The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, our Consolidated Financial Statements and related Notes included both herein and in our Annual Report on Form 10-K for the year ended September 30, 2011, filed with the Securities and Exchange Commission on November 14, 2011.

Forward Looking Statements

From time to time, we may make forward-looking statements that are not historical facts, including statements about our confidence and strategies and our expectations about revenue, results of operations, profitability, current and future contracts, market opportunities, market demand or acceptance of our products and services. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be forward-looking statements. The words "could," "estimate," "future," "intend," "may," "opportunity," "potential," "project," "will," "believes," "anticipates," "plans," "expect" and similar expressions are intended to identify forward-looking statements. These statements may involve risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks are detailed in Exhibit 99.1 to our Annual Report on Form 10-K for the year ended September 30, 2011 and incorporated herein by reference.

Business Overview

We provide business process outsourcing services to government health and human services agencies under our mission of Helping Government Serve the People.® Our business is focused almost exclusively on administering government-sponsored programs such as Medicaid, the Children's Health Insurance Program (CHIP), health care reform, welfare-to-work, Medicare, child support enforcement and other government programs. Founded in 1975, we are one of the largest pure-play health and human services administrative providers to governments in the United States, Australia, Canada, the United Kingdom and Saudi Arabia. We use our expertise, experience and advanced technological solutions to help government agencies run efficient, cost-effective programs and to improve program accountability, while enhancing the quality of services provided to program beneficiaries.

The Company is managed through two segments, Health Services and Human Services. The Health Services Segment provides a variety of business process outsourcing and administrative support services, as well as consulting services for state, provincial and federal programs, such as Medicaid, CHIP, Medicare, and the British Columbia Health Insurance Program. The Human Services Segment includes a variety of business process outsourcing, case management, job training, and support services for programs such as welfare-to-work programs, child support enforcement, K-12 special education, and other specialized consulting services.

On April 30, 2012, the Company completed the acquisition of PSI Services Holding, Inc. and its wholly-owned subsidiary, Policy Studies, Inc. ("PSI"). PSI operations are consistent with and will be integrated into our core Health Services and Human Services segments. The acquisition will strengthen the Company's business in the United States through new resources and customers as well as providing additional experience and knowledge of the health and human services markets.

Industry considerations

Within the United States, fiscal pressures remain a challenge for state governments while at the same time they are also facing increasing demand for critical services from the most vulnerable members of society. The majority of states are required to balance their budgets each year and states have taken steps to more efficiently manage their social programs, including Medicaid. Since Medicaid accounts for a large portion of states' budgets, many states have taken steps to control costs by shifting more populations to managed care, increasing co-pays, reducing provider rates, and modifying benefits. As more populations shift into managed care, demand for our administrative services and program volumes generally increases.

The situation for international governments is also challenging, with each of the areas in which MAXIMUS operates offering unique local issues in addition to general global economic factors. Both Australia and the United Kingdom have implemented measures to deal with significant debt and commitments and both have implemented welfare reform as a means to better manage resources. Companies like MAXIMUS may benefit from the need for governments to reform certain benefits programs.

Results of Operations



Consolidated



The following table sets forth, for the periods indicated, selected statements
of operations data:



                                          Three Months                Nine Months
                                         Ended June 30,              Ended June 30,
(dollars in thousands, except
per share data)                        2012          2011          2012          2011
Revenue                             $  266,353    $  238,296    $  749,408    $  679,526
Gross profit                        $   78,701    $   66,399    $  203,314    $  185,424
Selling, general and
administrative expenses             $   43,877    $   35,259    $  114,592    $   97,498
Selling, general and
administrative expense as a
percentage of revenue                     16.5 %        14.8 %        15.3 %        14.3 %

Operating income from continuing
operations excluding
acquisition-related expenses and
legal and settlement expense            34,824        31,140        88,722        87,926

Acquisition-related expenses and
legal and settlement expense             1,525           361         1,120           361

Operating income from continuing
operations                          $   33,299    $   30,779    $   87,602    $   87,565
Operating margin from continuing
operations percentage                     12.5 %        12.9 %        11.7 %        12.9 %

Interest and other income, net           1,164           961         3,092         2,371

Income from continuing
operations before income taxes          34,463        31,740        90,694        89,936
Provision for income taxes              13,987        11,780        38,349        33,351
Tax rate                                  40.6 %        37.1 %        42.3 %        37.1 %

Income from continuing
operations, net of income taxes     $   20,476    $   19,960    $   52,345    $   56,585
Income (loss) from discontinued
operations, net of income taxes     $        9    $      (68 )  $      117    $     (992 )
Net income                          $   20,485    $   19,892    $   52,462    $   55,593

Basic earnings (loss) per share:
Income from continuing
operations                          $     0.60    $     0.58    $     1.55    $     1.64
Income (loss) from discontinued
operations                                   -         (0.01 )           -         (0.03 )
Basic earnings per share            $     0.60    $     0.57    $     1.55    $     1.61

Diluted earnings (loss) per
share:
Income from continuing
operations                          $     0.59    $     0.56    $     1.51    $     1.59
Income (loss) from discontinued
operations                                   -             -             -         (0.03 )
Diluted earnings per share          $     0.59    $     0.56    $     1.51    $     1.56

The following provides an overview of the significant elements of our Consolidated Statements of Operations. As each of our business segments have different factors driving revenue growth and profitability, the sections that follow cover these segments in greater detail.

We discuss constant currency revenue information to provide a framework for assessing how our business performed excluding the effect of foreign currency rate fluctuations. To provide constant currency information, revenue from foreign operations is converted into United States dollars using average exchange rates from the previous fiscal year.

Following the Company's acquisition of PSI, the results of PSI are included in the financial results of the Company for the period after April 30, 2012. Revenue of $23.3 million and operating income before acquisition-related expenses and legal and settlement expenses of $1.8 million were recorded related to PSI in the three and nine month periods ended June 30, 2012. We provide organic revenue growth information to provide a framework for assessing how our business performed excluding the effects of acquisitions. To provide organic growth information, revenue in the prior year is compared to the current year without PSI revenues.

We discuss operating income from continuing operations excluding acquisition-related expenses and legal and settlement expenses and recoveries. Acquisition-related expenses relate to costs incurred directly as a consequence of the acquisition of PSI. Legal and settlement expenses and recoveries are typically driven by factors that are not consistent with other drivers of our business, and the timing and extent of both legal and settlement expenses and recoveries may have an unusual effect on our financial results. During the current year, we have received the benefit of an insurance recovery. We believe that excluding the effects of these costs and recoveries provides a framework for better assessing the comparability of how the business performed between periods.

Constant currency revenue, organic growth and operating income excluding legal and settlement expenses are non-GAAP numbers. We believe that these numbers provide a useful basis for assessing the Company's performance. The presentation of these non-GAAP numbers is not meant to be considered in isolation, or as an alternative to revenue growth or operating income as measures of performance.

Revenue increased 11.8%, or 13.1% on a constant currency basis, for the three months ended June 30, 2012, compared to the same period in fiscal 2011. Revenue increased 10.3%, or 10.4% on a constant currency basis, for the nine months ended June 30, 2012, compared to the same period in fiscal 2011. Organic growth for the three months and nine months ended June 30, 2012 was 2.0% and 6.8% respectively. Revenue during the third quarter of fiscal 2012 included the results of PSI from the acquisition date, which contributed $23.3 million. The organic growth was driven by the Health Services segment offset by declines in revenue from the Human Services segment. The principal drivers of the changes in the Health Services and Human Services Segments are discussed in more detail below.

Selling, general and administrative expense (SG&A) consists of costs related to general management, marketing and administration. These costs include salaries, benefits, bid and proposal efforts, travel, recruiting, continuing education, employee training, non-chargeable labor costs, facilities costs, printing, reproduction, communications, equipment depreciation, intangible amortization and legal expenses incurred in the ordinary course of business.

Acquisition-related expenses are direct costs incurred as a consequence of the acquisition of PSI and include legal fees, brokerage fees, due diligence, valuation reports, contract terminations related to redundant support services and severance. During the three and nine month periods ended June 30, 2012, the Company incurred $1.9 million and $2.1 million, respectively, of these costs. Legal and settlement costs and recoveries consist of significant legal settlements and non-routine matters, including probable future legal costs estimated to be incurred in connection with those matters, net of reimbursed insurance claims. Legal expenses incurred in the ordinary course of business are included in selling, general and administrative expense. During the three and nine months ended June 30, 2012, the Company received insurance recoveries of $0.4 million and $1.2 million, respectively.

Operating income from continuing operations increased 8.2% to $33.3 million for the three months ended June 30, 2012 compared to the same period in the prior year. Excluding acquisition-related expenses and legal and settlement costs and recoveries, operating income increased 11.8% to $34.8 million, compared to the same period last year. Operating income from continuing operations for the nine months ended June 30, 2012 was consistent with that of the comparative period in the prior year. Excluding acquisition-related expenses and legal and settlement costs and recoveries, operating income increased 0.9% to $88.7 million, compared to the same period last year. These increases were driven by the Health Services segment, offset by lower income from the Human Services Segment. The segment drivers are discussed in more detail below.

Interest and other income, net includes interest earned on cash and cash equivalents and on a note received by the Company for the disposal of a business in fiscal 2008, offset by charges related to the deferred compensation plan and the acquisition-related contingent consideration related to DeltaWare. The balance also includes foreign exchange gains and losses, which are typically immaterial. Almost all of the income recorded represents income from interest on cash accounts in overseas jurisdictions.

The provision for income taxes in the three and nine months ended June 30, 2012 was $14.0 million and $38.3 million, respectively, reflecting tax rates of 40.6% and 42.3%, respectively. These rates are higher than those in previous years owing to changes in our mix of income, with more income being earned in jurisdictions which carry a higher tax charge, as well as an error of $1.6 million which was recorded in the quarter ended March 31, 2012.

Income from continuing operations, net of income taxes, was $20.5 million, or $0.59 per diluted share, for the three months ended June 30, 2012, compared with $20.0 million, or $0.56 per diluted share, for the same period in fiscal year 2011. For the nine month periods ended June 30, 2012 and 2011, income from continuing operations, net of income taxes was $52.3 million and $56.6 million, or $1.51 and $1.59 per diluted share, respectively.

Health Services



                                  Three Months             Nine Months
                                 Ended June 30,          Ended June 30,
(dollars in thousands)          2012        2011        2012        2011

Revenue                       $ 170,403   $ 141,788   $ 489,616   $ 409,578
Gross profit                     50,787      35,459     127,923     108,056
Operating income                 25,652      15,923      60,637      54,098

Operating margin percentage        15.1 %      11.2 %      12.4 %      13.2 %

Revenue increased by 20.2%, or 20.7% on a constant currency basis, for the three months ended June 30, 2012, compared to the same period in fiscal year 2011. Organic growth, excluding PSI, was 13.9%. For the three months ended June 30, 2012, Health Services benefitted from $10.2 million of additional revenue and operating income related to a contract amendment.

Revenue increased by 19.5%, or 19.8% on a constant currency basis, for the nine months ended June 30, 2012, compared to the same period in fiscal year 2011. Organic growth, excluding PSI, was 17.4%. For the nine month period ended June 30, 2012, organic growth was driven by expansion of Medicaid managed care, primarily in Texas. The expansion of work in Texas is cost-reimbursable and operates at lower margins than that of our other work which is the largest contributor to the operating margin decline compared to the comparative period.

Human Services



                                 Three Months            Nine Months
                                Ended June 30,         Ended June 30,
(dollars in thousands)          2012       2011       2012        2011

Revenue                       $ 95,950   $ 96,508   $ 259,792   $ 269,948
Gross profit                    27,914     30,940      75,391      77,368
Operating income                 9,187     14,908      28,100      33,534

Operating margin percentage        9.6 %     15.4 %      10.8 %      12.4 %

Revenue declined by 0.6% for the three months ended June 30, 2012, compared to the same period in fiscal year 2011. This decline was caused in part by adverse foreign exchange fluctuations as, on a constant currency basis, revenues would have increased 1.9%. Excluding the benefit of PSI, revenue declined 15.6%. The decline in organic revenue was principally driven by the transition from the United Kingdom's "Flexible New Deal" contract, which was in operation during the first nine months of fiscal 2011, to the "Work Programme", which commenced in late fiscal 2011. This decline was anticipated and reflects the payment structure of the Work Programme where a greater share of the revenues is earned in placing individuals in sustained employment. Segment results were also tempered by operations in Australia due to the completion of short-term government projects which concluded earlier in the year, lower caseload volumes and unfavorable foreign exchange rates. The Work Programme, lower revenue in Australia and unfavorable foreign exchange rates was responsible for the decline in Human Services operating income, offset by contributions from the PSI acquisition.

Revenue declined by 3.8%, or 3.9% on a constant currency basis, for the nine months ended June 30, 2012, compared to the same period in fiscal year 2011. Excluding the benefit of PSI, revenue declined 9.1%. This decline was principally driven by the transition to the Work Programme noted above. The decline in operating income was driven by the United Kingdom contract offset by the acquisition of PSI and the benefit of $6.8 million related to changes in estimates on a fixed price contract. During the nine months ended June 30, 2011, the same contract had recorded charges of $7.3 million.

Discontinued operations

The Company has recorded gains on disposal in the three and nine months ended June 30, 2012. These principally relate to the sale of the Company's UNISON subsidiary in 2008, the terms of which included a promissory note of $6.4 million. The Company continues to monitor the payments on the note but no further gains are certain at this time.

The Company reported losses in discontinued operations in the three and nine months ended June 30, 2011. These charges related to the sale of the Company's ERP division in 2010 and included a pre-tax loss on sale of $1.0 million which the Company recorded owing to a dispute with the purchaser. This dispute was resolved in September 2011 for a total charge of $1.7 million.

Liquidity and Capital Resources

In recent years, the Company has relied upon cash flows from operations to fund operations, capital expenditures, acquisitions, share repurchases and dividends. Both domestic and overseas locations have remained self-sufficient in funding operations and capital resources. The Company expects to be able to continue to fund operations and capital expenditures from operating cash flows. In prior periods, the Company has faced short-term payment delays from state customers, all of which were ultimately recovered. The Company believes its liquidity and capital positions are adequate to weather short-term payment delays. In the event of more protracted delays, the Company may be required to seek additional capital sources, amend payment terms or take other actions. Extended payment delays could adversely affect the Company's cash flows, operations and profitability.

At June 30, 2012, the Company held $168.9 million in cash and cash equivalents. Approximately 70% of these funds are held in overseas locations. If we were to transfer these funds to the United States, the Company would be required to accrue and pay additional taxes. We do not intend to repatriate these funds and, accordingly, we have not attempted to quantify the charges which might arise if we were to make this transaction. The charges would vary based upon tax legislation in the United States and the other overseas jurisdictions as well as the manner and timing in which MAXIMUS would make these transactions. In addition to these cash balances, the Company had access to an additional $19.5 million from a credit facility in the United States. These funds are available to cover short-term cash requirements and other potential capital outlays, including share repurchases and acquisitions.

The Company currently has no debt, with the exception of a $1.7 million interest-free loan from the Atlantic Innovation Fund of Canada. These funds must be used for certain investment projects within Prince Edward Island. In addition to this, certain contracts require us to provide a letter of credit or a surety bond as a guarantee of performance. At June 30, 2012, the Company had letters of credit totaling $18.5 million and performance bond commitments totaling $25.4 million. These letters of credit and performance bonds are typically renewed annually and remain in place until the contractual obligations have been satisfied. Although the triggering events vary from contract to contract, in general, we would only be liable for the amount of these guarantees in the event of default in our performance of our obligations under each contract, the probability of which we believe is remote.

Our primary source of cash is revenues received from customers. Our collection of cash is driven by billing schedules and payment terms which can vary based upon a number of factors, including contract type. In certain contracts, particularly international welfare-to-work contracts, cash receipts are structured around our performance, which may take several quarters to be realized. In these cases, contracts will typically result in cash outflows over the early period of the contract and the ultimate cash flows of the contract will be subject to risk until the performance outcomes are known. Certain contracts require significant financial outlay in terms of capital assets and in reimbursable start-up costs. These expenditures result in our use of cash which may be reimbursed during the set-up phase or over the life of the contract. Related revenue may also be deferred during the set-up phase. At June 30, 2012, management considered that the net book value of all capital assets, including deferred contract costs, was less than the expected future cash flows related to these assets.

The Company's acquisition of PSI in April 2012 resulted in a net cash payment to the sellers of $66 million. In addition, the Company incurred approximately $2.1 million of expenses directly attributable to the acquisition, including the costs of third-party due diligence, integration, severance and contract termination charges. The funds utilized in this acquisition came from cash based in the United States.

Cash Flows



                                                                 Nine Months Ended
                                                                     June 30,
(dollars in thousands)                                            2012        2011

Net cash provided by (used in):
Operating activities - continuing operations                   $   85,061   $ 70,485
Operating activities - discontinued operations                          -     (1,086 )
Investing activities - continuing operations                      (78,195 )  (16,591 )
Financing activities - continuing operations                      (13,565 )   (9,634 )
Effect of exchange rate changes on cash and cash equivalents        2,649      5,521
Net increase (decrease) in cash and cash equivalents           $   (4,050 ) $ 48,695

Cash provided by operating activities from continuing operations for the nine months ended June 30, 2012 was $85.1 million, compared with $70.5 million in the same period in fiscal year 2011. The increase in net cash flows was driven by a decrease in payments to tax authorities period-over-period. Excluding the effect of taxation, the Company received $90.6 million in additional payments from customers driven by increased revenues and the timing of deferred revenue receipts, offset by an increase of $88.7 million in payments driven by similar factors.

Cash used in operating activities from discontinued operations for the nine months ended June 30, 2011 was $1.1 million. Upon the sale of the Company's ERP division in fiscal 2010, certain liabilities related to accounts payable and payroll had not been settled and were made by the Company in October 2010.

Cash used in investing activities from continuing operations for the nine months ended June 30, 2012 was $78.2 million, compared to $16.6 million for the same period in fiscal year 2011. The cash flows in fiscal 2012 include the initial payment of $66 million for the acquisition of PSI, offset by cash receipts of $2.5 million from the sale of businesses in 2010 and 2008. Cash outflows related to software costs also declined period-over-period owing to the completion of a number of capital software projects in the United States in 2011.

Cash used in financing activities from continuing operations for the nine months ended June 30, 2012 was $13.6 million, compared to $9.6 million for the same period in fiscal year 2011. The principal driver of the $4.0 million increase was a reduction of $7.1 million of funds received from employee stock transactions and an increase in the Company's dividends paid of $1.9 million, offset by a $7.1 million decline in funds utilized to buy back the Company's common stock. The decline in employee stock transactions is driven by the expiry of many of the Company's stock options, which have not been issued to employees since 2008. The increase in the dividend payment reflects the increase in the dividend per share from six cents per share to nine cents per share between the first and fourth quarters of fiscal 2011.

The Company's cash balance increased by $2.6 million in the nine-month period ended June 30, 2012 owing to foreign exchange rate fluctuations. The principal driver of this change was the strengthening of the Australian Dollar against the United States Dollar.

To supplement our statements of cash flows presented on a GAAP basis, we use the non-GAAP measure of free cash flows from continuing operations to analyze the funds generated from operations. We believe free cash flow from continuing operations is a useful basis for comparing our performance with our competitors. The presentation of non-GAAP free cash flows from continuing operations is not meant to be considered in isolation, or as an alternative to net income as an indicator of performance, or as an alternative to cash flows from operating activities as a measure of liquidity. We calculate free cash flow from continuing operations as follows:

                                                              Nine Months Ended
                                                                  June 30,
(dollars in thousands)                                      2012             2011

Cash provided by operating activities - continuing
operations                                              $      85,061    $     70,485
. . .