989			162,420		4,120			—			206,529
Refundable income taxes	2,026			—		439			—			2,465
Deferred income taxes	17,959			—		—			—			17,959
Non-trade receivables	542			8,835		68			—			9,445
Prepaid expenses and other current assets	6,894			5,161		310			—			12,365
Total current assets	68,789			180,140		10,643			—			259,572
Property and equipment, net	36,884			45,827		625			—			83,336
Goodwill	85,699			313,954		43,970			—			443,623
Other intangible assets, net	4,576			27,836		—			—			32,412
Investment in subsidiaries	492,487			—		—			(492,487		)	—
Other assets	11,210			4,290		100			—			15,600
	$	699,645		$	572,047	$	55,338		$	(492,487	)	$	834,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	32,863		$	18,615	$	3,172		$	—		$	54,650
Accrued expenses	44,897			44,550		1,049			—			90,496
Current portion of long-term debt	271			2,967		—			—			3,238
Current portion of obligations under capital leases	13			69		—			—			82
Accrued income taxes	1,146			—		413			—			1,559
Total current liabilities	79,190			66,201		4,634			—			150,025
Intercompany	(57,476		)	14,501		42,975			—			—
Long-term liabilities	31,721			1,744		—			—			33,465
Long-term debt	218,503			1,178		—			—			219,681
Obligations under capital leases	34			776		—			—			810
Deferred gains	1,587			2,892		—			—			4,479
Deferred income taxes	19,217			—		(5		)	—			19,212
Total liabilities	292,776			87,292		47,604			—			427,672
Minority interests	—			2		—			—			2
Total shareholders’ equity	406,869			484,753		7,734			(492,487		)	406,869
	$	699,645		$	572,047	$	55,338		$	(492,487	)	$	834,543

14

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended March 31, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Revenues	$	74,471		$	293,090		$	7,838		$	—		$	375,399
Operating expenses	73,923			270,568			7,259			—			351,750
Operating income	548			22,522			579			—			23,649
Other (income) expenses:
Interest, net	4,673			(38		)	(41		)	—			4,594
Equity in earnings of subsidiaries	(14,666		)	—			—			14,666			—
Total other expenses	(9,993		)	(38		)	(41		)	14,666			4,594
Income from continuing operations, before income taxes	10,541			22,560			620			(14,666		)	19,055
Income tax (benefit) expense	(1,505		)	8,234			226			—			6,955
Income from continuing operations	12,046			14,326			394			(14,666		)	12,100
Loss from discontinued operations, net of tax	—			(54		)	—			—			(54		)
Net income	$	12,046		$	14,272		$	394		$	(14,666	)	$	12,046

15

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended March 31, 2007

(In thousands)

				Guarantor			Non-Guarantor					Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries		Eliminations			Total
Revenues	$	71,838		$	265,868		$	789	$	—		$	338,495
Operating expenses	70,312			246,754			647		—			317,713
Operating income	1,526			19,114			142		—			20,782
Other (income) expenses:
Interest, net	2,187			2,326			24		—			4,537
Equity in earnings of subsidiaries	(10,571		)	—			—		10,571			—
Total other expenses	(8,384		)	2,326			24		10,571			4,537
Income from continuing operations, before  income taxes	9,910			16,788			118		(10,571		)	16,245
Income tax (benefit) expense	(242		)	6,153			43		—			5,954
Income from continuing operations	10,152			10,635			75		(10,571		)	10,291
Loss from discontinued operations, net of tax	—			(139		)	—		—			(139		)
Net income	$	10,152		$	10,496		$	75	$	(10,571	)	$	10,152

16

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2008

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income	$	12,046		$	14,272		$	394		$	(14,666	)	$	12,046
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization	2,576			2,555			105			—			5,236
Amortization of discount and deferred debt issuance costs on notes	292			—			—			—			292
Share-based compensation	1,096			—			—			—			1,096
Deferred income tax expense	1,979			—			(10		)	—			1,969
Excess tax benefit from share-based compensation	(1,349		)	—			—			—			(1,349		)
Provision for losses on accounts receivable	—			1,569			—			—			1,569
Equity in earnings of subsidiaries	(14,666		)	—			—			14,666			—
Changes in operating assets and liabilities	89,282			(90,662		)	371			947			(62		)
Cash provided by (used in) operating activities	91,256			(72,266		)	860			947			20,797
Investing activities:
Purchases of property and equipment	(2,283		)	(1,570		)	(116		)	—			(3,969		)
Acquisitions of businesses	—			(10,400		)	—			—			(10,400		)
Proceeds from sale of assets	—			25			—			—			25
Cash used in investing activities	(2,283		)	(11,945		)	(116		)	—			(14,344		)
Financing activities:
Long-term debt repayments	—			—			—			—			—
Borrowings of long-term debt	—			—			—			—			—
Short-term borrowings (repayments) – three months or less, net	31			(1,099		)	947			(947		)	(1,068		)
Payments on obligations under capital leases, net	—			(20		)	—			—			(20		)
Debt issuance costs	(99		)	—			—			—			(99		)
Net payments relating to intercompany financing	(86,426		)	85,701			725			—			—
Excess tax benefit from share-based compensation	738			—			—			—			738
Proceeds received from exercise of stock options	730			—			—			—			730
Employee withholding payments on share-based compensation	(779		)	—			—			—			(779		)
Cash (used in) provided by financing activities	(85,805		)	84,582			1,672			(947		)	(498		)
Increase in cash and cash equivalents	3,168			371			2,416			—			5,955
Cash and cash equivalents at beginning of period	1,379			3,724			5,706			—			10,809
Cash and cash equivalents at end of period	$	4,547		$	4,095		$	8,122		$	—		$	16,764

17

RES-CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2007

(In thousands)

				Guarantor			Non-Guarantor						Consolidated
	ResCare, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
Operating activities:
Net income (loss)	$	10,152		$	10,496		$	75		$	(10,571	)	$	10,152
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization	2,122			2,548			6			—			4,676
Impairment charge	—			332			—			—			332
Amortization of discount and deferred debt issuance costs on notes	269			—			—			—			269
Share-based compensation	1,560			—			—			—			1,560
Deferred income taxes, net	1,224			—			—			—			1,224
Excess tax benefit from share-based compensation	(281		)	—			—			—			(281		)
Provision for losses on accounts receivable	—			1,348			—			—			1,348
Equity in earnings of subsidiaries	(10,571		)	—			—			10,571			—
Changes in operating assets and liabilities	77,003			(71,368		)	(2,578		)	—			3,057
Cash provided by (used in) operating activities	81,478			(56,644		)	(2,497		)	—			22,337
Investing activities:
Purchases of property and equipment	(4,090		)	(1,005		)	(1		)	—			(5,096		)
Acquisitions of businesses	—			(20,958		)	—			—			(20,958		)
Proceeds from sale of assets	—			55			—			—			55
Cash used in investing activities	(4,090		)	(21,908		)	(1		)	—			(25,999		)
Financing activities:
Long-term debt repayments	(55,090		)	(435		)	—			—			(55,525		)
Borrowings of long-term debt	40,000			—			—			—			40,000
Short-term borrowings – three months or less, net	20,000			—			—			—			20,000
Payments on obligations under capital leases, net	—			(95		)	—			—			(95		)
Net payments relating to intercompany financing	(79,969		)	79,606			363			—			—
Excess tax benefit from share-based compensation	281			—			—			—			281
Proceeds received from exercise of stock options	568			—			—			—			568
Cash (used in) provided by financing activities	(74,210		)	79,076			363			—			5,229
Increase (decrease) in cash and cash equivalents	3,178			524			(2,135		)	—			1,567
Cash and cash equivalents at beginning of period	2,196			26			3,319			—			5,541
Cash and cash equivalents at end of period	$	5,374		$	550		$	1,184		$	—		$	7,108

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Preliminary Note Regarding Forward-Looking Statements

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

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Some of the events or circumstances that could cause actual results to differ from those discussed in the forward-looking statements are discussed in the “Risk Factors” section in Part II, Item 1A of this Report and in our 2007 Annual Report on Form 10-K. Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made.

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

Overview of Our Business

We receive revenues primarily from the delivery of residential, training, educational and support services to various populations with special needs. We have three reportable operating segments: (i) Community Services, (ii) Job Corps Training Services and (iii) Employment Training Services. Management’s discussion and analysis of each segment is included below. Further information regarding our segments is included in the notes to condensed consolidated financial statements.

Revenues for our Community Services operations are derived primarily from state Medicaid programs, other government agencies, commercial insurance companies and from management contracts with private operators, generally not-for-profit providers, who contract with state government agencies and are also reimbursed under the Medicaid program. Our services include social, functional and vocational skills training, supported employment and emotional and psychological counseling for individuals with intellectual or other disabilities. We also provide respite, therapeutic and other services to individuals with special needs and to older people in their homes. These services are provided on an as-needed basis or hourly basis through our periodic in-home services programs.

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

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

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

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

Additionally, we operate international job training and placement agencies that assist disadvantaged job seekers in the U.K., Germany and Netherlands, as well as domestic charter and alternative education schools.

Application of Critical Accounting Policies

Our discussion and analysis of the financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts and

20

related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

We continually review our accounting policies and financial information disclosures. A summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in our 2007 Annual Report on Form 10-K. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three months of 2008, there were no material changes in the critical accounting policies and assumptions.

Results of Operations

	Three Months Ended
	March 31
	2008			2007
	(Dollars in thousands)
Revenues:
Community Services (1)	$	268,872		$	244,609
Job Corps Training Services	41,695			41,679
Employment Training Services	53,075			46,661
Other (2)	11,757			5,546
Consolidated	$	375,399		$	338,495
Operating income:
Community Services (1)	$	29,583		$	27,784
Job Corps Training Services	3,085			2,917
Employment Training Services	4,918			3,070
Other (2) (3)	835			117
Total Operating Expenses (4)	(14,772		)	(13,106		)
Consolidated	$	23,649		$	20,782
Operating margin:
Community Services (1)	11.0		%	11.4		%
Job Corps Training Services	7.4		%	7.0		%
Employment Training Services	9.3		%	6.6		%
Other (2) (3)	7.1		%	2.1		%
Total Operating Expenses (4)	(3.9		)%	(3.9		)%
Consolidated	6.3		%	6.1		%

(1)	Excludes results for Washington, D.C. and New Mexico, which were reclassified to discontinued operations for all periods presented.
(2)	Represents our international job training and placement agencies, as well as our charter and alternative education schools.
(3)	Three months ended March 31, 2007 includes a $0.3 million goodwill impairment charge related to our charter schools.
(4)	Represents corporate general and administrative expenses, as well as other operating (income) and expenses related to the corporate office.

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Consolidated

Consolidated revenues for the quarter ended March 31, 2008 increased 10.9% over the 2007 quarter. This increase was primarily related to acquisitions in the Community Services and Other segments, as well as new contracts in the Employment Training Services segment. Revenues are more fully described in the segment discussions.

Consolidated operating income, which includes corporate general and administrative expenses, increased 13.8% for the quarter ended March 31, 2008, compared to the comparable period in 2007. This increase was primarily attributable to revenue growth. Operating margin increased to 6.3% for the 2008 quarter compared to 6.1% for the 2007 quarter. The increase in margin was due primarily to a $0.3 million goodwill impairment charge which was included in the 2007 first quarter results.

Net interest expense increased $0.1 million for the first quarter of 2008 over the same period in 2007. The increase was attributable to higher average borrowings on the revolver. Our effective income tax rate for the quarter ended March 31, 2008 was 36.5%, as compared to 36.7% over the same period in 2007.

Community Services

Community Services revenues for the quarter ended March 31, 2008 increased by 9.9% over the same period in 2007. This increase was due primarily to acquisitions occurring after March 31, 2007. Operating margin decreased from 11.4% in the first quarter of 2007 to 11.0% in the same period in 2008. The reduction in operating margin was primarily due to a $1.2 million increase in workers’ compensation insurance costs, which were partly attributable to a decrease in the discount rate from 5% to 4%. Automobile insurance costs were also $0.3 million higher in the first quarter of 2008 due to higher claim exposure.

Job Corps Training Services

Job Corps Training Services revenues remained consistent for the quarter ended March 31, 2008 and 2007. Operating margin increased from 7.0% in the first quarter of 2007 to 7.4% in the same period in 2008.

Employment Training Services

Employment Training Services revenues increased 13.7% in the quarter ended March 31, 2008 over the same period in 2007, due primarily to an increase of $4.8 million related to the Arizona and Indiana contracts. Operating margin increased from 6.6% in the first quarter of 2007 to 9.3% in the same period in 2008, due primarily to higher costs incurred during 2007 to initiate the New York Back to Work Program.

Other

Included in Other is our international job training and placement agencies, as well as a portion of our business dedicated to operating charter and alternative education schools. Revenues increased from $5.5 million in the 2007 first quarter to $11.8 million in the same period in 2008. This increase was primarily related to the late 2007 acquisitions in the international job training and placement agency business. International revenues were approximately $7.1 million during the quarter, with modest contribution margin. Operating margin increased from 2.1% in 2007 to 7.1% in 2008 due

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primarily to a $0.3 million goodwill impairment charge related to the charter schools, which was recorded in the 2007 first quarter.

Financial Condition, Liquidity and Capital Resources

Total assets increased 2.3% in 2008 over balances at December 31, 2007. This increase was primarily due to growth from prior year and current year acquisitions. Goodwill and other intangible assets increased $12.3 million from December 31, 2007, primarily as a result of the acquisitions completed during the first three months of 2008.

Cash and cash equivalents were $16.8 million at March 31, 2008, as compared to $10.8 million at December 31, 2007. Cash provided from operations for the three months ended March 31, 2008 was $20.8 million compared to $22.3 million for the three months ended March 31, 2007.

Net accounts receivable at March 31, 2008 increased to $212.5 million, compared to $206.5 million at December 31, 2007 due primarily to acquisition related growth. Days revenue in net accounts receivable were 48.6 days at March 31, 2008 compared with 49.0 days at December 31, 2007.

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

Capital expenditures were consistent with our historical experience. We invested $4.0 million during the first quarter of 2008 on purchases of property and equipment. We also used $10.4 million on acquisitions.

Our financing activities included a net payment of debt and capital lease obligations for the first three months of 2008 of  $1.1 million. This compares to net borrowings on the revolver of $60.0 million, offset by payments of debt and capital lease obligations of $55.6 million for the same period in 2007. Stock option exercise activity resulted in $0.7 million in proceeds for the 2008 period versus $0.6 million in 2007.

The 2007 amendment to our senior secured revolving credit facility increased our borrowing capacity by $50 million to a total of $250 million. Additional capacity of $50 million remains in place, subject to certain limitations in our $150 million 7.75% Senior Notes due 2013, which allows us to expand our total borrowing capacity to $300 million. The credit facility expires on October 3, 2010 and will be used primarily for working capital purposes, letters of credit required under our insurance programs and for acquisitions. The credit facility is secured by a lien on all of our assets and, through secured guarantees, on all of our domestic subsidiaries’ assets.

As of March 31, 2008, we had $130.0 million available under the revolver with an outstanding balance of $69.3 million. Outstanding balances bear interest at 1.38% over the London Interbank Offered Rate (LIBOR) or other bank developed rates at our option. As of March 31, 2008, the weighted average interest rate was 4.58%. As of March 31, 2008, we had irrevocable standby letters of credit in the

23

principal amount of $50.7 million issued primarily in connection with our insurance programs. Letters of credit had a borrowing rate of 1.38% as of March 31, 2008. The commitment fee on the unused balance was 0.3%. The margin over LIBOR and the commitment fee are determined quarterly based on our leverage ratio, as defined by the revolving credit facility.

The credit facility contains various financial covenants relating to net worth, capital expenditures and rentals and requires us to maintain specified ratios with respect to our interest and leverage. We are in compliance with our debt covenants as of March 31, 2008. Our ability to achieve the thresholds provided for in the financial covenants largely depends upon the maintenance of continued profitability and/or reductions of amounts borrowed under the facility, and continued cash collections.

Operating funding sources are approximately 61% through Medicaid reimbursement, 11% from the DOL and 28% from other payors. We believe our sources of funds through operations and available through the credit facility described above will be sufficient to meet our working capital, planned capital expenditure and scheduled debt repayment requirements for the next twelve months.

We had no significant off-balance sheet transactions or interests in 2008 or 2007.

Impact of Recently Issued Accounting Pronouncements

See Note 11 of the Notes to Condensed Consolidated Financial Statements.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

While we are exposed to changes in interest rates as a result of any outstanding variable rate debt, we do not currently utilize any derivative financial instruments related to our interest rate or foreign currency exposures. Our senior secured credit facility, which has an interest rate based on margins over LIBOR or prime, tiered based upon leverage calculations, had an outstanding balance of $69.3 million as of March 31, 2008 and December 31, 2007. A 100 basis point movement in the interest rate would result in an approximate $0.7 million annualized effect on interest expense and cash flows.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

ResCare’s management, under the supervision and with the participation of the Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2008. Based on that evaluation, the CEO and CFO concluded that ResCare’s disclosure controls and procedures are effective in timely making known to them material information required to be disclosed in the reports filed or submitted under the Securities Exchange Act. There were no changes in ResCare’s internal control over financial reporting during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of

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controls can provide absolute assurance that all control issues and instances of fraud, if any, with our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple errors or mistakes, and that controls can be circumvented by the acts of individuals or groups. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II.OTHER INFORMATION

Item 1.Legal Proceedings

Information regarding the legal proceedings is described in Note 10 to the condensed consolidated financial statements set forth in Part I of this report and incorporated by reference into this Part II, Item 1.

Item 1A.Risk Factors

There have been no material changes from the risk factors previously disclosed in our 2007 Annual Report on Form 10-K.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities	None
Issuer Repurchases of Securities	None

Item 5.Other Information

From time to time executive officers and directors of ResCare may adopt non-discretionary, written trading plans that comply with SEC Rule 10b5-1, which provides executives with a method to monetize their equity-based compensation in an automatic and non-discretionary manner over time. The trading plans adopted by our executives must comply with our compensation and trading policies, and applicable laws and regulations. Consistent with ResCare’s philosophy of open communication with our shareholders, we post information about any trading plans of our executive officers and directors in effect from time to time on our corporate website.

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Item 6.Exhibits

(a)	Exhibits
	10.1	Employment Agreement between Res-Care, Inc. and Vincent F. Doran is incorporated by reference to Exhibit 10.1 of Form 8-K filed on April 16, 2008.
	10.2	Employment Agreement between Res-Care, Inc. and Paul G. Dunn is incorporated by reference to Exhibit 10.2 of Form 8-K filed on April 16, 2008.
	10.3	Employment Agreement between Res-Care, Inc. and David W. Miles is incorporated by reference to Exhibit 10.3 of Form 8-K filed on April 16, 2008.
	31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
	31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.
	32.	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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.
			Registrant
Date:	May 8, 2008	By:	/s/ Ralph G. Gronefeld, Jr.
			Ralph G. Gronefeld, Jr.
			President and Chief Executive Officer
Date:	May 8, 2008	By:	/s/ David W. Miles
			David W. Miles
			Executive Vice President and
			Chief Financial Officer

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