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 June 28, 2009

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

One Park Place, 621 NW 53rd Street, Suite 700, Boca Raton, Florida (Address of Principal Executive Offices)		33487 (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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o   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			Smaller reporting company o
			(Do not check if a smaller reporting company)

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 July 31, 2009, 51,293,750 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 TWENTY-SIX WEEKS ENDED JUNE 28, 2009 AND JUNE 29, 2008 (UNAUDITED)			3
		CONSOLIDATED BALANCE SHEETS AS OF JUNE 28, 2009 (UNAUDITED) AND DECEMBER 28, 2008			4
		CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 2009 AND JUNE 29, 2008 (UNAUDITED)			5
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			6
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			23
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			46
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			46
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			46
ITEM 5.		OTHER INFORMATION			46
ITEM 5.02		DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.			46
ITEM 6.		EXHIBITS			46
SIGNATURES					48
EX-10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED
JUNE 28, 2009 AND JUNE 29, 2008
(In thousands, except per share data)
(UNAUDITED)

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Revenues		$	276,379			$	269,994			$	535,440			$	532,448
Operating expenses			218,857				216,024				421,184				429,022
Depreciation and amortization			9,630				9,285				19,446				18,194
General and administrative expenses			17,015				17,857				34,251				34,881
Operating income			30,877				26,828				60,559				50,351
Interest income			1,206				1,947				2,296				3,702
Interest expense			(6,761	)			(6,871	)			(13,965	)			(14,358	)
Income before income taxes, equity in earnings			25,322				21,904				48,890				39,695
of affiliate and discontinued operations Provision for income taxes			9,690				8,663				18,831				15,186
Equity in earnings of affiliate, net of income tax provision of $334, $300, $584 and $543			859				611				1,503				1,231
Income from continuing operations			16,491				13,852				31,562				25,740
Income (loss) from discontinued operations, net of tax provision (benefit) of $13, $206, $(216) and $527			20				347				(346	)			866
Net income		$	16,511			$	14,199			$	31,216			$	26,606
Weighted-average common shares outstanding:
Basic			50,802				50,506				50,749				50,429
Diluted			51,835				51,837				51,784				51,782
Income per common share:
Basic:
Income from continuing operations		$	0.32			$	0.27			$	0.62			$	0.51
Income from discontinued operations			0.01				0.01				0.00				0.02
Net income per share-basic		$	0.33			$	0.28			$	0.62			$	0.53
Diluted:
Income from continuing operations		$	0.32			$	0.27			$	0.61			$	0.50
Income (loss) from discontinued operations			0.00				0.00				(0.01	)			0.01
Net income per share-diluted		$	0.32			$	0.27			$	0.60			$	0.51

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

THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS
JUNE 28, 2009 AND DECEMBER 28, 2008
(In thousands, except share data)

		June 28, 2009				December 28, 2008
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	47,177			$	31,655
Restricted cash			13,313				13,318
Accounts receivable, less allowance for doubtful accounts of $350 and $625			189,530				199,665
Deferred income tax asset, net			17,340				17,340
Other current assets			12,112				12,911
Current assets of discontinued operations			—				7,031
Total current assets			279,472				281,920
Restricted Cash			21,560				19,379
Property and Equipment, Net			940,889				878,616
Assets Held for Sale			4,348				4,348
Direct Finance Lease Receivable			35,093				31,195
Deferred Income Tax Assets, Net			4,417				4,417
Goodwill			22,293				22,202
Intangible Assets, Net			11,910				12,393
Other Non-Current Assets			36,436				33,942
Non-Current Assets of Discontinued Operations			—				209
		$	1,356,418			$	1,288,621
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	65,006			$	56,143
Accrued payroll and related taxes			28,622				27,957
Accrued expenses			91,136				82,442
Current portion of capital lease obligations, long-term debt and non-recourse debt			18,788				17,925
Current liabilities of discontinued operations			—				1,459
Total current liabilities			203,552				185,926
Deferred Income Tax Liability			14				14
Other Non-Current Liabilities			31,692				28,876
Capital Lease Obligations			14,779				15,126
Long-Term Debt			386,486				378,448
Non-Recourse Debt			100,551				100,634
Commitments and Contingencies (Note 12)
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, 67,354,260 and 67,197,775 issued and 51,279,260 and 51,122,775 outstanding			513				511
Additional paid-in capital			346,417				344,175
Retained earnings			331,189				299,973
Accumulated other comprehensive loss			(444	)			(7,275	)
Treasury stock 16,075,000 shares, at cost, at June 28, 2009 and December 28, 2008			(58,888	)			(58,888	)
Total shareholders’ equity attributable to The GEO Group, Inc.			618,787				578,496
Noncontrolling interest			557				1,101
Total shareholders’ equity			619,344				579,597
		$	1,356,418			$	1,288,621

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

THE GEO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED
JUNE 28, 2009 AND JUNE 29, 2008
(In thousands)
(UNAUDITED)

		Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008
Cash Flow from Operating
Activities:
Net income		$	31,216			$	26,606
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization expense			19,446				18,194
Amortization of debt issuance costs			2,256				1,335
Amortization of unearned stock-based compensation			1,858				1,382
Stock-based compensation expense			522				421
Provision for doubtful accounts			(61	)			300
Equity in earnings of affiliates, net of tax			(1,503	)			(1,231	)
Income tax charge (benefit) of equity compensation			146				(676	)
Changes in assets and liabilities:
Accounts receivable			12,738				(22,007	)
Other current assets			596				737
Other assets			373				(1,881	)
Accounts payable and accrued expenses			7,698				6,095
Accrued payroll and related taxes			(862	)			1,552
Other liabilities			3,109				1,322
Net cash provided by (used in) operating activities of continuing operations			77,532				32,149
Net cash provided by operating activities of discontinued operations			5,818				1,506
Net cash provided by operating activities			83,350				33,655
Cash Flow from Investing Activities:
(Increase) Decrease in restricted cash			(1,563	)			6,464
Capital expenditures			(71,759	)			(70,663	)
Net cash used in investing activities of continuing operations			(73,322	)			(64,199	)
Net cash used in investing activities of discontinued operations			—				(120	)
Net cash used in investing activities			(73,322	)			(64,319	)
Cash Flow from Financing Activities:
Payments on debt			(16,325	)			(46,698	)
Termination of interest rate swap agreement			1,031				—
Proceeds from the exercise of stock options			8				429
Income tax (charge) benefit of equity compensation			(146	)			676
Proceeds from long-term debt			18,000				72,000
Debt issuance costs			(326	)			(78	)
Net cash provided by financing activities			2,242				26,329
Effect of Exchange Rate Changes on Cash and Cash Equivalents			3,252				1,007
Net Increase (Decrease) in Cash and Cash Equivalents			15,522				(3,328	)
Cash and Cash Equivalents, beginning of period			31,655				44,403
Cash and Cash Equivalents, end of period		$	47,177			$	41,075
Supplemental Disclosures:
Non-cash Investing and Financing activities:
Capital expenditures in accounts payable and accrued expenses		$	28,452			$	4,973

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”, or “GEO”), 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 28, 2008. 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 twenty-six weeks ended June 28, 2009 are not necessarily indicative of the results for the entire fiscal year ending January 3, 2010.

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 18, 2009 for the fiscal year ended December 28, 2008.

Certain prior period amounts related to discontinued operations (Note 4) and noncontrolling interest (Note 9) have been reclassified to conform to the current period presentation.

2. EARNINGS PER SHARE

Basic earnings per share is computed by dividing the income from continuing operations 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 twenty-six weeks ended June 28, 2009 and June 29, 2008 as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Income from continuing operations		$	16,491			$	13,852			$	31,562			$	25,740
Basic earnings per share:
Weighted average shares outstanding			50,802				50,506				50,749				50,429
Per share amount		$	0.32			$	0.27			$	0.62			$	0.51
Diluted earnings per share:
Weighted average shares outstanding			50,802				50,506				50,749				50,429
Effect of dilutive securities:
Stock options and restricted stock			1,033				1,331				1,035				1,353
Weighted average shares assuming dilution			51,835				51,837				51,784				51,782
Per share amount		$	0.32			$	0.27			$	0.61			$	0.50

Thirteen Weeks

For the thirteen weeks ended June 28, 2009, 89,966 weighted average shares of stock underlying options and 13,807 weighted average shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

For the thirteen weeks ended June 29, 2008, 383,020 weighted average shares of stock underlying options and no shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

Twenty-six Weeks

For the twenty-six weeks ended June 28, 2009, 121,859 weighted average shares of stock underlying options and 8,035 weighted average shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

For the twenty-six weeks ended June 29, 2008, 380,097 weighted average shares of stock underlying options and no shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

3. EQUITY INCENTIVE PLANS

The Company had awards outstanding under four equity compensation plans at June 28, 2009: 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 April 29, 2009, 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 1,000,000 shares of the Company’s common stock which increased the total amount of shares of common stock issuable pursuant to awards granted under the plan to 2,400,000 and specifying that up to 1,083,000 of such total shares pursuant to awards granted under the plan may constitute awards other than stock options and stock appreciation rights, including shares of restricted stock. See “Restricted Stock” below for further discussion. On June 26, 2009, the Company’s Compensation Committee of the Board of Directors approved a grant of 163,000 restricted stock awards to certain employees. As of June 28, 2009, the Company had 918,972 shares of common stock available for issuance pursuant to future awards that may be granted under the plan.

A summary of the status of stock option awards issued and outstanding under the Company’s Plans as of June 28, 2009 is presented below.

						Wtd. Avg.				Wtd. Avg.				Aggregate
						Exercise				Remaining				Intrinsic
Fiscal Year		Shares				Price				Contractual Term				Value
		(in thousands)												(in thousands)
Options outstanding at December 28, 2008			2,808			$	8.03				4.6			$	29,751
Options granted			5				15.86
Options exercised			—				—
Options forfeited/canceled/expired			(22	)			24.04
Options outstanding at June 28, 2009			2,791			$	7.92				4.1			$	30,795
Options exercisable at June 28, 2009			2,458			$	6.46				3.5			$	30,419

The Company uses a Black-Scholes option valuation model to estimate the fair value of each option awarded. For the thirteen and twenty-six weeks ended June 28, 2009, the amount of stock-based compensation expense related to stock options was $0.2 million and $0.5 million, respectively. For the thirteen and twenty-six weeks ended June 29, 2008, the amount of stock-based compensation expense related to stock options was $0.2 million and $0.4 million, respectively. The weighted average grant date fair value of options granted during the twenty-six weeks ended June 28, 2009 was $5.47 per share. As of June 28, 2009, the Company had $1.9 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.

Restricted Stock

A summary of restricted stock issued as of December 28, 2008 and changes during twenty-six weeks ended June 28, 2009 follows:

						Wtd. Avg.
						Grant date
		Shares				Fair value
Restricted stock outstanding at December 28, 2008			425,684			$	19.54
Granted			163,000				18.56
Vested			(176,597	)			18.27
Forfeited/canceled			(7,015	)			20.30
Restricted stock outstanding at June 28, 2009			405,072			$	19.69

During the thirteen and twenty-six weeks ended June 28, 2009, the Company recognized $1.0 million and $1.9 million, respectively, of compensation expense related to its outstanding shares of restricted stock. During the thirteen and twenty-six weeks ended June 29, 2008, the Company recognized $0.6 million and $1.4 million, respectively, of compensation expense related to its outstanding shares of restricted stock. As of June 28, 2009, the Company had $7.1 million of unrecognized compensation expense that is expected to be recognized over a weighted average period of 2.6 years.

4. DISCONTINUED OPERATIONS

Under the provisions of FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the termination of any of the Company’s management contracts by expiration or otherwise, may result in the classification of the operating results of such facility, net of taxes, as a discontinued operation, so long as the financial results can be clearly identified, and so long as the Company does not have any significant continuing involvement in the operations of the component after the disposal or termination transaction.

Historically, the Company has classified operations as discontinued in the period they are announced as normally all continuing cash flows cease within three to six months of that date. During the fiscal years 2009 and 2008, the Company discontinued operations at certain of its domestic and international subsidiaries. The results of operations, net of taxes, and the assets and liabilities of these operations, each as further described below, have been reflected in the accompanying consolidated financial statements as discontinued operations in accordance with FAS 144 for the thirteen and twenty-six weeks ended June 28, 2009 and June 29, 2008, respectively. Assets, primarily consisting of accounts receivable, and liabilities have been presented separately in the accompanying consolidated balance sheets for all periods presented.

U.S. corrections. On November 7, 2008, the Company announced its receipt of notice for the discontinuation of its contract with the State of Idaho, Department of Correction (“Idaho DOC”) for the housing of approximately 305 out-of-state inmates at the managed-only Bill Clayton Detention Center (the “Detention Center”) effective January 5, 2009. On August 29, 2008, the Company announced its discontinuation of its contract with Delaware County, Pennsylvania for the management of the county-owned 1,883-bed George W. Hill Correctional Facility effective December 31, 2008.

International services. On December 22, 2008, the Company announced the closure of its U.K.-based transportation division, Recruitment Solutions International (“RSI”). The Company purchased RSI, which provided transportation services to The Home Office Nationality and Immigration Directorate, for approximately $2 million in 2006. As a result of the termination of its transportation business in the United Kingdom, the Company wrote off assets of $2.6 million including goodwill of $2.3 million.

GEO Care. On June 16, 2008, the Company announced the discontinuation by mutual agreement of its contract with the State of New Mexico Department of Health for the management of Fort Bayard Medical Center effective June 30, 2008.

The following are the revenues and income (loss) related to discontinued operations for the periods presented (in thousands):

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Revenues		$	46			$	12,441			$	290			$	24,947
Net (loss) income			20				347				(346	)			866
Basic earnings per share		$	0.01			$	0.01			$	0.00			$	0.02
Diluted earnings per share		$	0.00			$	0.00			$	(0.01	)		$	0.01

5. COMPREHENSIVE INCOME

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

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Net income		$	16,511			$	14,199			$	31,216			$	26,606
Change in foreign currency translation, net of income tax expense of $2,087, $778, $2,275 and $650, respectively			4,713				1,243				5,208				1,038
Pension liability adjustment, net of income tax expense of $29, $29, $57 and $57, respectively			44				44				88				88
Unrealized gain on derivative instruments, net of income tax expense of $451, $260, $512 and $155, respectively			820				424				931				254
Comprehensive income		$	22,088			$	15,910			$	37,443			$	27,986

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Changes in the Company’s goodwill balances for the twenty-six weeks ended June 28, 2009 were as follows (in thousands):

						Foreign
		Balance as of				Currency				Balance as of
		December 28, 2008				Translation				June 28, 2009
U.S. corrections		$	21,692			$	—			$	21,692
International services			510				91				601
Total segments		$	22,202			$	91			$	22,293

Intangible assets consisted of the following (in thousands):

		Useful Life				Balance as of
		in Years				June 28, 2009
U.S. corrections — Facility Management Contracts			7-17			$	14,450
International services — Facility Management Contract			18				2,311
U.S. corrections — Covenants not to compete			4				1,470
						$	18,231
Less Accumulated Amortization							(6,321	)
Net book value of amortizable intangible assets						$	11,910

Amortization expense was $0.3 million and $0.7 million for U.S. corrections facility management contracts for the thirteen and twenty-six weeks ended June 28, 2009, respectively. Amortization expense was $0.4 million and $0.7 million for U.S. corrections facility management contracts for the thirteen and twenty-six weeks ended June 29, 2008, respectively. Amortization expense was $0.1 million and $0.2 million for U.S. corrections covenants not to compete for the thirteen and twenty-six weeks ended June 28, 2009, respectively. Amortization expense was $0.1 million and $0.2 million for U.S. corrections covenants not to compete for the thirteen and twenty-six weeks ended June 29, 2008, 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 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. The Company adopted FAS 157 as it relates to non-financial assets and liabilities on December 29, 2008, the first day of the Company’s fiscal year beginning after November 15, 2008, which is the end of the one-year deferral period proscribed in FSP 157-2 “Effective Date of FASB Statement No. 157”. FAS 157 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 and 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.

The following table provides the Company’s significant financial assets carried at fair value measured on a recurring basis as of June 28, 2009 (in thousands):

						Fair Value Measurements at June 28, 2009
		Total Carrying				Quoted Prices in				Significant Other				Significant
		Value at June 28,				Active Markets				Observable Inputs				Unobservable
		2009				(Level 1)				(Level 2)				Inputs (Level 3)
Interest rate swap derivative assets		$	2,370			$	—			$	2,370			$	—
Investments other than derivatives			1,365				—				1,365				—
		$	3,735			$	—			$	3,735			$	—

The Company’s only non-financial asset measured on a recurring basis is goodwill. This non-financial asset is measured for impairment annually on the Company’s measurement date at the reporting unit level using Level 3 inputs. For most assets, including goodwill, FAS 157 requires that the impact of changes resulting from its application be applied prospectively in the year in which the statement is initially applied. The Company’s measurement date for its goodwill is October 1, 2009 and as such, no fair value measurements have been made during the fiscal period ended June 28, 2009. No events have occurred that would indicate an impairment of goodwill.

The Company’s non-financial assets measured on a non-recurring basis include the Company’s property and equipment and finite-use intangible assets which are measured for recoverability, using level 3 inputs, when indicators for impairment are present. FAS 157 requires companies to disclose assets and liabilities measured on a non-recurring basis in the period in which the remeasurement at fair value is performed. The Company has reviewed its long-lived assets as of June 28, 2009 and determined that there are no significant assets to be tested for recoverability under FAS 144 and as such, no fair value measurements related to non-financial assets have been made during the fiscal period ended June 28, 2009.

Valuation technique

The Company’s assets carried at fair value on a recurring basis consist of interest rate swap derivative assets and long-term investments. Where applicable, the Company uses quoted prices in active markets for identical assets to determine fair value. 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 and long-term investments. The changes in value of the long term investment and the fair value interest rate swaps are recorded in interest income or expense. Changes in the value of the Company’s cash flow hedge are recorded in other comprehensive income. The net unrealized gain in the cash flow hedge for the thirteen and twenty-six weeks ended June 28, 2009 was $0.8 million and $0.9 million respectively. The net unrealized gain in the cash flow hedge for the thirteen and twenty-six weeks ended June 29, 2008 was $0.4 million and $0.3 million respectively. 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. FINANCIAL INSTRUMENTS

In April 2009, FASB issued FSP SFAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP SFAS No. 107-1 and APB 28-1 enhance consistency in financial reporting by increasing the frequency of fair value disclosures. The FSP relates to fair value disclosures for any financial instruments that are not currently reflected on a company’s balance sheet at fair value. The FSP requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The disclosure requirement under this FSP is effective for the Company’s interim reporting period ending on June 28, 2009.

The following table presents the carrying values and fair values for the Company’s financial instruments, not discussed in Note 7, at June 28, 2009:

		June 28, 2009
		Carrying				Estimated
		Value				Fair Value
Assets:
Cash and Cash equivalents			47,177				47,177
Restricted cash			34,873				34,873
Liabilities:
Borrowings under the Senior Credit Facility			240,788				224,661
Senior 81/4% Notes			150,000				147,000
Non-Recourse Debt			116,974				114,378

The fair values of publicly traded debt were based on market prices, where available. The fair value of the nonrecourse debt related to the Company’s Australian subsidiary was estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of the borrowings under the Senior Credit Facility was based on an estimate of trading value considering the company’s borrowing rate, the undrawn spread and similar trades. The fair values of all other financial instruments, including cash and cash equivalents and restricted cash, approximated their fair values at June 28, 2009.

9. VARIABLE INTEREST ENTITIES

The Company applies guidance of FAS Interpretation No. 46, revised (and amended in December 2008 by FSP 140-4 and FIN 46R-8) “Consolidation of Variable Interest Entities,” (FIN 46R) for all ventures deemed to be variable interest entities (“VIEs”). All other joint venture investments are accounted for under the equity method of accounting when the Company has a 20% to 50% ownership interest or exercises significant influence over the venture. If the Company’s interest exceeds 50% or in certain cases, if the Company exercises control over the venture, the results of the joint venture are consolidated herein.

In November 2008, the FASB issued FSP 140-4 and FIN 46(R)-8, “Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities”. These standards increase disclosures requirements for public companies for reporting periods after December 15, 2008. The standard was adopted by the company in the twenty-six weeks ended June 28, 2009 and did not have a significant impact on the Company’s financial condition, results of operations or cash flows.

The Company has reviewed its 50% owned South African joint venture in South African Custodial Services Pty. Limited (“SACS”), a variable interest entity (“VIE”), for consolidation in accordance with (FIN 46R) and has determined that the Company is not the primary beneficiary of SACS since it does not absorb a majority of the entity’s losses nor does it receive a majority of the entity’s expected returns. Additionally, the Company does not have the ability to exercise significant influence over SACS. As such, this entity is not consolidated. The Company accounts for SACS as an equity affiliate. SACS was established in 2001, to design, finance and build the Kutama Sinthumule Correctional Center. Subsequently, SACS was awarded a 25 year contract to design, construct, manage and finance a facility in Louis Trichardt, South Africa. SACS, based on the terms of the contract with the government, was able to obtain long-term financing to build the prison. The financing is fully guaranteed by the government, except in the event of default, for which it provides an 80% guarantee. The Company’s maximum exposure for loss under this contract is limited to its investment in joint venture of $7.0 million at June 28, 2009 and its guarantees related to SACS as disclosed in Note 10. Separately, SACS entered into a long-term operating contract with South African Custodial Management (Pty) Limited (“SACM”) to provide security and other management services and with SACS’ joint venture partner to provide purchasing, programs and maintenance services upon completion of the construction phase, which concluded in February 2002. The Company’s maximum exposure for loss under this contract is $12.8 million, which represents the Company’s initial investment and the guarantees discussed in Note 10.

Also, in accordance with FIN 46R, as amended by FSP 140-4 and FIN 46R-8, the Company consolidates South Texas Local Development Corporation (“STLDC”) which was created in order to finance construction for the development of a 1,904-bed facility in Frio County, Texas. This entity issued $49.5 million in taxable revenue bonds and 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 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.

10. NONCONTROLLING INTEREST IN SUBSIDIARY

The Company includes the results of operations and financial position of South African Custodial Management Pty. Limited (“SACM” or the “joint venture”), its majority-owned subsidiary, in its consolidated financial statements in accordance with FAS No. 94, “Consolidation of All Majority-Owned Subsidiaries”. SACM was established in 2001 to operate correctional centers in South Africa. The joint venture currently provides security and other management services for the Kutama Sinthumule Correctional Center in the Republic of South Africa under a 25-year management contract which commenced in February 2002.

In December 2007, the FASB issued FAS No. 160, Accounting for Noncontrolling Interests (“FAS 160”), which was effective for fiscal years beginning after December 15, 2008. This statement clarifies the classification of noncontrolling 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 implemented this accounting standard in the twenty-six weeks ended June 28, 2009. The Company has applied this statement retrospectively in the presentation of its consolidated balance sheets. As a result, the Company reclassified its minority interest of $1.1 million, net of other comprehensive income, from non-current liabilities to Shareholders’ Equity on the consolidated balance sheet as of December 28, 2008. The income attributable to the noncontrolling interest is not material to the Company’s results of operations and is not presented separately.

On October 29, 2008, the Company, along with one other joint venture partner, executed a Sale of Shares Agreement for the purchase of a portion of the remaining non-controlling shares of SACM which changed the Company’s share in the profits of the joint venture from 76.25% to 88.75%. All of the non-controlling shares of the third joint venture partner were allocated between the Company and the second joint venture partner on a pro rata basis based on their respective ownership percentages. As a result of the share purchase the Company recognized $2.3 million in amortizable intangible assets valued at foreign exchange rates as of June 28, 2009.

There were no changes in the Company’s ownership percentage of the consolidated subsidiary during the twenty-six weeks ended June 28, 2009.

11. LONG-TERM DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS

The Senior Credit Facility

On August 26, 2008, the Company completed an 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”). Amendment No. 4 to the Credit Agreement requires the Company to maintain certain leverage ratios, as computed in accordance with the Credit Agreement at the end of each fiscal quarter for the immediately preceding four quarter-period. Amendment No. 4 to the Credit Agreement also 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. In addition, amendment No. 4 amends the capital expenditure limits applicable to the Company under the Credit Agreement. To the extent that the Company’s capital expenditures during any fiscal year are less than the limit permitted for such fiscal year, certain maximum amounts will be added to the maximum capital expenditures that the Company can make in the following fiscal year. The Company’s failure to comply with any of the covenants under its Senior Credit Facility could cause an event of default under such documents and result in an acceleration of all of outstanding senior secured indebtedness. The Company believes it was in compliance with all of the covenants of the Senior Credit Facility as of June 28, 2009.

As of June 28, 2009, the Senior Credit Facility consisted of a $365.0 million, seven-year term loan (“Term Loan B”), and a $240.0 million five-year revolver which expires September 14, 2010 (the “Revolver”). The interest rate for the Term Loan B is LIBOR plus 1.50% (the weighted average rate on outstanding borrowings under the Term Loan portion of the facility as of June 28, 2009 was 1.89%). The Revolver currently bears interest at LIBOR plus 1.75% or at the base rate (prime rate) plus 0.75%. The weighted average interest rate on outstanding borrowings under the Senior Credit Facility was 1.95% as of June 28, 2009.

As of June 28, 2009, the Company had $156.8 million outstanding under the Term Loan B. The Company’s $240.0 million Revolver had $84.0 million outstanding in loans, $45.5 million outstanding in letters of credit and $110.5 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.

The Company has the ability to increase its borrowing capacity under the Senior Credit facility by another $150.0 million subject to lender demand and market conditions.

Senior 8 1/4% Notes

In July 2003, to facilitate the completion of the purchase of 12.0 million shares from Group 4 Falck, the Company’s former majority shareholder, the Company issued $150.0 million in aggregate principal amount, ten-year, 8¼% senior unsecured notes (the “Notes”). The Notes are general, unsecured, senior obligations. Interest is payable semi-annually on January 15 and July 15 at 8¼%. 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 all or a portion of the Notes plus accrued and unpaid interest at various redemption prices ranging from 100.000% to 102.750% 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’s failure to comply with certain of the covenants under the indenture governing the Notes could cause an event of default of any indebtedness and result in an acceleration of such indebtedness. In addition, there is a cross-default provision which becomes enforceable if default of other indebtedness is caused by failure to make payment when due at final maturity or if default of other indebtedness results in the acceleration of that indebtedness prior to its express maturity. The Company believes it was in compliance with all of the covenants of the Indenture governing the Notes as of June 28, 2009.

The Notes are reflected net of the original issue discount of $2.3 million as of June 28, 2009 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 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 4.11% 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. The carrying value of the facility as of June 28, 2009 and December 28, 2008 was $27.6 million and $27.9 million, respectively and is included in property and equipment in the accompanying balance sheets.

On February 2, 2009, STLDC made a payment from its restricted cash account of $4.4 million for the current portion of its periodic debt service requirement in relation to the STLDC operating agreement and bond indenture. As of June 28, 2009, the remaining balance of the debt service requirement under the STDLC financing agreement is $36.7 million, of which $4.6 million is due within the next twelve months. Also, as of June 28, 2009, included in current restricted cash and non-current restricted cash is $6.3 million and $11.7 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 3.20% 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 thirteen weeks ended June 28, 2009 in relation to the WEDFA bond indenture. As of June 28, 2009, the remaining balance of the debt service requirement is $37.3 million, of which $5.7 million is classified as current in the accompanying balance sheet.

As of June 28, 2009, included in current restricted cash and non-current restricted cash is $7.0 million and $5.8 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 $43.0 million and $38.1 million at June 28, 2009 and December 28, 2008, 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 June 28, 2009, was $4.0 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 $7.7 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 60% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 8.4 million South African Rand, or $1.1 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 $2.6 million, to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under this guarantee and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations relative to this guarantee expire upon SACS’s fulfillment of its contractual obligations.

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 (“CAD”) 2.5 million, or $2.2 million, commencing in 2017. The Company has a liability of $1.4 million and $1.3 million related to this exposure as of June 28, 2009 and December 28, 2008, respectively. 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 June 28, 2009, the Company also had seven letters of guarantee outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $6.3 million. The Company does not have any off balance sheet arrangements other than those previously disclosed in the Company’s Form 10-K.

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 two 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. Each of the Swaps had a termination clause that gave the lender the right to terminate the interest rate swap at fair market value if they were no longer a lender under the Credit Agreement. In addition to the termination clause, the interest rate swaps also contain call provisions which specify that the lender can elect to settle the swap for the call option price, as specified in the swap agreement. During the twenty-six weeks ended June 28, 2009, one of the Company’s lenders elected to prepay its interest rate swap obligation to the Company with respect to an aggregate notional amount of $25.0 million at the call option price which equaled the fair value of the interest rate swap on the respective call date. Since the Company did not elect to call any portion of the Notes, the Company is amortizing the value of the call option as a reduction to interest expense over the remaining life of the Notes. In July 2009, the other lender elected to prepay its interest rate swap (the “Remaining Swap Agreement” at June 28, 2009).

During the twenty-six weeks ended June 28, 2009, under the Remaining Swap Agreement, the Company received a fixed interest rate payment from the financial counterparty to the agreement equal to 8.25% per year calculated on the notional $25.0 million amount, while the Company made a variable interest rate payment to the same counterparty equal to the six-month LIBOR plus a fixed margin of 3.55%, also calculated on the notional $25.0 million amount. The Company designated this swap as a hedge against the change in the fair value of a designated portion of the Notes due to the change in the underlying interest rate. Accordingly, the change in the fair value of this interest rate swap is recorded in earnings along with related designated change in the value of the Notes. Total net loss recognized and recorded in earnings related to this fair value hedge was not significant for the thirteen and twenty-six weeks ended June 28, 2009 or June 29, 2008. As of June 28, 2009 and December 28, 2008, the fair value of the Remaining Swap Agreement totaled $1.1 million and $1.2 million, respectively. At December 28, 2008, the fair value of this swap was included in other non-current assets and as an adjustment to the carrying value of the Notes. At June 28, 2009, $1.1 million was classified as other current assets in anticipation of the July 2009 settlement. There was no material ineffectiveness in this interest rate swap during the period ended June 28, 2009.

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 gain recognized in the periods and recorded in accumulated other comprehensive income, net of tax, related to these cash flow hedges was $0.8 million and $0.9 million for the thirteen and twenty-six weeks ended June 28, 2009, respectively. 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 $0.4 million and $0.3 million for the thirteen and twenty-six weeks ended June 29, 2008, respectively. The total value of the swap asset as of June 28, 2009 and December 28, 2008 was $1.6 million and $0.2 million, respectively, and is recorded as a component of other assets in the accompanying consolidated balance sheets. There was no material ineffectiveness of this 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.

12. 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, captioned Gregorio de la Rosa, Sr., et al., v. Wackenhut Corrections Corporation, (cause no. 02-110) in the District Court, 404th Judicial District, Willacy County, Texas, 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 recorded 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 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. On April 2, 2009, the Thirteenth Court of Appeals, Corpus Christi, Texas, rendered its opinion which reversed in part and affirmed in part the verdict of the trial court. The appellate court reversed the award of $5.0 million to the Estate of Gregorio de la Rosa, Sr. and the award of $7,000 for funeral expenses. All other awards of compensatory and punitive damages were affirmed. The Company plans to appeal the decision of the Thirteenth Court of Appeals to the Texas Supreme Court. The supersedeas bond posted by the insurance carrier remains in place.

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 (No. SC 656 of 2006 to be heard by the Supreme Court of the Australian Capital Territory) 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 AUD 18 million or $14.5 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. 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. 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 and related reserve for loss, the Company believes that, if settled unfavorably, this matter could have a material adverse effect on its financial condition, results of operations or 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.

On January 30, 2008, a lawsuit seeking class action certification was filed against the Company by an inmate at one of the Company’s 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 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 plaintiffs allege 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. Based on recent developments in this matter, the Company believes that, even if resolved unfavorably, it is not reasonably possible that this lawsuit will have a material adverse effect on its financial condition, results of operations or cash flows.

On October 23, 2008, a wage and hour claim seeking potential class action certification was served against the Company. The case is styled Mayes v. The GEO Group Inc. (Civil Action No. 08-0248) and it is pending in the U.S. District Court for the Northern District of Florida, Panama City Division. The plaintiffs in this case have alleged that the Company violated the Fair Labor Standards Act by failing to pay certain employees for work performed before and after their scheduled shifts. Based on recent developments in this matter and the current status of the case, the Company believes that, even if resolved unfavorably, it is not reasonably possible that this lawsuit will have a material adverse effect on its financial condition, results of operations or cash flows.

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.

GEO is currently self-financing the simultaneous construction or expansion of several correctional and detention facilities in multiple jurisdictions. As of June 28, 2009, the Company was in the process of constructing or expanding five facilities representing 4,870 total beds. The Company is providing the financing for four of the five facilities, representing 2,870 beds. Total capital expenditures related to these projects is expected to be $180.6 million, of which $94.5 million was completed through the twenty-six weeks ended June 28, 2009. The Company expects to incur at least another $68.6 million in capital expenditures relating to these owned projects during fiscal year 2009, and the remaining $17.5 million by First Quarter 2010. Additionally, financing for the remaining 2,000-bed facility is being provided for by a third party for state ownership. GEO is managing the construction of this project with total construction costs of $113.8 million, of which $32.5 million has been completed through the twenty-six weeks ended June 28, 2009, and $81.3 million of which remains to be completed through second quarter 2010.

The Company is currently under examination by the Internal Revenue Service for its U.S. income tax returns for fiscal years 2002 through 2005 and expects this examination to be concluded in 2009; however, the final outcome is not yet determinable. Based on the status of the audit to date, the Company does not currently expect the outcome of the audit to have a material adverse impact on its financial condition, results of operation or cash flows.

13. 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								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Revenues:
U.S. corrections		$	192,265			$	173,708			$	384,034			$	342,099
International services			29,870				34,999				55,549				69,031
GEO Care			27,860				29,824				56,463				60,269
Facility construction and design			26,384				31,463				39,394				61,049
Total revenues		$	276,379			$	269,994			$	535,440			$	532,448
Depreciation and amortization:
U.S. corrections		$	8,972			$	8,360			$	18,055			$	16,375
International services			330				404				663				787
GEO Care			328				521				728				1,032
Facility construction and design			—				—				—				—
Total depreciation and amortization		$	9,630			$	9,285			$	19,446			$	18,194
Operating income (loss):
U.S. corrections		$	43,021			$	38,804			$	84,516			$	73,504
International services			1,958				3,050				3,823				5,493
GEO Care			2,787				2,781				6,266				6,038
Facility construction and design			126				50				205				197
Operating income from segments			47,892				44,685				94,810				85,232
General and administrative expenses			(17,015	)			(17,857	)			(34,251	)			(34,881	)
Total operating income		$	30,877			$	26,828			$	60,559			$	50,351

		June 28, 2009				December 28, 2008
Segment assets:
U.S. corrections		$	1,130,332			$	1,093,880
International services			82,673				69,937
GEO Care			18,379				21,169
Facility construction and design			21,227				10,286
Total segment assets		$	1,252,611			$	1,195,272

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 and discontinued operations, in each case, during the thirteen and twenty-six weeks ended June 28, 2009 and June 29, 2008, respectively.

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Total operating income from segments		$	47,892			$	44,685			$	94,810			$	85,232
Unallocated amounts:
General and Administrative Expenses			(17,015	)			(17,857	)			(34,251	)			(34,881	)
Net interest expense			(5,555	)			(4,924	)			(11,669	)			(10,656	)
Income before income taxes, equity in earnings of affiliates and discontinued operations		$	25,322			$	21,904			$	48,890			$	39,695

Asset Reconciliation of Segments

The following is a reconciliation of the Company’s reportable segment assets to the Company’s total assets as of June 28, 2009 and December 28, 2008, respectively.

		June 28, 2009				December 28, 2008
Reportable segment assets:		$	1,252,611			$	1,195,272
Cash			47,177				31,655
Deferred income tax			21,757				21,757
Restricted cash			34,873				32,697
Assets of discontinued operations			—				7,240
Total assets		$	1,356,418			$	1,288,621

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								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Revenues:
Correctional and detention		$	222,135			$	208,707			$	439,583			$	411,130
GEO Care			27,860				29,824				56,463				60,269
Facility construction and design			26,384				31,463				39,394				61,049
Total revenues		$	276,379			$	269,994			$	535,440			$	532,448

Equity in Earnings of Affiliate

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								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Statement of Operations Data
Revenues		$	9,069			$	9,035			$	16,641			$	18,200
Operating income			3,684				3,487				6,531				7,018
Net income (loss)			1,719				1,504				3,006				2,640

		June 28, 2009				December 28, 2008
Balance Sheet Data
Current assets		$	26,857			$	18,421
Non-current assets			45,476				37,722
Current liabilities			2,983				2,245
Non-current liabilities			50,358				41,321
Shareholders’ equity			18,992				12,577

As of June 28, 2009 and December 28, 2008, the Company’s investment in SACS was $9.5 million and $6.3 million, respectively. The investment is included in other non-current assets in the accompanying consolidated balance sheets.

14. 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. There were no significant transactions between the employer or related parties and the plan during the period.

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. As of June 28, 2009, all three executives were qualified and eligible to receive these payments upon retirement.

The following table summarizes key information related to the Company’s pension plans and retirement agreements. 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.

		June 28, 2009				December 28, 2008
		(in thousands)
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of period		$	19,320			$	17,938
Service cost			282				530
Interest cost			359				654
Plan amendments			—				—
Actuarial gain			—				246
Benefits paid			(46	)			(48	)
Projected benefit obligation, end of period		$	19,915			$	19,320
Change in Plan Assets
Plan assets at fair value, beginning of period		$	—			$	—
Company contributions			46				48
Benefits paid			(46	)			(48	)
Plan assets at fair value, end of period		$	—			$	—
Unfunded Status of the Plan		$	(19,915	)		$	(19,320	)
Amounts Recognized in Accumulated Other Comprehensive Income
Prior service cost			61				82
Net loss			2,427				2,551
Accrued pension cost		$	2,488			$	2,633

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		June 28, 2009				June 29, 2008				June 28, 2009				June 29, 2008
Components of Net Periodic Benefit Cost
Service cost		$	141			$	132			$	282			$	265
Interest cost			179				163				359				327
Amortization of:
Prior service cost			10				10				20				20
Net loss			62				63				125				125
Net periodic pension cost		$	392			$	368			$	786			$	737
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			5.00	%			5.50	%			5.00	%			5.50	%

In February 2009, the Company announced the retirement of its Chief Financial Officer. As a result of his retirement, effective August 2, 2009, the Company will pay $3.2 million in retirement payments under the executive retirement agreement, representing the discounted value of the benefit of August 2, 2009 plus gross up of $1.2 million for certain taxes as specified in the agreement. Including the benefits paid to the Company’s Chief Financial Officer (excluding gross up payments of $1.2 million), the Company expects to pay $2.2 million in the current fiscal year related to its defined benefit pension plans.

15. RECENT ACCOUNTING STANDARDS

The Company’s adoption of new accounting standards in the twenty-six week period ended June 28, 2009 had no significant impact on the Company’s financial condition, results of operations and cash flows. The Company adopted the following accounting standards in the twenty-six weeks ended June 28, 2009:

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP FAS 141(R)-1). This pronouncement amends FAS No. 141(R) to clarify the initial and subsequent recognition, subsequent accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS No. 141(R)-1 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value at the acquisition date if it can be determined during the measurement period. If the acquisition-date fair value of an asset or liability cannot be determined during the measurement period, the asset or liability will only be recognized at the acquisition date if it is both probable that an asset existed or liability has been incurred at the acquisition date, and if the amount of the asset or liability can be reasonably estimated. FSP FAS No. 141(R)-1 became effective for the Company as of December 29, 2008. The Company did not assume any assets or liabilities as a result of a business combination and as such, the adoption of this standard has not had a material impact on its financial condition, results of operations and cash flows for the fiscal year to date.

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.

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 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

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. FAS 141(R) retains the fundamental requirements in FAS 141 but 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.

In addition to these standards, the Company also adopted standards as discussed in Note 7, Note 8, Note 9, Note 10 and Note 16.

The following accounting standards have implementation dates subsequent to the period ended June 28, 2009 and as such, have not yet been adopted by the Company:

In June 2009, the FASB issued FAS No. 168, “The FASB Accounting Standards Codification (Codification) and the Hierarchy of GAAP” (FAS No. 168), which replaces FAS No. 162, “The Hierarchy of GAAP” and establishes the Codification as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. FAS No. 168 modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and non-authoritative. FAS No. 168 is effective beginning for periods ended after September 15, 2009. As FAS No. 168 is not intended to change or alter existing GAAP, it will not impact the Company’s financial condition, results of operations and cash flows.

In June 2009, the FASB issued FAS No. 167, “Amendments to FASB Interpretation No. FIN 46(R)” (SFAS No. 167). FAS No. 167 amends the manner in which entities evaluate whether consolidation is required for VIEs. A company must first perform a qualitative analysis in determining whether it must consolidate a VIE, and if the qualitative analysis is not determinative, must perform a quantitative analysis. Further, FAS No. 167 requires that companies continually evaluate VIEs for consolidation, rather than assessing based upon the occurrence of triggering events. SFAS No. 167 also requires enhanced disclosures about how a company’s involvement with a VIE affects its financial statements and exposure to risks. FAS No. 167 is effective for interim and annual periods beginning after November 15, 2009. The Company does not anticipate that the adoption of this standard will have a material impact on its financial position, results of operations and cash flows.

16. SUBSEQUENT EVENTS

In May 2009, the FASB issued FAS No. 165, Subsequent Events (“FAS 165”), which introduces the concept of financial statements being available to be issued and requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date as either the date the financial statements were issued or were available to be issued. This standard became effective for the Company in the fiscal quarter ended June 28, 2009. The implementation of this standard did not have a significant impact on the Company’s financial condition, results of operations or cash flows. The Company evaluated all events and transactions that occurred after June 28, 2009 up through August 3, 2009, the date the Company issued these financial statements. During this period, the Company did not have any material recognizable subsequent events; however, the Company did have unrecognizable subsequent events as discussed further below.

Effective September 18, 2003, the Company entered into two interest rate swap agreements in the aggregate notional amount of $50.0 million. During the thirteen weeks ended March 29, 2009, one of the Company’s lenders elected to prepay its interest rate swap obligations to the Company with respect to an aggregate notional amount of $25.0 million at the call option price which equaled the fair value of the interest rate swap on the respective call date. In July 2009, the other interest rate swap obligation with respect to the remaining $25.0 million aggregate notional amount was also prepaid by the Company’s lender at the call option price with equaled the fair value of the interest rate swap on the call date.

On June 29, 2009, the Company announced that its wholly owned U.K. subsidiary, GEO UK Ltd., assumed management functions at the 260-bed Harmondsworth Immigration Removal Centre (the “Centre”) located in London, England. The Company’s subsidiary will manage and operate the Centre under three-year contract with the United Kingdom Border Agency. This contract is expected to generate approximately $14.0 million in annual revenues for the Company. Additionally, the Centre will be expanded by 360 beds bringing its capacity to 620 beds when the expansion is completed in June 2010. Upon completion of the expansion, this management contract is expected to generate approximately $19.5 million in annual revenues.

On July 1, 2009, the Company announced the opening of a 384-bed expansion of the 1,500-bed Graceville Correctional Facility in Graceville, Florida. The Company operates this correctional facility under a managed-only contract with the State of Florida Department of Management Services and expects to complete the intake of inmates during the third quarter of 2009. At full occupancy, the 384-bed expansion is expected to generate approximately $5.0 million in additional annualized operating revenues.

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 the documents incorporated by reference herein 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 facilities and/or facility expansions that we are currently constructing with an aggregate total of $171.2 million of our own capital, of which we have already spent $93.8 million;
•		an increase in unreimbursed labor rates;
•		our ability to expand, diversify and grow our correctional mental health and residential treatment services business;
•		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 state and federal income tax law changes internationally and domestically;
•		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 acquisitions 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 Securities and Exchange Commission, or 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 filed with the SEC.

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 28, 2008, filed with the Securities and Exchange Commission on February 18, 2009. 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 June 28, 2009 as “Second Quarter 2009,” and we refer to the thirteen weeks ended June 29, 2008 as “Second Quarter 2008.”

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, which are operated through our wholly-owned subsidiary GEO Care Inc., involve the delivery of quality care, innovative programming and active patient treatment, primarily at privatized state mental health care facilities. 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.

As of June 28, 2009, we managed 58 facilities totaling approximately 53,400 beds worldwide. As of the end of Second Quarter 2009, we had an additional 4,870 beds under development at five facilities, including an expansion and renovation of one vacant facility which we own, the expansion of three facilities we currently own and operate and a new 2,000-bed facility which we will manage upon completion. We maintained an average companywide facility occupancy rate of 94.9% for the twenty-six weeks ended June 28, 2009.

Reference is made to Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on February 18, 2009, for further discussion and analysis of information pertaining to our financial condition and results of operations for the fiscal year ended December 28, 2008.

Fiscal 2009 Developments

On February 12, 2009, we announced that Mr. John G. O’Rourke will retire as our Chief Financial Officer. Effective August 3, 2009, Brian R. Evans assumed the position of Chief Financial Officer. Mr. O’Rourke has entered into a two-year consulting agreement with GEO which became effective August 3, 2009. On July 31, 2009, the Company’s Board of Directors named Mr. Ronald A. Brack, GEO’s Vice President and Controller, as the Company’s Vice President, Chief Accounting Officer and Controller effective August 3, 2009. Mr. Brack joined GEO in May 2005 and has held the positions of Assistant Controller and Vice President and Controller during his four-year tenure.

The following table sets forth current expansion and development projects at June 28, 2009:

Capacity

Following

Estimated

Additional

Expansion/

Completion

Facilities Under Construction

Beds

Construction

Date

Customer

Financing

North Lake Correctional Facility, Michigan(1)

1,225

1,725

Q1 2010

Federal or Various States

GEO

Northwest Detention Center, Washington(2)

545

1,575

Q4 2009

Federal

GEO

Aurora ICE Processing Center, Colorado(2)

1,100

1,500

Q1 2010

Federal

GEO

Broward Transition Center, Florida(3)

n/a

n/a

Q2 2010

Federal

GEO

Blackwater River Correctional Facility, Florida

2,000

2,000

Q2 2010

DMS

Third party

4,870

On January 8, 2009, we announced that our subsidiary, The GEO Group Australia Pty. Ltd. (“GEO Australia”) was selected as the preferred tenderer by the New South Wales, Department of Corrective Services (the “Department”) for the continued management and operation of the 790-bed Junee Correctional Center (the “Center”). GEO Australia has managed the minimum-to-medium security Center since its opening in 1993. The new contract will have a term of 15 years, inclusive of renewal options, and is expected to generate annual revenues of approximately $21 million.

On January 14, 2009 we announced the opening of a 192-bed expansion of the 576-bed Robert A. Deyton Detention Facility (the “Facility”) in Lovejoy, Georgia. We manage the Facility under a 20-year contract, inclusive of three five-year option periods, with the Office of the Federal Detention Trustee. We lease the Facility from Clayton County under a 20-year agreement, with two five-year renewal options. The Facility houses detainees under custody of the United States Marshals Service. We completed the intake of 192 detainees in First quarter of 2009 and expect the 192-bed expansion to generate approximately $4 million in additional annual operating revenues.

On April 23, 2009, we announced an award of a contract by U.S. Immigration and Customs Enforcement (ICE) for the continued management of the Broward Transition Center (referred to as the “Center”), which we own, located in Deerfield Beach, Florida. The new contract will have an initial term of one year, effective April 1, 2009, with four one-year renewal option periods. Under the terms of the new agreement, the contract capacity at the Center will be increased from 600 to 700 beds, and the transportation responsibilities will be expanded. The new contract is expected to generate approximately $21 million in annualized revenues at full occupancy, including the new transportation responsibilities.

On May 4, 2009, we announced we executed a contract with Bexar County, Texas Commissioners’ Court for the continued operation of the 685-bed Central Texas Detention Facility (the “Facility”) located in San Antonio, Texas. The Facility, which is owned by Bexar County, houses detainees predominately for the U.S. Marshals Service. We have managed the Facility since 1988. The new contract will have a term of ten years, effective April 29, 2009, and will generate approximately $11.0 million in annualized operating revenues for us at full occupancy.

On June 29, 2009, we announced that our wholly owned U.K. subsidiary, GEO UK Ltd., has assumed management functions at the 260-bed Harmondsworth Immigration Removal Centre (the “Centre”) located in London, England. Our subsidiary will manage and operate the Centre under three-year contract with the United Kingdom Border Agency. This contract is expected to generate approximately $14.0 million in annual revenues for us. Additionally, the Centre will be expanded by 360 beds bringing its capacity to 620 beds when the expansion is completed in June 2010. Upon completion of the expansion, this management contract is expected to generate approximately $19.5 million in annual revenues.

On July 1, 2009, we announced the opening of a 384-bed expansion of the 1,500-bed Graceville Correctional Facility in Graceville, Florida. We operate this correctional facility under a managed-only contract with the State of Florida Department of Management Services and expect to complete the intake of inmates during the third quarter of 2009. At full occupancy, the 384-bed expansion is expected to generate approximately $5.0 million in additional annualized operating revenues.

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 28, 2008.

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.

We earn construction revenue from our contracts with certain customers to perform construction and design services (“project development services”) for various facilities. In these instances, we act as the primary developer and sub contracts with bonded National and/or Regional Design Build Contractors. These construction 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. Construction 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. As the primary contractor, we are exposed to the various risks associated with construction, including the risk of cost overruns. Accordingly, we record our construction revenue on a gross basis in accordance with SOP 81-1. The related cost of construction activities is included in Operating Expenses.

When evaluating multiple element arrangements for certain contracts where we provide project development services to our clients in addition to standard management services, 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 these project development services and subsequent management services, generally, the arrangement results in no delivered elements at the onset of the agreement. The elements are delivered over the contract period as the project development and management services are performed. Project development services are not provided separately to a customer without a management contract and therefore, the value of the project development deliverable, is determined using the residual method.

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 are liable for any claims that may arise in excess of these limits. For most casualty insurance policies, we carry substantial deductibles or self-insured retentions — $3.0 million per occurrence for general liability and hospital professional liability, $2.0 million per occurrence for workers’ compensation and $1.0 million per occurrence for automobile liability. We also maintain insurance to cover property and other casualty risks including, workers’ compensation, medical malpractice, environmental liability and 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 some of our facilities to full replacement value.

Of the reserves discussed above, our most significant insurance reserves relate to workers’ compensation and general liability claims. These reserves are undiscounted and were $25.5 million and $23.5 million as of December 28, 2008 and December 30, 2007, respectively. We use statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as historical frequency and severity of claims at each of our facilities, claim development, payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the size of jury awards. We also may experience variability between our estimates and the actual settlement due to limitations inherent in the estimation process, including our ability to estimate costs of processing and settling claims in a timely manner as well as our ability to accurately estimate our exposure at the onset of a claim. Because we have high deductible insurance policies, the amount of our insurance expense is dependent on our ability to control our claims experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition, results of operations and cash flows could be materially impacted.

Income Taxes

We account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, or FAS 109, Accounting for Income Taxes, 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. Significant judgments are required to determine the consolidated provision for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of our deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which we operate, estimates of future taxable income and the character of such taxable income. Based on our estimate of future earnings and our favorable earnings history, management currently expects full realization of the deferred tax assets net of any recorded valuation allowances. Additionally, judgment must be made as to certain tax positions which may not be fully sustained upon review by tax authorities. If actual circumstances differ from our assumptions, adjustments to the carrying value of deferred tax assets or liabilities may be required, which may result in an adverse impact on the results of our operations and our effective tax rate. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of FAS No. 109. Management has not made any significant changes to the way we account for our deferred tax assets and liabilities in any year presented in the consolidated financial statements. To the extent that the provision for income taxes increases/decreases by 1% of income before income taxes, equity in earnings of affiliate and discontinued operations, consolidated income from continuing operations would have decreased/increased by $0.9 million, $0.6 million and $0.4 million, respectively, for the years ended December 28, 2008, December 30, 2007 and December 31, 2006.

Property and Equipment

As of June 28, 2009, we had $940.9 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.

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, “Accounting for the Impairment or Disposal of Long-Lived Assets”. If a long-lived asset is part of a group that includes other assets, the unit of accounting for the long-lived asset is its group. Generally, we group our assets by facility for the purposes of considering whether any impairment exists. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or asset group and its eventual disposition. When considering the future cash flows of a facility, we make assumptions based on historical experience with our customers, terminal growth rates and weighted average cost of capital. While these estimates do not generally have a material impact on the impairment charges associated with managed-only facilities, the sensitivity increases significantly when considering the impairment on facilities that are either owned or leased by us. 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 that might impair recovery of long-lived assets such as the termination of a management contract. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. 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.

Fair Value Measurements

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. We 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. We adopted FAS 157 as it relates to non-financial assets and liabilities on December 29, 2008, the first day of our fiscal year beginning after November 15, 2008, which is the end of the one-year deferral period proscribed in FSP 157-2, “Effective Date of FASB Statement No. 157”. FAS 157 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. and 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 our 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.

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, captioned Gregorio de la Rosa, Sr., et al., v. Wackenhut Corrections Corporation, (cause no. 02-110) in the District Court, 404th Judicial District, Willacy County, Texas, 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 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. On April 2, 2009, the Thirteenth Court of Appeals, Corpus Christi, Texas, rendered its opinion which reversed in part and affirmed in part the verdict of the trial court. The appellate court reversed the award of $5.0 million to the Estate of Gregorio de la Rosa, Sr. and the award of $7,000 for funeral expenses. All other awards of compensatory and punitive damages were affirmed. We plan to appeal the decision of the Thirteenth Court of Appeals to the Texas Supreme Court. The supersedeas bond posted by the insurance carrier remains in place.

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 (No. SC 656 of 2006 to be heard by the Supreme Court of the Australian Capital Territory) 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 AUD 18 million or $14.5 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. 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. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and our preliminary review of the claim and related reserve for loss, 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.

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 company-wide 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 plaintiffs allege 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. Based on recent developments in this matter, we believe that, even if resolved unfavorably, it is not reasonably possible that this lawsuit will have a material adverse effect on our financial condition, results of operations and cash flows.

On October 23, 2008, a wage and hour claim seeking potential class action certification was served against us. The case is styled Mayes v. The GEO Group Inc. (Civil Action No. 08-0248) and it is pending in the U.S. District Court for the Northern District of Florida, Panama City Division. The plaintiffs in this case have alleged that we violated the Fair Labor Standards Act by failing to pay certain employees for work performed before and after their scheduled shifts. Based on recent developments in this matter and the current status of the case, we believe that, even if resolved unfavorably, it is not reasonably possible that this lawsuit will have a material adverse effect on our financial condition, results of operations and cash flows.

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 June 28, 2009, we were in the process of constructing or expanding five facilities representing 4,870 total beds. We are providing the financing for four of the five facilities, representing 2,870 beds. Total capital expenditures related to these projects is expected to be $180.6 million, of which $94.5 million was completed through Second Quarter 2009. We expect to incur at least another $68.6 million in capital expenditures relating to these owned projects during fiscal year 2009, and the remaining $17.5 million by First Quarter 2010. Additionally, financing for the remaining 2,000-bed facility is being provided for by a third party for state ownership. We are managing the construction of this project with total construction costs of $113.8 million, of which $32.5 million has been completed through Second Quarter 2009 and $81.3 million of which remains to be completed through second quarter 2010.

We are currently under examination by the Internal Revenue Service for our U.S. income tax returns for fiscal years 2002 through 2005 and expect this examination to be concluded in 2009; however, the final outcome is not yet determinable. 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 June 28, 2009 and Thirteen Weeks Ended June 29, 2008

For the purposes of the discussion below, “Second Quarter 2009” refers to the thirteen week period ended June 28, 2009 and “Second Quarter 2008” refers to the thirteen week period ended June 29, 2008.

Revenues

		2009				% of Revenue				2008				% of Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. corrections		$	192,265				69.6	%		$	173,708				64.3	%		$	18,557				10.7	%
International services			29,870				10.8	%			34,999				13.0	%			(5,129	)			(14.7	)%
GEO Care			27,860				10.1	%			29,824				11.0	%			(1,964	)			(6.6	)%
Facility construction and design			26,384				9.5	%			31,463				11.7	%			(5,079	)			(16.1	)%
Total		$	276,379				100.0	%		$	269,994				100.0	%		$	6,385				2.4	%

U.S. corrections

The increase in revenues for U.S. corrections facilities in the Second Quarter 2009 over Second Quarter 2008, is primarily attributable to new project activations and capacity increases at existing facilities as follows: (i) revenues increased due to our new contracts for the management of Joe Corley Facility in Conroe, Texas and Northeast New Mexico Detention Facility in Clayton, New Mexico. These two activations took place in the third quarter of 2008 and attributed to $7.9 million of the increase; (ii) revenues increased $7.8 million as a result of the opening of our Rio Grande Detention Center located in Laredo, Texas in the fourth quarter 2008; (iii) revenues increased $1.7 million as a result of the activation of our 744-bed expansion of the LaSalle Detention Facility in Jena, Louisiana effective May 2008 and the activation of our 192-bed expansion of Robert A. Deyton Facility in Lovejoy, Georgia, effective January 2009; (iv) revenues increased $1.7 million as a result of the 500-bed expansion of East Mississippi Correctional Facility which was complete in the fourth quarter 2008; (v) revenues increased $1.3 million at Broward Transition Center due to an increase in per diem rates and population; (vi) we also experienced an increase of revenues of $2.7 million related to contract modifications and additional services at our South Texas Detention Complex in Pearsall, Texas. These increases were partially offset by a decrease in revenues of $3.7 million due to the termination of our management contracts at the Sanders Estes Unit in Venus, Texas and the Tri-County Justice and Detention Center in Ullin, IL.

The number of compensated mandays in U.S. corrections facilities increased by approximately 284,000 to 3.6 million mandays in Second Quarter 2009 from 3.3 million mandays in Second Quarter 2008 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 93.8% of capacity in Second Quarter 2009, excluding the terminated contract for Tri-County Justice & Detention Center which was terminated effective August 2008. The average occupancy in our U.S. correction and detention facilities was 95.9% in Second Quarter 2008, not taking into account our new contracts at the Joe Corley Detention Facility, Rio Grande Detention Center, Maverick County Detention Facility and the Northeast New Mexico Detention Facility which commenced in Third and Fourth Quarters 2008.

International services

Revenues for our International services segment during Second Quarter 2009 decreased over the prior year primarily due to unfavorable fluctuations in foreign exchange currency rates for the Australian Dollar, South African Rand and British Pound. These unfavorable fluctuations in foreign exchange rates resulted in a decrease of revenues over Second Quarter 2008 of $6.9 million. These unfavorable variances were partially offset during Second Quarter 2009 by an increase in revenues from our South African and Australian subsidiaries due to contract modifications.

GEO Care

The decrease in revenues for GEO Care in Second Quarter 2009 compared to Second Quarter 2008 is primarily attributable to the termination of our management contract at the South Florida Evaluation and Treatment Center — Annex in Miami, Florida. This contract was terminated effective July 2008 and generated $3.2 million revenue during Second Quarter 2008. This decrease in revenues was partially offset by combined increases of $1.3 million at the South Florida Evaluation and Treatment Center in Miami, Florida and the Treasure Coast Forensic Treatment Center in Stuart, Florida. The increases at these two facilities are mainly attributable to capacity increases and contract modifications.

Facility construction and design

The decrease in revenues from the Facility construction and design segment in Second Quarter 2009 compared to Second Quarter 2008 is mainly due to decreases in construction activities at three facilities: (i) the completion of construction of our Northeast New Mexico Detention Facility in Clayton, New Mexico in Third Quarter 2008 decreased revenues by $7.2 million, (ii) the completion of Florida Civil Commitment Center in First Quarter 2009 decreased revenues by $13.7 million and (iii) the completion of Graceville Correctional Facility in First Quarter 2009 which decreased revenues by $10.3 million. These decreases over the same period in the prior year were offset by an increase of $27.3 million related to the construction of Blackwater River Correctional Facility, in Milton, Florida which commenced in First Quarter 2009.

Operating Expenses

						% of Segment								% of Segment
		2009				Revenue				2008				Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. corrections		$	140,272				73.0	%		$	126,544				72.8	%		$	13,728				10.8	%
International services			27,582				92.3	%			31,545				90.1	%			(3,963	)			(12.6	)%
GEO Care			24,745				88.8	%			26,522				88.9	%			(1,777	)			(6.7	)%
Facility construction and design			26,258				99.5	%			31,413				99.8	%			(5,155	)			(16.4	)%
Total		$	218,857				79.2	%		$	216,024				80.0	%		$	2,833				(1.3	)%

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 Second Quarter 2009 as compared to Second Quarter 2008. Overall costs increased slightly as a percentage of revenues. This net increase was mainly driven by an increase in labor and correctional officer travel costs and was offset by higher margins at certain of our newer facilities and lower start up costs compared to Second Quarter 2008.

International services

Operating expenses for international services facilities increased as a percentage of segment revenues in Second Quarter 2009 compared to Second Quarter 2008 due to an increase in labor costs at our South Africa and Australian subsidiaries. Our subsidiary in the United Kingdom also experienced lower margins due to an increase in start up costs for the transitioning of the Harmondsworth Immigration Removal Centre, which became effective June 29, 2009.

GEO Care

Operating expenses for residential treatment decreased $1.8 million during Second Quarter 2009 from Second Quarter 2008 primarily due to the termination of our contract at the South Florida Evaluation and Treatment Center — Annex.

Facility construction and design

Operating expenses for facility construction and design decreased $5.2 million during Second Quarter 2009 compared to Second Quarter 2008 primarily due to a decrease in costs associated with our facilities under construction as a result of the completion of several facilities and expansions including Northeast New Mexico Detention Facility, Maverick County Detention Facility, Graceville Correctional Facility and Florida Civil Commitment Center. These decreases were offset by increases related to our construction of Blackwater River Correctional Facility.

Other Unallocated Operating Expenses

		2009				% of Revenue				2008				% of Revenue				$ Change				% Change
		(Dollars in thousands)
General and Administrative Expenses		$	17,015				6.2	%		$	17,857				6.6	%		$	(842	)			(4.7	)%

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. These costs decreased as a percentage of revenues over the prior year due to a decrease in corporate travel and other cost savings initiatives.

Non Operating Expenses

Interest Income and Interest Expense

		2009				% of Revenue				2008				% of Revenue				$ Change				% Change
		(Dollars in thousands)
Interest Income		$	1,206				0.4	%		$	1,947				0.7	%		$	(741	)			(38.1	)%
Interest Expense		$	6,761				2.4	%		$	6,871				2.5	%		$	(110	)			(1.6	)%

The majority of our interest income generated in Second Quarter 2009 and Second Quarter 2008 is from the cash balances at our Australian subsidiary and the interest generated from the Direct Finance Lease Receivable. The decrease in the current period over the same period last year is mainly attributable to unfavorable currency exchange rates, and to a lesser extent, lower interest rates earned on cash balances.

The decrease in interest expense of $0.1 million is primarily attributable to a decrease in LIBOR rates which reduced expense. This decrease was partially offset by expense on additional revolver borrowings, finance fees related to Amendment No. 4 to our Third Amended and Restated Credit Agreement, referred to as our Senior Credit Facility, and less capitalized interest from the completion of projects in fiscal year ending 2008. Total Borrowings at June 28, 2009 and June 29, 2008, excluding non-recourse debt and capital lease liabilities, were $390.2 million and $342.0 million, respectively.

Provision for Income Taxes

		2009				Effective Rate				2008				Effective Rate				$ Change				% Change
		(Dollars in thousands)
Income Taxes		$	9,690				38.3	%		$	8,663				39.5	%		$	1,027				(11.9	)%

The effective tax rate for Second Quarter 2009 was approximately 38.3%, compared to the effective income tax rate of 39.5% for the same period in the prior year. We estimate our annual effective tax rate for fiscal 2009 to be in the range of 38% to 39%.

Comparison of Twenty-six Weeks Ended June 28, 2009 and Twenty-six Weeks Ended June 29, 2008

For the purposes of the discussion below, “First Half 2009” refers to the twenty-six week period ended June 28, 2009 and “First Half 2008” refers to the twenty-six week period ended June 29, 2008.

Revenues

		2009				% of Revenue				2008				% of Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. corrections		$	384,034				71.7	%		$	342,099				64.2	%		$	41,935				12.3	%
International services			55,549				10.4	%			69,031				13.0	%			(13,482	)			(19.5	)%
GEO Care			56,463				10.5	%			60,269				11.3	%			(3,806	)			(6.3	)%
Facility construction and design			39,394				7.4	%			61,049				11.5	%			(21,655	)			(35.5	)%
Total		$	535,440				100.0	%		$	532,448				100.0	%		$	2,992				(0.6	)%

U.S. corrections

The increase in revenues for U.S. corrections facilities in the First Half 2009 over First Half 2008, is primarily attributable to several items: (i) revenues increased due to our new contracts for the management of Joe Corley Detention Facility in Conroe, Texas; Northeast New Mexico Detention Facility in Clayton, New Mexico and Maverick County Detention Facility in Maverick, Texas. These three activations took place in the third and fourth quarters of 2008 and attributed $16.8 million of the increase; (ii) revenues increased $15.7 million as a result of the opening of our Rio Grande Detention Center located in Laredo, Texas in the fourth quarter of 2008; (iii) revenues increased $3.4 million as a result of our 744-bed expansion of the LaSalle Detention Facility in Jena, Louisiana which opened in Second Quarter 2008; (iv) revenues increased $3.5 million as a result of the 500-bed expansion of East Mississippi Correctional Facility which was complete in the fourth quarter of 2008; (v) revenues increased $3.4 million due to our contract with Clayton County for the management of the Robert A. Deyton Detention Facility which opened in February 2008, and the expansion of the facility completed January 2009; (vi) revenues increased $1.6 million at the Broward Transition Center due to an increase in per diem rates and population; (vii) we also experienced an increase of revenues of $4.8 million related to contract modifications and additional services at our South Texas Detention Complex in Pearsall, Texas. These increases were partially offset by a decrease in revenues of $7.0 million due to the termination of our management contract at the Sanders Estes Unit in Venus, Texas and the Tri-County Justice & Detention Center in Ullin, IL.

The number of compensated mandays in U.S. corrections facilities increased by approximately 654,800 to 7.1 million mandays in First Half 2009 from 6.5 million mandays in First Half 2008 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 94.1% of capacity in First Half 2009, excluding the terminated contract for Tri-County Justice & Detention Center which was terminated effective August 2008. The average occupancy in our U.S. correction and detention facilities was 95.9% in First Half 2008, not taking into account our new contracts at the Joe Corley Detention Facility, Rio Grande Detention Complex, Maverick County Detention Facility and the Northeast New Mexico Detention Facility which commenced in Third and Fourth Quarters 2008.

International services

Revenues for our international services segment during First Half 2009 decreased significantly over the prior year primarily due to unfavorable fluctuations in foreign exchange currency rates for the Australian Dollar, South African Rand and British Pound. These unfavorable fluctuations in foreign exchange rates resulted in a decrease of revenues over First Half 2008 of $15.9 million. These unfavorable variances were partially offset during First Half 2009 by an increase in revenues from our South African and Australian subsidiaries due to contractual increases.