UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 28, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from                 to

Commission file number 1-14260

The GEO Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Florida		65-0043078
(State or Other Jurisdiction of		(IRS Employer Identification No.)
Incorporation or Organization)

One Park Place, 621 NW 53rd Street, Suite 700,
Boca Raton, Florida		33487
(Address of Principal Executive Offices)		(Zip Code)

(561) 893-0101
(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.

Yes þ       No o

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

Large accelerated filer þ		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

At November 4, 2008, 51,097,675 shares of the registrant’s common stock were issued and outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2008 AND SEPTEMBER 30, 2007 (UNAUDITED)			3
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 28, 2008 (UNAUDITED) AND DECEMBER 30, 2007			4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2008 AND SEPTEMBER 30, 2007 (UNAUDITED)			5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			43
ITEM 4. CONTROLS AND PROCEDURES			44
PART II — OTHER INFORMATION			45
ITEM 1. LEGAL PROCEEDINGS			45
ITEM 1A. RISK FACTORS			46
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			47
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			47
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			47
ITEM 5. OTHER INFORMATION			47
ITEM 6. EXHIBITS			47
SIGNATURES			48
EX-10.2 Form of Lender Addendum
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED
SEPTEMBER 28, 2008 AND SEPTEMBER 30, 2007
(In thousands, except per share data)
(UNAUDITED)

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30,2007				September 28, 2008				September 30, 2007
Revenues		$	265,407			$	266,119			$	821,006			$	759,496
Operating expenses			209,511				215,897				658,912				615,931
Depreciation and amortization			9,512				9,177				28,041				24,927
General and administrative expenses			16,944				16,054				51,825				46,849
Operating income			29,440				24,991				82,228				71,789
Interest income			1,878				2,296				5,580				6,536
Interest expense			(7,309	)			(8,351	)			(21,667	)			(28,049	)
Write-off of deferred financing fees from extinguishment of debt			—				—				—				(4,794	)
Income before income taxes, minority interest, equity in earnings of affiliate and discontinued operations			24,009				18,936				66,141				45,482
Provision for income taxes			8,835				7,281				24,951				17,288
Minority interest			(95	)			(90	)			(297	)			(281	)
Equity in earnings of affiliate, net of income tax provision of $276, $258, $819 and $690			778				591				2,009				1,480
Income from continuing operations			15,857				12,156				42,902				29,393
Income (loss) from discontinued operations, net of tax provision (benefit) of $1, $373, ($278) and $620			2				582				(437	)			975
Net income		$	15,859			$	12,738			$	42,465			$	30,368
Weighted-average common shares outstanding:
Basic			50,626				50,331				50,495				46,853
Diluted			51,803				51,770				51,820				48,320
Income per common share:
Basic:
Income from continuing operations		$	0.31			$	0.24			$	0.85			$	0.63
Income (loss) from discontinued operations			0.00				0.01				(0.01	)			0.02
Net income per share-basic		$	0.31			$	0.25			$	0.84			$	0.65
Diluted:
Income from continuing operations		$	0.31			$	0.24			$	0.83			$	0.61
Income (loss) from discontinued operations			0.00				0.01				(0.01	)			0.02
Net income per share-diluted		$	0.31			$	0.25			$	0.82			$	0.63

The accompanying notes are an integral part of these unaudited consolidated financial statements.

THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 2008 AND DECEMBER 30, 2007
(In thousands, except share data)

		September 28, 2008				December 30, 2007
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	26,613			$	44,403
Restricted cash			13,106				13,227
Accounts receivable, less allowance for doubtful accounts of $325 and $445			191,667				172,291
Deferred income tax asset, net			19,705				19,705
Other current assets			13,741				14,892
Total current assets			264,832				264,518
Restricted cash			20,852				20,880
Property and equipment, net			853,628				783,612
Assets held for sale			1,265				1,265
Direct finance lease receivable			38,632				43,213
Deferred income tax assets, net			4,918				4,918
Goodwill and other intangible assets, net			35,635				37,230
Other non-current assets			33,858				36,998
		$	1,253,620			$	1,192,634
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	54,648			$	48,661
Accrued payroll and related taxes			25,228				34,766
Accrued expenses			77,601				85,528
Current portion of capital lease obligations, long-term debt and non-recourse debt			18,272				17,477
Total current liabilities			175,749				186,432
Deferred income tax liability			223				223
Minority interest			1,804				1,642
Other non-current liabilities			29,177				30,179
Capital lease obligations			15,295				15,800
Long-term debt			345,904				305,678
Non-recourse debt			114,687				124,975
Commitments and contingencies (Note 9)
Shareholders’ Equity
Preferred stock, $0.01 par value, 30,000,000 shares authorized, none issued or outstanding			—				—
Common stock, $0.01 par value, 90,000,000 shares authorized, 67,132,675 and 67,050,596 issued and 51,057,675 and 50,975,596 outstanding			511				510
Additional paid-in capital			342,202				338,092
Retained earnings			283,536				241,071
Accumulated other comprehensive income			3,420				6,920
Treasury stock 16,075,000 and 16,075,000 shares			(58,888	)			(58,888	)
Total shareholders’ equity			570,781				527,705
		$	1,253,620			$	1,192,634

The accompanying notes are an integral part of these unaudited consolidated financial statements.

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 28, 2008 AND SEPTEMBER 30, 2007
(In thousands)
(UNAUDITED)

		Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007
Cash Flow from Operating Activities:
Income from continuing operations		$	42,902			$	29,393
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization expense			28,041				24,927
Amortization of debt issuance costs			2,043				1,865
Amortization of unearned stock-based compensation			2,198				1,721
Stock-based compensation expense			707				652
Write-off of deferred financing fees			—				4,794
Provision (Recovery) for doubtful accounts			302				(120	)
Equity in earnings of affiliates, net of tax			(2,009	)			(1,480	)
Minority interests in earnings of consolidated entity			297				281
Income tax benefit of equity compensation			(713	)			(2,421	)
Changes in assets and liabilities, net of acquisition:
Accounts receivable			(19,795	)			(11,410	)
Other current assets			2,848				(6,635	)
Other assets			624				3,649
Accounts payable and accrued expenses			1,970				896
Accrued payroll and related taxes			(8,878	)			(7,647	)
Deferred revenue			—				(10	)
Other liabilities			(866	)			1,990
Net cash provided by operating activities of continuing operations			49,671				40,445
Net cash used in operating activities of discontinued operations			(437	)			(328	)
Net cash provided by operating activities			49,234				40,117
Cash Flow from Investing Activities:
Acquisition, net of cash acquired			—				(410,436	)
Increase in restricted cash			(77	)			(5,429	)
Proceeds from sale of assets			1,035				2,447
Capital expenditures			(98,757	)			(67,955	)
Net cash used in investing activities			(97,799	)			(481,373	)
Cash Flow from Financing Activities:
Payments on long-term debt			(92,846	)			(218,092	)
Proceeds from the exercise of stock options			491				1,195
Income tax benefit of equity compensation			713				2,421
Proceeds from long-term debt			124,000				380,000
Debt issuance costs			(1,046	)			(9,080	)
Proceeds from equity offering, net			—				227,485
Net cash provided by financing activities			31,312				383,929
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(537	)			2,083
Net Decrease in Cash and Cash Equivalents			(17,790	)			(55,244	)
Cash and Cash Equivalents, beginning of period			44,403				111,520
Cash and Cash Equivalents, end of period		$	26,613			$	56,276
Supplemental Disclosures:
Non-cash Investing and Financing activities:
Capital expenditures in accounts payable and accrued expenses		$	12,949			$	9,434
Extinguishment of pre-acquisition liabilities, net		$	—			$	6,663
Total liabilities assumed in acquisition		$	—			$	2,558

The accompanying notes are an integral part of these unaudited consolidated financial statements.

THE GEO GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements of The GEO Group, Inc., a Florida corporation (the “Company”), included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to the Company’s Annual Report on Form 10-K for the year ended December 30, 2007. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Quarterly Report on Form 10-Q have been made. Results of operations for the thirteen weeks ended September 28, 2008 (“Third Quarter 2008”) and thirty-nine weeks ended September 28, 2008 are not necessarily indicative of the results for the entire fiscal year ending December 28, 2008.

The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 15, 2008 for the fiscal year ended December 30, 2007.

Certain prior period amounts related to discontinued operations (Note 4) have been reclassified to conform to the current period presentation.

2. EARNINGS PER SHARE

Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of outstanding shares of common stock. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator includes dilutive common stock equivalents such as stock options and shares of restricted stock. Basic and diluted earnings per share (“EPS”) were calculated for the thirteen and thirty-nine weeks ended September 28, 2008 and September 30, 2007 as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Net income		$	15,859			$	12,738			$	42,465			$	30,368
Basic earnings per share:
Weighted average shares outstanding			50,626				50,331				50,495				46,853
Per share amount		$	0.31			$	0.25			$	0.84			$	0.65
Diluted earnings per share:
Weighted average shares outstanding			50,626				50,331				50,495				46,853
Effect of dilutive securities:
Stock options and restricted stock			1,177				1,439				1,325				1,467
Weighted average shares assuming dilution			51,803				51,770				51,820				48,320
Per share amount		$	0.31			$	0.25			$	0.82			$	0.63

Thirteen Weeks

Of 2,653,076 shares underlying options outstanding at September 28, 2008, 404,448 underlying shares were excluded from the computation of diluted EPS because their effect would be anti-dilutive. Of 425,684 shares of restricted stock outstanding at September 28, 2008, no shares were excluded from the computation of diluted EPS because their effect would be anti-dilutive.

No shares underlying options or shares of restricted stock were excluded from the computation of diluted EPS for the thirteen weeks ended September 30, 2007 (“Third Quarter 2007”) because their effect would be anti-dilutive.

Thirty-nine Weeks

Of 2,653,076 shares underlying options outstanding at September 28, 2008, 375,015 underlying shares were excluded from the computation of diluted EPS because their effect would have been anti-dilutive. Of 425,684 shares of restricted stock outstanding as of September 28, 2008, no shares of restricted stock were excluded from the computation of diluted EPS for the thirty-nine weeks ended September 28, 2008 because their effect would be anti-dilutive.

No shares underlying options were excluded from the computation of diluted EPS for the thirty-nine weeks ended September 30, 2007 because their effect would be anti-dilutive. Of 626,512 shares of restricted stock outstanding at September 28, 2007, none of the shares were excluded from the computation of diluted EPS because their effect would have been anti-dilutive.

3. EQUITY INCENTIVE PLANS

In accordance with the modified prospective method of adoption under FAS No. 123R, “Share-based Payment” (“FAS 123R”), the Company recognizes compensation cost for all stock options granted after January 1, 2006, plus any prior awards granted to employees that remained unvested at that time, using a Black-Scholes option valuation model to estimate the fair value of each option awarded. The assumptions used to value options granted during the interim period were comparable to those used at December 30, 2007. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.

The Company had awards outstanding under four equity compensation plans at September 28, 2008: The Wackenhut Corrections Corporation 1994 Stock Option Plan (the “1994 Plan”); the 1995 Non-Employee Director Stock Option Plan (the “1995 Plan”); the Wackenhut Corrections Corporation 1999 Stock Option Plan (the “1999 Plan”); and The GEO Group, Inc. 2006 Stock Incentive Plan (the “2006 Plan” and, together with the 1994 Plan, the 1995 Plan and the 1999 Plan, the “Company Plans”).

On May 1, 2007, the Company’s Board of Directors adopted and its shareholders approved several amendments to the 2006 Plan, including an amendment providing for the issuance of an additional 500,000 shares of the Company’s common stock which increased the total amount available for grant to 1,400,000 shares pursuant to awards granted under the plan and specifying that up to 300,000 of such additional shares may constitute awards other than stock options and stock appreciation rights, including shares of restricted stock. See “Restricted Stock” below for further discussion.

Except for 750,000 shares of restricted stock issued under the 2006 Plan as of September 28, 2008, all of the foregoing awards previously issued under the Company Plans consist of stock options. Although awards are currently outstanding under all of the Company Plans, the Company may only grant new awards under the 2006 Plan. As of September 28, 2008, the Company had the ability to issue awards with respect to 275,357 shares of common stock pursuant to the 2006 Plan. Please see Note 13 to these unaudited consolidated financial statements for information on awards made under the 2006 Plan subsequent to September 28, 2008.

Under the terms of the Company Plans, the vesting period and, in the case of stock options, the exercise price per share, are determined by the terms of each plan. All stock options that have been granted under the Company Plans are exercisable at the fair market value of the common stock at the date of the grant. Generally, the stock options vest and become exercisable ratably over a four-year period, beginning immediately on the date of the grant. However, the Board of Directors has exercised its discretion to grant stock options that vest 100% immediately for the Chief Executive Officer. In addition, stock options granted to non-employee directors under the 1995 Plan became exercisable immediately. All stock options awarded under the Company Plans expire no later than ten years after the date of the grant.

A summary of the status of stock option awards issued and outstanding under the Company’s Plans is presented below.

		September 28, 2008
						Wtd. Avg.				Wtd. Avg.				Aggregate
						Exercise				Remaining				Intrinsic
Fiscal Year		Shares				Price				Contractual Term				Value
		(in thousands)												(in thousands)
Options outstanding at December 30, 2007			2,770			$	7.15				5.0			$	58,698
Options granted			30				27.19
Options exercised			(106	)			4.62
Options forfeited/canceled			(41	)			23.64
Options outstanding at September 28, 2008			2,653			$	7.24				4.3			$	38,757
Options exercisable at September 28, 2008			2,404			$	5.79				3.9			$	38,578

For the thirteen weeks and thirty-nine weeks ended September 28, 2008, the amount of stock-based compensation expense related to stock options was $0.3 million and $0.7 million, respectively. For the thirteen weeks and thirty-nine weeks ended September 30, 2007, the amount of stock-based compensation expense related to stock options was $0.2 million and $0.7 million, respectively. The weighted average grant date fair value of options granted during the thirty-nine weeks ended September 28, 2008 was $27.19 per share. The total intrinsic value of options exercised during the thirty-nine weeks ended September 28, 2008 was $2.1 million compared to $6.2 million in the thirty-nine weeks ended September 30, 2007.

The following table summarizes information about the exercise prices and related information of stock options outstanding under the Company Plans at September 28, 2008:

		Options Outstanding												Options Exercisable
						Wtd. Avg.				Wtd. Avg.								Wtd. Avg.
		Number				Remaining				Exercise				Number				Exercise
Exercise Prices		Outstanding				Contractual Life				Price				Exercisable				Price
$2.63 — $2.63			6,000				1.6			$	2.63				6,000			$	2.63
$2.81 — $2.81			278,500				1.4				2.81				278,500				2.81
$3.10 — $3.10			372,000				2.4				3.10				372,000				3.10
$3.17 — $3.98			157,019				4.3				3.20				157,019				3.20
$4.67 — $4.67			415,638				4.6				4.67				415,638				4.67
$5.13 — $5.13			657,000				3.4				5.13				657,000				5.13
$5.30 — $7.70			268,319				5.6				6.89				262,403				6.88
$7.83 — $20.63			135,400				6.6				12.44				110,200				10.64
$21.56 — $21.56			349,200				8.3				21.56				139,200				21.56
$26.66 — $28.24			14,000				6.1				27.79				6,000				27.19
$2.63 — $28.24			2,653,076				4.3			$	7.24				2,403,960			$	5.79

As of September 28, 2008, the Company had $2.4 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.4 years. Proceeds received from option exercises during the thirteen weeks ended September 28, 2008 and September 30, 2007 were $0.1 million and $0.3 million, respectively. Proceeds received from option exercises during the thirty-nine weeks ended September 28, 2008 and September 30, 2007 were $0.5 million and $1.2 million, respectively.

Restricted Stock

Shares of restricted stock become unrestricted shares of common stock upon vesting on a one-for-one basis. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. The shares of restricted stock granted under the 2006 Plan vest in equal 25% increments on each of the four anniversary dates immediately following the date of grant. The following is a summary of restricted stock issued as of September 28, 2008 and changes during the thirty-nine weeks ended September 28, 2008:

						Wtd. Avg.
						Grant date
		Shares				Fair value
Restricted stock outstanding at December 30, 2007			626,512			$	19.14
Granted			24,228				26.66
Vested			(176,600	)			18.27
Forfeited/canceled			(48,456	)			22.48
Restricted stock outstanding at September 28, 2008			425,684			$	19.54

During the thirteen and thirty-nine weeks ended September 28, 2008, the Company recognized $0.8 million and $2.2 million, respectively, of compensation expense related to its outstanding shares of restricted stock. During the thirteen and thirty-nine weeks ended September 30, 2007, the Company recognized $0.8 million and $1.7 million, respectively, of compensation expense related to its outstanding shares of restricted stock. As of September 28, 2008, the Company had $7.3 million of unrecognized compensation expense that is expected to be recognized over a weighted average period of 2.1 years.

4. DISCONTINUED OPERATIONS

The Company’s management service contract with the State of New Mexico, Department of Health for the management of the Fort Bayard Medical Center expired effective June 30, 2008 and was not renewed by mutual agreement. The Company does not expect material future impacts related to this discontinued operation.

The table below sets forth revenues, net income (loss) and earnings per share data related to discontinued operations for the periods presented (in thousands). Discontinued operations for all periods presented include only the operations of the Fort Bayard Medical Center except for the thirty-nine week period ended September 30, 2007 which also includes discontinued operations for Atlantic Shores Hospital.

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Revenues		$	10			$	1,572			$	1,806			$	3,657
Net income (loss)			2				582				(437	)			975
Basic earnings per share		$	0.00			$	0.01			$	(0.01	)		$	0.02
Diluted earnings per share		$	0.00			$	0.01			$	(0.01	)		$	0.02

5. COMPREHENSIVE INCOME

The components of the Company’s comprehensive income, net of tax, are as follows (in thousands):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Net income		$	15,859			$	12,738			$	42,465			$	30,368
Change in foreign currency translation, net of income tax (benefit) expense of $(1,497), $761, $(1,133) and $1,160, respectively			(2,779	)			1,367				(2,104	)			2,083
Pension liability adjustment, net of income tax benefit of $29, $24, $86 and $102, respectively			44				36				132				156
Unrealized (loss) gain on derivative instruments, net of income tax (benefit) expense of $(1,182), $16, $(1,027) and $597, respectively			(1,781	)			24				(1,527	)			953
Comprehensive income		$	11,343			$	14,165			$	38,966			$	33,560

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Changes in the Company’s goodwill balances for the thirty-nine weeks ended September 28, 2008 were as follows (in thousands):

						Foreign
		Balance as of				Currency				Balance as of
		December 30, 2007				Translation				September 28, 2008
U.S. corrections		$	21,709			$	—			$	21,709
International services			3,206				(240	)			2,966
Total segments		$	24,915			$	(240	)		$	24,675

Intangible assets consisted of the following (in thousands):

Description		Balance as of
		September 28, 2008				Asset Life
Facility management contracts		$	14,450			7-17 years
Covenants not to compete			1,470			4 years
			15,920
Less accumulated amortization			(4,960	)
Net book value of amortizable intangible assets at September 28, 2008		$	10,960

Amortization expense was $0.4 million and $0.9 million for the thirteen weeks ended September 28, 2008 and September 30, 2007, respectively. The expense for the thirteen weeks ended September 30, 2007 includes a write-off of $0.4 million (net of accumulated amortization of $0.1 million) related to the termination of our contract with Dickens County Correctional Center in July 2007. Amortization expense was $1.4 million and $1.7 million for the thirty-nine weeks ended September 28, 2008 and September 30, 2007, respectively. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets.

7. FAIR VALUE OF ASSETS AND LIABILITIES

In February 2007, the Financial Accounting Standards Board (“FASB”) issued FAS No. 159, “Fair Value Option” which provides companies an irrevocable option to report selected financial assets and liabilities at fair value. This Statement was effective for entities as of the beginning of the first fiscal year beginning after November 15, 2007. The Company did not exercise the irrevocable option to change the reporting for any of its assets or liabilities not already accounted for using fair value. There was no impact on the Company’s financial condition, results of operations, cash flows or disclosures as a result of the adoption of this standard.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements,” (“FAS 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. The Company adopted FAS 157 on December 31, 2007 with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities (see discussion related to FSP 157-2). This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels which distinguish between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The level in the fair value hierarchy within which the respective fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities, Level 2 inputs are other than quotable market prices included in Level 1 that are observable for the asset or liability either directly or indirectly through corroboration with observable market data. Level 3 inputs are unobservable inputs for the assets or liabilities that reflect management’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

Relative to FAS 157, in February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”) to provide a one-year deferral of the effective date of FAS 157 for non-financial assets and non-financial liabilities. This FSP defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. As a result of the issuance of FSP 157-2, the Company has elected to defer the adoption of this standard for non-financial assets and non-financial liabilities. The Company does not expect that the adoption of this standard for non-financial assets and liabilities will have a significant impact on its financial condition, results of operations or cash flows.

The following table provides the Company’s significant assets carried at fair value measured on a recurring basis as of September 28, 2008 (in thousands):

						Fair Value Measurements at September 28, 2008
						Quoted prices in				Significant other				Significant
		Total carrying				active markets				observable inputs				unobservable
		value at September 28,2008				(Level 1)				(Level 2)				inputs (Level 3)
Interest Rate Swap Derivative assets		$	3,908			$	—			$	3,908			$	—
Investments other than derivatives			4,555				1,158				3,397				—
		$	8,463			$	1,158			$	7,305			$	—

Valuation technique

The Company’s assets carried at fair value on a recurring basis consist of interest rate swap derivative assets, U.S. dollar denominated money market accounts, long-term investments and a short-term investment held at one of the Company’s international subsidiaries. Where applicable, the Company uses quoted prices in active markets for identical assets to determine fair value. This pricing methodology applies to the Company’s Level 1 U.S. dollar denominated money market accounts. If quoted prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices for similar assets or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2 and consist of interest rate swap derivative assets, long-term investments and the short-term investment held at one of the Company’s international subsidiaries. The Company does not have any Level 3 assets or liabilities upon which the value is based on unobservable inputs reflecting the Company’s assumptions.

8. LONG-TERM DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS

Senior Debt

The Senior Credit Facility

On August 26, 2008, the Company completed a fourth amendment to its senior secured credit facility through the execution of Amendment No. 4 to the Amended and Restated Credit Agreement (“Amendment No. 4”) between the Company, as Borrower, certain of the Company’s subsidiaries, as Grantors, and BNP Paribas, as Lender and as Administrative Agent (collectively, the “Senior Credit Facility” or the “Credit Agreement”). As further described below, Amendment No. 4 revises certain leverage ratios, eliminates the fixed charge ratio, adds a new interest coverage ratio and sets forth new capital expenditure limits under the Credit Agreement. Additionally, Amendment No. 4 permits the Company to add incremental borrowings under the accordion feature of the Senior Credit Facility of up to $150.0 million on or prior to December 31, 2008 and up to an additional $150.0 million after December 31, 2008. Amendment No. 4 does not require any lenders to make any new borrowings under the accordion feature but simply provides a mechanism under the Senior Credit Facility for the Company to incur such borrowings without requiring further lender consent. Any such borrowings by the Company under the accordion feature of the Senior Credit Facility, whether as revolving borrowings or incremental term loans as permitted in the Amendment No. 4, would be subject to lender demand and market conditions and may not be available to the Company on satisfactory terms, or at all. The Company believes that this amendment may provide additional flexibility if and when it should decide to activate the accordion feature of the Senior Credit Facility.

As of September 28, 2008, the Senior Credit Facility consisted of a $365.0 million, seven-year term loan (“Term Loan B”), and a $150.0 million five-year revolver which expires September 14, 2010 (the “Revolver”). The interest rate for the Term Loan B is LIBOR plus 1.5% (the weighted average rate on outstanding borrowings under the Term Loan portion of the facility as of September 28, 2008 was 4.01%). The Revolver currently bears interest at LIBOR plus 2.0% or at the base rate (prime rate) plus 1.0%.

As of September 28, 2008, the Company had $159.5 million outstanding under the Term Loan B, and the Company’s $150.0 million Revolver had $42.0 million outstanding in loans, $44.8 million outstanding in letters of credit and $63.2 million available for borrowings. The Company intends to use future borrowings from the Revolver for the purposes permitted under the Senior Credit Facility, including for general corporate purposes. Please see Note 13 to these unaudited consolidated financial statements for information on changes made to the Credit Agreement subsequent to September 28, 2008 which have increased the Company’s borrowing capacity under the Revolver by $85.0 million.

Indebtedness under the Revolver bears interest in each of the instances below at the stated rate:

		Interest Rate under the Revolver
LIBOR borrowings		LIBOR plus 1.50% to 2.50%.
Base rate borrowings		Prime rate plus 0.5% to 1.50%.
Letters of credit		1.50% to 2.50%.
Available borrowings		0.38% to 0.5%.

Amendment No. 4 to the Credit Agreement requires the Company to maintain the following total leverage ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:

Period		Leverage Ratio
Through the penultimate day of fiscal year 2009		Total leverage ratio £ 4.50 to 1.00
From the last day of the fiscal year 2009 through the penultimate day of fiscal year 2010		Reduces from 4.50 to 1.00, to 4.25 to 1.00
From the last day of the fiscal year 2010 through the penultimate day of fiscal year 2011		Reduces from 4.25 to 1.00, to 3.25 to 1.00
Thereafter		Reduces from 3.25 to 1.00, to 3.00 to 1.00

Amendment No. 4 to the Credit Agreement also requires the Company to maintain the following senior secured leverage ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:

Period		Senior Secured Leverage Ratio
Through the penultimate day of fiscal year 2010		3.25 to 1.00
From the last day of the fiscal year 2010 through the penultimate day of fiscal year 2011		2.25 to 1.00
Thereafter		2.00 to 1.00

In addition, Amendment No. 4 to the Credit Agreement adds a new interest coverage ratio which requires the Company to maintain a ratio of EBITDA (as such term is defined in the Credit Agreement) to Interest Expense (as such term is defined in the Credit Agreement) payable in cash of no less than 3.00 to 1.00, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period. The foregoing covenants replace the corresponding covenants previously included in the Credit Agreement, and eliminate the fixed charge coverage ratio formerly incorporated in the Credit Agreement.

Amendment No. 4 also amends the capital expenditure limits applicable to the Company under the Credit Agreement as follows:

Period		Capital Expenditure Limit
Fiscal year 2008		$200.0 million
Fiscal year 2009		$275.0 million
Each fiscal year thereafter		$50.0 million

The foregoing limits are subject to the provision that to the extent that the Company’s capital expenditures during any fiscal year are less than the limit permitted for such fiscal year, the following maximum amounts will be added to the maximum capital expenditures that the Company can make in the following fiscal year: (i) up to $30.0 million may be added to the fiscal year 2009 limit from unused amounts in fiscal year 2008; (ii) up to $50.0 million may be added to the fiscal year 2010 limit from unused amounts in fiscal year 2009; or (iii) up to $20.0 million may be added to the fiscal year 2010 limit, and to fiscal years thereafter, from unused amounts in the immediately prior fiscal years.

All of the obligations under the Senior Credit Facility are unconditionally guaranteed by each of the Company’s existing material domestic subsidiaries. The Senior Credit Facility and the related guarantees are secured by substantially all of the Company’s present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, as specified in the Credit Agreement. In addition, the Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict the Company’s ability to be party to certain transactions, as further specified in the Credit Agreement. Events of default under the Senior Credit Facility include, but are not limited to, (i) the Company’s failure to pay principal or interest when due, (ii) the Company’s material breach of any representation or warranty, (iii) covenant defaults, (iv) bankruptcy, (v) cross default to certain other indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental state of claims which are asserted against it, and (viii) a change of control. The Company believes it was in compliance with all of the covenants in the Senior Credit Facility as of September 28, 2008.

Senior 8 1/4% Notes

The Company has $150.0 million in aggregate principal amount, ten-year, 8 1/4% senior unsecured notes issued and outstanding (the “Notes”). The Notes are general, unsecured, senior obligations. Interest is payable semi-annually on January 15 and July 15 at 8 1/4%. The Notes are governed by the terms of an Indenture, dated July 9, 2003, between the Company and the Bank of New York, as trustee, referred to as the Indenture. Additionally, after July 15, 2008, the Company may redeem, at the Company’s option, all or a portion of the Notes plus accrued and unpaid interest at various redemption prices ranging from 100.000% to 104.125% of the principal amount to be redeemed, depending on when the redemption occurs. The Indenture contains covenants that, among other things, limit the Company’s ability to incur additional indebtedness, pay dividends or distributions on its common stock, repurchase its common stock, and prepay subordinated indebtedness. The Indenture also limits the Company’s ability to issue preferred stock, make certain types of investments, merge or consolidate with another company, guarantee other indebtedness, create liens and transfer and sell assets. The Company believes it was in compliance with all of the covenants of the Indenture governing the Notes as of September 28, 2008.

The Notes are reflected net of the original issue discount of $2.7 million as of September 28, 2008 which is being amortized over the ten-year term of the Notes using the effective interest method.

Non-Recourse Debt

South Texas Detention Complex

The Company has a debt service requirement related to the development of the South Texas Detention Complex, a 1,904-bed detention complex in Frio County, Texas acquired in November 2005 from Correctional Services Corporation (“CSC”). CSC was awarded the contract in February 2004 by the Department of Homeland Security, U.S. Immigration and Customs Enforcement (“ICE”) for development and operation of the detention center. In order to finance its construction, South Texas Detention Center Local Development Corporation (“STLDC”) was created and issued $49.5 million in taxable revenue bonds. These bonds mature in February 2016 and have fixed coupon rates between 3.84% and 5.07%. Additionally, the Company is owed $5.0 million of subordinated notes by STLDC which represents the principal amount of financing provided to STLDC by CSC for initial development.

The Company has an operating agreement with STLDC, the owner of the complex, which provides it with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract with ICE be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operations of the facility including all operating expenses and is required to pay all operating expenses whether or not there are sufficient revenues. STLDC has no liabilities resulting from its ownership. The bonds have a ten-year term and are non-recourse to the Company and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. The Company has determined that it is the primary beneficiary of STLDC and consolidates the entity as a result.

On February 1, 2008, STLDC made a payment from its restricted cash account of $4.3 million for the current portion of its periodic debt service requirement in relation to the STLDC operating agreement and bond indenture. As of September 28, 2008, the remaining balance of the debt service requirement under the STDLC financing agreement is $41.1 million, of which $4.4 million is due within the next twelve months. Also, as of September 28, 2008, included in current restricted cash and non-current restricted cash is $6.2 million and $9.7 million, respectively, of funds held in trust with respect to the STLDC for debt service and other reserves.

Northwest Detention Center

On June 30, 2003, CSC arranged financing for the construction of the Northwest Detention Center in Tacoma, Washington, referred to as the Northwest Detention Center, which was completed and opened for operation in April 2004. The Company began to operate this facility following its acquisition in November 2005. In connection with the original financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57.0 million note payable to the Washington Economic Development Finance Authority, referred to as WEDFA, an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the proceeds of the bond issuance back to CSC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to the Company and the loan from WEDFA to CSC is non-recourse to the Company. These bonds mature in February 2014 and have fixed coupon rates between 2.90% and 4.10%.

The proceeds of the loan were disbursed into escrow accounts held in trust to be used to pay the issuance costs for the revenue bonds, to construct the Northwest Detention Center and to establish debt service and other reserves. No payments were made during the fiscal period ended September 28, 2008 in relation to the WEDFA bond indenture. As of September 28, 2008, the remaining balance of the debt service requirement is $42.7 million, of which $5.4 million is classified as current in the accompanying balance sheet.

As of September 28, 2008, included in current restricted cash and non-current restricted cash is $6.9 million and $7.0 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.

Australia

The Company’s wholly-owned Australian subsidiary financed the development of a facility and subsequent expansion in 2003 with long-term debt obligations. These obligations are non-recourse to the Company and total $47.3 million and $53.0 million at September 28, 2008 and December 30, 2007, respectively. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, which, at September 28, 2008, was approximately $4.2 million. This amount is included in restricted cash and the annual maturities of the future debt obligation is included in non-recourse debt.

Guarantees

In connection with the creation of South African Custodial Services Ltd., referred to as SACS, the Company entered into certain guarantees related to the financing, construction and operation of the prison. The Company guaranteed certain obligations of SACS under its debt agreements up to a maximum amount of 60.0 million South African Rand, or approximately $7.5 million, to SACS’ senior lenders through the issuance of letters of credit. Additionally, SACS is required to fund a restricted account for the payment of certain costs in the event of contract termination. The Company has guaranteed the payment of 50% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 7.5 million South African Rand, or approximately $0.9 million, as security for its guarantee. The Company’s obligations under this guarantee expire upon SACS’ release from its obligations in respect of the restricted account under its debt agreements. No amounts have been drawn against these letters of credit, which are included in the Company’s outstanding letters of credit under its Revolving Credit Facility.

The Company has agreed to provide a loan, of up to 20.0 million South African Rand, or approximately $2.5 million, referred to as the Standby Facility, to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under the Standby Facility, and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations under the Standby Facility expire upon the earlier of full funding or SACS’s release from its obligations under its debt agreements. The lenders’ ability to draw on the Standby Facility is limited to certain circumstances, including termination of the contract.

The Company has also guaranteed certain obligations of SACS to the security trustee for SACS’ lenders. The Company secured its guarantee to the security trustee by ceding its rights to claims against SACS in respect of any loans or other finance agreements, and by pledging the Company’s shares in SACS. The Company’s liability under the guarantee is limited to the cession and pledge of shares. The guarantee expires upon expiration of the cession and pledge agreements.

In connection with a design, build, finance and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of a not-for-profit entity. The potential estimated exposure of these obligations is Canadian Dollar (“CAN”) 2.5 million, or approximately $2.4 million, commencing in 2017. The Company has a liability of $1.3 million related to this exposure as of September 28, 2008. To secure this guarantee, the Company has purchased Canadian dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. The Company has recorded an asset and a liability equal to the current fair market value of those securities on its consolidated balance sheet. The Company does not currently operate or manage this facility.

At September 28, 2008, the Company also had six letters of guarantee outstanding under separate international facilities relating to its Australian subsidiary totaling approximately $6.1 million. The Company does not have any off balance sheet arrangements other than those previously disclosed.

Derivatives

The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in interest rates. The Company measures its derivative financial instruments at fair value in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations and amendments.

Effective September 18, 2003, the Company entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. The agreements, which have payment and expiration dates and call provisions that coincide with the terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while the Company makes a variable interest rate payment to the same counterparties equal to the six-month LIBOR plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. The Company has designated the swaps as hedges against changes in the fair value of a designated portion of the Notes due to changes in underlying interest rates. Accordingly, the changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the Notes. Total net (losses) gains recognized and recorded in earnings related to these fair value hedges were $0.7 million and $(1.1) million for the thirty-nine weeks ended September 28, 2008 and September 30, 2007, respectively. As of September 28, 2008 and December 30, 2007, the fair value of the swaps totaled approximately $0.7 million and $0, respectively, and is included in other non-current assets and as an adjustment to the carrying value of the Notes in the accompanying consolidated balance sheets. There was no material ineffectiveness in this interest rate swap during the period ended September 28, 2008.

The Company’s Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on the variable rate non-recourse debt to 9.7%. The Company has determined the swap, which has a notional amount of $50.9 million, payment and expiration dates, and call provisions that coincide with the terms of the non-recourse debt to be an effective cash flow hedge. Accordingly, the Company records the change in the value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. Total net (loss) gain recognized in the periods and recorded in accumulated other comprehensive income, net of tax, related to these cash flow hedges was $(1.5) million and $1.0 million for the thirty-nine weeks ended September 28, 2008 and September 30, 2007, respectively. The total value of the swap asset as of September 28, 2008 and December 30, 2007 was approximately $3.2 million and $5.8 million, respectively, and is recorded as a component of other assets in the accompanying consolidated balance sheets.

There was no material ineffectiveness of the Company’s interest rate swap for the fiscal periods presented. The Company does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this swap currently reported in accumulated other comprehensive income.

9. COMMITMENTS AND CONTINGENCIES

Litigation, Claims and Assessments

On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded a $47.5 million verdict against the Company. In October 2006, the verdict was entered as a judgment against the Company in the amount of $51.7 million. The lawsuit is being administered under the insurance program established by The Wackenhut Corporation, the Company’s former parent company, in which the Company participated until October 2002. Policies secured by the Company under that program provide $55.0 million in aggregate annual coverage. As a result, the Company believes it is fully insured for all damages, costs and expenses associated with the lawsuit and as such has not taken any reserves in connection with the matter. The lawsuit stems from an inmate death which occurred at the Company’s former Willacy County State Jail in Raymondville, Texas, in April 2001, when two inmates at the facility attacked another inmate. Separate investigations conducted internally by the Company, The Texas Rangers and the Texas Office of the Inspector General exonerated the Company and its employees of any culpability with respect to the incident. The Company believes that the verdict is contrary to law and unsubstantiated by the evidence. The Company’s insurance carrier has posted a supersedeas bond in the amount of approximately $60.0 million to cover the judgment. On December 9, 2006, the trial court denied the Company’s post trial motions and the Company filed a notice of appeal on December 18, 2006. The appeal is proceeding. On March 26, 2008, oral arguments were made before the Thirteenth Court of Appeals, Corpus Christi, Texas (No. 13-06-00692-CV) which took the matter under advisement pending the issuance of its ruling.

In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities that its Australian subsidiary formerly operated. The claim relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, legal proceedings in this matter were formally commenced when the Company was served with notice of a complaint filed against it by the Commonwealth of Australia seeking damages of up to approximately AUS 18.0 million or $15.0 million, plus interest. The Company believes that it has several defenses to the allegations underlying the litigation and the amounts sought and intends to vigorously defend its rights with respect to this matter. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and the Company’s preliminary review of the claim, the Company believes that, if settled unfavorably, this matter could have a material adverse effect on its financial condition, results of operations and cash flows. The Company is uninsured for any damages or costs that it may incur as a result of this claim, including the expenses of defending the claim. The Company has established a reserve based on its estimate of the most probable loss based on the facts and circumstances known to date and the advice of legal counsel in connection with this matter.

On January 30, 2008, a lawsuit seeking class action certification was filed against the Company by an inmate at one of its facilities. The case is now entitled Allison and Hocevar v. The GEO Group, Inc. (Civil Action No. 08-467) and is pending in the U.S. District Court for the Eastern District of Pennsylvania. The lawsuit alleges that the Company has a companywide blanket policy at its immigration/detention facilities and jails that requires all new inmates and detainees to undergo a strip search upon intake into each facility. The plaintiff alleges that this practice, to the extent implemented, violates the civil rights of the affected inmates and detainees. The lawsuit seeks monetary damages for all purported class members, a declaratory judgment and an injunction barring the alleged policy from being implemented in the future. The Company is in the initial stages of investigating this claim. However, following its preliminary review, the Company believes it has several defenses to the allegations underlying this litigation, and the Company intends to vigorously defend its rights in this matter. Nevertheless, the Company believes that, if resolved unfavorably, this matter could have a material adverse effect on its financial condition and results of operations. Discovery has recently commenced in connection with this matter.

The nature of the Company’s business exposes it to various types of claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by its customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the Company’s facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. Except as otherwise disclosed above, the Company does not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on its financial condition, results of operations or cash flows.

Commitments

The Company is currently self-financing the simultaneous construction or expansion of several correctional and detention facilities in multiple jurisdictions. As of September 28, 2008, the Company was in the process of constructing or expanding six facilities representing 4,166 total beds. The Company is providing the financing for four of the six facilities, representing 3,062 beds. Total capital expenditures related to these projects is expected to be $173.0 million, of which $24.9 million was completed through Third Quarter 2008. The Company expects to incur at least another $26.2 million in capital expenditures relating to these owned projects during fiscal year 2008 and the remaining $121.9 million by the first fiscal quarter 2010. Additionally, financing for the remaining two facilities representing 1,104 beds is being provided for by third party sources for state or county ownership. The Company is managing the construction of these projects with total costs of $84.9 million, of which $65.1 million has been completed through Third Quarter 2008 and $19.8 million remains to be completed through fiscal year 2009. The Company capitalized interest related to its ongoing construction of its construction and expansion projects of $1.1 million and $0.8 million for the thirteen week periods ended September 28, 2008 and September 30, 2007, respectively. Capitalized interest for the thirty-nine week periods ended September 28, 2008 and September 30, 2007 was $4.0 million and $1.7 million, respectively.

10. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

Operating and Reporting Segments

The Company conducts its business through four reportable business segments: the U.S. corrections segment; the International services segment; the GEO Care segment; and the Facility construction and design segment. The Company has identified these four reportable segments to reflect the current view that the Company operates four distinct business lines, each of which constitutes a material part of its overall business. The U.S. corrections segment primarily encompasses U.S.-based privatized corrections and detention business. The International services segment primarily consists of privatized corrections and detention operations in South Africa, Australia and the United Kingdom. The GEO Care segment, which is operated by the Company’s wholly-owned subsidiary GEO Care, Inc., comprises privatized mental health and residential treatment services business, all of which is currently conducted in the U.S. The Facility construction and design segment consists of contracts with various state, local and federal agencies for the design and construction of facilities for which the Company has management contracts. Disclosures for business segments are as follows (in thousands):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Revenues:
U.S. corrections		$	188,997			$	169,369			$	552,987			$	502,765
International services			34,131				33,510				104,422				95,672
GEO Care			28,794				30,053				89,063				79,891
Facility construction and design			13,485				33,187				74,534				81,168
Total revenues		$	265,407			$	266,119			$	821,006			$	759,496
Depreciation and amortization:
U.S. corrections		$	8,693			$	8,318			$	25,393			$	22,951
International services			419				461				1,216				995
GEO Care			400				398				1,432				981
Facility construction and design			—				—				—				—
Total depreciation and amortization		$	9,512			$	9,177			$	28,041			$	24,927
Operating income (loss):
U.S. corrections (1), (2)		$	40,674			$	35,367			$	116,258			$	103,419
International services			2,381				2,375				8,221				8,151
GEO Care			3,214				3,019				9,262				6,971
Facility construction and design			115				284				312				97
Operating income from segments			46,384				41,045				134,053				118,638
General and administrative expenses			(16,944	)			(16,054	)			(51,825	)			(46,849	)
Total operating income		$	29,440			$	24,991			$	82,228			$	71,789

		September 28, 2008				December 30, 2007
Segment assets:
U.S. corrections		$	1,050,648			$	962,090
International services			82,531				91,692
GEO Care			20,217				19,334
Facility construction and design			15,030				16,385
Total segment assets		$	1,168,426			$	1,089,501

Pre-Tax Income Reconciliation of Segments

The following is a reconciliation of the Company’s total operating income from its reportable segments to the Company’s income before income taxes, equity in earnings of affiliates, discontinued operations and minority interest, in each case, during the thirteen weeks and thirty-nine weeks ended September 28, 2008 and September 30, 2007, respectively.

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Total operating income from segments		$	46,384			$	41,045			$	134,053			$	118,638
Unallocated amounts:
General and Administrative Expenses			(16,944	)			(16,054	)			(51,825	)			(46,849	)
Net interest expense			(5,431	)			(6,055	)			(16,087	)			(21,513	)
Write off of deferred financing fees from extinguishment of debt			—				—				—				(4,794	)
Income before income taxes, minority interest, equity in earnings of affiliate and discontinued operations		$	24,009			$	18,936			$	66,141			$	45,482

Asset Reconciliation of Segments

The following is a reconciliation of the Company’s reportable segment assets to the Company’s total assets as of September 28, 2008 and December 30, 2007, respectively.

		September 28, 2008				December 30, 2007
Reportable segment assets:		$	1,168,426			$	1,089,501
Cash			26,613				44,403
Deferred tax asset, net			24,623				24,623
Restricted cash			33,958				34,107
Total Assets		$	1,253,620			$	1,192,634

Sources of Revenue

The Company derives most of its revenue from the management of privatized correctional and detention facilities. The Company also derives revenue from the management of residential treatment facilities and from the construction and expansion of new and existing correctional, detention and residential treatment facilities. All of the Company’s revenue is generated from external customers.

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Revenues:
Correctional and detention		$	223,128			$	202,879			$	657,409			$	598,437
GEO Care			28,794				30,053				89,063				79,891
Facility construction and design			13,485				33,187				74,534				81,168
Total revenues		$	265,407			$	266,119			$	821,006			$	759,496

Equity in earnings of affiliate includes the Company’s joint venture in South Africa, SACS. This entity is accounted for under the equity method of accounting and the Company’s investment in SACS is presented as a component of other non-current assets in the accompanying consolidated balance sheets.

A summary of financial data for SACS is as follows (in thousands):

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Statement of Operations Data
Revenues		$	9,501			$	9,326			$	27,701			$	26,660
Operating income			3,621				3,823				10,639				10,808
Net income (loss)			1,378				1,149				4,018				2,930

		September 28, 2008				December 30, 2007
Balance Sheet Data
Current assets		$	18,926			$	21,608
Non-current assets			45,813				53,816
Current liabilities			3,923				6,120
Non-current liabilities			51,152				62,401
Shareholders’ equity			9,664				6,903

As of September 28, 2008 and December 30, 2007, the Company’s investment in SACS was $4.8 million and $3.5 million, respectively. The investment is included in other non-current assets in the accompanying consolidated balance sheets.

11. BENEFIT PLANS

The Company has two non-contributory defined benefit pension plans covering certain of the Company’s executives. Retirement benefits are based on years of service, employees’ average compensation for the last five years prior to retirement and social security benefits. Currently, the plans are not funded. The Company purchased and is the beneficiary of life insurance policies for certain participants enrolled in the plans.

In 2001, the Company established non-qualified deferred compensation agreements with three key executives. These agreements were modified in 2002, and again in 2003. The current agreements provide for a lump sum payment when the executives retire, no sooner than age 55. All three executives have reached age 55 and are eligible to receive the payments upon retirement.

The Company adopted FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),” (“FAS 158”) at December 30, 2007. FAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multi-employer plan) as an asset or liability on its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. FAS 158 requires an employer to measure the funded status of a plan as of its year-end date.

FAS 158 also requires an entity to measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. Since the Company currently has a measurement date of December 31 for all plans, this provision did not have a material impact in the year of adoption.

In accordance with FAS 158, the Company has disclosed contributions and payment of benefits related to the plans. There were no assets in the plan at September 28, 2008 or December 30, 2007. There were no significant transactions between the employer or related parties and the plan during the period.

The following table summarizes key information related to these pension plans and retirement agreements which includes information as required by FAS 158. The table illustrates the reconciliation of the beginning and ending balances of the benefit obligation showing the effects during the period attributable to each of the following: service cost, interest cost, plan amendments, termination benefits, actuarial gains and losses. The assumptions used in the Company’s calculation of accrued pension costs are based on market information and the Company’s historical rates for employment compensation and discount rates, respectively.

		September 28, 2008				December 30, 2007
		(in thousands)
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of period		$	17,938			$	17,098
Service cost			398				551
Interest cost			490				619
Plan amendments			—				—
Actuarial gain			—				(287	)
Benefits paid			(32	)			(43	)
Projected benefit obligation, end of period		$	18,794			$	17,938
Change in Plan Assets
Plan assets at fair value, beginning of period		$	—			$	—
Company contributions			32				43
Benefits paid			(32	)			(43	)
Plan assets at fair value, end of period		$	—			$	—
Unfunded Status of the Plan		$	(18,794	)		$	(17,938	)
Amounts Recognized in Accumulated Other Comprehensive Income
Prior service cost			92				123
Net loss			2,368				2,554
Accrued pension cost		$	2,460			$	2,677

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		September 28, 2008				September 30, 2007				September 28, 2008				September 30, 2007
Components of Net Periodic Benefit Cost
Service cost		$	133			$	138			$	398			$	413
Interest cost			163				188				490				393
Amortization of:
Prior service cost			10				10				31				30
Net loss			62				76				187				227
Net periodic pension cost		$	368			$	412			$	1,106			$	1,063
Weighted Average Assumptions for Expense
Discount rate			5.75	%			5.75	%			5.75	%			5.75	%
Expected return on plan assets			N/A				N/A				N/A				N/A
Rate of compensation increase			5.50	%			5.50	%			5.50	%			5.50	%

12. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2008, the FASB issued FAS No. 162, The Hierarchy of Generally Accepted Accounting Principles” which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company does not expect that the adoption of this pronouncement will have a significant impact on its financial condition, results of operations and cash flows.

In April 2008, the FASB issued Financial Staff Position 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”) which amends the factors that must be considered when developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets”. This statement amends paragraph 11(d) of FAS 142 to require an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset. This statement is effective for financial statements in fiscal years beginning after December 15, 2008. The Company does not expect that the adoption of this pronouncement will have a significant impact on its financial condition, results of operations or cash flows.

In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 applies to all derivative instruments accounted for under FAS 133 and requires entities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments are accounted for under FAS 133 and related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early adoption encouraged. The Company does not expect that the adoption of this pronouncement will have a significant impact on its financial condition, results of operations and cash flows.

In December 2007, the FASB issued FAS No. 141(R) “Applying the Acquisition Method” (“FAS 141R”), which is effective for fiscal years beginning after December 15, 2008. This statement retains the fundamental requirements in FAS 141 that the acquisition method be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141R broadens the scope of FAS 141 by requiring application of the purchase method of accounting to transactions in which one entity establishes control over another entity without necessarily transferring consideration, even if the acquirer has not acquired 100% of its target. Among other changes, FAS 141R applies the concept of fair value and “more likely than not” criteria to accounting for contingent consideration, and preacquisition contingencies. As a result of implementing the new standard, since transaction costs would not be an element of fair value of the target, they will not be considered part of the fair value of the acquirer’s interest and will be expensed as incurred. The Company does not expect that the impact of this standard will have a significant effect on its financial condition, results of operations and cash flows.

In December 2007, the FASB also issued FAS No. 160, “Accounting for Noncontrolling Interests”, which is effective for fiscal years beginning after December 15, 2008. This statement clarifies the classification of noncontolling interests in the consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and the holders of non-controlling interests. The Company does not expect that the adoption of this standard will have a significant impact on its financial condition, results of operations and cash flows.

13. SUBSEQUENT EVENTS

On October 31, 2008, the Company awarded options to purchase an aggregate total of 215,000 shares of common stock to certain executive officers, directors and employees. All of these options were issued under the 2006 Plan and have an exercise price of $16.69 per share. After giving effect to these options, as of November 4, 2008, the Company had the ability to issue awards with respect to an additional 60,357 shares of common stock pursuant to the 2006 Plan.

On October 29, 2008, the Company announced that it exercised the accordion feature in its existing senior credit facility to add $85.0 million in additional borrowing capacity under the Revolver. After giving effect to this additional borrowing capacity, the total size of the Revolver was increased to $235.0 million. As of November 3, 2008, the Company had approximately $74.0 million outstanding in loans under the Revolver, $44.3 million outstanding in letters of credit and $116.7 million available for borrowings under the Revolver. Amounts outstanding under the Revolver will continue to bear interest at LIBOR plus 2.00%, which rate is subject to adjustment based on a pricing grid set forth in the senior credit facility. The Company paid a one-time up front fee of 2.00% on the increased borrowing capacity, which will be amortized over the remaining term of the Revolver.

As previously disclosed, on March 17, 2008, the Company purchased its former Coke County facility and the related land at a cost of $3.2 million, terminating any of its further obligations under the prior lease with respect to that facility. Initially, the Company’s intention was to retain the facility and the related land for future business purposes and as such, no formal plan was entered into for the sale of the asset. In October 2008, the Company received and accepted a verbal offer from a third party for the purchase of the facility. The Company expects to complete the sale during the fourth fiscal quarter of 2008.

THE GEO GROUP, INC.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission, which we refer to as the SEC, contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking” statements are any statements that are not based on historical information. Statements other than statements of historical facts included in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are “forward-looking” statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or “cautionary statements,” include, but are not limited to:

•		our ability to timely build and/or open facilities as planned, profitably manage such facilities and successfully integrate such facilities into our operations without substantial additional costs;
•		the instability of foreign exchange rates, exposing us to currency risks in Australia, the United Kingdom, and South Africa, or other countries in which we may choose to conduct our business;
•		our ability to reactivate the North Lake Correctional Facility in Michigan;
•		our ability to secure facility management contracts on suitable terms for the operation of three new facilities and/or facility expansions that we are currently constructing with an aggregate total of $173.0 million of our own capital, of which we have already spent $24.9 million;
•		an increase in unreimbursed labor rates;
•		our ability to expand, diversify and grow our correctional mental health and residential treatment services;
•		our ability to win management contracts for which we have submitted proposals and to retain existing management contracts;
•		our ability to raise new project development capital given, among other things, the current adverse conditions in the capital markets, our current significant amount of indebtedness and the often short-term nature of the customers’ commitment to use newly developed facilities;
•		our ability to estimate the government’s level of dependency on privatized correctional services;
•		our ability to accurately project the size and growth of the U.S. and international privatized corrections industry;
•		our ability to develop long-term earnings visibility;
•		our ability to obtain future financing at competitive rates and on satisfactory terms, or at all;
•		our exposure to rising general insurance costs;
•		our exposure to claims for which we are uninsured;
•		our exposure to rising employee and inmate medical costs;
•		our ability to maintain occupancy rates at our facilities;
•		our ability to manage costs and expenses relating to ongoing litigation arising from our operations;

•		our ability to accurately estimate on an annual basis, loss reserves related to general liability, workers compensation and automobile liability claims;
•		our ability to identify suitable acquisitions, and to successfully complete and integrate such acquisition on satisfactory terms;
•		the ability of our government customers to secure budgetary appropriations to fund their payment obligations to us; and
•		other factors contained in our filings with the SEC, including, but not limited to, those detailed in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K and our Current Reports on Form 8-K.

We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q.

Introduction

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007, filed with the Securities and Exchange Commission on February 15, 2008. The discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. For the purposes of this discussion and analysis, we refer to the thirteen weeks ended September 28, 2008 as “Third Quarter 2008,” and we refer to the thirteen weeks ended September 30, 2007 as “Third Quarter 2007.”

We are a leading provider of government-outsourced services specializing in the management of correctional, detention and mental health and residential treatment facilities in the United States, Australia, South Africa, the United Kingdom and Canada. We operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers and mental health and residential treatment facilities. Our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities. Our mental health and residential treatment services involve the delivery of quality care, innovative programming and active patient treatment, primarily at privatized state mental health. We also develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency.

We currently manage 61 facilities totaling approximately 55,300 beds worldwide. As of the end of Third Quarter 2008, we had an additional 4,046 beds under development at six facilities, including an expansion and renovation of one vacant facility which we own and the expansion of five facilities we currently operate. Excluding our 200-bed Oak Creek Confinement Center which was an idle facility at the end of Third Quarter 2008, we maintained an average companywide facility occupancy rate of 97.0% for Third Quarter 2008.

Reference is made to Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on February 15, 2008, for further discussion and analysis of information pertaining to our financial condition and results of operations for the fiscal year ended December 30, 2007.

Fiscal 2008 Developments

Contracts and facility activations

New facilities and facility openings

On October 21, 2008, we announced that we have received a Notice of Intent to Award contracts from the State of Florida, Department of Management Services for the design, construction, and operation of a new 2,000-bed special needs prison to be located in Santa Rosa County, Florida. The new 2,000-bed prison will house medium and close-custody security adult male inmates, the majority of whom will require chronic medical and mental health treatment. Under the award, we will begin the design and construction, through tax-exempt bonds, of a new $120.0 million, 2,000-bed prison that will be lease-purchase financed and owned by the State of Florida. We expect to begin management and operation of the prison upon its completion by the end of Second Quarter 2010.

In October 2008, we announced the opening of two facilities. In Laredo, Texas, we opened our 1,500-bed Rio Grande Detention Center which we will manage under a contract with the Office of the Federal Detention Trustee, which we refer to as OFDT. The contract has a maximum term of 20 years, consisting of an initial base period of five years and three additional five-year option periods exercisable at the discretion of the OFDT. We expect to complete the intake of detainees at this facility by the end of the fourth quarter of 2008. We also announced the opening of a 500-bed expansion of the 1,000-bed East Mississippi Correctional Facility in Meridian, Mississippi. We currently manage this facility under a management agreement with the State of Mississippi Department of Corrections, which has a contract to utilize 375 of the new additional beds. At full capacity, these two facilities are expected to generate approximately $42.0 million in annualized operating revenues.

On August 7, 2008 we announced the expansion of two of our company-owned facilities. We have begun the expansion of our Northwest Detention Center, which currently houses immigration detainees, to increase its total capacity to 1,575 beds. We expect the 545-bed expansion to cost approximately $40.0 million and to be completed in September 2009. We do not currently have a management contract with a government client to operate this expansion but plan to market the new beds to the Bureau of Immigration and Customs Enforcement, our existing client at this facility and, if necessary, to other federal and state agencies around the country. We are also expanding our Broward Transition Center by 100 beds which will increase the capacity of this facility to 700 beds. This expansion is expected to cost approximately $5.0 million and is scheduled to be completed in Fourth Quarter of 2009.

On July 14, 2008 we announced the execution of an Intergovernmental Agreement between Montgomery County Texas, which we refer to as Montgomery County, and the United States Marshals Service, referred to as USMS, for the housing of up to 1,100 USMS detainees at the new county-owned 1,100-bed Joe Corley Detention Facility, in Conroe, Texas. We began the intake of USMS detainees in August of 2008 and now manage this facility under a two-year agreement with Montgomery County subject to continuing two-year extensions.

On May 1, 2008, we announced plans to complete a 1,225-bed expansion of our existing 500-bed North Lake Correctional Facility located in Baldwin, Michigan. We estimate the expansion of this company-owned facility, which is currently idle, to cost approximately $60.0 million. We have started construction on this facility and expect the project to be completed in the second half of 2009. We do not currently have a management contract with a government client to operate the North Lake Correctional Facility following its expansion but plan to market the beds to federal and state agencies around the country.

In January 2008, we executed a contract, effective January 2, 2008 with the OFDT for the housing of up to 768 USMS detainees at the Robert A. Deyton Detention Facility located in Clayton County, Georgia. The contract has a maximum term of 20 years, consisting of an initial base period of five years and three additional five-year option periods exercisable at the discretion of the OFDT. We lease this facility from Clayton County under a 20-year agreement, with two five-year renewal options. This facility currently has a capacity of 576 beds, and we have begun construction on a 192-bed expansion. At the 576-bed occupancy level, we expect to generate approximately $16.0 million in annualized operating revenues with an 80 percent occupancy guarantee. Once the 192-bed expansion is complete, expected in the fourth quarter of 2008, this facility is expected to generate approximately $20.0 million in annualized operating revenues with an 80 percent occupancy guarantee.

Contract terminations

On October 1, 2008, we announced that our management contract for the continued management and operation of the 1,040-bed Sanders Estes Unit in Venus, Texas, was awarded to a competitor. The Sanders Estes Unit generated approximately $11.0 million in annual operating revenues for us under a managed-only contract with TDJC. This contract will terminate effective as of the beginning of the first quarter of 2009.

On August 29, 2008, we announced our discontinuation of our contract with Delaware County, Pennsylvania for the management of the county-owned 1,883-bed George W. Hill Correctional Facility effective December 31, 2008. This facility is the only local county jail managed by us and is generating approximately $38.0 million in annualized operating revenues. We do not expect the discontinuation of the Delaware County, Pennsylvania contract to have a material adverse impact on our financial condition, results of operations or cash flows.

On June 16, 2008, we announced the discontinuation by mutual agreement of our contract with Fort Bayard Medical Center effective June 30, 2008. We do not expect that the termination of this contract will have a material adverse impact on our financial condition, results of operations or cash flows.

As we previously disclosed on May 1, 2008, GEO Care Inc., recently activated the new 238-bed South Florida Evaluation and Treatment Center, which we refer to as SFETC, in Florida City, Florida which replaced the old SFETC center located in downtown Miami, Florida. Following the opening of the new SFETC center, the state of Florida approved budget language providing for the closure of the 100-bed South Florida Evaluation and Treatment Center Annex, referred to as the Annex, effective July 31, 2008. The closure of the Annex will result in a loss of approximately $5.5 million dollars in revenues for GEO Care in 2008. Simultaneously, the Florida legislature also approved budget language providing for an increase in the capacity of two GEO Care facilities, the new SFETC center and the Treasure Coast Forensic Treatment Center located in Indiantown, Florida, for a total of 73 beds. The increased capacity at these two facilities will result in an increase of approximately $2.8 million dollars in revenues for GEO Care in 2008, largely offsetting the closure of the Annex. We don’t expect the closure of the Annex to have a material adverse impact on our financial condition, results of operations or cash flows.

On April 30 2008, we exercised our contractual right to terminate our contract for the operation and management of the Tri-County Justice and Detention Center located in Ullin, Illinois. We will continue to manage the facility through August 28, 2008. We do not expect that the termination of this contract will have a material adverse impact on our financial condition, results of operations or cash flows.

Planned activations

Between August and October 2008, we activated four of our previously announced projects representing 3,725 beds and approximately $66.0 million in annualized revenues. In December 2008, we plan to activate one additional project representing 654 beds and approximately $10.0 million in annualized revenues. During the first half of fiscal 2009, we expect to activate our 192-bed expansion of our Robert A. Deyton Detention Facility and also our 384-bed expansion at Graceville Correctional Facility. During the second half of 2009, we will complete the 1,225-bed expansion and renovation of our 500-bed North Lake Correctional Facility and also expect to complete three of our other previously announced capital projects representing 1,745 additional beds. We will continue to pursue opportunities to expand our worldwide operations and expect to timely announce any new additional projects that we plan to undertake.

Shelf Registration Statement

On March 13, 2007, we filed a universal shelf registration statement with the SEC, which became effective immediately upon filing. The universal shelf registration statement provides for the offer and sale by us, from time to time, on a delayed basis, of an indeterminate aggregate amount of our common stock, preferred stock, debt securities, warrants, and/or depositary shares. These securities, which may be offered in one or more offerings and in any combination, will in each case be offered pursuant to a separate prospectus supplement issued at the time of the particular offering that will describe the specific types, amounts, prices and terms of the offered securities. Unless otherwise described in the applicable prospectus supplement relating to the offered securities, we anticipate using the net proceeds of each offering for general corporate purposes, including debt repayment, capital expenditures, acquisitions, business expansion, investments in subsidiaries or affiliates, and/or working capital.

Critical Accounting Policies

The accompanying unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is contained in Note 1 to our financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007.

Revenue Recognition

We recognize revenue in accordance with Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition,” and related interpretations. Facility management revenues are recognized as services are provided under facility management contracts with approved government appropriations based on a net rate per day per inmate or on a fixed monthly rate. Certain of our contracts have provisions upon which a portion of the revenue is based on our performance of certain targets, as defined in the specific contract. In these cases, we recognize revenue when the amounts are fixed and determinable and the time period over which the conditions have been satisfied has lapsed. In many instances, we are a party to more than one contract with a single entity. In these instances, each contract is accounted for separately.

Project development and design revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to the estimated total cost for each contract. This method is used because we consider costs incurred to date to be the best available measure of progress on these contracts. Provisions for estimated losses on uncompleted contracts and changes to cost estimates are made in the period in which we determine that such losses and changes are probable. Typically, we enter into fixed price contracts and do not perform additional work unless approved change orders are in place. Costs attributable to unapproved change orders are expensed in the period in which the costs are incurred if we believe that it is not probable that the costs will be recovered through a change in the contract price. If we believe that it is probable that the costs will be recovered through a change in the contract price, costs related to

unapproved change orders are expensed in the period in which they are incurred, and contract revenue is recognized to the extent of the costs incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. When evaluating multiple element arrangements, we follow the provisions of Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21 provides guidance on determining if separate contracts should be evaluated as a single arrangement and if an arrangement involves a single unit of accounting or separate units of accounting and if the arrangement is determined to have separate units, how to allocate amounts received in the arrangement for revenue recognition purposes.

In instances where we provide project development services and subsequent management services, the amount of the consideration from an arrangement is allocated to the delivered element based on the residual method and the elements are recognized as revenue when revenue recognition criteria for each element is met. The fair value of the undelivered elements of an arrangement is based on specific objective evidence.

We extend credit to the governmental agencies we contract with and other parties in the normal course of business as a result of billing and receiving payment for services thirty to sixty days in arrears. Further, we regularly review outstanding receivables, and provide estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, we make judgments regarding our customers’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. We also perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral. We maintain reserves for potential credit losses, and such losses traditionally have been within our expectations.

We extend credit to the governmental agencies we contract with and other parties in the normal course of business as a result of billing and receiving payment for services thirty to sixty days in arrears. Further, we regularly review outstanding receivables, and provide estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, we make judgments regarding our customers’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. We also perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral. We maintain reserves for potential credit losses, and such losses traditionally have been within our expectations.

Reserves for Insurance Losses

The nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain insurance coverage for these general types of claims, except for claims relating to employment matters, for which we carry no insurance.

We currently maintain a general liability policy and excess liability coverage policy for all U.S. corrections operations with limits of $62.0 million per occurrence and in the aggregate, including a specific loss limit for medical professional liability of $35.0 million. Our wholly owned subsidiary, GEO Care, Inc., is separately insured for general liability and medical professional liability with a specific loss limit of $35.0 million per occurrence and in the aggregate. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, medical malpractice, environmental liability and automobile liability. For most casualty insurance policies, we carry substantial deductibles or self-insured retentions — $3,000,000 per occurrence for general liability and hospital professional liability, $2,000,000 per occurrence for workers’ compensation and $1,000,000 per occurrence for automobile liability. Our Australian subsidiary is required to carry tail insurance on a general liability policy providing an extended reporting period through 2011 related to a discontinued contract. We also carry various types of insurance with respect to our operations in South Africa, United Kingdom and Australia. There can be no assurance that our insurance coverage will be adequate to cover all claims to which we may be exposed.

In addition, certain of our facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring our facilities to full replacement value.

Since our insurance policies generally have high deductible amounts or retentions, losses are recorded when reported and a further provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies. Because we are significantly self-insured, the amount of our insurance expense is dependent on our claims experience and our ability to control claims experience. If actual losses related to insurance claims significantly differ from management’s estimates, our financial condition and results of operations could be materially adversely impacted.

Income Taxes

We account for income taxes in accordance with FAS No. 109, “Accounting for Income Taxes” (“FAS 109”) as clarified by FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of the deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of FAS 109.

FIN 48 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Property and Equipment

As of September 28, 2008, we had $853.6 million in long-lived property and equipment held for use. Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 2 to 40 years. Equipment and furniture and fixtures are depreciated over 3 to 10 years. Accelerated methods of depreciation are generally used for income tax purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. We perform ongoing evaluations of the estimated useful lives of the property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the period over which services are expected to be rendered by the asset. Maintenance and repairs are expensed as incurred. Interest is capitalized in connection with the construction of correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. During Third Quarter 2008 and Third Quarter 2007, we capitalized $1.1 million and $0.8 million of interest cost, respectively.

We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable in accordance with FAS No. 144, (“FAS 144”) “Accounting for the Impairment of Disposal of Long-Lived Assets.” Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Management has reviewed our long-lived assets and determined that there are no events requiring impairment loss recognition for Third Quarter 2008. Events that would trigger an impairment assessment include deterioration of profits for a business segment that has long-lived assets, or when other changes occur which might impair recovery of long-lived assets.

Stock-Based Compensation Expense

We account for stock-based compensation in accordance with the provisions of FAS 123R, “Share-Based Payment” (“FAS123R”). Under the fair value recognition provisions of FAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of the stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially impact our operating results.

Fair Value Measurements

We partially adopted Statement No. 157, “Fair Value Measurements” (“FAS 157”) on December 31, 2007 (see discussion on FASB FSP 157-2 following). This Statement establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. We determine fair value based on quoted market prices in active markets for identical assets or liabilities. If quoted market prices are not available, we use valuation techniques that place greater reliance on observable inputs and less reliance on unobservable inputs. In measuring fair value, we may make adjustments for risks and uncertainties, if a market participant would include such an adjustment in pricing. Relative to FAS 157, in February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”) to provide a one-year deferral of the effective date of FAS 157 for non-financial assets and non-financial liabilities. This FSP defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. As a result of the issuance of FSP 157-2, we elected to defer the adoption of FAS 157 for non-financial assets and non-financial liabilities. We do not expect that the adoption of this standard for non-financial assets and liabilities will have a significant impact on our financial condition, results of operations or cash flows.

Commitments and Contingencies

On September 15, 2006, a jury in an inmate wrongful death lawsuit in a Texas state court awarded a $47.5 million verdict against us. In October 2006, the verdict was entered as a judgment against us in the amount of $51.7 million. The lawsuit is being administered under the insurance program established by The Wackenhut Corporation, our former parent company, in which we participated until October 2002. Policies secured by us under that program provide $55.0 million in aggregate annual coverage. As a result, we believe we are fully insured for all damages, costs and expenses associated with the lawsuit and as such we have not taken any reserves in connection with the matter. The lawsuit stems from an inmate death which occurred at our former Willacy County State Jail in Raymondville, Texas, in April 2001, when two inmates at the facility attacked another inmate. Separate investigations conducted internally by us, The Texas Rangers and the Texas Office of the Inspector General exonerated us and our employees of any culpability with respect to the incident. We believe that the verdict is contrary to law and unsubstantiated by the evidence. Our insurance carrier has posted a supersedeas bond in the amount of approximately $60.0 million to cover the judgment. On December 9, 2006, the trial court denied our post trial motions and we filed a notice of appeal on December 18, 2006. The appeal is proceeding. On March 26, 2008, oral arguments were made before the Thirteenth Court of Appeals, Corpus Christi, Texas (No. 13-06-00692-CV) which took the matter under advisement pending the issuance of its ruling.

In June 2004, we received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities that our Australian subsidiary formerly operated. The claim relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, legal proceedings in this matter were formally commenced when the Company was served with notice of a complaint filed against it by the Commonwealth of Australia seeking damages of up to approximately AUS 18.0 million or $15.0 million, plus interest. We believe that we have several defenses to the allegations underlying the litigation and the amounts sought and intend to vigorously defend our rights with respect to this matter. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and our preliminary review of the claim, we believe that, if settled unfavorably, this matter could have a material adverse effect on our financial condition, results of operations and cash flows. We are uninsured for any damages or costs that we may incur as a result of this claim, including the expenses of defending the claim. We have established a reserve based on our estimate of the most probable loss based on the facts and circumstances known to date and the advice of our legal counsel in connection with this matter.

On January 30, 2008, a lawsuit seeking class action certification was filed against us by an inmate at one of our jails. The case is now entitled Allison and Hocevar v. The GEO Group, Inc. (Civil Action No. 08-467) and is pending in the U.S. District Court for the Eastern District of Pennsylvania. The lawsuit alleges that we have a companywide blanket policy at our immigration/detention facilities and jails that requires all new inmates and detainees to undergo a strip search upon intake into each facility. The plaintiff alleges that this practice, to the extent implemented, violates the civil rights of the affected inmates and detainees. The lawsuit seeks monetary damages for all purported class members, a declaratory judgment and an injunction barring the alleged policy from being implemented in the future. We are in the initial stages of investigating this claim. However, following our preliminary review, we believe we have several defenses to the allegations underlying this litigation and intend to vigorously defend our rights in this matter. Nevertheless, we believe that, if resolved unfavorably, this matter could have a material adverse effect on our financial condition and results of operations. Discovery has recently commenced in connection with this matter.

The nature of our business exposes us to various types of claims or litigation against us, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by our customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. Except as otherwise disclosed above, we do not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on our financial condition, results of operations or cash flows.

We are currently self-financing the simultaneous construction or expansion of several correctional and detention facilities in multiple jurisdictions. As of September 28, 2008, we were in the process of constructing or expanding six facilities representing 4,166 total beds. We are providing the financing for four of the six facilities, representing 3,062 beds. Total capital expenditures related to these projects is expected to be $173.0 million, of which $24.9 million was completed through Third Quarter 2008. We expect to incur at least another approximately $26.2 million in capital expenditures relating to these owned projects during fiscal year 2008, and the remaining $121.9 million by First Quarter 2010. Additionally, financing for the remaining two facilities representing 1,104 beds is being provided for by third party sources for state or county ownership. We are managing the construction of these projects with total costs of $84.9 million, of which $65.1 million has been completed through Third Quarter 2008 and $19.8 million remains to be completed through 2009.

We are currently under examination by the Internal Revenue Service for our U.S. income tax returns for fiscal years 2002 through 2005. We currently expect this examination to be concluded in 2009. Based on the status of the audit to date, we do not currently expect the outcome of the audit to have a material adverse impact on our financial condition, results of operation or cash flows.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the notes to our unaudited consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Comparison of Thirteen Weeks Ended September 28, 2008 and Thirteen Weeks Ended September 30, 2007

Revenues

		2008				% of Revenue				2007				% of Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. corrections		$	188,997				71.2	%		$	169,369				63.6	%		$	19,628				11.6	%
International services			34,131				12.9	%			33,510				12.6	%			621				1.9	%
GEO Care			28,794				10.8	%			30,053				11.3	%			(1,259	)			(4.2	)%
Facility construction and design			13,485				5.1	%			33,187				12.5	%			(19,702	)			(59.4	)%
Total		$	265,407				100.0	%		$	266,119				100.0	%		$	(712	)			(0.3	)%

U.S. corrections

The increase in revenues for U.S. corrections facilities in the thirteen weeks ended September 28, 2008, referred to as Third Quarter 2008, compared to the thirteen weeks ended September 30, 2007, referred to as Third Quarter 2007, is primarily attributable to several items: (i) revenues increased $4.8 million due to the opening of our Graceville Correctional Facility, located in Graceville, Florida, in September 2007; (ii) revenues increased $4.9 million as a result of the opening of our Robert A. Deyton Detention Facility located in Clayton County, Georgia in February 2008; (iii) revenues increased $5.1 million as a result of the reactivation of the LaSalle Detention Facility in Jena, Louisiana in October 2007; (iv) revenues increased $2.2 million as a result of significant increases in population at our Val Verde Correctional Facility; (v) revenues increased $2.0 million and $1.6 million, respectively, due to the August 2008 openings of our Joe Corley Detention Facility located in Conroe, Texas and our Northeast New Mexico Detention Facility located in Clayton, New Mexico; and (vi) we also experienced increases at certain of our California facilities which accounted for $3.4 million, in the aggregate, of the increase. These significant increases were partially offset by decreases in revenues of $8.0 million due to the termination of our management contracts at the Taft Correctional Institution, the Coke County Juvenile Justice Center and the Dickens County Correctional Center.

The number of compensated mandays in U.S. corrections facilities increased by approximately 206,000 to 3.9 million mandays in Third Quarter 2008 from 3.7 million mandays in Third Quarter 2007 due to the addition of new facilities and capacity increases. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. correction and detention facilities was 96.5% of capacity in Third Quarter 2008, excluding the terminated contracts for the Coke County Juvenile Justice Center, the Dickens County Correctional Center, and the Taft Correctional Institution. The average occupancy in our U.S. correction and detention facilities was 96.4% in Third Quarter 2007, excluding our new contracts at the Graceville Correctional Facility, the LaSalle Detention Facility, the Robert A. Deyton Detention Facility and the Northeast New Mexico Detention Facility.

International services

Revenues for our International services segment during Third Quarter 2008 remained relatively consistent as compared to the same period last year. There was an overall favorable fluctuation in the foreign currency exchange rate for the Australian Dollar during Third Quarter 2008. This favorable variance was offset during Third Quarter 2008 by a decrease in revenues from our subsidiary in the United Kingdom of $1.4 million related to the completion of construction of Campsfield House Immigration Removal Centre and unfavorable foreign exchange currency fluctuations for the South African Rand and British Pound.

GEO Care

The decrease in revenues for GEO Care in Third Quarter 2008 compared to Third Quarter 2007 is primarily attributable to the termination of our management contracts at the Fort Bayard Medical Center in Fort Bayard, New Mexico and the South Florida Evaluation and Treatment Center — Annex in Miami, Florida. These two contracts combined generated $2.9 million less revenue during Third Quarter 2008 compared to the same period last year. The loss of revenues from these terminated contracts was partially offset by increases of $0.5 million and $0.6 million at the Florida Civil Commitment Center in Arcadia, Florida and the Treasure Coast Forensic Treatment Center in Stuart, Florida.

Facility construction and design

The decrease in revenues from the Facility construction and design segment in Third Quarter 2008 compared to Third Quarter 2007 is mainly due to decreases in construction activities at two facilities: (i) the completion of construction for the South Florida Evaluation and Treatment Center in Miami, Florida in Second Quarter 2008 decreased revenues by $9.0 million; and (ii) the completion of construction of our Northeast New Mexico Detention Facility in Clayton, New Mexico in Third Quarter 2008 decreased revenues by $13.7 million. These decreases over the same period in the prior year were slightly offset by increases in construction revenue for our expansion of the Graceville Correctional Facility in Gainesville, Florida which commenced in First Quarter 2008, and the construction of Maverick County Detention Facility in Eagle Pass, Texas which commenced in Second Quarter 2008.

Operating Expenses

						% of Segment								% of Segment
		2008				Revenue				2007				Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. corrections		$	139,630				73.9	%		$	125,684				74.2	%		$	13,946				11.1	%
International services			31,331				91.8	%			30,674				91.5	%			657				2.1	%
GEO Care			25,180				87.4	%			26,636				88.6	%			(1,456	)			(5.5	)%
Facility construction and design			13,370				99.1	%			32,903				99.1	%			(19,533	)			(59.4	)%
Total		$	209,511				78.9	%		$	215,897				81.1	%		$	(6,386	)			(3.0	)%

Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health and GEO Care facilities and expenses incurred in our Facility construction and design segment.

U.S. corrections

The increase in operating expenses for U.S. corrections reflects the new openings and expansions discussed above as well as general increases in labor costs in Third Quarter 2008 as compared to Third Quarter 2007. These increases in operating expenses were offset by the effects of a change in our vacation policy for certain employees which conformed to a fiscal year-end based policy during Third Quarter 2008. The new policy allows employees to use vacation regardless of service period but within the fiscal year. Vacation expense decreased by $2.0 million in Third Quarter 2008 compared to Third Quarter 2007 primarily due to the change in our policy. In Third Quarter 2008, this savings was partially offset by an increase to our general liability and workers’ compensation reserve. In order to estimate our workers’ compensation and general liability reserves, we engage an independent actuary to make a projection of our annual losses based on our actual claims experience. For the fiscal years ended 2008 and 2007, this analysis was performed in October using historical data. The results of the actuarial projection are reflected in fiscal Third Quarter 2008 and 2007. As a result of this analysis and some specific reserves for certain claims for fiscal year 2008, we increased our reserves by $2.4 million as of September 28, 2008. For the same period in the prior year, we increased our reserves by $0.8 million. These charges to expense are included in our operating expense for periods presented.

International services

Operating expenses for international services facilities remained consistent as a percentage of segment revenues in Third Quarter 2008 compared to Third Quarter 2007.

GEO Care

Operating expenses for residential treatment decreased during Third Quarter 2008 from Third Quarter 2007 primarily due to the termination of our contracts at the Fort Bayard Medical Center and the South Florida Evaluation and Treatment Center — Annex.

Facility construction and design

Operating expenses for facility construction and design decreased $19.5 million during Third Quarter 2008 compared to Third Quarter 2007 primarily due to a decrease in costs associated with our facilities under construction as a result of reduced activity as discussed above.

Other Unallocated Operating Expenses

		2008				% of Revenue				2007				% of Revenue				$ Change				% Change
		(Dollars in thousands)
General and Administrative Expenses		$	16,944				6.4	%		$	16,054				6.0	%		$	890				5.5	%

General and administrative expenses comprise substantially all of our other unallocated expenses. General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses increased by $0.9 million in Third Quarter 2008 as compared to Third Quarter 2007, and increased 0.4% as a percentage of revenues. The increase in general and administrative costs is mainly due to increases in corporate travel and some increases in direct labor costs as a result of increased staff.

Non Operating Expenses

Interest Income and Interest Expense

		2008				% of Revenue				2007				% of Revenue				$ Change				% Change
		(Dollars in thousands)
Interest Income		$	1,878				0.7	%		$	2,296				0.9	%		$	(418	)			(18.2	)%
Interest Expense		$	7,309				2.8	%		$	8,351				3.1	%		$	(1,042	)			(12.5	)%

The majority of our interest income is generated from the cash balances at our international subsidiaries.

The decrease in interest expense is primarily attributable to a significant decrease in LIBOR rates. We also experienced an increase in the amount of interest capitalized in connection with the construction of our correctional and detention facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. During Third Quarter 2008 and Third Quarter 2007, we capitalized $1.1 million and $0.8 million of interest expense, respectively.

Provision for Income Taxes

		2008				% of Revenue				2007				% of Revenue				$ Change				% Change
		(Dollars in thousands)
Income Taxes		$	8,835				3.3	%		$	7,281				2.7	%		$	1,554				21.3	%

The effective tax rate for Third Quarter 2008 was approximately 36.8%, compared to the effective income tax rate of 38.0% for the same period in the prior year. We estimate our annual effective tax rate for fiscal 2008 to be in the range of 38% to 39%.

Comparison of Thirty-nine Weeks Ended September 28, 2008 and Thirty-nine Weeks Ended September 30, 2007

Revenues

		2008				% of Revenue				2007				% of Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. corrections		$	552,987				67.4	%		$	502,765				66.2	%		$	50,222				10.0	%
International services			104,422				12.7	%			95,672				12.6	%			8,750				9.1	%
GEO Care			89,063				10.8	%			79,891				10.5	%			9,172				11.5	%
Facility construction and design			74,534				9.1	%			81,168				10.7	%			(6,634	)			(8.2	)%
Total		$	821,006				100.0	%		$	759,496				100.0	%		$	61,510				8.1	%