The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This quarterly report on Form 10-Q contains statements as to our beliefs and expectations of the outcome of future events that are forward-looking statements as defined within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of current or historical fact contained herein, including statements regarding our future financial position, business strategy, budgets, projected costs and plans, and objectives of management for future operations, are forward-looking statements. The words "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "projects," "will," and similar expressions, as they relate to us, are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. These include, but are not limited to, the risks and uncertainties associated with:
• fluctuations in operating results because of changes in occupancy levels, competition, increases in cost of operations, fluctuations in interest rates, and risks of operations;

• changes in the privatization of the corrections and detention industry and the public acceptance of our services;

• our ability to obtain and maintain correctional facility management contracts, including as the result of sufficient governmental appropriations, inmate disturbances, and the timing of the opening of new facilities and the commencement of new management contracts as well as our ability to utilize current available beds and new capacity as development and expansion projects are completed;

• increases in costs to develop or expand correctional facilities that exceed original estimates, or the inability to complete such projects on schedule as a result of various factors, many of which are beyond our control, such as weather, labor conditions, and material shortages, resulting in increased construction costs;

• changes in governmental policy and in legislation and regulation of the corrections and detention industry that adversely affect our business including, but not limited to, judicial challenges regarding the transfer of California inmates to out-of-state private correctional facilities;

• the availability of debt and equity financing on terms that are favorable to us; and

• general economic and market conditions.

Any or all of our forward-looking statements in this quarterly report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions described in "Risk Factors" disclosed in detail in our annual report on Form 10-K for the fiscal year ended December 31, 2007, filed with the Securities and Exchange Commission (the "SEC") on February 27, 2008 (File No. 001-16109) (the "2007 Form 10-K") and in other reports we file with the SEC from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events

or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. 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 contained in this report and in the 2007 Form 10-K.
OVERVIEW
The Company
As of September 30, 2008, we owned 45 correctional, detention and juvenile facilities, three of which we leased to other operators. As of September 30, 2008, we operated 65 facilities, including 42 facilities that we owned, with a total design capacity of approximately 82,000 beds in 19 states and the District of Columbia. We are also constructing an additional 2,232-bed facility in Adams County, Mississippi that is expected to be completed in the fourth quarter of 2008, a 3,060-bed facility in Eloy, Arizona that is expected to be completed in the first quarter of 2009, and a 2,040-bed facility in Trousdale County, Tennessee that is expected to be completed in the first quarter of 2010. Further, during the second quarter of 2008 we were awarded a contract by the Office of Federal Detention Trustee to design, build, and operate a new correctional facility in Pahrump, Nevada, which is currently expected to be completed during the second quarter of 2010.
We specialize in owning, operating, and managing prisons and other correctional facilities and providing inmate residential and prisoner transportation services for governmental agencies. In addition to providing the fundamental residential services relating to inmates, our facilities offer a variety of rehabilitation and educational programs, including basic education, religious services, life skills and employment training and substance abuse treatment. These services are intended to reduce recidivism and to prepare inmates for their successful re-entry into society upon their release. We also provide health care (including medical, dental and psychiatric services), food services and work and recreational programs.
Our website address is www.correctionscorp.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
Section 16 reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), available on our website, free of charge, as soon as reasonably practicable after these reports are filed with or furnished to the SEC.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements in this report 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. A summary of our significant accounting policies is described in our 2007 Form 10-K. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Asset impairments. As of September 30, 2008, we had $2.5 billion in property and equipment. We evaluate the recoverability of the carrying values of our long-lived assets,

other than goodwill, when events suggest that an impairment may have occurred. Such events primarily include, but are not limited to, the termination of a management contract or a significant decrease in inmate populations within a correctional facility we own or manage. In these circumstances, we utilize estimates of undiscounted cash flows to determine if an impairment exists. If an impairment exists, it is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
Goodwill impairments. As of September 30, 2008, we had $13.7 million of goodwill. We evaluate the carrying value of goodwill during the fourth quarter of each year, in connection with our annual budgeting process, and whenever circumstances indicate the carrying value of goodwill may not be recoverable. Such circumstances primarily include, but are not limited to, the termination of a management contract or a significant decrease in inmate populations within a reporting unit. We test for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined using a collaboration of various common valuation techniques, including market multiples, discounted cash flows, and replacement cost methods. Each of these techniques requires considerable judgment and estimations which could change in the future.
Income taxes. Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 generally requires us to record deferred income taxes for the tax effect of differences between book and tax bases of our assets and liabilities.
Deferred income taxes reflect the available net operating losses and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of our deferred tax assets, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
We have approximately $6.1 million in net operating losses applicable to various states that we expect to carry forward in future years to offset taxable income in such states. Accordingly, we have a valuation allowance of $1.2 million for the estimated amount of the net operating losses that will expire unused, in addition to a $5.6 million valuation allowance related to state tax credits that are also expected to expire unused. Although our estimate of future taxable income is based on current assumptions that we believe to be reasonable, our assumptions may prove inaccurate and could change in the future, which could result in the expiration of additional net operating losses or credits. We would be required to establish a valuation allowance at such time that we no longer expected to utilize these net operating losses or credits, which could result in a material impact on our results of operations in the future.
Self-funded insurance reserves. As of September 30, 2008, we had $35.5 million in accrued liabilities for employee health, workers' compensation, and automobile insurance claims. We are significantly self-insured for employee health, workers' compensation, and automobile liability insurance claims. As such, our insurance expense is largely dependent on claims experience and our ability to control our claims. We have consistently accrued the estimated liability for employee health insurance claims based on our history of claims

experience and the time lag between the incident date and the date the cost is paid by us. We have accrued the estimated liability for workers' compensation and automobile insurance claims based on a third-party actuarial valuation of the outstanding liabilities, discounted to the net present value of the outstanding liabilities. These estimates could change in the future. It is possible that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.
Legal reserves. As of September 30, 2008, we had $15.4 million in accrued liabilities related to certain legal proceedings in which we are involved. We have accrued our estimate of the probable costs for the resolution of these claims based on a range of potential outcomes. In addition, we are subject to current and potential future legal proceedings for which little or no accrual has been reflected because our current assessment of the potential exposure is nominal. These estimates have been developed in consultation with our General Counsel's office and, as appropriate, outside counsel handling these matters, and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.

RESULTS OF OPERATIONS
Our results of operations are impacted by the number of facilities we owned and
managed, the number of facilities we managed but did not own, the number of
facilities we leased to other operators, and the facilities we owned that were
not yet in operation. The following table sets forth the changes in the number
of facilities operated for the periods presented.

                                                         Owned
                                    Effective             and            Managed
                                      Date              Managed           Only            Leased          Total
Facilities as of
December 31, 2006                                             40               25               3             68

Expiration of the
management contract for the
Liberty County
Jail/Juvenile Center               January 2007                -               (1 )             -             (1 )
Completion of construction
of the Saguaro Correctional
Facility                             June 2007                 1                -               -              1

Facilities as of
December 31, 2007                                             41               24               3             68


Activation of 1,020 beds at
the La Palma Correctional
Center                               July 2008                 1                -               -              1
Expiration of the
management contract for the
Camino Nuevo Correctional
Center                              August 2008                -               (1 )             -             (1 )

Facilities as of
September 30, 2008                                            42               23               3             68

Our results of operations are also impacted by the number of beds created as a result of expansion projects completed at facilities we own or at facilities we manage but do not own. The following table sets forth the number of beds placed into service since January 1, 2007 as a result of facility expansion projects:

                                                                   Expansion          Owned or
Facility                                 Quarter Completed           Beds           Managed-Only
Citrus County Detention Facility        First quarter 2007              360         Managed-Only

Crossroads Correctional Center          First quarter 2007               96         Owned

Gadsden Correctional Institution        Third quarter 2007              384         Managed-Only

Bay Correctional Facility               Third quarter 2007              235         Managed-Only

North Fork Correctional Facility        Fourth quarter 2007             960         Owned

Tallahatchie County Correctional        Fourth quarter 2007             720         Owned
Facility
                                        Second quarter 2008             720         Owned

Kit Carson Correctional Center          First quarter 2008              720         Owned

Eden Detention Center                   First quarter 2008              129         Owned

Bent County Correctional Facility       Second quarter 2008             720         Owned

Leavenworth Detention Center            Second quarter 2008             266         Owned

Davis Correctional Facility             Third quarter 2008              660         Owned

                                                                      5,970

Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended September 30, 2007
Net income was $37.9 million, or $0.30 per diluted share, for the three months ended September 30, 2008, compared with net income of $33.3 million, or $0.26 per diluted share, for the three months ended September 30, 2007. During the nine months ended September 30, 2008, we generated net income of $110.4 million, or $0.87 per diluted share, compared with net income of $98.4 million, or $0.79 per diluted share, for the nine months ended September 30, 2007. Net income during the three and nine months ended September 30, 2008 was favorably impacted by the increase in operating income of $8.5 million, or 12.8%, for the three-month period over the same period in the prior year and $21.7 million, or 11.0%, for the nine-month period over the same period in the prior year. Contributing to the increase in operating income during 2008 compared with the previous year was an increase in inmate populations and the commencement of new management contracts, partially offset by increases in general and administrative expenses and depreciation and amortization. Facility Operations
A key performance indicator we use to measure the revenue and expenses associated with the operation of the facilities we own or manage is expressed in terms of a compensated man-day, which represents the revenue we generate and expenses we incur for one inmate for one calendar day. Revenue and expenses per compensated man-day are computed by dividing facility revenue and expenses by the total number of compensated man-days during the period. We believe the measurement is useful because we are compensated for operating and managing facilities at an inmate per-diem rate based upon actual or minimum guaranteed occupancy levels. We also measure our ability to contain costs on a per-compensated man-

day basis, which is largely dependent upon the number of inmates we accommodate. Further, per compensated man-day measurements are also used to estimate our potential profitability based on certain occupancy levels relative to design capacity. Revenue and expenses per compensated man-day for all of the facilities placed into service that we owned or managed were as follows for the three and nine months ended September 30, 2008 and 2007:

                                                     For the Three Months                For the Nine Months
                                                     Ended September 30,                 Ended September 30,
                                                    2008               2007             2008              2007
Revenue per compensated man-day                  $     57.23         $  54.94        $     56.57        $  54.27
Operating expenses per compensated man-day:
Fixed expense                                          30.50            29.25              29.74           28.56
Variable expense                                        9.83             9.98               9.97            9.91

Total                                                  40.33            39.23              39.71           38.47

Operating margin per compensated man-day         $     16.90         $  15.71        $     16.86        $  15.80

Operating margin                                        29.5 %           28.6 %             29.8 %          29.1 %

Average compensated occupancy                           95.3 %           97.9 %             96.3 %          98.1 %

Average compensated population                        77,695           73,740             76,626          72,439

Average compensated population for the quarter ended September 30, 2008 increased 3,955 from 73,740 in the third quarter of 2007 to 77,695 in the third quarter of 2008. The increase in average compensated population resulted primarily from the placement of 5,514 expansion beds into service since the end of the second quarter of 2007, and the opening and subsequent ramp-up in populations at our 1,896-bed Saguaro Correctional Facility in June 2007. Further, we also commenced operation at our La Palma Correctional Center by placing 1,020 beds into service during July 2008.
State revenues increased $28.8 million, or 15.5%, from $185.2 million for the three months ended September 30, 2007 to $214.0 million for the three months ended September 30, 2008, and $88.1 million, or 16.8%, from $525.6 million for the nine months ended September 30, 2007 to $613.7 million for the nine months ended September 30, 2008. State revenues increased as certain states, such as the state of California, turned to the private sector to help alleviate their overcrowding situations, while other states utilized additional bed capacity we constructed for them or contracted to utilize additional beds at our facilities. We were also successful in achieving certain per diem increases caused by a strong demand for prison beds. We are monitoring the challenges faced by our customers as a result of the downturn in the economy and the unusual financial environment. Although this environment increases the level of uncertainty in the short-term, we believe the long-term implications are very positive as states may defer or cancel plans for adding new prison bed capacity, which should ensure a continuation of the supply and demand imbalance that has been benefiting the private prison industry.
Business from our federal customers, including primarily the Federal Bureau of Prisons, or the BOP, the U.S. Marshals Service, or the USMS, and U.S. Immigration and Customs Enforcement, or ICE, continues to be a significant component of our business. Our federal customers generated approximately 39% and 41% of our total revenue for the nine months ended September 30, 2008 and 2007, respectively, increasing 5.4%, from $443.2 million during the nine months ended September 30, 2007 to $467.1 million during the nine months

ended September 30, 2008. Similar to business from our state customers, we were successful in achieving per diem increases under several of our federal management contracts as a result of a strong demand for prison beds. Operating expenses totaled $292.6 million and $273.5 million for the three months ended September 30, 2008 and 2007, respectively, while operating expenses for the nine months ended September 30, 2008 and 2007 totaled $850.2 million and $778.9 million, respectively. Operating expenses consist of those expenses incurred in the operation and management of adult and juvenile correctional and detention facilities and for our inmate transportation subsidiary.
Fixed expenses per compensated man-day during the three-month periods increased 4.3% from $29.25 in 2007 to $30.50 in 2008. Fixed expenses per compensated man-day during the nine-month periods increased 4.1% from $28.56 in 2007 to $29.74 in 2008 primarily as a result of an increase in salaries and benefits. Salaries and benefits represent the most significant component of fixed operating expenses and represent approximately 64% of total operating expenses during both the three and nine months ended September 30, 2008. During the three and nine months ended September 30, 2008, facility salaries and benefits expense increased $17.3 million and $50.6 million, respectively. Salaries and benefits increased most notably at the aforementioned facilities such as our Saguaro facility that opened in June 2007, our La Palma facility that opened in July 2008, and at our North Fork and Tallahatchie facilities where expansion beds were placed into service.
Fixed costs per compensated man-day will be negatively impacted as we commence operations at newly developed facilities or as we hire additional staff at facilities we expand until the occupancy at such facilities reach stabilized levels. Further, as we fill our available beds, the opportunity to leverage our fixed costs, such as salaries and benefits, over a larger inmate population will be diminished. While we have also experienced tightening labor markets for staff, a softening economy could provide relief.
Although facility variable expenses decreased $0.15 per compensated man-day during the three-month period in the current year compared with the prior year, facility variable expenses increased $0.06 per compensated man-day during the nine months ended September 30, 2008 compared with the same period in the prior year. The increase in facility variable operating expenses during the nine-month period was largely due to increased costs at facilities where new beds were placed into service. Additionally, we experienced an increase in legal expenses during the first nine months of 2008 compared with the same period in the prior year. Expenses associated with legal proceedings may fluctuate from quarter to quarter based on new or threatened litigation, changes in our assumptions, new developments, or the effectiveness of our litigation and settlement strategies. We continually evaluate the profitability of certain management contracts and may elect to terminate such contracts from time to time based on a variety of factors but primarily based on poor operating performance. Although generally more profitable, the operation of the facilities we own carries a higher degree of risk associated with a management contract than the operation of the facilities we manage but do not own because we incur significant capital expenditures to construct or acquire facilities we own. Additionally, correctional and detention facilities have a limited or no alternative use. Therefore, if a management contract is terminated on a facility we own, we continue to incur certain operating expenses, such as real estate taxes, utilities, and insurance, that we would not incur if a management contract

were terminated for a managed-only facility. As a result, revenue per compensated man-day is typically higher for facilities we own and manage than for managed-only facilities. Because we incur higher expenses, such as repairs and maintenance, real estate taxes, and insurance, on the facilities we own and manage, our cost structure for facilities we own and manage is also higher than the cost structure for the managed-only facilities. The following tables display the revenue and expenses per compensated man-day for the facilities placed into service that we own and manage and for the facilities we manage but do not own:

                                                     For the Three Months                For the Nine Months
                                                     Ended September 30,                 Ended September 30,
                                                    2008               2007             2008              2007
Owned and Managed Facilities:
Revenue per compensated man-day                  $     66.14         $  63.67        $     65.35        $  62.68
Operating expenses per compensated man-day:
Fixed expense                                          32.84            31.39              31.82           30.63
Variable expense                                       10.55            10.85              10.65           10.72

Total                                                  43.39            42.24              42.47           41.35

Operating margin per compensated man-day         $     22.75         $  21.43        $     22.88        $  21.33
. . .