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 July 1, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     

The GEO Group, Inc.

(Exact name of registrant as specified in its charter)

Florida
(State or other jurisdiction of		65-0043078
incorporation or organization)		(I.R.S. Employer Identification No.)
One Park Place, 621 NW 53rd Street, Suite 700,		33487
Boca Raton, Florida		(Zip code)
(Address of principal executive offices)

(561) 893-0101
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No  o

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

Large accelerated o     Accelerated filer þ     Non accelerated filer filer o

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

Yes o     No  þ

At August 6, 2007, 50,967,996 shares of the registrant’s common stock were issued and outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 1, 2007 AND JULY 2, 2006 (UNAUDITED)			3
CONSOLIDATED BALANCE SHEETS AS OF JULY 1, 2007 (UNAUDITED) AND DECEMBER 31, 2006			4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 2007 AND JULY 2, 2006 (UNAUDITED)			5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			21
FINANCIAL CONDITION			22
RESULTS OF OPERATIONS			28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			42
ITEM 4. CONTROLS AND PROCEDURES			42
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			44
ITEM 1A. RISK FACTORS			45
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			45
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			45
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			45
ITEM 5. OTHER INFORMATION			45
ITEM 6. EXHIBITS			45
SIGNATURES			46
Ex-10.1 Amendment to The 2006 Stock Incentive Plan
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		July 1, 2007				July 2, 2006				July 1, 2007				July 2, 2006
Revenues		$	258,183			$	208,688			$	495,186			$	394,569
Operating expenses			207,373				172,415				401,477				326,161
Depreciation and amortization			8,471				6,024				15,752				11,688
General and administrative expenses			15,741				14,292				30,795				28,301
Operating income			26,598				15,957				47,162				28,419
Interest income			1,000				2,807				4,240				5,023
Interest expense			(8,633	)			(7,829	)			(19,698	)			(15,408	)
Write off of deferred financing fees from extinguishment of debt			—				(1,295	)			(4,794	)			(1,295	)
Income before income taxes, minority interest, equity in earnings of affiliate and discontinued operations			18,965				9,640				26,910				16,739
Provision for income taxes			7,004				3,595				10,145				6,288
Minority interest			(100	)			35				(191	)			26
Equity in earnings of affiliate, net of income tax provision of $223, $22, $433 and $40			506				351				889				628
Income from continuing operations			12,367				6,431				17,463				11,105
Income (loss) from discontinued operations, net of tax provision (benefit) of $-, $(61), $109 and $(126)			—				(113	)			167				(231	)
Net income		$	12,367			$	6,318			$	17,630			$	10,874
Weighted-average common shares outstanding:
Basic			50,091				31,326				45,115				30,213
Diluted			51,592				32,772				46,577				31,338
Income per common share:
Basic:
Income from continuing operations		$	0.25			$	0.21			$	0.39			$	0.37
Income (loss) from discontinued operations			—				(0.01	)			—				(0.01	)
Net income per share-basic		$	0.25			$	0.20			$	0.39			$	0.36
Diluted:
Income from continuing operations		$	0.24			$	0.20			$	0.38			$	0.35
Income (loss) from discontinued operations			—				(0.01	)			—				—
Net income per share-diluted		$	0.24			$	0.19			$	0.38			$	0.35

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

THE GEO GROUP, INC.

		July 1, 2007				December 31, 2006
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	76,849			$	111,520
Restricted cash			13,168				13,953
Accounts receivable, less allowance for doubtful accounts of $806 and $926			171,062				162,867
Deferred income tax asset, net			16,152				19,492
Other current assets			22,976				14,922
Total current assets			300,207				322,754
Restricted cash			21,233				19,698
Property and equipment, net			719,256				287,374
Assets held for sale			1,412				1,610
Direct finance lease receivable			43,362				39,271
Deferred income tax assets, net			2,897				4,941
Goodwill and other intangible assets, net			40,790				41,554
Other non current assets			34,355				26,251
		$	1,163,512			$	743,453
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	64,929			$	48,890
Accrued payroll and related taxes			34,882				31,320
Accrued expenses			66,549				77,675
Current portion of deferred revenue			—				1,830
Current portion of capital lease obligations, long-term debt and non-recourse debt			21,896				12,685
Current liabilities of discontinued operations			—				1,303
Total current liabilities			188,256				173,703
Deferred revenue			—				1,755
Minority interest			1,792				1,297
Other non current liabilities			25,830				24,816
Capital lease obligations			16,205				16,621
Long-term debt			304,887				144,971
Non-recourse debt			130,568				131,680
Commitments and contingencies
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, 66,974,896 and 66,497,168 issued and 50,899,896 and 39,497,168 outstanding			509				395
Additional paid-in capital			333,338				143,035
Retained earnings			216,857				201,697
Accumulated other comprehensive income			4,158				2,393
Treasury stock 16,075,000 and 27,000,000 shares			(58,888	)			(98,910	)
Total shareholders’ equity			495,974				248,610
		$	1,163,512			$	743,453

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

THE GEO GROUP, INC.

		Twenty-Six Weeks Ended
		July 1, 2007				July 2, 2006
Cash Flow from Operating Activities:
Income from continuing operations		$	17,463			$	11,105
Adjustments to reconcile income from continuing operations to net cash provided by operating activities
Depreciation and amortization expense			15,752				11,688
Amortization of debt issuance costs			1,195				568
Amortization of unearned compensation			913				234
Stock-based compensation expense			440				257
Write-off of deferred financing fees			4,794				1,295
Deferred tax expense (benefit)			—				24
(Recovery) Provision for doubtful accounts			(120	)			262
Equity in earnings of affiliates, net of tax			(889	)			(628	)
Minority interests in earnings (losses) of consolidated entity			191				(679	)
Income tax benefit of equity compensation			(703	)			(643	)
Changes in assets and liabilities, net of acquisition
Accounts receivable			(8,075	)			(17,289	)
Other current assets			(8,054	)			2,092
Other assets			2,321				(1,053	)
Goodwill			—				1,311
Accounts payable and accrued expenses			661				21,102
Accrued payroll and related taxes			3,562				2,393
Deferred revenue			(152	)			(841	)
Other liabilities			1,308				824
Net cash provided by (used in) operating activities of continuing operations			30,607				32,022
Net cash provided by (used in) operating activities of discontinued operations			(1,303	)			120
Net cash provided by (used in) operating activities			29,304				32,142
Cash Flow from Investing Activities:
Acquisition, net of cash acquired			(410,436	)			—
Change in restricted cash			(447	)			(4,353	)
Proceeds from sale of assets			1,567				42
Capital expenditures			(39,298	)			(13,883	)
Net cash used in investing activities			(448,614	)			(18,194	)
Cash Flow from Financing Activities:
Payments on long-term debt			(216,081	)			(75,677	)
Proceeds from the exercise of stock options			895				2,592
Income tax benefit of equity compensation			703				643
Proceeds from long-term debt			380,000				111
Debt issuance costs			(9,080	)			—
Proceeds from equity offering, net			227,485				99,941
Net cash provided by financing activities			383,922				27,610
Effect of Exchange Rate Changes on Cash and Cash Equivalents			717				64
Net Decrease in Cash and Cash Equivalents			(34,671	)			41,622
Cash and Cash Equivalents, beginning of period			111,520				57,094
Cash and Cash Equivalents, end of period		$	76,849			$	98,716
Supplemental Disclosures:
Non-cash investing and financing activities:
Extinguishment of pre-acquisition liabilities,net		$	6,663			$	—
Total liabilities assumed in acquisition		$	2,558			$	—

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

THE GEO GROUP, INC.

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements of The GEO Group, Inc., a Florida corporation (the “Company”), included in this 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 Form 10-K for the year ended December 31, 2006. 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 Form 10-Q have been made. Results of operations for the twenty-six weeks ended July 1, 2007 are not necessarily indicative of the results for the entire fiscal year ending December 30, 2007.

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 Form 10-K filed with the Securities and Exchange Commission on March 2, 2007 for the fiscal year ended December 31, 2006.

2. STOCK SPLIT

On May 1, 2007, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock. The stock split took effect on June 1, 2007 with respect to stockholders of record on May 15, 2007. Following the stock split, the Company’s shares outstanding increased from 25.4 million to 50.8 million. All share and per share in this Form 10-Q data have been adjusted to reflect the stock split.

3. EQUITY OFFERING

On March 23, 2007, the Company sold in a follow-on public offering 5,462,500 shares of its common stock at a price of $43.99 per share, (10,925,000 shares of its common stock at a price of $22.00 per share reflecting the two-for-one stock split). All shares were issued from treasury. The aggregate net proceeds to the Company (after deducting underwriter’s discounts and expenses of $12.8 million) were $227.5 million. On March 26, 2007, the Company utilized $200.0 million of the net proceeds to repay outstanding debt under the term loan portion of its senior secured credit facility. The balance of the proceeds will be used for general corporate purposes, which may include working capital, capital expenditures and potential acquisitions of complementary businesses and other assets. See Note 9 — Long Term Debt and Derivative Financial Instruments — The Senior Credit Facility, for further discussion.

4. ACQUISITION

On January 24, 2007, the Company completed its previously announced acquisition of CentraCore Properties Trust (“CPT”), a Maryland real estate investment trust, pursuant to an Agreement and Plan of Merger, dated as of September 19, 2006 (the “Merger Agreement”), by and among the Company, GEO Acquisition II, Inc., a direct wholly-owned subsidiary of the Company (“Merger Sub”) and CPT. Under the terms of the Merger Agreement, CPT merged with and into Merger Sub (the “Merger”), with Merger Sub being the surviving corporation of the Merger.

As a result of the Merger, each share of common stock of CPT (collectively, the “Shares”) was converted into the right to receive $32.5826 in cash, inclusive of a pro-rated dividend for all quarters or partial quarters for which CPT’s dividend had not yet been paid as of the closing date. In addition, each outstanding option to purchase CPT common stock (collectively, the “Options”) having an exercise price less than $32.00 per share was converted into the right to receive the difference between $32.00 per share and the exercise price per share of the option, multiplied by the total number of shares of CPT common stock subject to the option. The Company paid an aggregate purchase price of $421.6 million for the acquisition of CPT, inclusive of the payment of $368.3 million in exchange for the Shares and the Options, the repayment of $40.0 million in CPT debt and the payment of $13.3 million in transaction related fees. The Company financed the acquisition through the use of $365.0 million in new borrowings under a new seven year term loan, referred to as Term Loan B and approximately $65.6 million in cash on hand. The Company deferred debt issuance costs of $9.1 million related to the new $365.0 million term loan. These costs are being amortized over the life of the term loan. As a result of the merger, the Company no longer has ongoing lease expense related to the properties the Company previously leased from CPT. However the Company has increased depreciation expense reflecting its ownership of the properties and higher interest expense as a result of borrowings used to fund the acquisition.

During the first quarter of 2007, the Company performed a preliminary allocation of purchase price. During the quarter ended July 1, 2007, the Company received additional information related to deal costs and information related to taxes that allowed it to finalize the purchase accounting for this transaction. As a result, the Company reduced deferred tax assets and increased the fair market value of assets acquired by approximately $4.8 million during the thirteen weeks ended July 1, 2007.

The results of operations of CPT are included in the Company’s results of operations beginning after January 24, 2007. CPT is part of the Company’s US Corrections reportable segment. See Note 11 for segment information. The following unaudited pro forma information combines the consolidated results of operations of the Company and CPT as if the acquisition had occurred at the beginning of fiscal year 2006. Pro forma results are not presented for the twenty-six weeks ended July 1, 2007 as the acquisition was completed at or near the beginning of the period and the results would be immaterial:

		Thirteen				Twenty-six
		Weeks Ended				Weeks Ended
		July 2, 2006				July 2, 2006
Revenues		$	209,838			$	396,725
Income from continuing operations			4,441				7,287
Loss from discontinued operations			(113	)			(231	)
Net income			4,328				7,056
Net income per share — basic
Income from continuing operations		$	0.14			$	0.24
Loss from discontinued operations			—				(0.01	)
Net income per share — basic		$	0.14			$	0.23
Net income per share — diluted
Loss from continuing operations		$	0.13			$	0.23
Loss from discontinued operations			—				—
Net income per share — diluted		$	0.13			$	0.23

5. EQUITY INCENTIVE PLANS

In January 2006, the Company adopted Financial Accounting Standard (“FAS”) No. 123(R), (“FAS 123R”), “Share-Based Payment” using the modified prospective method. Under the modified prospective method of adopting FAS No. 123(R), the Company recognizes compensation cost for all share-based payments granted after January 1, 2006, plus any prior awards granted to employees that remained unvested at that time. The Company uses a Black-Scholes option valuation model to estimate the fair value of each option awarded. The assumptions used to value options granted during the interim period were comparable to those used at December 31, 2006. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.

The Company had four equity compensation plans at July 1, 2007: 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”).

The 2006 Plan was approved by the Board of Directors and by the Company’s shareholders on May 4, 2006. On May 1, 2007, the Company’s Board of Directors adopted and its shareholders approved several amendments to the 2006 Plan, including an amendment providing for the issuance of an additional 500,000 shares of the Company’s common stock which increased the total amount available for grant to 1,400,000 shares, pursuant to awards granted under the plan, and specifying that up to 300,000 of such additional shares may constitute awards other than stock options and stock appreciation rights, including shares of restricted stock. See Restricted Stock for further discussion.

Except for 750,000 shares of restricted stock issued under the 2006 Plan as of July 1, 2007, all of the foregoing awards previously issued under the Company Plans consist of stock options. Although awards are currently outstanding under all of the Company Plans, the Company may only grant new awards under the 2006 Plan. As of July 1, 2007, the Company had the ability to issue awards with respect to 240,928 shares of common stock pursuant to the 2006 Plan.

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

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

						Wtd. Avg.				Wtd. Avg.				Aggregate
						Exercise				Remaining				Intrinsic
Fiscal Year		Shares				Price				Contractual Term				Value
		(in thousands)												(in thousands)
Outstanding at December 31, 2006			2,632			$	4.61
Granted			431				21.47
Exercised			(191	)			4.70
Forfeited/canceled			(24	)			12.20
Options outstanding at July 1, 2007			2,848				7.09				5.48			$	62,682
Options exercisable at July 1, 2007			2,431				5.10				4.86			$	58,333

For the thirteen week period and twenty-six week period ending July 1, 2007, the amount of stock-based compensation expense was $0.8 million and $1.4 million, respectively. The weighted average grant date fair value of options granted during the twenty-six weeks ended July 1, 2007 was $8.73 per share. The total intrinsic value of options exercised during the twenty-six weeks ended July 1, 2007 was $4.3 million.

The following table summarizes information about the exercise prices and related information of stock options outstanding under the Company Plans at July 1, 2007:

		Options Outstanding												Options Exercisable
						Wtd. Avg.				Wtd. Avg.								Wtd. Avg.
		Number				Remaining				Exercise				Number				Exercise
Exercise Prices		Outstanding				Contractual Life				Price				Exercisable				Price
$2.63 — $2.63			6,000				2.8			$	2.63				6,000			$	2.63
$2.81 — $2.81			377,250				2.6				2.81				377,250				2.81
$3.10 — $3.10			372,000				3.6				3.10				372,000				3.10
$3.17 — $3.98			184,123				5.5				3.20				184,123				3.20
$4.67 — $4.67			428,728				5.8				4.67				428,728				4.67
$5.13 — $5.13			657,000				4.6				5.13				657,000				5.13
$5.30 — $7.70			299,781				6.5				6.84				232,534				6.82
$7.83 — $13.74			103,500				7.2				9.14				89,100				9.19
$20.63 —$20.63			40,000				9.6				20.63				8,000				20.63
$21.56 — $21.56			379,800				9.6				21.56				75,800				21.56
$2.63 — $21.56			2,848,182				5.5			$	7.09				2,430,535			$	5.10

As of July 1, 2007, the Company had $3.3 million of unrecognized compensation costs related to non-vested stock option awards that is expected to be recognized over a weighted average period of 3.1 years. Proceeds received from option exercises during the thirteen weeks and twenty-six weeks ended July 1, 2007 were $0.8 million and $0.9 million , respectively.

Restricted Stock

During the twenty six weeks ended July 1, 2007, the Company granted 300,000 shares of non-vested restricted stock under the 2006 Plan to key employees and non-employee directors. Shares of restricted stock become unrestricted shares of

common stock upon vesting on a one-for-one basis. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. The shares of restricted stock that were granted under the 2006 Plan vest in equal 25% increments on each of the four anniversary dates immediately following the date of grant. The following is a summary of restricted stock issued as of July 1, 2007 and changes during the twenty-six week period ended July 1, 2007:

						Wtd. Avg.
						Grant date
		Shares				Fair value
Restricted stock outstanding at January 1, 2007			445,500			$	13.07
Granted			300,000				25.75
Vested			(110,360	)			13.07
Forfeited/canceled			(8,628	)			13.07
Restricted stock outstanding at July 1, 2007			626,512			$	19.14

During the thirteen weeks and twenty-six weeks ended July 1, 2007, the Company recognized $0.8 million and $1.2 million of compensation expense respectively related to its outstanding shares of restricted stock and as of July 1, 2007 had $11.0 million of unrecognized compensation expense

6. 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
		July 1, 2007				July 2, 2006				July 1, 2007				July 2, 2006
Net income		$	12,367			$	6,318			$	17,630			$	10,874
Change in foreign currency translation, net of income tax (expense) benefit of $(999) , $(76), $(272) and $(592), respectively			2,628				200				716				1,559
Pension liability adjustment, net of income tax (expense) benefit of $(48), $0, $(78) and $0, respectively			74				95				120				95
Unrealized gain (loss) on derivative instruments, net of income tax (expense) benefit of $(756), $396, $(966) and $490, respectively			449				(908	)			929				(818	)
Comprehensive income		$	15,518			$	5,705			$	19,395			$	11,710

7. EARNINGS PER SHARE

Basic earnings per share is computed by dividing the net income available to shareholders by the weighted average number of outstanding common shares. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator includes dilutive common share 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 July 1, 2007 and July 2, 2006 as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		July 1, 2007				July 2, 2006				July 1, 2007				July 2, 2006
Net income		$	12,367			$	6,318			$	17,630			$	10,874
Basic earnings per share:
Weighted average shares outstanding			50,091				31,326				45,115				30,213
Per share amount		$	0.25			$	0.20			$	0.39			$	0.36
Diluted earnings per share:
Weighted average shares outstanding			50,091				31,326				45,115				30,213
Effect of dilutive securities:
Stock options and restricted stock			1,501				1,446				1,462				1,125
Weighted average shares assuming dilution			51,592				32,772				46,577				31,338
Per share amount		$	0.24			$	0.19			$	0.38			$	0.35

No options or shares of restricted stock were excluded from the computation of diluted EPS for the thirteen weeks ended July 1, 2007 and the thirteen weeks ended July 2, 2006 because their effect would be anti-dilutive.

No options were excluded from the computation of diluted EPS for the twenty six weeks ended July 1, 2007 because their effect would be anti-dilutive. Of 3,768,300 options outstanding at July 2, 2006, options to purchase 40,500 shares of the Company’s common stock, with an exercise price of $10.73 per share and expiration year of 2015, were excluded from the computation of diluted EPS because their effect would be anti-dilutive.

Of 626,512 shares of restricted stock outstanding at July 1, 2007, options to purchase 300,000 shares of common stock were excluded from the computation of diluted EPS because their effect would be anti-dilutive. Of 448,500 restricted shares outstanding at July 2, 2006, none were included in the computation of diluted EPS because their effect would be anti-dilutive.

8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Changes in the Company’s goodwill balances for the twenty-six weeks ended July 1, 2007 were as follows (in thousands):

						Foreign
		Balance as of				Currency				Balance as of
		December 31, 2006				Translation				July 1, 2007
U.S. Corrections		$	23,999			$	—			$	23,999
International Services			3,075				114				3,189
Total Segments		$	27,074			$	114			$	27,188

No goodwill resulted from the acquisition of CPT on January 24, 2007.

Intangible assets consisted of the following (in thousands):

		Description				Asset Life
Facility management contracts		$	15,050			7-17 years
Covenants not to compete			1,470			4 years
		$	16,520
Less accumulated amortization			(2,918	)
		$	13,602

Amortization expense was $0.9 million for the twenty-six weeks ended July 1, 2007 and July 2, 2006. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets.

9. LONG TERM DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS

Senior Debt

The Senior Credit Facility

On January 24, 2007, the Company completed the refinancing of its senior secured credit facility through the execution of a Third Amended and Restated Credit Agreement (the “Senior Credit Facility”), by and among the Company, as Borrower, BNP Paribas, as Administrative Agent, BNP Paribas Securities Corp., as Lead Arranger and Syndication Agent, and the lenders who are, or may from time to time become, a party thereto. The Senior Credit Facility consists of a $365 million, seven-year term loan (the “Term Loan B”) and a $150 million five-year revolver (the “Revolver”). The initial interest rate for the Term Loan B is at the London Interbank Offered Rate, (“LIBOR”) plus 1.5% and the Revolver bears interest at LIBOR plus 2.25% or at the base rate plus 1.25%. On January 24, 2007, the Company used the $365 million in borrowings under the Term Loan B to finance its acquisition of CPT, as discussed in Note 4 — Acquisition.

On March 26, 2007, the Company used $200.0 million of the aggregate net proceeds of $227.5 million from its recent equity offering (see Note 3 Equity Offering) to repay debt outstanding under the Term Loan B. As a result of the debt repayment, the Company wrote off approximately $4.8 million in deferred financing fees during the quarter ended April 1, 2007. As of July 1, 2007, the Company had $164.1 million outstanding under the Term Loan B, no amounts outstanding under the Revolver, $64.2 million outstanding in letters of credit under the Revolver and $85.8 million available under the Revolver. The Company intends to use future borrowings thereunder for general corporate purposes.

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

		Interest Rate Under the Revolver
Borrowings		LIBOR plus 2.25% or base rate plus 1.25%.
Letters of credit		1.50% to 2.50%.
Available borrowings		0.38% to 0.5%.

The Senior Credit Facility contains financial covenants which require us to maintain the following ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period:

Period		Leverage Ratio
Through December 30, 2008		Total leverage ratio £ 5.50 to 1.00
From December 31, 2008 through December 31, 2011		Reduces from 4.75 to 1.00, to 3.00 to 1.00
Through December 30, 2008		Senior secured leverage ratio £ 4.00 to 1.00
From December 31, 2008 through December 31, 2011		Reduces from 3.25 to 1.00, to 2.00 to 1.00
Four quarters ending June 29, 2008, to December 30, 2009		Fixed charge coverage ratio of 1.00, thereafter 1.10 to 1.00

All of the obligations under the Senior Credit Facility are unconditionally guaranteed by each of the Company’s existing material domestic subsidiaries. The Senior Credit Facility and the related guarantees are secured by substantially all of the Company’s present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, including but not limited to (i) a first-priority pledge of all of the outstanding capital stock owned by the Company and each guarantor, and (ii) perfected first-priority security interests in all of the Company’s present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor.

The Senior Credit Facility contains certain customary representations and warranties, and certain customary covenants that restrict the Company’s ability to, among other things (i) create, incur or assume any indebtedness, (ii) incur liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) sell its assets, (vi) make certain restricted payments, including declaring any cash dividends or redeem or repurchase capital stock, except as otherwise permitted, (vii) issue, sell or otherwise dispose of capital stock, (viii) transact with affiliates, (ix) make changes in accounting treatment, (x) amend or modify the terms of any subordinated indebtedness, (xi) enter into debt agreements that contain negative pledges on its assets or covenants more restrictive than those contained in the Senior Credit Facility, (xii) alter the business it conducts, and (xiii) materially impair the Company’s lenders’ security interests in the collateral for its loans.

Events of default under the Senior Credit Facility include, but are not limited to, (i) the Company’s failure to pay principal or interest when due, (ii) the Company’s material breach of any representation or warranty, (iii) covenant defaults, (iv) bankruptcy, (v) cross default to certain other indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental state of claims which are asserted against it, and (viii) a change of control.

Senior 8 1/4% Notes

To facilitate the completion of the purchase of the interest of the Company’s former majority shareholder in 2003, the Company issued $150.0 million aggregate principal amount, ten-year, 8 1/4% senior unsecured notes (the “Notes”). The Notes are general, unsecured, senior obligations. Interest is payable semi-annually on January 15 and July 15 at 8 1/4%. The Notes are governed by the terms of an Indenture, dated July 9, 2003, between the Company and the Bank of New York, as trustee, referred to as the Indenture. Additionally, after July 15, 2008, the Company may redeem, at the Company’s option, all or a portion of the Notes plus accrued and unpaid interest at various redemption prices ranging from 104.125% to 100.000% of the principal amount to be redeemed, depending on when the redemption occurs. The Indenture contains covenants that 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 was in compliance with all of the covenants of the Indenture governing the notes as of July 1, 2007.

Non-Recourse Debt

South Texas Detention Complex

On February 1, 2007, the Company made a payment of $4.1 million for the current portion of our periodic debt service requirement in relation to the South Texas Local Development Corporation (“STLDC”) operating agreement and bond indenture. As of July 1, 2007, the remaining balance of the debt service requirement is $45.3 million, out of which $4.3 million is due within the next twelve months. Previously, in February 2004, Correctional Services Corporation (“CSC”), which the Company acquired in November 2005, was awarded a contract by the Department of Homeland Security, Bureau of Immigration and Customs Enforcement (“ICE”) to develop and operate a 1,020 bed detention complex in Frio County Texas. STLDC was created and issued $49.5 million in taxable revenue bonds to finance the construction of the detention center. Additionally, CSC provided $5.0 million of subordinated notes to STLDC for initial development. The Company determined that it is the primary beneficiary of STLDC and consolidates the entity as a result.

STLDC is the owner of the complex and entered into a development agreement with CSC to oversee the development of the complex. In addition, STLDC entered into an operating agreement providing CSC the sole and exclusive right to operate and manage the complex. The operating agreement and bond indenture require the revenue from CSC’s 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 CSC to cover CSC’s operating expenses and management fee. CSC 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 CSC and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center.

As of July 1, 2007, $9.9 million is included in non-current restricted cash as 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 CSC completed and opened for operation in April 2004. In connection with this financing, CSC of Tacoma LLC, a wholly owned subsidiary of CSC, issued a $57 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 to CSC of Tacoma LLC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to CSC and the loan from WEDFA to CSC of Tacoma, LLC is non-recourse to CSC.

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.

As of July 1, 2007, $7.1 million is included in non-current restricted cash equivalents and investments as funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.

Australia

In connection with the financing and management of one Australian facility, the Company’s wholly owned Australian subsidiary financed the facility’s development and subsequent expansion in 2003 with long-term debt obligations, which are non-recourse to the Company. As a condition of the loan, the Company is required to maintain a restricted cash balance of Australian Dollar (“AUD”) 5.0 million, which, at July 1, 2007, was approximately $4.2 million. 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.

Guarantees

In connection with the creation of South African Custodial Services Ltd., referred to as SACS, the Company entered into certain guarantees related to the financing, construction and operation of the prison. The Company guaranteed certain obligations of SACS under its debt agreements up to a maximum amount of 60.0 million South African Rand, or approximately $8.5 million, to SACS’ senior lenders through the issuance of letters of credit. Additionally, SACS is required to fund a restricted account for the payment of certain costs in the event of contract termination. The Company has guaranteed the payment of 50% of amounts which may be payable by SACS into the restricted account and provided a standby letter of credit of 7.0 million South African Rand, or approximately $1.0 million, as security for its guarantee. The Company’s obligations under this guarantee expire upon the release from SACS of 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 Revolver.

The Company has agreed to provide a loan, of up to 20.0 million South African Rand, or approximately $2.9 million, referred to as the Standby Facility, to SACS for the purpose of financing the obligations under the contract between SACS and the South African government. No amounts have been funded under the Standby Facility, and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations under the Standby Facility expire upon the earlier of full funding or SACS’s release from its obligations under its debt agreements. The lenders’ ability to draw on the Standby Facility is limited to certain circumstances, including termination of the contract.

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

In connection with a design, build, finance and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of a not-for-profit entity. The potential estimated exposure of these obligations is Canadian Dollar (“CAN”) 2.5 million, or approximately $2.3 million commencing in 2017. The Company has a liability of approximately $0.7 million related to this exposure as of July 1, 2007 and December 31, 2006. 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 balance sheet. The Company does not currently operate or manage this facility.

The Company’s wholly-owned Australian subsidiary financed the development of a facility and subsequent expansion in 2003, with long-term debt obligations, which are non-recourse to the Company and total $53.2 million and $50.0 million at July 1, 2007 and December 31, 2006, 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 July 1, 2007, was approximately $4.2 million. This amount is included in restricted cash and the annual maturities of the future debt obligation is included in non recourse debt.

At July 1, 2007, the Company also had outstanding seven letters of guarantee totaling approximately $6.6 million under separate international facilities. The Company does not have any off balance sheet arrangements.

Derivatives

Effective September 18, 2003, the Company entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. The Company has designated the swaps as hedges against changes in the fair value of a designated portion of the Notes due to changes in underlying interest rates. Changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the Notes. The agreements, which have payment and expiration dates and call provisions that coincide with the terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while the Company makes a variable interest rate payment to the same counterparties equal to the six-month LIBOR plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. As of July 1, 2007 and December 31, 2006 the fair value of the swaps totaled approximately $(2.4) million and $(1.7) million, respectively, and are included in other non-current liabilities and as an adjustment to the carrying value of the Notes in the accompanying balance sheets. There was no material ineffectiveness of the Company’s interest rate swaps for the fiscal period presented.

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 to be an effective cash flow hedge. Accordingly, the Company records the value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. The total value of the swap asset as of July 1, 2007 and December 31, 2006 was approximately $5.1 million and $3.2 million, respectively, and was recorded as a component of other assets within the consolidated financial statements. There was no material ineffectiveness of the Company’s interest rate swap for the fiscal periods presented. The Company does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses of amounts associated with this swap which are currently reported in accumulated other comprehensive income. See Note 6 Comprehensive Income.

10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Florida Department of Management Services Matter

On May 19, 2006, the Company, along with Corrections Corporation of America, referred to as CCA, were sued by an individual plaintiff in the Circuit Court of the Second Judicial Circuit for Leon County, Florida (Case No. 2005CA001884). The complaint

alleges that, during the period from 1995 to 2004, the Company and CCA over billed the State of Florida by an amount of at least $12.7 million by submitting to the State false claims for various items relating to (i) repairs, maintenance and improvements to certain facilities which the Company operates in Florida, (ii) the Company’s staffing patterns in filling vacant security positions at those facilities, and (iii) the Company’s alleged failure to meet the conditions of certain waivers granted to the Company by the State of Florida from the payment of liquidated damages penalties relating to the Company’s staffing patterns at those facilities. The portion of the complaint relating to the Company arises out of the Company’s operations at the Company’s South Bay and Moore Haven, Florida correctional facilities. The complaint appears to be based largely on the same set of issues raised by a Florida Inspector General’s Evaluation Report released in late June 2005, referred to as the IG Report, which alleged that the Company and CCA over billed the State of Florida by over $12.0 million.

Subsequently, the Florida Department of Management Services, referred to as the DMS, which is responsible for administering the Company’s correctional contracts with the State of Florida, conducted a detailed analysis of the allegations raised by the IG Report which included a comprehensive written response to the IG Report prepared by the Company. In September 2005, the DMS provided a letter to the Company stating that, although its review had not yet been fully completed, it did not find any indication of any improper conduct by the Company. On October 17, 2006, DMS provided a letter to the Company stating that its review had been completed. The Company and DMS then agreed to settle this matter for $0.3 million. This amount was accrued at December 31, 2006 and paid in the first quarter of 2007. Although this determination is not dispositive of the recently initiated litigation, the Company believes it supports the Company’s position that the Company has valid defenses in this matter. The Florida Department of Law Enforcement has completed its investigation of this matter and found no wrongdoing on behalf of the Company. The Company will continue to monitor this matter and intends to defend its rights vigorously. However, given the amounts claimed by the plaintiff and the fact that the nature of the allegations could cause adverse publicity to the Company, the Company believes that this matter, if settled unfavorably to the Company, could have a material adverse effect on the Company’s financial condition and results of operations.

Texas Wrongful Death Action

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. Recently, the verdict was entered as a judgment against the Company in the amount of $51.7 million. The lawsuit is being administered under the insurance program established by The Wackenhut Corporation, the Company’s former parent company, in which the Company participated until October 2002. Policies secured by the Company under that program provide $55 million in aggregate annual coverage. As a result, the Company believes it is fully insured for all damages, costs and expenses associated with the lawsuit and as such has not taken any reserves in connection with the matter. The lawsuit stems from an inmate death which occurred at the Company’s former Willacy County State Jail in Raymondville, Texas, in April 2001, when two inmates at the facility attacked another inmate. Separate investigations conducted internally by the Company, The Texas Rangers and the Texas Office of the Inspector General exonerated the Company and its employees of any culpability with respect to the incident. The Company believes that the verdict is contrary to law and unsubstantiated by the evidence. The Company’s insurance carrier has posted a supersedeas bond in the amount of approximately $60 million to cover the judgment. On December 9, 2006, the trial court denied the Company’s post trial motions and the Company filed a notice of appeal on December 18, 2006. The appeal is proceeding.

Other Legal Proceedings

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 our 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.

Contracts

On April 26, 2007, the Company announced that the Federal Bureau of Prisons awarded a contract for the management of the 2,048-bed Taft Correctional Institution, which has been managed by the Company since 1997, to another private operator. The management

contract, which was competitively re-bid, will be transitioned to the alternative operator effective August 20, 2007. The Company does not expect the loss of this contract to have a material adverse effect on its financial condition or results of operations

Our total commitment for construction projects as of July 1, 2007 is approximately $175 million of which approximately $38 million has been paid.

11. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

Operating and Reporting Segments

The Company conducts its business through three reportable business segments: its U.S. corrections segment; its international services segment; and its GEO Care segment. 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 United States. “Other” primarily consists of activities associated with the Company’s construction business. Set forth below is certain financial and other information regarding each of the Company’s reportable segments. The segment information presented below with respect to prior periods has been reclassified to conform to the Company’s current presentation. US corrections operating income for the thirteen and twenty-six weeks ended July 1, 2007 include $1.1 million related to certain contingencies established during purchase accounting for CSC in 2005 that are no longer necessary based on new information the Company received during the quarter.

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		July 1, 2007				July 2, 2006				July 1, 2007				July 2, 2006
Revenues:
U.S. corrections		$	169,048			$	150,717			$	333,396			$	297,481
International services			33,320				24,905				62,162				48,017
GEO Care			29,513				15,530				51,647				30,432
Other			26,302				17,536				47,981				18,639
Total revenues		$	258,183			$	208,688			$	495,186			$	394,569
Depreciation and amortization:
U.S. corrections		$	7,798			$	5,116			$	14,633			$	10,030
International services			275				763				534				1,413
GEO Care			398				145				585				245
Other			—				—				—				—
Total depreciation and amortization		$	8,471			$	6,024			$	15,752			$	11,688
Operating income (loss):
U.S. corrections		$	35,648			$	26,487			$	68,052			$	48,916
International services			4,037				1,536				5,776				3,358
GEO Care			2,680				2,215				4,316				4,432
Other			(26	)			11				(187	)			14
Operating income from segments			42,339				30,249				77,957				56,720
Corporate expenses			(15,741	)			(14,292	)			(30,795	)			(28,301	)
Total operating income		$	26,598			$	15,957			$	47,162			$	28,419

		July 1, 2007				December 31, 2006
Segment assets:
U.S. corrections		$	908,658			$	457,545
International services			87,933				79,641
GEO Care			18,055				15,606
Other			18,567				21,057
Total segment assets		$	1,033,213			$	573,849

Pre-Tax Income Reconciliation of Segments

The following is a reconciliation of the Company’s total operating income from its reportable segments to the Company’s income before income taxes, equity in earnings of affiliates, discontinued operations and minority interest, in each case, during the thirteen weeks and twenty-six weeks ended July 1, 2007 and July 2, 2006, respectively.

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		July 1, 2007				July 2, 2006				July 1, 2007				July 2, 2006
Total operating income from segments		$	42,339			$	30,249			$	77,957			$	56,720
Unallocated amounts:
Corporate expenses			(15,741	)			(14,292	)			(30,795	)			(28,301	)
Net interest expense			(7,633	)			(5,022	)			(15,458	)			(10,385	)
Write off of deferred financing fees from extinguishment of debt			—				(1,295	)			(4,794	)			(1,295	)
Income before income taxes, minority interest, equity in earnings of affiliates and discontinued operations.		$	18,965			$	9,640			$	26,910			$	16,739

Asset Reconciliation of Segments

The following is a reconciliation of the Company’s reportable segment assets to the Company’s total assets as of July 1, 2007 and December 31, 2006, respectively.

		July 1, 2007				December 31, 2006
Reportable segment assets		$	1,014,646			$	552,792
Cash			76,849				111,520
Deferred tax asset, net			19,049				24,433
Restricted cash			34,401				33,651
Other			18,567				21,057
Total Assets		$	1,163,512			$	743,453

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
		July 1, 2007				July 2, 2006				July 1, 2007				July 2, 2006
Revenues:
Correctional and detention		$	202,368			$	175,622			$	395,558			$	345,498
Residential treatment			29,513				15,530				51,647				30,432
Construction			26,302				17,536				47,981				18,639
Total revenues		$	258,183			$	208,688			$	495,186			$	394,569

Equity in Earnings of Affiliate

Equity in earnings of affiliate includes our joint venture in South Africa, SACS. This entity is accounted for under the equity method of accounting.

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

		Twenty-six Weeks Ended
		July 1, 2007				July 2, 2006
Statement of Operations Data
Revenues		$	17,334			$	17,625
Operating income			6,985				6,735
Net income			(3,222	)			1,269
Balance Sheet Data

		July 1,				December 31,
		2007				2006
Current assets			16,872				15,396
Non current assets			53,080				60,023
Current liabilities			5,278				5,282
Non current liabilities			61,551				63,919
Shareholders’ equity			3,123				6,217

SACS commenced operations in fiscal 2002. Total equity in undistributed income (loss) for SACS before income taxes, for the twenty-six weeks ended July 1, 2007 and July 2, 2006 was $2.6 million, and $1.3 million , respectively.

12. BENEFIT PLANS

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

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

The Company adopted FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),” (“FAS 158”) at December 31, 2006. FAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. FAS 158 requires an employer to measure the funded status of a plan as of its year-end date.

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

In accordance with FAS 158, the Company has disclosed contributions and payment of benefits related to the plans. There were no assets in the plan at July 1, 2007 or December 31, 2006. There were no significant transactions between the employer or related parties and the plan during the period.

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

		July 1,				December 31,
		2007				2006
		(in thousands)
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of period		$	17,098			$	15,702
Service cost			275				671
Interest cost			205				546
Plan amendments			—				—
Actuarial gain			—				215
Benefits paid			—				(36	)
Projected benefit obligation, end of period		$	17,578			$	17,098
Change in Plan Assets
Plan assets at fair value, beginning of period		$	—			$	—
Company contributions			22				36
Benefits paid			(22	)			(36	)

		July 1,				December 31,
		2007				2006
		(in thousands)
Plan assets at fair value, end of period		$	—			$	—
Unfunded Status of the Plan		$	(17,578	)		$	(17,098	)
Amounts Recognized in Accumulated Other Comprehensive Income
Unrecognized prior service cost			143				164
Unrecognized net loss			2,992				3,028
Accrued pension cost		$	3,135			$	3,192

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		July 1, 2007				July 2, 2006				July 1, 2007				July 2, 2006
Components of Net Periodic Benefit Cost
Service cost		$	138			$	133			$	275			$	265
Interest cost			79				64				205				308
Amortization of:
Unrecognized prior service cost			10				10				20				20
Unrecognized net loss			76				36				151				72
Net periodic pension cost		$	303			$	243			$	651			$	665
Weighted Average Assumptions for Expense
Discount rate			5.75	%			5.50	%			5.75	%			5.50	%
Expected return on plan assets			N/A				N/A				N/A				N/A
Rate of compensation increase			5.50	%			5.50	%			5.50	%			5.50	%

In fiscal 2006, the Company reported total comprehensive income of approximately $34.5 million which included the effect of the adoption of FAS 158 of approximately ($1.9) million. The effect of the adoption of FAS 158 should not have been reported as an adjustment to comprehensive income which, if excluded, would have resulted in total comprehensive income in 2006 of approximately $36.4 million. The ending accumulated other comprehensive income balance of approximately $2.4 million and total stockholders’ equity of approximately $248.6 million reported in the statements of stockholders’ equity at December 31, 2006 are correct as reported. The Company will adjust the presentation of the 2006 comprehensive income amounts in its 2007 10-K filing.

13. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (FASB) issued FAS No. 159 (“FAS 159”), “Fair Value Option for Financial Assets and Financial Liabilities, “ which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of FAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by FAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact this standard will have on its financial condition, results of operations, cash flows or disclosures.

In September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair Value Measurements,” which establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. FAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact this standard will have on its financial condition, results of operations, cash flows or disclosures.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The Company adopted the provisions of FIN 48, on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As required by FIN 48, which clarifies Statement 109, Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of FIN 48, the Company recognized an increase of approximately a $2.5 million in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings.

The amount of unrecognized tax benefits as of January 1, 2007, was $5.7 million. That amount includes $3.4 million of unrecognized tax benefits which, if ultimately recognized, will reduce the Company’s annual effective tax rate. As a result of a South African tax law change enacted in February, 2007, a liability for unrecognized tax benefits in the amount of $2.4 million is no longer required resulting in a material change in unrecognized tax benefits during the first quarter of 2007. The reduction in the liability resulted in an increase to equity in earnings of affiliate for the first quarter of 2007. During the second quarter of 2007 there has been no material change to the amount of unrecognized tax benefits.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2002.

The Internal Revenue Service commenced an examination of the Company’s U.S. income tax returns for 2002 through 2004 in the third quarter of 2005 that is anticipated to be completed during 2008. The Company does not expect to recognize any further significant changes to the total amount of unrecognized tax benefits during the remaining quarters of the year.

In adopting FIN 48, the Company changed its previous method of classifying interest and penalties related to unrecognized tax benefits as income tax expense to classifying interest accrued as interest expense and penalties as operating expenses. Because the transition rules of FIN 48 do not permit the retroactive restatement of prior period financial statements, the Company’s second quarter 2006 financial statements continue to reflect interest and penalties on unrecognized tax benefits as income tax expense. The Company accrued approximately $0.9 million for the payment of interest and penalties at January 1, 2007. Subsequent changes to accrued interest and penalties have not been significant.

Subsequently, in May 2007, the FASB published FSP FIN 48-1. FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. As of our adoption date of FIN 48, our accounting is consistent with the guidance in FSP FIN 48-1.

14. SUBSEQUENT EVENTS

On July 25, 2007, the Company announced that the LaSalle Economic Development District (the “LEDD”) has signed a contract with U.S. Immigration and Customs Enforcement (“ICE”) for the housing of up to 1,160 immigration detainees at the Company owned LaSalle Detention Facility (the “Facility”) located in Jena, Louisiana. The Company will house and manage the immigration detainee population at the Facility pursuant to an agreement with LEDD.

The Company expects to commence the intake of 416 detainees during the fourth quarter of 2007, and the Facility is expected to ramp-up to 416 detainees by year-end 2007. As announced previously, the Company is currently expanding the Facility by 744 beds. The 744-bed expansion, which will cost approximately $30.0 million, is expected to be completed by the end of the second quarter of 2008. Following the completion of construction, the Company will begin intake of the additional 744 detainees. The Facility is expected to ramp up to full occupancy of 1,160 beds by the end of the third quarter of 2008. The agreement is expected to generate approximately $23.5 million in annualized operating revenues at full occupancy.

THE GEO GROUP, INC.

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

Forward-Looking Information

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

•		our ability to timely build and/or open facilities as planned, profitably manage such facilities and successfully integrate such facilities into our operations without substantial additional costs;
•		the instability of foreign exchange rates, exposing us to currency risks in Australia, the United Kingdom, and South Africa, or other countries in which we may choose to conduct our business;
•		our ability to reactivate the Michigan Correctional Facility;
•		an increase in unreimbursed labor rates;
•		our ability to expand, diversify and grow our correctional and residential treatment services;
•		our ability to win management contracts for which we have submitted proposals and to retain existing management contracts;
•		our ability to raise new project development capital given 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 grow our mental health and residential treatment 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;
•		our exposure to rising general insurance costs;
•		our exposure to claims for which we are uninsured;
•		our exposure to rising employee and inmate medical costs;
•		our ability to maintain occupancy rates at our facilities;
•		our ability to manage costs and expenses relating to ongoing litigation arising from our operations;

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

FINANCIAL CONDITION

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 Form 10-K for the year ended December 31, 2006, filed with the SEC on March 2, 2007. The discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Form 10-Q.

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

As of July 1, 2007, we operated a total of 60 correctional, detention and mental health and residential treatment facilities and had approximately 59,000 beds under management or for which we had been awarded contracts. We maintained an average facility occupancy rate of 96.5% for the thirteen weeks ended July 1, 2007 excluding our vacant Michigan and Jena facilities.

Reference is made to Part II, Item 7 of our annual report on Form 10-K filed with the SEC on March 2, 2007, for further discussion and analysis of information pertaining to our financial condition and results of operations for the fiscal year ended December 31, 2006.

Recent Developments

On July 25, 2007, we announced that the LaSalle Economic Development District (the “LEDD”) has signed a contract with U.S. Immigration and Customs Enforcement (“ICE”) for the housing of up to 1,160 immigration detainees at our owned LaSalle Detention Facility (the “Facility”) located in Jena, Louisiana. We will house and manage the immigration detainee population at the Facility pursuant to an agreement with LEDD.

We expect to commence the intake of 416 detainees during the fourth quarter of 2007, and the Facility is expected to ramp-up to 416 detainees by year-end 2007. As announced previously, we are currently expanding the Facility by 744 beds. The 744-bed expansion, which will cost approximately $30.0 million, is expected to be completed by the end of the second quarter of 2008. Following the completion of construction, we will begin intake of the additional 744 detainees. The Facility is expected to ramp-up to full occupancy of 1,160 beds by the end of the third quarter of 2008. The agreement is expected to generate approximately $23.5 million in annualized operating revenues at full occupancy.

Transition of Taft Correctional Institution

On April 26, 2007, we announced that the Federal Bureau of Prisons awarded a contract for the management of the 2,048-bed Taft Correctional Institution, which has been managed by us since 1997, to another private operator. The management contract, which was competitively re-bid, will be transitioned to the alternative operator effective August 20, 2007. We do not expect the loss of this contract to have a material adverse effect on our financial condition or results of operations

Stock Split

On May 1, 2007 our Board of Directors declared a two-for-one stock split of our common stock. The stock split took effect on June 1, 2007 with respect to stockholders of record on May 15, 2007. Following the stock split, our shares outstanding increased from 25.4 million to 50.8 million. All share and per share data included in this quarterly report on Form 10-Q have been adjusted to reflect the stock split.

Acquisition of CentraCore Properties Trust

On January 24, 2007, we completed the acquisition of CentraCore Properties Trust, which we refer to as CPT, pursuant to the merger of CPT with and into GEO Acquisition II, Inc., our wholly-owned subsidiary. We paid an aggregate purchase price of $421.6 million for the acquisition of CPT, inclusive of the payment of $368.3 million in exchange for the outstanding CPT common stock and stock options, the repayment of $40.0 million in CPT debt and the payment of $13.3 million in transaction related fees. We financed the acquisition through the use of $365.0 million in new borrowings under a new seven-year Term Loan B (defined below) and $65.6 million in cash on hand. The Company deferred debt issuance costs of $9.1 million related to the new $365 million term loan. These costs are being amortized over the life of the term loan. As a result of the merger we no longer have ongoing lease expense related to the properties we previously leased from CPT. However, we have increased depreciation expense reflecting our ownership of the properties and higher interest expense as a result of borrowings used to fund the acquisition.

Recent Financings

On January 24, 2007, in connection with our acquisition of CPT, we completed the refinancing of our senior credit facility through the execution of an amended senior credit facility, which we refer to as the Senior Credit Facility. The Senior Credit Facility initially consisted of a $365.0 million seven-year term loan, referred to as the Term Loan B, and a $150 million five-year revolver, referred to as the Revolver. The initial interest rate for the Term Loan B is LIBOR plus 1.50% and any future borrowings under the Revolver would bear interest at LIBOR plus 2.25% or at the base rate plus 1.25%. On January 24, 2007, we used the $365.0 million in borrowings under the Term Loan B to finance our acquisition of CPT.

On March 23, 2007, we sold in a follow-on public equity offering 5,462,500 shares of our common stock at a price of $43.99 per share, (10,925,000 shares of our common stock at a price of $22.00 per share reflecting the two-for-one stock split). All shares were issued from treasury. The aggregate net proceeds to us from the offering (after deducting underwriter’s discounts and expenses of $12.8 million) were $227.5 million. On March 26, 2007, we utilized $200.0 million of the net proceeds from the offering to repay outstanding debt under the Term Loan B portion of the Senior Credit Facility. As a result, as of July 1, 2007, we had reduced our total Term Loan B borrowings to $164.1 million. We intend to use the balance of the proceeds from the offering for general corporate purposes, which may include working capital, capital expenditures and potential acquisitions of complementary businesses and other assets.

Variable Interest Entities

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which addressed consolidation by a business of variable interest entities in which it is the primary beneficiary. In December 2003, the FASB issued FIN No. 46R which replaced FIN No. 46. Our 50% owned South African joint venture in South African Custodial Services Pty. Limited, which we refer to as SACS, is a variable interest entity. We determined that we are not the primary beneficiary of SACS and as a result are not required to consolidate SACS under FIN 46R. We account 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 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Guarantees” for a discussion of our guarantees related to SACS. Separately, SACS entered into a long-term operating contract with South African Custodial Management (Pty) Limited, which we refer to as SACM, to provide security and other management services and with SACS’s joint venture partner to provide purchasing, programs and maintenance services upon completion of the construction phase, which concluded in February 2002. Our maximum exposure for loss under this contract is $15.6 million, which represents our initial investment and the guarantees discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In February 2004, Correctional Services Corporation, now our wholly-owned subsidiary which we refer to as CSC, was awarded a contract by the Department of Homeland Security, Immigration and Customs Enforcement, or ICE, to develop and operate a 1,020 bed detention complex in Frio County, Texas. South Texas Local Development Corporation, referred to as STLDC, a non profit corporation, was created and issued $49.5 million in taxable revenue bonds to finance the construction of the detention complex. Additionally, CSC provided a $5 million subordinated note to STLDC for initial development costs. We determined that we are the primary beneficiary of STLDC and consolidate the entity as a result. STLDC is the owner of the complex and entered into a development agreement with CSC to oversee the development of the complex. In addition, STLDC entered into an operating agreement providing CSC the sole and exclusive right to operate and manage the complex. The operating agreement and bond indenture require that the revenue from CSC’s 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 CSC to cover CSC’s operating expenses and management fee. CSC 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 CSC and STLDC. The bonds are fully insured and the sole source of payment for the bonds is the operating revenues of the center.

Shelf Registration Statement

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

CRITICAL ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is contained in Note 1 to our financial statements on Form 10-K for the year ended December 31, 2006.

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.

Project development and design revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to the estimated total cost for each contract. This method is used because we consider costs incurred to date to be the best available measure of progress on these contracts. Provisions for estimated losses on uncompleted contracts and changes to cost estimates are made in the period in which we determine that such losses and changes are probable. Typically, we enter into fixed price contracts and do not perform additional work unless approved change orders are in place. Costs attributable to unapproved change orders are expensed in the period in which the costs are incurred if we believe that it is not probable that the costs will be recovered through a change in the contract price. If we believe that it is probable that the costs will be recovered through a change in the contract price, costs related to unapproved change orders are expensed in the period in which they are incurred, and contract revenue is recognized to the extent of the costs incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined.

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

We currently maintain a general liability policy for all U.S. corrections operations with $52.0 million per occurrence and in the aggregate. On October 1, 2004, we increased our deductible on this general liability policy from $1.0 million to $3.0 million for each claim which occurs after October 1, 2004. Geo Care, Inc. is separately insured for general and professional liability. Coverage is maintained with limits of $10.0 million per occurrence and in the aggregate subject to a $3.0 million self-insured retention. We also

maintain insurance to cover property and casualty risks, 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.

Since our insurance policies generally have high deductible amounts (including a $3.0 million per claim deductible under our general liability and auto liability policies and $2.0 million per claim deductible under our workers’ compensation policy), losses are recorded when reported and a further provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies. If actual losses related to insurance claims significantly differ from our estimates, our financial condition and results of operations could be materially impacted.

Certain of our facilities located in Florida and determined by insurers to be in high-risk hurricane areas carry substantial windstorm deductibles of up to $4.8 million. Since hurricanes are considered unpredictable future events, no reserves have been established to pre-fund for potential windstorm damage. Limited commercial availability of certain types of insurance relating to windstorm exposure in coastal areas and earthquake exposure mainly in California may prevent us from insuring our facilities to full replacement value.

INCOME TAXES

We account for income taxes in accordance with Financial Accounting Standards, or FAS, No. 109, “Accounting for Income Taxes.” Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of FAS 109.

In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, and estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required.

PROPERTY AND EQUIPMENT

As of July 1, 2007, we had $719.3 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 our 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.

We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable in accordance with FAS No. 144, (“FAS 144”) “Accounting for the Impairment of Disposal of Long-Lived Assets.” Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Management has reviewed our long-lived assets and determined that there are no events requiring impairment loss recognition for the period ended July 1, 2007. Events that would trigger an impairment assessment include deterioration of profits for a business segment that has long-lived assets, or when other changes occur which might impair recovery of long-lived assets.

STOCK-BASED COMPENSATION EXPENSE

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

COMMITMENTS AND CONTINGENCIES

Florida Department of Management Services Matter

On May 19, 2006, we, along with Corrections Corporation of America, referred to as CCA, were sued by an individual plaintiff in the Circuit Court of the Second Judicial Circuit for Leon County, Florida (Case No. 2005CA001884). The complaint alleges that, during the period from 1995 to 2004, the Company and CCA over billed the State of Florida by an amount of at least $12.7 million by submitting to the State false claims for various items relating to (i) repairs, maintenance and improvements to certain facilities which we operate in Florida, (ii) our staffing patterns in filling vacant security positions at those facilities, and (iii) our alleged failure to meet the conditions of certain waivers granted to us by the State of Florida from the payment of liquidated damages penalties relating to our staffing patterns at those facilities. The portion of the complaint relating to us arises out of our operations at its South Bay and Moore Haven, Florida correctional facilities. The complaint appears to be based largely on the same set of issues raised by a Florida Inspector General’s Evaluation Report released in late June 2005, referred to as the IG Report, which alleged that our Company and CCA over billed the State of Florida by over $12.0 million.

Subsequently, the Florida Department of Management Services, referred to as the DMS, which is responsible for administering our correctional contracts with the State of Florida, conducted a detailed analysis of the allegations raised by the IG Report which included a comprehensive written response to the IG Report which we prepared. In September 2005, the DMS provided a letter to us stating that, although its review had not yet been fully completed, it did not find any indication of any improper conduct by us. On October 17, 2006, DMS provided a letter to us stating that its review had been completed. We then agreed to settle this matter with DMS for $0.3 million. This was accrued at December 31, 2006 and paid during the first quarter 2007. Although this determination is not dispositive of the recently initiated litigation, we believe it supports the position that we have valid defenses in this matter. The Florida Department of Law Enforcement has completed its investigation of this matter and found no wrongdoing on behalf of the Company. We will continue to monitor this matter and intend to defend our rights vigorously. However, given the amounts claimed by the plaintiff and the fact that the nature of the allegations could cause adverse publicity, we believe that this matter, if settled unfavorably, could have a material adverse effect on our financial condition and results of operations.

Texas Wrongful Death Action

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. Recently, the verdict was entered as a judgment against us in the amount of $51.7 million. The lawsuit is being administered under the insurance program established by The Wackenhut Corporation, our former parent company, in which we participated until October 2002. Policies secured by us under that program provide $55.0 million in aggregate annual coverage. As a result, we believe that we are fully insured for all damages, costs and expenses associated with the lawsuit and as such have not taken any reserves in connection with the matter. The lawsuit stems from an inmate death which occurred at our former Willacy County State Jail in Raymondville, Texas, in April 2001, when two inmates at the facility attacked another inmate. Separate investigations conducted internally by us, The Texas Rangers and the Texas Office of the Inspector General exonerated us and our employees of any culpability with respect to the incident. We believe that the verdict is contrary to law and unsubstantiated by the evidence. Our insurance carrier has posted a supersedeas bond in the amount of approximately $60.0 million to cover the judgment. On December 9, 2006, the trial court denied our post trial motions and we filed a notice of appeal on December 18, 2006. The appeal is proceeding.

Contracts

On April 26, 2007, we announced that the Federal Bureau of Prisons awarded a contract for the management of the 2,048-bed Taft Correctional Institution, which we have managed since 1997, to another private operator. The management contract, which was competitively re-bid, will be transitioned to the alternative operator effective August 20, 2007. We do not expect the loss of this contract to have a material adverse effect on our financial condition or results of operations

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 report.

Comparison of Thirteen Weeks Ended July 1, 2007 and Thirteen Weeks Ended July 2, 2006

Revenues

		2007				% of Revenue				2006				% of Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. Corrections		$	169,048				65.5	%		$	150,717				72.2	%		$	18,331				12.2	%
International Services			33,320				12.9	%			24,905				11.9	%			8,415				33.8	%
GEO Care			29,513				11.4	%			15,530				7.5	%			13,983				90.0	%
Other			26,302				10.2	%			17,536				8.4	%			8,766				50.0	%
Total		$	258,183				100.0	%		$	208,688				100.0	%		$	49,495				23.7	%

U.S. Corrections

The increase in revenues for U.S. corrections facilities in the thirteen weeks ended July 1, 2007 (“Second Quarter 2007”) compared to the thirteen weeks ended July 2, 2006 (“Second Quarter 2006”) is primarily attributable to five items: (i) revenues increased $5.1 million in Second Quarter 2007 due to the completion of the Central Arizona Correctional Facility at the end of 2006 in Florence, Arizona; (ii) revenues increased $2.7 million in Second Quarter 2007 as a result of the capacity increase in September 2006 in our Lawton Correctional Facility located at Lawton, Oklahoma; (iii) revenues increased $2.7 million in Second Quarter 2007 as a result of the capacity increases in August 2006 in South Texas Detention Facility and in December 2006 in our Northwest Detention Center located in Tacoma, Washington; (iv) revenues increased $1.9 million in Second Quarter 2007 due to the commencement of our contract with the Arizona Department of Corrections (“ADOC”) at our New Castle, Indiana facility in March 2007; (v) revenues increased due to contractual adjustments for inflation, and improved terms negotiated into a number of contracts.

The number of compensated mandays in U.S. corrections facilities increased to 3.7 million in Second Quarter 2007 from 3.3 million in Second Quarter 2006 due to the addition of new facilities and capacity increases. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. correction and detention facilities was 96.0% of capacity in Second Quarter 2007 compared to 96.7% in Second Quarter 2006, excluding our vacant Michigan and Jena facilities due in part to a delay in the ramp-up of the New Castle contract.

International Services

The increase in revenues for international services facilities in the Second Quarter 2007 compared to the Second Quarter 2006 was mainly due to following items: (i) The United Kingdom revenues increased approximately $3.2 million due to the commencement of Campsfield House in Kidlington, England during the Second Quarter of 2006; (ii) Australian revenues increased approximately $4.9 million due to favorable fluctuations in foreign currency exchange rates during the period as well as contractual adjustments for inflation and the three-year renewal of the contract for the Fulham Correctional Centre at favorable terms as well as an increase of 50 beds at the Junee Correctional Centre; and (iii) South African revenues increased by approximately $0.3 million due to a contractual inflationary uplift and a wage adjustment factor increase as well as lower than normal occupancy rates in the Second Quarter 2006.

The number of compensated mandays in international services facilities increased to 506,195 in Second Quarter 2007 from 487,497 in Second Quarter 2006. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our international services facilities was 99.8% of capacity in Second Quarter 2007 compared to 99.7% in Second Quarter 2006.

GEO Care

The increase in revenues for GEO Care in the Second Quarter 2007 compared to the Second Quarter 2006 is primarily attributable to three items: (i) the Florida Civil Commitment Center in Arcadia, Florida, which commenced in July 2006 and contributed revenues of $5.6 million; (ii) the Treasure Coast Forensic Center in Martin County, Florida, which commenced operations in First Quarter 2007 and increased revenues by $4.3 million; (iii) the South Florida Evaluation and Treatment Center — Annex in Miami, Florida which commenced operation in January 2007 increased revenues by $3.1 million.

Other

The increase in revenues from other activities is mainly due to an increase in construction activities in the Second Quarter 2007 compared to the Second Quarter 2006 and is primarily attributable to three items: (i) the construction of the Clayton Correctional facility located in Clayton County, New Mexico, which commenced construction in September 2006 and increased revenues by $8.2 million; (ii) the construction of the South Florida Evaluation and Treatment Center that we are building in Miami, Florida, which commenced construction in November 2005 and increased revenues by $6.1 million offset by (iii) a reduction in the construction activity related to Graceville Correctional Facility located in Graceville, Florida, which we commenced construction in February 2006 by $6.7 million.

Operating Expenses

		2007				% of Revenue				2006				% of Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. Corrections		$	125,603				48.6	%		$	119,112				57.1	%		$	6,491				5.4	%
International Services			29,008				11.2	%			22,608				10.8	%			6,400				28.3	%
GEO Care			26,434				10.3	%			13,170				6.3	%			13,264				100.7	%
Other			26,328				10.2	%			17,525				8.4	%			8,803				50.2	%
Total		$	207,373				80.3	%		$	172,415				82.6	%		$	34,958				20.3	%

Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health and GEO Care facilities. Expenses also include construction costs which are included in “Other.”

U.S. Corrections

The increase in U.S. corrections operating expenses reflects the new openings and expansions discussed above as well as general increases in labor costs and utilities. This increase was partially offset by a decrease of $1.1 million related to certain contingencies established during purchase accounting for CSC in 2005 that are no longer necessary. Operating expense as a percentage of revenues decreased in Second Quarter 2007 compared to Second Quarter 2006 due to higher margins at certain facilities as well as the overall increase in revenue during the Second Quarter 2007.

International Services

Operating expenses for international services facilities increased in the Second Quarter 2007 compared to the Second Quarter 2006 largely as a result of the June 2006 commencement of the Campsfield House contract in the United Kingdom. The Campsfield House contract increased operating expenses in the United Kingdom by $2.8 million. Australian operating expenses also increased by $4.1 million mainly due to fluctuations in foreign currency exchange rates during the period as well as additional staffing and expenses related to contract variations and South African operating expenses decreased $0.5 million for the Second Quarter 2007 compared to the Second Quarter 2006.

GEO Care

Operating expenses for residential treatment increased approximately $13.3 million during Second Quarter 2007 from Second Quarter 2006 primarily due to the new contracts discussed above. Operating expense as a percentage of revenues increased in Second Quarter 2007 as compared to Second Quarter 2006 primarily due to start-up costs related to the new contracts discussed above.

Other

Other increased $8.8 million during the Second Quarter 2007 compared to the Second Quarter 2006 primarily due to the four construction contracts discussed above.

Other Unallocated Operating Expenses

		2007				% of Revenue				2006				% of Revenue				$ Change				% Change
		(Dollars in thousands)
General and Administrative Expenses		$	15,741				6.1	%		$	14,292				6.8	%		$	1,449				10.1	%

General and administrative expenses comprise substantially all of our other unallocated expenses. General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses increased by $1.5 million in Second Quarter 2007 compared to Second Quarter 2006, however decreased slightly as a percentage of revenues due to the overall increase in revenue during Second Quarter 2007. The increase in general and administrative costs is mainly due to increases in direct labor costs as a result of increased administrative staff.

Non Operating Expenses

Interest Income and Interest Expense

		2007				% of Revenue				2006				% of Revenue				$ Change				% Change
		(Dollars in thousands)
Interest Income		$	1,000				0.4	%		$	2,807				1.3	%		$	(1,807	)			64.4	%
Interest Expense		$	8,633				3.3	%		$	7,829				3.8	%		$	804				10.3	%

The decrease in interest income is primarily due to lower average invested cash balances.

The increase in interest expense is primarily attributable to the increase in our debt as a result of the CPT acquisition, as well as the increase in LIBOR rates.

Provision (Benefit) for Income Taxes

		2007				% of Revenue				2006				% of Revenue				$ Change				% Change
		(Dollars in thousands)
Income Taxes		$	7,004				2.7	%		$	3,595				1.7	%		$	3,409				94.8	%

The income tax expense is based on an estimated annual effective tax rate for Second Quarter 2007 of approximately 38%, comparable to 38% in Second Quarter 2006. Additionally, during the Second Quarter 2007, as during the Second Quarter 2006, we recorded certain state tax benefits.

Comparison of Twenty-six Weeks Ended July 1, 2007 and Twenty-six Weeks Ended July 2, 2006

Revenues

		2007				% of Revenue				2006				% of Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. corrections		$	333,396				67.3	%		$	297,481				75.4	%		$	35,915				12.1	%
International services			62,162				12.6	%			48,017				12.2	%			14,145				29.5	%
GEO Care			51,647				10.4	%			30,432				7.7	%			21,215				69.7	%
Other			47,981				9.7	%			18,639				4.7	%			29,342				157.4	%
Total		$	495,186				100.0	%		$	394,569				100.0	%		$	100,617				25.5	%

U.S. Corrections

The increase in revenues for U.S. corrections facilities in the twenty-six weeks ended July 1, 2007 (“First Half 2007”) compared to the twenty-six weeks ended July 2, 2006 (“First Half 2006”) is primarily attributable to five items: (i) revenues increased $9.7 million in 2007 due to the completion of the Central Arizona Correctional Facility at the end of 2006 in Florence, Arizona; (ii) revenues increased $5.4 million in 2007 as a result of the capacity increase in September 2006 in our Lawton Correctional Facility located at Lawton, Oklahoma; (iii) revenues increased $6.3 million in 2007 as a result of the capacity increases in August 2006 in South Texas Detention Facility; and in December 2006 in our Northwest Detention Center, located at Tacoma, Washington; (iv) revenues increased $2.0 million due to the commencement of our contract with the Arizona Department of Corrections (“ADOC”) located in New Castle, Indiana in March 2007, (v) revenues increased due to contractual adjustments for inflation, and improved terms negotiated into a number of contracts.

The number of compensated mandays in U.S. corrections facilities increased to 7.3 million in First Half 2007 from 6.4 million in First Half 2006 due to the addition of new facilities and capacity increases. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of

capacity. The average occupancy in our U.S. correction and detention facilities was 96.9% of capacity in First Half 2007 compared to 94.6% in First Half 2006, excluding our vacant Michigan and Jena facilities.

International Services

The increase in revenues for international services facilities in the First Half 2007 compared to the First Half 2006 was mainly due to following items: (i) South African revenues increased by approximately $0.8 million due to a contractual inflationary uplift and a wage adjustment factor increase ; (ii) Australian revenues increased approximately $6.3 million due to the favorable fluctuations in foreign currency exchange rates during the period as well as contractual adjustments for inflation and improved terms; and (iii) The United Kingdom revenues increased approximately $7.0 million due to the commencement of Campsfield House in Kidlington, England during the Second Quarter of 2006.

The number of compensated mandays in international services facilities remained constant at 1.0 million for First Half 2007 and First Half 2006. 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 international services facilities was 99.6% of capacity in First Half 2007 compared to 97.6% in First Half 2006.

GEO Care

The increase in revenues for GEO Care in the First Half 2007 compared to the First Half 2006 is primarily attributable to five items: (i) the Florida Civil Commitment Center in Arcadia, Florida, which commenced in July 2006 and contributed revenues of $10.6 million; (ii) the Treasure Coast Forensic Center in Martin County, Florida, which commenced operations in First Quarter 2007 and increased revenues by $4.3 million (iii) the South Florida Evaluation and Treatment Center — Annex in Miami, Florida which commenced operation in January 2007 increased revenues by $3.6 million. (iv) the Palm Beach County Jail in Palm Beach County, Florida, which commenced operations in May 2006 and increased revenues by $0.9 million, and a $1.0 million increase at South Florida State Hospital due to a contract modification in third quarter 2006.

Other

The increase in revenues from other activities is mainly due to an increase in construction activities in the First Half 2007 compared to the First Half 2006 and is primarily attributable to four items: (i) the renovation of Treasure Coast Forensic Center located in Martin County, Florida, which we commenced construction in March, 2007 increased revenue by $2.2 million; (ii) the construction of the Clayton Correctional facility located in Clayton County, New Mexico, which commenced construction in September 2006 and increased revenues by $13.6 million; (iii) the construction of the expansion facility in the Florida Civil Commitment Center in Arcadia, Florida increased revenues by $3.6 million (iv) the construction of the South Florida Evaluation and Treatment Center that we are building in Miami, Florida, which commenced construction in November 2005 and increased revenues by $8.9 million.

Operating Expenses

		2007				% of Revenue				2006				% of Revenue				$ Change				% Change
		(Dollars in thousands)
U.S. Corrections		$	250,710				50.6	%		$	238,534				60.5	%		$	12,176				5.1	%
International Services			55,853				11.3	%			43,247				11.0	%			12,606				29.1	%
GEO Care			46,746				9.5	%			25,755				6.5	%			20,991				81.5	%
Other			48,168				9.7	%			18,625				4.7	%			29,543				158.6	%
Total		$	401,477				81.1	%		$	326,161				82.7	%		$	75,316				23.1	%

Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and mental health and GEO Care facilities. Expenses also include construction costs which are included in “Other.”

U.S. Corrections

The increase in U.S. corrections operating expenses reflects the new openings and expansions discussed above as well as general increases in labor costs and utilities. This increase was partially offset by a decrease of $1.1 million related to certain contingencies established during purchase accounting for CSC in 2005 that are no longer necessary. Operating expense as a percentage of revenues decreased in First Half 2007 compared to First Half 2006 due to higher margins at certain facilities as well as the overall increase in revenue during the First Half 2007.

International Services

Operating expenses for international services facilities increased in the First Half 2007 compared to the First Half 2006 largely as a result of the June 2006 commencement of the Campsfield House contract in the United Kingdom. The Campsfield House contract increased operating expenses in the United Kingdom by $6.6 million. Australian operating expenses also increased by $6.7 million mainly due to unfavorable fluctuations in foreign currency exchange rates during the period as well as additional staffing and expenses related to contract variations. South African operating expenses decreased by $0.7 million for the First Half 2007 and the First Half 2006.

GEO Care

Operating expenses for residential treatment increased approximately $21.1 million during First Half 2007 from First Half 2006 primarily due to the new contracts discussed above. Operating expense as a percentage of revenues increased in First Half 2007 compared to First Half 2006 primarily due to start-up costs related to the new contracts discussed above.

Other

Other increased $29.5 million during the First Half 2007 compared to the First Half 2006 primarily due to the four construction contracts discussed above.

Other Unallocated Operating Expenses

		2007				% of Revenue				2006				% of Revenue				$ Change				% Change
		(Dollars in thousands)
General and Administrative Expenses		$	30,795				6.2	%		$	28,301				7.2	%		$	2,494				8.8	%