UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2007March 31, 2008

OR

For the transition period from            to            

Commission File No. 000-50364

The Providence Service Corporation

(Exact name of registrant as specified in its charter)

(520) 747-6600

(Registrant’s telephone number, including area code)

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 12 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definition of “accelerated filer and large“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

As of NovemberMay 2, 2007,2008, there were outstanding 11,723,27812,187,681 shares (excluding treasury shares of 612,026) of the registrant’s Common Stock, $0.001 par value per share.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

The Providence Service Corporation

Condensed Consolidated Balance Sheets

See accompanying notes to unaudited condensed consolidated financial statements

The Providence Service Corporation

Unaudited Condensed Consolidated Statements of Income

See accompanying notes to unaudited condensed consolidated financial statements

The Providence Service Corporation

Unaudited Condensed Consolidated Statements of Cash Flows

See accompanying notes to unaudited condensed consolidated financial statements

The Providence Service Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2007March 31, 2008

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “consolidated financial statements”) include the accounts of The Providence Service Corporation and its wholly-owned subsidiaries, including its foreign wholly-owned subsidiary WCG International LtdLtd. (“WCG”) (collectively, the “Company”, “our”, “we” and “us”). These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the ninethree months ended September 30, 2007March 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2007.2008.

The consolidated balance sheet at December 31, 20062007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2006.2007.

2. Description of Business and Summary of Critical Accounting Estimates

Description of Business

The Company is a government outsourcing privatization company specializing in alternatives to institutional care.company. The Company operates in the following two segments: Social Services and Non-Emergency Transportation Services (“NET Services”). As of March 31, 2008, the Company operated in 36 states, and the District of Columbia, United States, and British Columbia, Canada.

The Social Services operating segment responds to governmental privatization initiatives in adult and juvenile justice, corrections, social services, welfare systems, education and workforce development by providing home-based and community-based counseling services and foster care to at-risk families and children. These services are purchased primarily by state, city, and county levels of government, and are delivered under block purchase, cost based and fee-for-service arrangements. The Company also contracts with not-for-profit organizations to provide management services for a fee. As

The NET Services operating segment provides non-emergency transportation management solution services, primarily to Medicaid beneficiaries. The entities that pay for non-emergency medical transportation services include state Medicaid programs, health maintenance organizations and commercial insurers. Most of September 30, 2007,the Company’s non-emergency medical transportation services are delivered under capitated contracts where the Company operated in 35 states,assumes the Districtresponsibility of Columbia and British Columbia.meeting the transportation needs of a specific geographic population.

Seasonality

The Company’s quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in its business, principally due to lowerbusiness. Lower client demand for the Company’s home and community based services during the holiday and summer seasons. Asseasons results in lower revenue during those periods. The Company’s non-emergency transportation services also experience fluctuations in demand during the Company has grown its homeholiday, summer and community based services business, the Company’s exposure to seasonal variations has grown and will continue to grow, particularly with respect to its school based services, educational services and tutoring services. The Company experiences lower home and community based services revenue when school is not in session.winter seasons. The Company’s expenses however,related to its Social Services operating segment do not vary significantly with these changes and, as a result, such expenses may not fluctuate significantly on a quarterly basis. Conversely, due to the fixed revenue stream and variable expense base structure of the Company’s NET Services operating segment, expenses related to this segment do vary with

these changes and, as a result, such expenses fluctuate on a quarterly basis. The Company expects quarterly fluctuations in operating results and operating cash flows to continue as a result of the uneven seasonal demand for its home and community based services and non-emergency transportation services. Moreover, asAs the Company enters new markets, it could be subject to additional seasonal variations along with any competitive response to the Company’s entry by other social services and transportation providers.

Concentration of Credit Risk

Contracts the Company enters into with governmental agencies and with other entities that contract with governmental agencies accounted for approximately 81% and 84% of the Company’s revenue for the three months ended March 31, 2007 and 2008, respectively. For the three months ended March 31, 2007, the largest customer accounted for 6.9% of the Company’s total revenue. For the three months ended March 31, 2008, the two largest customers accounted for 9.1% and 6.6% of the Company’s total revenue. The related contracts are subject to possible statutory and regulatory changes, rate adjustments, administrative rulings, rate freezes and funding reductions. Reductions in amounts paid by these contracts for the Company’s services or changes in methods or regulations governing payments for the Company’s services could materially adversely affect its revenue.

For the three months ended March 31, 2008, the Company conducted a portion of its operations in Canada through WCG. At March 31, 2008, approximately $21.8 million, or 11.3% of the Company’s net assets were located in Canada. The Company is subject to the risks inherent in conducting business across national boundaries, any one of which could adversely impact its business. In addition to currency fluctuations, these risks include, among other things: (i) economic downturns; (ii) changes in or interpretations of local law, governmental policy or regulation; (iii) restrictions on the transfer of funds into or out of the country; (iv) varying tax systems; (v) delays from doing business with governmental agencies; (vi) nationalization of foreign assets; and (vii) government protectionism. The Company intends to continue to evaluate opportunities to establish additional operations in Canada. One or more of the foregoing factors could impair the Company’s current or future operations and, as a result, harm its overall business.

Foreign Currency Translation

The financial position and results of operations of WCG are measured using WCG’s local currency (Canadian Dollar) as the functional currency. Revenues and expenses of WCG have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity. OfPresently, it is the Company’s totalintention to reinvest the undistributed earnings of its foreign subsidiary indefinitely in foreign operations. Therefore, the Company is not providing for U.S. or additional foreign withholding taxes on its foreign subsidiary’s undistributed earnings. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of propertydeferred tax liability on such undistributed earnings due to the complexities of the Internal Revenue Code of 1986, as amended, (“IRC”) and equipment netthe hypothetical nature of accumulated depreciation at September 30, 2007, approximately $2.8 million was located domesticallythe calculations.

Derivative Instruments and $1.2 million was locatedHedging Activities

The Company holds a derivative financial instrument for the purpose of hedging interest rate risk. The type of risk hedged relates to the variability of future earnings and cash flows caused by movements in Canada. Revenues frominterest rates applied to the Company’s foreign operationsfloating rate long-term debt as described in note 7 below. The Company documented its risk management strategy and hedge effectiveness at the inception of the hedge and will continue to assess its effectiveness during the term of the hedge. The Company has designated the interest rate swap as a cash flow hedge under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”).

Derivatives that have been designated and qualify as cash flow hedging instruments are reported at fair value. The gain or loss on the three and nine months ended September 30, 2007 approximated $4.7 million and was attributable toeffective portion of the operationshedge (i.e. change in fair value) is initially reported as a component of WCG. Revenues fromother comprehensive income. The remaining gain or loss of the Company’s domestic operations forineffective portion of the three and nine months ended September 30, 2007 approximated $59.0 million and $181.8 million, respectively.hedge, if any, is recognized currently in earnings.

Restricted Cash Equivalents

Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. Investments in cash equivalents are carried at cost, which approximates fair value. The Company places its temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) and the Canada Deposit Insurance Corporation (CDIC) insurance limits.

At DecemberMarch 31, 20062008, approximately $3.4 million of cash was held by WCG and September 30, 2007,is not freely transferable without unfavorable tax consequences between the Company and WCG.

Restricted Cash

The Company had approximately $8.5$15.3 million and $9.4$12.1 million of restricted cash respectively. at December 31, 2007 and March 31, 2008 as follows:

Of the restricted cash amount at September 30,December 31, 2007 $175,000and March 31, 2008:

At September 30, 2007,March 31, 2008, approximately $6.4$3.1 million, $1.8 million, $5.8 million and $250,000 of the restricted cash was held in custody by the Bank of Tucson. In addition, theTucson, Wells Fargo, Fifth Third Bank and Bank of America, respectively. The cash is restricted as to withdrawal or use and is currently invested in certificates of deposit.deposit or short-term marketable securities. The remaining balance of approximately $3.0$1.1 million of the restricted cash is also restricted as to withdrawal or use, and is currently held in various non-interest bearing bank accounts related to Correctional Services.

Stock-Based Compensation Arrangements

Stock-based compensation expense charged against income for stock options and stock grants awarded subsequent to December 31, 2005 for the ninethree months ended September 30, 2006March 31, 2007 and 20072008 was based on the grant-date fair value adjusted for estimated forfeitures based on awards expected to vest in accordance with the provisions of Statement of Financial Accounting StandardsSFAS No. 123R, “Share-Based“Share-Based Payment” (“(“SFAS 123R”) and amounted to approximately $104,000$286,000 and $885,000$328,000 (net of tax of $69,000$199,000 and $616,000,$226,000, respectively), respectively. SFAS 123R requires forfeitures to be estimated at the time of grant and revised as necessary in subsequent periods if the actual forfeitures differ from those estimates.

For the ninethree months ended September 30, 2006March 31, 2007 and 2007,2008, the amount of excess tax benefits resulting from the exercise of stock options was approximately $1.8 million$0 and $540,000,$27,916, respectively. These amounts areThis amount is reflected as cash flows from operating and financing activities for the ninethree months ended September 30, 2006 and 2007March 31, 2008 in the accompanying consolidated statements of cash flows.

Stock-based compensation expense is amortized over the vesting period of three years with approximately 37%29.5% recorded as client services expense and 63%70.5% recorded as general and administrative expense in the Company’s consolidated statement of income statement for the ninethree months ended September 30, 2007.March 31, 2008.

As of September 30, 2007,March 31, 2008, there was approximately $3.7 million of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company’s 2006 Long-Term Incentive Plan (“2006 Plan”). The cost is expected to be recognized over a weighted-average period of 2.31.87 years. The total fair value of shares vested during the nine months ended September 30, 2007 was $1.2 million.

The fair value of each stock option awarded during the ninethree months ended September 30,March 31, 2007 and 2006(no grants were awarded during the three months ended March 31, 2008) was estimated on the date of grant using the Black-Scholes-Merton option-pricing formula with the following assumptions:

		Nine months ended September 30,
		2006		2007
Expected dividend yield		0.0%		0.0%
Expected stock price volatility		33.9%		34.1% -34.5%
Risk-free interest rate		5.0%		4.7% - 4.9%
Expected life of options		5		6

		Three months ended March 31, 2007
Expected dividend yield		0.0	%
Expected stock price volatility		34.4	%
Risk-free interest rate		4.7	%
Expected life of options		6

The risk-free interest rate was based on the U.S. Treasury security rate in effect as of the date of grant. The expected lives of options were based upon historical data. The expected stock price volatility was based on the Company’s historical data. Implied volatility was not considered.

Reinsurance and Self-Funded Insurance Programs

Reinsurance

The Company reinsures a substantial portion of its general and professional liability and workers’ compensation costs and the general and professional liability and workers’ compensation costs of certain designated entities the Company manages under reinsurance programs through its wholly-owned captive insurance subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”). These decisions were made based on current conditions in the insurance marketplace that have led to increasingly higher levels of self-insurance retentions, increasing number of coverage limitations and fluctuating insurance premium rates.

The following table summarizes the Company’s insurance coverage under its reinsurance programs:

SPCIC had restricted cash of approximately $6.2 million at December 31, 2006 and September 30, 2007, which was restricted to secure the reinsured claims losses of SPCIC under the general and professional liability and workers’ compensation reinsurance programs. The full extent of claims may not be fully determined for years. Therefore, the estimates of potential obligations are based on recommendations of an independent actuary using historical data, industry data, and the Company’s experience. Although management believes that the amounts accrued for losses incurred but not reported under the terms of its reinsurance programs are sufficient, any significant increase in the number of claims or costs associated with these claims made under these programs could have a material adverse effect on the Company’s financial results.

Any obligations above the Company’s reinsurance program limits are the responsibility of the Company.

Health Insurance

The Company offers its employees an option to participate in a self-funded health insurance program. For the program year ended June 30, 2007, health claims were self-funded with a stop-loss umbrella policy with a third party insurer to limit the maximum potential liability for individual claims to $150,000 per person and for total claims up to $6.7 million. Effective July 1, 2007, the Company renewed its stop-loss umbrella policy under substantially the same terms as the prior year policy except for the maximum potential liability for total claims which may change substantially depending on member enrollment. Health insurance claims are paid as they are submitted to the plan administrator. The Company maintains accruals for claims that have been incurred but not yet reported to the plan administrator and therefore have not been paid. The incurred but not reported reserve is based on an established cap and current payment trends of health insurance claims. The liability for the self-funded health plan of approximately $746,000 and $735,000 as of December 31, 2006 and September 30, 2007, respectively, was recorded in “Reinsurance liability reserve” in the accompanying consolidated balance sheets.

The Company charges its employees a portion of the costs of its self-funded group health insurance programs, and it determines this charge at the beginning of each plan year based upon historical and projected medical utilization data. Any difference between the Company’s projections and its actual experience is borne by the Company. The Company estimates potential obligations for liabilities under this program to reserve what it believes to be a sufficient amount to cover liabilities based on its past experience. Any significant increase in the number of claims or costs associated with claims made under this program above what the Company reserves could have a material adverse effect on its financial results.

Critical Accounting Estimates

The Company has made a number of estimates relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States for

interim financial information. The Company based its estimates on historical experience and on various other assumptions the Company believes to be reasonable under the circumstances. However, actual results may differ from these estimates under different assumptions or conditions. Some of the more significant estimates impact revenue recognition, accounts receivable and allowance for doubtful accounts, accounting for business combinations, goodwill and other intangible assets, purchased transportation costs, accounting for management agreement relationships, loss reserves for reinsurance and self-funded insurance programs, stock-based compensation, foreign currency translation, and stock-based compensation. We havederivatives. The Company has reviewed ourits critical accounting estimates with ourthe Company’s board of directors, audit committee and disclosure committee.

Reclassification

Certain amounts have been reclassified in prior periods in order to conform with the current period presentation.

New Accounting Pronouncements

In June 2006, theThe Financial Accounting Standards Board (“FASB”) issued FASB Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition

threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007. Upon adoption of FIN 48, the Company had no unrecognized tax benefits. The Company is not aware of any issues that would cause a significant increase to the amount of unrecognized tax benefits within the next 12 months. The Company recognizes interest and penalties as a component of income tax expense. The Company is subject to taxation in the United States, Canada and various state jurisdictions. The statute of limitations is generally three years for the United States and between eighteen months and four years for states. The Company is subject to the following material taxing jurisdictions: United States, Arizona, California, Maine, North Carolina, Pennsylvania, and Virginia. The tax years that remain open to examination by the United States, Maine, North Carolina and Virginia jurisdictions are years ended December 31, 2003, December 31, 2004, December 31, 2005, and December 31, 2006; the Arizona and California filings that remain open to examination are years ended June 30, 2003, December 31, 2003, December 31, 2004, December 31, 2005, and December 31, 2006; the Pennsylvania filings that remain open to examination are years ended December 31, 2005, and December 31, 2006.

Pending Accounting Pronouncements

FASB issued Statement of Financial Accounting StandardsSFAS No. 157, “Fair“Fair Value Measurement”Measurement” (“SFAS 157”) in September 2006, to define fair value and require that the measurement thereof be determined based on the assumptions that market participants would use in pricing an asset or liability and expand disclosures about fair value measurements. Additionally, SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. SFAS 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. EarlyOn February 12, 2008, the FASB issued FSP No. FAS 157-2,“Effective Date of FASB Statement No. 157”, which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis; the statement is effective for fiscal years beginning after December 31, 2008. The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial liabilities for which the Company has not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing and indefinite lived intangible assets measured at fair value for impairment testing. Although the adoption of SFAS 157 related to financial assets and financial liabilities did not materially impact its financial condition, results of operations, or cash flow, the Company is encouraged.now required to provide additional disclosures as part of its financial statements. The Company is evaluatingcurrently assessing the effect, if any,impact of adopting SFAS 157 for nonfinancial assets and nonfinancial liabilities on the Company’s consolidatedits financial statements.condition, results of operations and cash flow.

In February 2007, the FASB issued Statement of Financial Accounting StandardsSFAS No. 159, “The“The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115”115” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early applicationThe Company adopted SFAS 159 on January 1, 2008. There was no material impact on the Company’s consolidated financial statements upon adoption of SFAS 159, and the Company does not believe that the provisions of SFAS 159 is permitted. The Company is evaluating the effect, if any, of adopting SFAS 159will have a material impact on its consolidated financial statements.statements for the year ending December 31, 2008.

Pending Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of 2009. The Company has not electedis currently evaluating the potential impact, if any, of the adoption of SFAS 141R on its consolidated results of operations and financial condition.

In December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interest of the parent and the interests of the noncontrolling owners. SFAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2009. Had SFAS 160 been effective for the periods covered by this report, the Company would have classified ownership interest in one of its subsidiaries held by the sellers related to the Company’s acquisition of WCG of approximately $7.6 million as equity. At December 31, 2007 and March 31, 2008, this ownership interest was classified as non-controlling interest in the accompanying consolidated balance sheets. The Company is currently evaluating the other potential impacts, if any, of the adoption of SFAS 160 on its consolidated results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), which amends SFAS 133. SFAS 161 requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. The required disclosures include the fair value optionof derivative instruments and their gains or losses in tabular format, information about credit-risk-related contingent features in derivative agreements, counterparty credit risk, and the company’s strategies and objectives for using derivative instruments. SFAS 161 expands the current disclosure framework in SFAS 133. SFAS 161 is effective prospectively for periods beginning on or after November 15, 2008. Early adoption is encouraged. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 161 on its consolidated results of operations and financial instruments.condition.

Other accounting standards that have been issued or proposed by the FASB or other standards setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

3. Fair Value Measurements

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2008:

The Company’s interest rate swap is carried at fair value measured on a recurring basis. Fair value is determined through the use of models that consider various assumptions as well as other relevant market data, which are inputs that are classified within Level 2 of the valuation hierarchy.

4. Other Receivables

At December 31, 2007 and March 31, 2008, insurance premiums of approximately $1.7 million and $1.3 million, respectively, were receivable from third parties related to the reinsurance activities of the Company’s two captive subsidiaries. The insurance premiums receivable was classified as “Other receivables” in the accompanying consolidated balance sheets. In addition, the Company’s expected losses related to workers’ compensation and general and professional liability in excess of the Company’s liability under its associated reinsurance programs at March 31, 2008 was approximately $1.3 million, of which $302,000 was classified as “Other receivables” and $1.0 million was classified as “Other assets” in the accompanying consolidated balance sheet. The Company recorded a corresponding liability at March 31, 2008 which offsets these expected losses. This liability was classified as “Reinsurance liability reserve” and “Other long-term liabilities” in the accompanying consolidated balance sheet.

Based on certain provisions of the Company’s loan and securityprevious credit agreement with CIT Healthcare LLC, (“CIT”), a significant portion of the Company’s collections on accounts related to its operating activities are sweptwere deposited into lockbox accounts to insure payment of outstanding obligations to CIT. Any amounts so collected which exceed amounts due CIT under the Company’s loan and security agreement are remitted to the Company pursuant to a weekly settlement process. From time to time the Company’s reporting period cut-off date falls between settlement dates with CIT resulting in a receivable from CIT in an amount equal to the excess of collections on accounts related to the Company’s operating activities and amounts due to CIT under the Company’s loan and security agreement as of the Company’s reporting period cut-off date.Healthcare LLC. As of December 31, 2006 and September 30, 2007, the amount due to the Company from CIT Healthcare LLC under this arrangementlockbox arrangements totaled approximately $828,000 and $2.3 million, respectively, and was$322,000. No such arrangements exist under the Company’s new credit agreement with CIT Capital Securities LLC (“CIT”), entered into in December 2007 in connection with acquisition of Charter LCI Corporation, including its subsidiaries (“LogistiCare”). These receivables were classified as “Other receivables” in the Company’s consolidated balance sheet.

4.5. Prepaid Expenses and Other

Prepaid expenses and other comprise the following:

5. Acquisitions6. Notes Receivable from Related Party

The following acquisitions have been accounted for usingIn connection with the purchase methodacquisition of accounting and the results of operations are includedLogistiCare in the Company’s consolidated financial statements from the date of acquisition. The cost of these acquisitions has been allocated to the assets and liabilities acquired based on a preliminary evaluation of their respective fair values and may change when the final valuation of certain intangible assets and deferred taxes are determined.

Effective January 1, 2007, the Company acquired allentered into a separate stock option cancellation and exchange agreement with each employee of LogistiCare who held options to purchase shares of Charter LCI Corporation’s common stock as of the assetsacquisition date. The terms of the Behavioral Health Rehabilitation Services business of Raystown Development, Inc. (“Raystown”). The business provides in-home counseling and school based services in Pennsylvania. The purchase price consisted of cash of $500,000, of which $100,000 was placed in to escrow to cover possible indemnity obligations by the seller. The purchase price was funded by cash flow from operations. This acquisition further expands the Company’s home and community based services in Pennsylvania.

The following represents the Company’s preliminary allocation of the purchase price and associated acquisition costs:

Currently, the above goodwill is expectedthese agreements provided for, among other things, a loan to be tax deductible.

On August 1, 2007, PSC of Canada Exchange Corp. (“PSC”), a wholly-owned subsidiary of the Company, acquired all of the equity interest in WCG, a Victoria, British Columbia based workforce initiative company with operations in communities across British Columbia. The purchase price included

$10.1 million (previously reported as $9.8 million; change due to exchange rate adjustment) in cash (less certain adjustments contained in the purchase agreement) inclusive of the sellers’ investment banking fees which were reimbursedmade by the Company to each optionholder in an amount equal to the optionholders’ withholding taxes related to the cancellation and 287,576 exchangeable shares issued by PSC valued at approximately $7.8 million in accordance with the provisionsexchange of the optionholders’ in-the-money stock options to purchase agreement ($7.6 millionshares of Charter LCI Corporation common stock for accounting purposes). For accounting purposes the valueshares of the exchangeable shares issued by PSC was determined based upon the product of the average market price for the Company’s common stockstock. Each loan bore interest of 6.0% per annum with principal and accrued interest due within 180 days from the acquisition date. As collateral security for the five trading days ended August 3, 2007prompt and complete payment for all obligations under the loans, each optionholder granted a security interest to the Company in the optionholders’ right, title and interest in and to 40% of $26.59 and 287,576 shares issued. The shares are exchangeable at each shareholder’s option, for no additional consideration, into unregisteredthe shares of the Company’s common stock on a one-for-one basis (“Exchangeable Shares”) beginning aftergranted to the optionholders under the stock option cancellation and exchange agreements. The amount due to the Company under these arrangements at December 31, 2008. This acquisition expands2007 totaled approximately $2.4 million. Of this amount, approximately $1.7 million was classified as “Notes receivable from related party” in the accompanying consolidated balance sheet. The remaining balance of $715,000 was classified as “Common stock subscription receivable” in the accompanying consolidated balance sheet. At March 31, 2008, approximately $44,000 including accrued interest receivable due to the Company under these arrangements remained uncollected and was classified as “Notes receivable from related party” in the accompanying consolidated balance sheet.

7. Interest Rate Swap

On February 27, 2008, the Company entered into an interest rate swap to convert a portion of its floating rate long-term debt to fixed rate debt. The purpose of this instrument is to hedge the variability of the Company’s workforce development service offeringfuture earnings and extendscash flows caused by movements in interest rates applied to its floating rate long-term debt. The Company holds this derivative only for the Company’s geographical service deliverypurpose of hedging such risks, not for speculation. The Company entered into Canada. The cash portionthe interest rate swap with a notional amount of $86.5 million maturing on February 27, 2010. Under the purchase price was funded through the Company’s acquisition line of credit.

The following represents the Company’s preliminary allocation of the purchase price and associated acquisition costs:

Currently, the above goodwill is not expected to be tax deductible.

Effective May 1, 2007,swap agreement, the Company becamereceives interest equivalent to three-month LIBOR and pays a fixed rate of interest of 3.026% with settlement occurring quarterly. The Company recorded the sole memberfair market value of Maple Star Oregon, Inc. (“MSO”),its interest rate swap as a not-for-profit organization managed by the Company. MSO is not a federally tax exempt organizationcash flow hedge on its balance sheet and neither the Internal Revenue Service rules governing Internal Revenue Code Section 501(c)(3) exempt organizations, norhas marked it to fair value through other Internal Revenue Code sections applicable to tax exempt organizations, apply to this organization.

comprehensive income. The following unaudited pro forma information presents a summary of the consolidated results of operations of the Company as if the acquisition of Raystown, WCG and MSO had occurred on January 1, 2006 or 2007. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been affected on January 1, 2006 or 2007.

On May 9, 2007, the Company paid approximately $7.7 million to the sellers of W.D. Management, L.L.C. (“WD Management”) under contingent consideration provisions of the associated purchase agreement. Thechange in fair value of the identifiable assets acquiredinterest rate swap resulted in a loss, before taxes, of approximately $1.0 million as of March 31, 2008, which is reflected in “Accumulated other comprehensive income (loss), net of tax” and “Other long-term liabilities” in the accompanying consolidated balance sheet.

8. Business Segments

The Company’s operations are organized and reviewed by management along its services lines. Upon the consummation of the acquisition of LogistiCare in December 2007, the Company now operates in two reportable segments: Social Services and NET Services. The Company operates these reportable segments as separate divisions and differentiates the segments based on the nature of the services they offer. The following describes each of the Company’s segments and its corporate services area.

Social Services. Social Services includes government sponsored social services that the Company has historically offered. Primary services in this transaction exceeded that portionsegment include home and community based counseling, foster care and not-for-profit management services. Social Services is a separate division of the purchase price paid byCompany with management and service offerings distinct from the Company’s NET Services segment.

NET Services. NET Services includes managing the delivery of non-emergency transportation services. NET Services is a separate division of the Company before any contingency amount atwith operational management and service offerings distinct from the acquisition date.Company’s Social Services operating segment.

Corporate. Corporate includes accounting and finance, information technology, payroll and human resources and various other overhead charges, all of which were directly allocated to the operating segments.

Segment asset disclosures include property and equipment and other intangible assets. The Company recorded this excess fair value as a liability for contingent consideration. The fair valueaccounting policies of the additional consideration paid toCompany’s segments are the sellers on May 9, 2007 approximated the earn out liability initially allocated at the acquisition date. Additionally, under the contingent consideration provisionssame as those of the purchase agreement, the Company may be obligated to pay additional contingent consideration in 2008 as more fullyconsolidated company described in note 9 below.1 of the Company’s consolidated financial statements included in its annual report on

Form 10-K for the year ended December 31, 2007. The valueCompany evaluates performance based on operating income. Operating income is revenue less operating expenses (including client services expense, general and administrative expense, and depreciation and amortization) but is not affected by other income/expense or by income taxes. Other income/expense consists principally of any additional contingent consideration paidinterest income and interest expense. In calculating operating income for each segment, general and administrative expenses incurred at the corporate level are allocated to each segment based upon their relative direct expense levels excluding costs for purchased services. All intercompany transactions have been eliminated. There are no intersegment revenues or transfers.

The following table sets forth certain financial information attributable to the sellers will be recorded as goodwill. The goodwill amount, if any, is expected to be deductible.

UponCompany’s business segments for the final determinationthree months ended March 31, 2008 (the first full quarter the Company operated in two reportable segments). In addition, none of the purchase price on May 29, 2007, the Company paid approximately $651,000 to the sellers of Maple Star Nevada. The fair valuesegments have significant noncash items other than depreciation and amortization in reported income.

There was no single payer from which 10% or more of the additional consideration paid toCompany’s revenue was derived for the sellers was recorded as an additional cost to acquire Maple Star Nevada.three months ended March 31, 2008.

Goodwill

Changes in goodwill were as follows:

6.9. Stockholders’ Equity

The Company’s second amended and restated certificate of incorporation provides that the Company’s authorized capital stock consists of 40,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share.

During the nine months ended September 30,At December 31, 2007 the Company granted a total of 139,900 ten-year options under its 2006 Plan to purchase the Company’s common stock at exercise prices equal to the market value of the Company’s common stock on the date of grant. The optionsand March 31, 2008, there were granted to the non-employee members of its board of directors12,756,392 and certain key employees. The option exercise prices ranged from $21.84 to $27.12 and the options vest in equal installments on the first, second and third anniversary of the grant date. The weighted-average fair value of the options granted during the nine months ended September 30, 2007 totaled $10.75 per share.

The Company granted a total of 93,500 shares of restricted stock to certain executive officers, non-employee directors and key employees of the Company during the nine months ended September 30, 2007. These awards vest equally and at various times over the next three years. The weighted-average fair value of the restricted stock awards granted during the nine months ended September 30, 2007 totaled $25.11 per share.

The Company issued 41,968 shares of its common stock to its employees upon the vesting of certain restricted stock awards granted in 2006 under the Company’s 2006 Plan. In connection with the vesting of these restricted stock awards, 2,62112,776,933 shares of the Company’s common stock were surrendered to the Company by the recipients to pay their associated taxes due to the Federaloutstanding, respectively, (including 612,026 treasury shares at December 31, 2007 and state taxing authorities. These shares were placed in treasury.

During the nine months ended September 30, 2007, the Company issued 4,575March 31, 2008) and no shares of its commonpreferred stock in connection with the exercise of employee stock options under the Company’s 1997 Stock Option and Incentive Plan, and 92,134 shares of its common stock in connection with the exercise of employee stock options under the Company’s 2003 Stock Option Plan.

In connection with the acquisition of WCG in August 2007, PSC (the Company’s wholly-owned subsidiary) issued 287,576 Exchangeable Shares. The Company recorded the value of the Exchangeable Shares issued as non-controlling interest in the accompanying consolidated balance sheet at September 30, 2007.outstanding.

Other comprehensive income included foreign currency translation adjustments which amounted to $896,373a loss of approximately $875,000 and a loss of approximately $596,000, net of tax, which resulted from the change in fair value of the Company’s interest rate swap for the three and nine months ended September 30, 2007.March 31, 2008.

On February 1, 2007,

The components of comprehensive income, net of taxes, for the Company’s board of directors approved a stock repurchase program for up to one million shares of its common stock. The Company may purchase shares of its common stock from time to time in the open market or in privately negotiated transactions, depending on the market conditions and the Company’s capital requirements. During the ninethree months ended September 30, 2007, the Company spent approximately $10.9 million to purchase 462,500 shares of its common stock in the open market.March 31, 2008 were as follows:

At December 31, 2006 and September 30, 2007, there were 12,171,127 and 12,309,804 shares of the Company’s common stock outstanding, respectively, (including 146,905 treasury shares at December 31, 2006 and 612,026 treasury shares at September 30, 2007) and no shares of preferred stock outstanding.

The following table reflects changes in common stock, additional paid-in capital,components of accumulated other comprehensive income, and treasury stock for the nine months ended September 30, 2007:net of taxes, at March 31, 2008 were as follows:

7.10. Earnings Per Share

The following table details the computation of basic and diluted earnings per share:

The numerator for calculating basic earnings per share is reduced to arrive at net income available to common stockholders for a convertible participating security issued by a subsidiary under the two class method and then theto calculate basic earnings per share. The numerator iswould be increased to net income for calculating diluted earnings per share.

The weighted-average shares for diluted earnings per share forif the effect were dilutive. For the three and nine months ended September 30, 2007 included 25,421 shares and 8,567 shares, respectively, anticipated to be issued toMarch 31, 2008, the sellers of WD Management under the earnout provisionseffect of the associated purchase agreement. non-controlling interest was antidilutive.

For the ninethree months ended September 30, 2006March 31, 2007 and 2007,2008, employee stock options to purchase 128,34724,768 and 17,7405,867 shares of common stock, respectively, were not included in the computation of diluted earnings per share as the exercise price of these options was greater than the average fair value of the common stock for the period and, therefore, the effect of these options would have been antidilutive. In addition, the effect of issuing 1,678,740 shares of common stock on an assumed conversion basis related to the Convertible Senior Subordinated Notes issued in connection with the acquisition of LogistiCare was not included in the computation of diluted earnings per share for the three months ended March 31, 2008 as it would have been antidilutive. Additionally, the weighted-average shares for basic earnings per share for the three months ended March 31, 2008 included 78,740 shares anticipated to be issued to the sellers of W.D. Management, L.L.C. (“WD Management”) under the earnout provisions of the associated purchase agreement.

8.11. Income Taxes

The Company’s effective income tax rate for the interim periods was based on management’s estimate of the Company’s effective tax rate for the applicable year and differs from the federal statutory income rate primarily due to nondeductible permanent differences such as meals, foreign taxes, and state income taxes.

9.12. Commitments and Contingencies

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

In accordance with certain provisions in the purchase agreement related to the acquisition of Family Based Strategies, Inc. (“FBS”) in 2006, the Company may make an earn out payment in the second quarter of 2008 based on the financial performance of FBS over the period from March 1, 2006 to December 31, 2007. Any additional consideration will be paid in cash and the Company will record the additional consideration paid as goodwill.

Inits fiscal year 2008, the Company will be obligated to pay to the former members of WD Management an additional amountapproximately $8.9 million under an earn out provision pursuant to a formula specified in the purchase agreement that iswas based upon the future financial performance of WD Management. When the conditionsManagement for payment under the earn out provision are met in 2008, the2007. The contingent consideration will be paid in a combination of cash and shares of the Company’s unregistered common stock, the value of which will bewas determined in

accordance with the provisions of the purchase agreement. When the earn out provision is triggered or when theThe Company makes any payment under the earn out provision, the Company will record any excess ofrecorded the fair value of the additional consideration paid issued or issuable over the contingent liability as goodwill.

The Company assumed certain liabilities in connection with its purchase of all of the assets of Correctional Services effective September 30, 2006. These liabilities include a deferred compensation liability limited to $250,000 and liabilities that may arise under any purchased asset, assigned contract or subcontract which the Company entered into simultaneously with the asset purchase agreement subject to certain limitations set forth in the asset purchase agreement.

In accordance with an earn out provision ofin the purchase agreement related to the acquisition of WCG, the Company may make an earn out payment up to a total of approximately CAD $10.8 million (determined as of December 31, 2008) in the first quarter of 2009 based on the financial performance of WCG during the period August 1, 2007 to December 31, 2008. If the earn out provision is met, the contingent consideration will be paid approximately one-third in cash and the balance in additional Exchangeable Sharesshares of PSC of Canada Exchange Corp. (“PSC”) (a subsidiary of the Company established to facilitate the acquisition of WCG) common stock valued at the price of the Company’s common stock at the closing date the Company announced the transaction. These shares are exchangeable at each shareholder’s option, for no additional consideration, into shares of the transaction.Company’s common stock on a one-for-one basis (“Exchangeable Shares”) beginning after December 31, 2008. The Exchangeable Shares represent ownership in PSC and are accounted for as non-controlling interest. If the contingency is met in accordance with the related provisions of the purchase agreement and the additional consideration becomes distributable, the Company will record the fair value of the consideration paid, issued or issuable as goodwill.

On August 31,The Company may be obligated to pay an additional amount under an earn out provision contained in the merger agreement related to the purchase of LogistiCare based on certain consolidated financial earnings results of LogistiCare for 2007 and 2008. The actual amount of the earn out consideration to be paid, if any, will be determined pursuant to a formula set forth in the merger agreement and will be capped at $40 million. If earned, the contingent consideration will be paid in cash; provided that, subject to the Company obtaining the approval of its stockholders of such issuance, each seller will have the right to elect to receive up to 50% of its pro rata share of the earn out payment in shares of the Company’s common stock valued at the price of the Company’s common stock ($31.42 per share) on November 6, 2007, the Company’s boardlast trading day prior to the date the Company

announced the transaction. If the Company does not obtain stockholder approval of directors adopted The Providence Service Corporation Deferred Compensation Plan (the “Deferred Compensation Plan”) for eligible employees and independent contractorssuch issuance, then each seller who elected to receive stock will be entitled to cash in an amount equal to the value of the Company or a participating employer (as definedshares of the Company’s common stock it would have received had stockholder approval been obtained as set forth in the Deferred Compensation Plan). Under the Deferred Compensation Plan participants may defer all ormerger agreement, based upon a portion of their base salary, service bonus, performance-based compensation earned in a period of 12 months or more, commissions and,formula set forth in the case of independent contractors,merger agreement, subject to the $40 million cap on the total earn-out consideration.

The Company has two deferred compensation reportable on a Form 1099. The Deferred Compensation Plan is unfunded,plans for management and highly compensated associates. These deferred compensation plans are unfunded; therefore, benefits are paid from the general assets of the Company. AsThe total of September 30,participant deferrals, which is reflected in “Other long-term liabilities” in the accompanying consolidated balance sheets, was approximately $190,000 and $219,000 at December 31, 2007 there were no participants.and March 31, 2008.

10.13. Transactions with Related Parties

OneMr. Geringer, one of the Company’s directors, resigned his position as a member of the Company’s board of directors on April 10, 2008 as more fully described in note 14 below. Prior to his resignation the following transaction was deemed to be a related party transaction. Mr. Geringer is a holder of capital stock and the non-executive chairman of the board of Qualifacts Systems, IncInc. (“Qualifacts”). Qualifacts is a specialized healthcare information technology provider that entered into a software license, maintenance and servicing agreement with the Company. This agreement became effective on March 1, 2002 and was to continue for five years. Effective January 10, 2006, a new software license, maintenance and servicing agreement between the Company and Qualifacts was signed and continues for five years. This agreement replaces the agreement which began on March 1, 2002 and may be terminated by either party without cause upon 90 days written notice and for cause immediately upon written notice. The new agreement grants the Company access to additional software functionality and licenses for additional sites. Qualifacts provided the Company services and the Company incurred expenses in the amount of approximately $64,000$53,000 and $171,000$59,000 for the ninethree months ended September 30, 2006March 31, 2007 and 2007,2008, respectively, under the agreement.

Upon the Company’s acquisition of Maple Services, LLC in August 2005, Mr. McCusker, the Company’s chief executive officer, Mr. Deitch, the Company’s chief financial officer, and Mr. Norris, the Company’s chief operating officer, became members of the board of directors of the not-for-profit organization (Maple Star Colorado, Inc.) formerly managed by Maple Services, LLC. Maple Star Colorado, Inc. is a non-profit member organization governed by its board of directors and the state laws of Colorado in which it is incorporated. Maple Star Colorado, Inc. is not a federally tax exempt organization and neither the Internal Revenue Service rules governing Internal Revenue CodeIRC Section 501(c)(3) exempt organizations, nor any other Internal Revenue CodeIRC sections applicable to tax exempt organizations, apply to this organization. The Company provided management services to Maple Star Colorado, Inc. under a management agreement for consideration in the amount of approximately $276,000$38,000 and $237,000$124,000 for the ninethree months ended September 30,March 31, 2007 and 2006,2008, respectively.

As part of its commitment to give back Amounts due to the local communities in whichCompany from Maple Star Colorado, Inc. for management services provided to it operates,by the Company has provided a loan to a Tucson, Arizona based not-for-profit organization that supportsat December 31, 2007 and promotes

public awareness of artMarch 31, 2008 were approximately $221,000 and humanities. Mr. McCusker became a member of the not-for-profit entity’s board of directors in March 2007. The loan of $100,000 was granted in 2006 to the not-for-profit entity under a demand promissory note that bears interest equal to the prime rate in effect from time to time as quoted in the Wall Street Journal plus 1% with principal and accrued interest due upon demand. As of September 30, 2007, the entire balance of this note was reserved as uncollectible.$294,000, respectively.

The Company is using a twin propeller KingAir airplane operated by Las Montanas Aviation, LLC for business travel purposes on an as needed basis. Las Montanas Aviation, LLC is owned by Mr. McCusker. The Company reimburses Las Montanas Aviation, LLC for the actual cost of use currently equal to $1,200$1,400 per flight hour. For the ninethree months ended September 30, 2006March 31, 2007 and 2007,2008, the Company reimbursed Las Montanas Aviation, LLC approximately $120,000$45,000 and $117,000,$0, respectively, for use of the airplane for business travel purposes.

11.14. Subsequent Events

On October 5, 2007, the Company’s wholly-owned subsidiary, Children’s Behavioral Health, Inc. (“CBH”), acquired substantially allApril 10, 2008, Mr. Geringer resigned his positions as a member of the assetsboard of Family & Children’s Services, Inc. (“FCS”directors of the Company and Chairman of the board’s compensation committee, for personal reasons. Mr. Geringer will continue to serve the Company as a consultant for a period commencing on April 11, 2008 and terminating on May 31, 2010 (the “Term”) located in Sharon, Pennsylvania. The purchase price consisted of approximately $8.2 million in cash and the balance in a $1.8 million subordinated promissory note. Underpursuant to the terms of a consulting agreement entered into between the promissory note, $300,000 is due six monthsparties ( the “Consulting Agreement”). Mr. Geringer will receive a consulting fee of approximately $6,666.67 per month during the Term of the Consulting Agreement, payable on the 15^th day of each calendar month, as well as an award of 1,334 shares of restricted stock (the “initial grant”) under the 2006 Plan. The initial grant of restricted stock will vest in two equal installments on each of January 2, 2009 and $1.5 million is due 30 months fromJanuary 3, 2010.

In addition, subject to stockholder approval of an amendment to the 2006 Plan, Mr. Geringer will receive (i) on the date of acquisition. This acquisition was effective October 1, 2007 and expanded the Company’s home and school based behavioral health rehabilitation services into northwestern Pennsylvania.

The cash portionsuch stockholder approval, an award of the above acquisition was funded with the Company’s operating cash and borrowings under the Company’s acquisition line of credit. This acquisition is being accounted for using the purchase method of accounting, and the results of operations will be included in the Company’s consolidated financial statements from the date of acquisition. The cost of the acquisition will be allocated to the assets and liabilities acquired upon the completion of an evaluation of its fair value. The Company has not yet compiled pro forma revenue and operating income information related to this acquisition.

On November 6, 2007, the Company signed a definitive merger agreement to acquire all of the outstanding equity of Charter LCI Corporation, the parent company of LogistiCare, Inc. (“LogistiCare”). LogistiCare, based in Atlanta, Georgia, is the nation’s largest case management provider coordinating non emergency transportation services primarily to Medicaid recipients. The purchase price in the amount of $220 million consists primarily of cash with approximately $13.9 million in LogistiCare employeenon-qualified stock options that are being cancelled and exchanged into the Company’s common stock. In addition, the Company may be obligated to pay additional amounts up to $40 million under an earnout provision of the merger agreement. The purchase price is expected to be paid with funds drawn down on new credit facilities and proceeds received from a private placement of the Company’s 6.5% Convertible Senior Subordinated Notes due 2014 (the “Notes”). Funding for the acquisition has been committed to by CIT Capital Securities LLC through $253 million in senior secured credit facilities that include a $40 million revolver, a $173 million senior secured first lien term loan and a $40 million delayed draw term loan. The Notes will be convertible into6,666 shares of the Company’s common stock at a 32.5% premium. The net cash proceeds fromand an award of 1,334 shares of restricted stock, each of which will vest in two equal installments on January 1, 2009 and January 1, 2010; and (ii) on the private placementfirst business day of 2009, an award of non-qualified stock options to purchase 3,334 shares of the NotesCompany’s common stock and 667 shares of restricted stock, which will be placed into escrow and will be released tovest on the seller upon closingfirst anniversary of the acquisition. The proposed acquisition is expected to close prior to December 31, 2007, subject to the satisfactiondate of customary closing conditions.grant.

The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2007March 31, 2008 as well as our consolidated financial statements and accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Form 10-K for the year ended December 31, 2006.2007.

Overview of our business

We provide government sponsored social services directly and through not-for-profit social services organizations whose operations we manage.manage, and we arrange for and manage non-emergency transportation services. As a result of and in response to the large and growing population of eligible beneficiaries of government sponsored social services and non-emergency transportation services, increasing pressure on governments to control costs and increasing acceptance of privatized social services, we have grown both organically and by consummating strategic acquisitions.

As part of our growth strategy we have entered into the in-home tutoring, workforce development and private probation services markets and expanded our presence in existing markets through several acquisitions which were completed in 2006. During the first nine months of 2007, we further expanded our in-home counseling, school based services and workforce development service offerings, and entered into Canada and the non-emergency transportation management services market through several strategic acquisitions. As of September 30, 2007, we provided services directly and through the entities we manage to nearly 71,000 clients from 346 locationsacquisitions which were completed in 35 states, the District of Columbia and British Columbia. Additionally, on August 1, 2007, as discussed below, we began offering our services in Canada as a result of an acquisition.2007. Our goal is to be the primary provider of choice to the social services industry. Focusing on our core competencies in the delivery of home and community based counseling, foster care and not-for-profit managed services while adding other supporting social services such as non-emergency transportation management services to our service offerings, we believe we are well positioned to offer the highest quality of service to our clients and provide a viable alternative to state and local governments’ current service delivery systems. As of March 31, 2008, we provided social services directly and through the entities we manage to over 80,000 clients, and had approximately 7 million individuals eligible to receive services under our non-emergency transportation services contracts. We provided services to these clients from 414 locations in 36 states, the District of Columbia and British Columbia.

Our working capital requirements are primarily funded by cash from operations and borrowings from our credit facility with CIT HealthcareCapital Securities LLC, or CIT, which provides funding for general corporate purposes and acquisitions.

Critical accounting estimates

In preparing our financial statements in accordance with accounting principles generally accepted in the United States, we are required to make estimates and judgments that affect the amounts reflected in our financial statements. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. However, actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are those policies most important to the portrayal of our financial condition and results of operations. These policies require our most difficult, subjective or complex judgments, often employing the use of estimates about the effect of matters inherently uncertain. Our most critical accounting policies pertain to revenue recognition, accounts receivable and allowance for doubtful

accounts, accounting for business combinations, goodwill and other intangible assets, ourpurchased transportation costs, accounting for management agreement relationships, and loss reserves for certain reinsurance and self-funded insurance programs.programs, stock-based compensation, and foreign currency translation.

As of September 30, 2007,March 31, 2008, except for the addition of a foreign currency translationderivative instruments and hedging activities accounting policy (discussed below) related to the acquisition of a Canadian entity,our floating rate long-term debt, there has been no change in our accounting policies or the underlying assumptions or estimates made by us to fairly present our financial position, results of operations and cash flows for the periods covered by this report.

We hold an interest rate swap for the purpose of hedging interest rate risks. The financial positiontype of risk we hedge relates to the variability of future earnings and resultscash flows caused by movements in interest rates applied to our floating rate long-term debt. We documented our risk management strategy and hedge effectiveness at the inception of operationsthe hedge and will continue to assess its effectiveness during the term of the hedge. We have designated the interest rate swap as a cash flow hedge under Statement of Financial Accounting Standards, or SFAS, No. 133, “Accounting for Derivative Instruments and Hedging Activities”, or SFAS 133.

Derivatives that have been designated and qualify as cash flow hedging instruments are reported at fair value. The fair value of our foreign subsidiaryinterest rate swap is determined through the use of models that consider various assumptions as well as other relevant market data, which are measured using the foreign subsidiary’s local currency as the functional currency. Revenues and expenses of this subsidiary are translated into U.S. dollars at average exchange rates prevailing during the period. Assetsinputs that include quoted prices for similar assets and liabilities in active markets or inputs that are translated atobservable for the ratesasset or liability, either directly or indirectly through market corroboration, for substantially the full term of exchangethe financial instrument. The gain or loss on the balance sheet date. The resulting translation gain and loss adjustments are recorded directlyeffective portion of the hedge (i.e. change in fair value) is initially reported as a separate component of stockholders’ equity, unless there is a saleother comprehensive income. The remaining gain or complete liquidationloss of the underlying foreign investment. Presently, it is our intention to reinvest the undistributed earnings of our foreign subsidiary indefinitely in foreign operations. Therefore, we are not providing for U.S. or additional foreign withholding taxes on our foreign subsidiary’s undistributed earnings. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings due to the complexities of Internal Revenue Code rules and regulations and the hypothetical natureineffective portion of the calculations.hedge, if any, is recognized currently in earnings.

For further discussion of our critical accounting policies see “Management’s Discussionmanagement’s discussion and Analysisanalysis of Financial Conditionfinancial condition and Resultsresults of Operations”operations contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

Acquisitions

Since December 31, 2006, we completed the following acquisitions:

Effective January 1, 2007, we acquired all of the assets of the Behavioral Health Rehabilitation Services business of Raystown Development Services, Inc., or Raystown. The business provides in-home counseling and school based services in Pennsylvania. The purchase price consisted of cash totaling $500,000, of which $100,000 was placed in escrow to cover possible indemnity obligations by the seller. The purchase price was primarily funded from our operating cash. This acquisition was effective as of January 1, 2007 and further expands our home and community based services in Pennsylvania.

Effective May 1, 2007, we became the sole member of Maple Star Oregon, Inc., or MSO, a not-for-profit organization managed by us.

On August 1, 2007, PSC of Canada Exchange Corp., or PSC, our wholly-owned subsidiary, acquired all of the equity interest in WCG International Consultants Ltd., or WCG, a Victoria, British Columbia based workforce initiative company with operations in communities across British Columbia. The purchase price included $10.1 million (previously reported as $9.8 million; change due to exchange rate adjustment) in cash (less certain adjustments contained in the purchase agreement) inclusive of the sellers’ investment banking fees which were reimbursed by us and 287,576 exchangeable shares issued by PSC valued at approximately $7.8 million in accordance with the provisions of the purchase agreement ($7.6 million for accounting purposes), or Exchangeable Shares. The Exchangeable Shares are exchangeable at each shareholder’s option, for no additional consideration, into unregistered shares of our common stock on a one-for-one basis. The cash portion of the purchase price was funded through our acquisition line of credit. This acquisition expands our services beyond the United States and provides a base of multi-year contracts in Canada.

On October 5, 2007, our wholly-owned subsidiary, Children’s Behavioral Health, Inc., or CBH, acquired substantially all of the assets of Family & Children’s Services, Inc., or FCS, located in Sharon, Pennsylvania. FCS’ staff provides home and school based behavioral health rehabilitation services to adolescents under a Commonwealth of Pennsylvania Department of Public Welfare program in several counties in northwestern Pennsylvania. The purchase price consisted of approximately $8.2 million in cash and the balance in a $1.8 million subordinated promissory note. Under the terms of the promissory note, $300,000 is due six months and $1.5 million is due 30 months from the date of acquisition. The cash portion of the purchase price was funded by cash from operations and borrowings under the Company’s acquisition line of credit. This acquisition was effective October 1, 2007 and expanded our home and school based behavioral health rehabilitation services into northwestern Pennsylvania.

On November 6, 2007, we signed a definitive merger agreement to acquire all of the outstanding equity of Charter LCI Corporation, the parent company of LogistiCare, Inc. (“LogistiCare”). LogistiCare, based in Atlanta, Georgia, is the nation’s largest case management provider coordinating non emergency transportation services primarily to Medicaid recipients. The purchase price in the amount of $220 million consists primarily of cash with approximately $13.9 million in LogistiCare employee stock options that are being cancelled and exchanged into the Company’s common stock. In addition, we may be obligated to pay additional amounts up to $40 million under an earnout provision of the merger agreement. The purchase price is expected to be paid with funds drawn down on new credit facilities and proceeds received from a private placement of our 6.5% Convertible Senior Subordinated Notes due 2014 (the “Notes”). Funding for the acquisition has been committed to by CIT Capital Securities LLC through $253 million in senior secured credit facilities that include a $40 million revolver, a $173 million senior secured first lien term loan and a $40 million delayed draw term loan. The Notes will be convertible into shares of our common stock at a 32.5% premium. The net cash proceeds from the private placement of the Notes will be placed into escrow and will be released to the seller upon closing of the acquisition. The proposed acquisition is expected to close prior to December 31, 2007, subject to the satisfaction of customary closing conditions.

We continue to selectively identify and pursue attractive acquisition opportunities. There are no assurances, however, that we will complete acquisitions in the future or that any completed acquisitions will prove profitable for us.2007.

Results of operations

Segment reporting.Our operations are organized and reviewed by our chief operating decision maker along our service lines in two reportable segments (i.e. Social Services and Non-Emergency Transportation Services, or NET Services). We operate these reportable segments as separate divisions and differentiate the segments based on the nature of the services they offer.

The following table sets forth the percentage of consolidated total revenues represented by items in our consolidated statements of operationsincome for the periods presented:

Three months ended September 30, 2007March 31, 2008 compared to three months ended September 30, 2006March 31, 2007

Revenues

Home and community based services. The acquisition of Raystown in January 2007,WCG International Ltd., or WCG, in August 2007, Innovative Employment Solutions, or IES, in August 2006 and the CorrectionalFamily & Children’s Services, Business of Maximus, Inc., or Correctional Services,FCS, in October 20062007, added, on an aggregate basis, approximately $7.5$10.9 million to home and community based services revenue for the three months ended September 30, 2007March 31, 2008 as compared to the same prior year period. We added nearly 2,700 clients as a result of these acquisitions and expanded our home and community based services to include workforce development as well as entered several new markets.three months ended March 31, 2007.

Excluding the acquisition of Raystown, WCG and the acquisitions completed in 2006,FCS our home and community based services provided additional revenue of approximately $7.1$5.0 million for the three months ended September 30, 2007,March 31, 2008, as compared to the same period oneprior year agoperiod due to client volume increases in new and existing locations, and moderate rate increases for services we provide. Generally, increases in rates for services we provide are based on the cost of living index.

Foster care services. OnThe operations of Maple Star Oregon, or MSO, that we consolidated effective May 1, 2007, we became the sole member of MSO, a not-for-profit organization managed by us. For the three months ended September 30, 2007, MSO contributed approximately $854,000 to foster care services revenue. Partially offsetting the increase in$933,000 of foster care services revenue for the three months ended September 30, 2007 as compared to the same prior year period

were lower funding caps recently implemented by contracting payers and systemic changes that have led to a shorter length of stay per client and a lower number of clients eligible to receive care in certain of our foster care services markets. We are increasing our efforts to recruit additional foster care homes in many of our markets which we expect will increase our foster care service offerings.

Management fees. Revenue for entities we manage but do not consolidate for financial reporting purposes (managed entity revenue) increased to $54.4 million for the three months ended September 30, 2007 as compared to $48.0 million for the same prior year period. A number of our managed entities (where our management fee is based on a percentage of their revenues) have experienced business growth through increased client volume in existing and new markets. The effects of business growth at these managed entities resulted in increased management fees revenue of approximately $1.1 million for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. On May 1, 2007, we became the sole member of MSO, a not-for-profit organization managed by us. As a result, we consolidate MSO for financial reporting purposes and no longer separately report management fees from this entity which partially offset increased management fees by approximately $234,000 for the three months ended September 30, 2007 compared to the same prior year period.

Operating expenses

Client service expense.Client service expense included the following for the three months ended September 30, 2006 and 2007:

Payroll and related costs. To support our growth, provide high quality service and meet increasing compliance requirements expected by the government agencies with which we contract to provide services, we must hire and retain employees who possess higher degrees of education, experience and licensures. As we enter new markets, we expect payroll and related costs to continue to increase. Our payroll and related costs increased for the three months ended September 30, 2007, as compared to the same prior year period, as we added new direct care providers, administrative staff and other employees to support our growth. In addition, we added over 500 new employees in connection with the acquisition of Raystown in January 2007, WCG in August 2007, IES in August 2006 and Correctional Services in October 2006, and the consolidation of MSO in May 2007 which resulted in an increase in payroll and related costs of approximately $4.4 million in the aggregate for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006.

We continually evaluate client census, case loads and client eligibility to determine our staffing needs under each contract in order to optimize the quality of service we provide while managing the payroll and related costs to provide these services. Determining our staffing needs may not directly coincide with the generation of revenue as we are required at times to increase our capacity to provide services prior to starting new contracts. Sometimes we must decrease our capacity in response to budgetary constraints and changes to the eligibility requirements of the government entities that provide funding and referrals for the services we provide. Alternatively, we may lag behind in client referrals as we may have difficulty recruiting employees to service our contracts. Furthermore, acquisitions may cause fluctuations in our payroll and related costs as a percentage of revenue from period to period as we attempt to merge new operations into our service delivery system. As a percentage of revenue, payroll and related costs remained relatively constant at 56% for the three months ended September 30, 2006 and 2007.

Purchased services. In August 2007, we began providing workforce development services in Canada upon the acquisition of WCG. We subcontract with a network of partners to provide a portion of these services throughout British Columbia. In addition, we incur a variety of other support service expenses in the course of placing clients in the workforce. For the three months ended September 30, 2007, these services added approximately $1.6 million to purchased services as compared to the same prior year period. Further, increases in foster parent payments and the number of referrals requiring out-of-home placement and pharmacy and other support services under our annual block purchase contract accounted for an increase in purchased services of approximately $796,000 for the three months ended September 30, 2007 as compared to the same period one year ago. We strive to manage our purchased services costs by constantly seeking alternative treatments to costly services that we do not provide. Although we manage and provide alternative treatments to clients requiring out-of-home placements and other purchased services, we sometimes cannot control the number of referrals requiring out-of-home placement and support services under our annual block purchase contract. As a percentage of revenue, purchased services increased from 10.2% for the three months ended September 30, 2006 to 11.3% for the three months ended September 30, 2007 primarily due to the acquisition of WCG and an increase in foster parent payments during the three months ended September 30, 2007.

Other operating expenses. As a result of our organic growth during the last twelve months ended September 30, 2007, we added several new locations that contributed to an increase of approximately $2.0 million in other operating expenses for the three months ended September 30, 2007 when compared to the three months ended September 30, 2006. Also contributing to the increase in other operating expenses were increased client related expenses under new contracts in California and as a result of the addition of workforce development services in Pennsylvania. The acquisitions of Raystown in January 2007, WCG in August 2007, IES in August 2006 and Correctional Services in October 2006 and the consolidation of MSO in May 2007 added approximately $2.2 million to other operating expenses for the three months ended September 30, 2007. As a percentage of revenue other operating expenses increased from 10.6% to 11.0% from the 2006 period to the 2007 period primarily due to our organic growth rate and additional client related expenses.

Stock-based compensation. Stock-based compensation of approximately $160,000 for the three months ended September 30, 2007, represents the amortization of the fair value of stock options and stock grants awarded to executive officers, directors and employees in 2006 and 2007 under our 2006 Long-Term Incentive Plan. For the three month period ended September 30, 2006, a minimal amount of stock-based compensation expense was recognized as we were beginning to grant awards under the 2006 Long-Term Incentive Plan which was approved by our stockholders in May 2006. All equity awards outstanding prior to 2006 were fully vested.

General and administrative expense.

The addition of corporate staff to adequately support our growth and provide services under our management agreements and higher rates of pay for employees accounted for an increase of approximately $411,000 of corporate administrative expenses for the three months ended September 30, 2007 as compared to the same prior year period. Also contributing to the increase in general and administrative expense were stock-based compensation and accounting related fees. Partially offsetting the increase in general and administrative expense was an adjustment to our employee medical and dental benefits to recognize the excess medical claims paid by us over the medical insurance liability contractual cap for the medical plan year ended June 30, 2007. In addition, as a result of our growth during the twelve months ended September 30, 2007, rent and facilities management increased $943,000 for the three months ended September 30, 2007 mostly due to our acquisition activities. As a percentage of revenue, general and administrative expense decreased from 11.6% to 10.7% from period to period primarily due to our revenue growth rate and leverage of corporate costs.

Depreciation and amortization.

The increase in depreciation and amortization from period to period primarily resulted from the increased depreciation expense due to the addition of software and computer equipment during the last twelve months and amortization of customer relationships related to the acquisitions of IES in August 2006, Correctional Services in October 2006 and WCG in August 2007. As a percentage of revenues, depreciation and amortization decreased from 1.9% to 1.8% from the 2006 period to the 2007 period.

Non-operating (income) expense

Interest expense. On April 18, 2006, we prepaid approximately $15.8 million of the principal and accrued interest then outstanding related to our credit facility with CIT out of the net proceeds from the follow-on offering of our common stock that was completed on April 17, 2006. Due to the level of acquisition activity we have engaged in over the last twelve months, our long-term debt obligations have increased. As a result, interest expense for the three months ended September 30, 2007 was higher than that for the three months ended September 30, 2006 due to a higher level of debt for the three months ended September 30, 2007 as compared to the same current year period.

Interest income. The decrease in interest income for the three months ended September 30, 2007 as compared to the same prior year period resulted from a lower level of funds earning interest as we have used funds previously deposited in interest bearing accounts to acquire other businesses and to fund the repurchase of our common stock on the open market during the last twelve months.

Provision for income taxes

The provision for income taxes is based on our estimated annual effective income tax rate for the full fiscal year equal to approximately 40.5%. Our estimated annual effective income tax rate differs from the federal statutory rate primarily due to nondeductible permanent differences, foreign taxes and state income taxes.

Nine months ended September 30, 2007 compared to nine months ended September 30, 2006

Revenues

Home and community based services. The acquisition of Raystown in January 2007, WCG in August 2007, A to Z In-Home Tutoring, LLC, or A to Z, and Family Based Strategies, Inc, or FBS, in February 2006, IES in August 2006 and Correctional Services in October 2006 added, on an aggregate basis, approximately $19.7 million to home and community based services revenue for the nine months ended September 30, 2007 as compared to the same prior year period.

Excluding the acquisition of Raystown, WCG, and the acquisitions completed in 2006, our home and community based services provided additional revenue of approximately $26.9 million for the nine months ended September 30, 2007, as compared to the same period one year ago due to client volume increases in new and existing locations, and moderate rate increases for services we provide. Generally, increases in rates for services we provide are based on the cost of living index.

Foster care services.March 31, 2008. Our cross-selling and recruiting efforts along with the operations of MSO that we consolidated effective May 1, 2007 (as noted above) resulted in an increase in foster care services revenue of approximately $1.4 million$379,000 for the ninethree months ended September 30, 2007March 31, 2008 as compared to the priorsame three month period one year nine month period.ago. We are increasing our efforts to recruit additional foster care homes in many of our markets which we expect will increase our foster care service offerings.

Management fees. Revenue for entities we manage but do not consolidate for financial reporting purposes (managed entity revenue) increased to $165.1$56.4 million for the ninethree months ended September 30, 2007March 31, 2008 as compared to $137.2$53.3 million for the same prior year period.three months ended March 31, 2007. The combined effectseffect of business growth andof the addition of a management agreement acquired in connection with the acquisition of WD Management in April 2006not-for-profit entities we managed added approximately $3.1 million$458,000 in additional management fees revenue for the ninethree months ended September 30, 2007 as compared to the nine months ended September 30, 2006. Effective July 1, 2006, the managed entities that previously participated in our self-funded health insurance programs obtained separate health insurance policies which partially offset the increase in management fees revenue for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 by approximately $891,000. In addition, no consulting fee revenue was earned for the nine months ended September 30, 2007, which further offset the increase in management fees revenue for the first nine months of 2007 by approximately $614,000March 31, 2008 as compared to the same period one ago.prior year period.

Non-emergency transportation services. We generated all of our non-emergency transportation services revenue for the three months ended March 31, 2008 through our NET Services operating segment as a result of the acquisition of Charter LCI Corporation, including its subsidiaries, or LogistiCare, in December 2007.

Operating expenses

Client service expense.Client service expense included the following for the ninethree months ended September 30, 2006March 31, 2007 and 2007:2008:

Payroll and related costs. Our payroll and related costs increased for the ninethree months ended September 30, 2007,March 31, 2008, as compared to the same priorthree month period one year period,ago, as we added new direct care providers, administrative staff and other employees to support our growth. In addition, we added over 600100 new employees in connection with the acquisition of Raystown in January 2007, WCG in August 2007, A to Z and FBS in February 2006, IES in August 2006 and Correctional Services in October 2006,FCS, and the consolidation of MSO in May 2007 which resulted in an increase in payroll and related costs of approximately $12.5$3.9 million in the aggregate for the ninethree months ended September 30, 2007March 31, 2008 as compared to the nine months ended September 30, 2006.same prior year period. As a percentage of revenue, excluding NET Services revenue, payroll and related costs increaseddecreased from 55.5%58.8% for the ninethree months ended September 30, 2006March 31, 2007 to 57.2%56.0% for the ninethree months ended September 30, 2007March 31, 2008 due to the rate at which we have increased our capacity to provide services under existing and new contracts.revenue growth rate.

Purchased services. We Since acquiring WCG in August 2007, we subcontract with a network of partners to provideproviders for the provision of a portion of the workforce development services we provide throughout British Columbia since acquiring WCG in August 2007.Columbia. In

addition, we incur a variety of other support service expenses in the course of placing clients in the workforce.workforce for all of our workforce development services. For the ninethree months ended September 30, 2007,March 31, 2008, these services added approximately $1.6$3.3 million to purchased services as compared to the same priorthree month period one year period.ago. Additionally, increases in foster parent payments, pharmacy and the number of referrals requiring out-of-home placement under our annual block purchase contract accounted for thean increase in purchased services for the ninethree months ended September 30, 2007March 31, 2008 as compared to the same prior year period one year ago.of approximately $881,000. As a percentage of revenue, excluding NET Services revenue, purchased services decreasedincreased from 10.3%7.9% for the ninethree months ended September 30, 2006March 31, 2007 to 9.3%11.4% for the ninethree months ended September 30, 2007March 31, 2008 primarily due to our revenue growth ratehigher purchased services costs related to the operations of WCG and a decreasean increase in the number of referrals requiring support services under our annual block purchase contract during the nine months ended September 30, 2007.foster parent payments.

Other operating expenses. As a result of our organic growth during the last twelve months ended September 30, 2007, we added several new locations that contributed to an increase of approximately $3.0 million in other operating expenses for the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006. In addition, client related expenses have increased under new contracts in California, and as a result of the addition of workforce development services in Pennsylvania. The acquisition of RaystownWCG and FCS in January 2007, WCG in August 2007, A to Z and FBS in February 2006, IES in August 2006 and Correctional Services in October 2006, and the consolidation of MSO in May 2007 added approximately $4.5$2.0 million to other operating expenses for the ninethree months ended September 30, 2007.March 31, 2008 as compared to the same prior year period. As a percentage of revenue, excluding NET Services revenue, other operating expenses increased from 9.2%10.4% for the three months ended March 31, 2007 to 10.8% from11.1% for the 2006 period to the 2007 periodthree months ended March 31, 2008 primarily due to the addition of new locations resulting from our organic growth and additional clienthigher costs related expenses.to the operations of WCG and FCS.

Stock-based compensation. Stock-based compensation of approximately $549,000$163,000 for the ninethree months ended September 30, 2007,March 31, 2008 represents the amortization of the fair value of stock options and stock grants awarded to executive officers, directors and employees in 2006 and 2007 under our 2006 Long-Term Incentive Plan.

Cost of non-emergency transportation services.

With the acquisition of LogistiCare in December 2007, we added over 1,000 new employees which resulted in payroll and related costs related to our NET Services operating segment of approximately $10.0 million for the three months ended March 31, 2008. Through our NET Services operating segment we subcontract with a number of third party transportation providers to provide non-emergency transportation services to our clients. For the nine month periodthree months ended September 30, 2006,March 31, 2008, purchased transportation costs amounted to approximately $71.7 million. In addition, other operating expenses of our NET Services operating segment were approximately $4.5 million for the three months ended March 31, 2008. As a minimal amountpercentage of stock-based compensation expenseNET Services revenue, the cost of non-emergency transportation services was recognized as we were beginning to grant awards under90.2% for the 2006 Long-Term Incentive Plan which was approved by our stockholders in May 2006. All equity awards outstanding prior to 2006 were fully vested.three months ended March 31, 2008.

General and administrative expense.