UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

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

For the transition period from to

Commission File Number 1-14472

CORNELL COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		76-0433642
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1700 West Loop South, Suite 1500, Houston, Texas		77027
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (713) 623-0790

Indicate by a 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o No o

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

Large accelerated filer o		Accelerated filer x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

At November 6, 2009, the registrant had 14,928,619 shares of common stock outstanding.

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Cornell Companies, Inc.

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Form 10-Q

		Page
Part I
Item 1.	Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	46

Part II
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Submission of Matters to a Vote of Security Holders	47
Item 5.	Other Information	47
Item 6.	Exhibits	47

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Forward-Looking Information

The statements included in this quarterly report regarding future financial performance and results of operations and other statements that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this quarterly report include, but are not limited to, statements about the following subjects:

· revenues,

· revenue mix,

· expenses, including personnel and medical costs,

· results of operations,

· operating margins,

· supply and demand,

· market outlook in our various markets,

· our other expectations with regard to market outlook,

· utilization,

· parolee, detainee, inmate and youth offender trends,

· pricing and per diem rates,

· contract commencements,

· new contract opportunities,

· operations at, future contracts for, and results from our Regional Correctional Center,

· the timing (including ramp of facility population) and other aspects of planned expansions, including without limitation the D. Ray James Prison and Walnut Grove Youth Correctional Facility expansions, and client contracts for such facilities,

· the construction and lease of the new facility in Hudson, Colorado and our contract with the Alaska Department of Corrections, including the timing of the ramp of facility population,

· adequacy of insurance,

· debt levels,

· debt reduction,

· common stock repurchases,

· the effect of FIN No. 48,

· our effective tax rate,

· tax assessments,

· results and effects of legal proceedings and governmental audits and assessments,

· liquidity, including future liquidity and our ability to obtain financing,

· financial markets,

· cash flow from operations,

· adequacy of cash flow for our obligations,

· capital requirements,

· capital expenditures,

· effects of accounting changes and adoption of accounting policies,

· changes in laws and regulations,

· adoption of accounting policies,

· benefit payments, and

· changes in laws and regulations.

Forward-looking statements in this quarterly report are identifiable by, but not limited to, the use of the following words and other similar expressions among others:

· “anticipates”

· “believes”

· “budgets”

· “could”

· “estimates”

· “expects”

· “forecasts”

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· “intends”

· “may”

· “might”

· “plans”

· “predicts”

· “projects”

· “scheduled”

· “should”

Such statements are subject to numerous risks, uncertainties and assumptions, including, but not limited to:

· those described (in the Company’s 2008 Annual Report on Form 10-K) under “Item 1A. Risk Factors,” as filed with the SEC,

· the adequacy of sources of liquidity,

· the effect and results of litigation, audits and contingencies, and

· other factors discussed in this quarterly report and in the Company’s other filings with the SEC, which are available free of charge on the SEC’s website at www.sec.gov .

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated.

All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.

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PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CORNELL COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

	September 30, 2009			December 31, 2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,972		$	14,613
Accounts receivable — trade (net of allowance for doubtful accounts of $4,899 and $4,272, respectively)	74,971			64,622
Other receivables	4,523			4,766
Bond fund payment account and other restricted assets	26,904			31,370
Deferred tax assets	10,562			9,151
Prepaid expenses and other	5,702			6,368
Total current assets	127,634			130,890
PROPERTY AND EQUIPMENT, net	451,944			450,354
OTHER ASSETS:
Debt service reserve fund	23,370			23,750
Goodwill, net	13,308			13,308
Intangible assets, net	1,374			2,320
Deferred costs and other	18,318			16,299
Total assets	$	635,948		$	636,921

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities	$	57,432		$	69,093
Current portion of long-term debt	13,413			12,412
Total current liabilities	70,845			81,505
LONG-TERM DEBT, net of current portion	292,798			308,070
DEFERRED TAX LIABILITIES	18,854			17,491
OTHER LONG-TERM LIABILITIES	1,973			1,688
Total liabilities	384,470			408,754

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued	—			—
Common stock, $.001 par value, 30,000,000 shares authorized, 16,412,802 and 16,238,685 shares issued and 14,924,916 and 14,732,522 shares outstanding, respectively	16			16
Additional paid-in capital	167,534			164,746
Retained earnings	92,500			73,318
Accumulated other comprehensive income	1,485			1,676
Treasury stock (1,487,886 and 1,506,163 shares of common stock, at cost, respectively)	(11,888		)	(12,034		)
Total Cornell Companies, Inc.	249,647			227,722
Non-controlling interest	1,831			445
Total stockholders’ equity	251,478			228,167
Total liabilities and stockholders’ equity	$	635,948		$	636,921

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

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CORNELL COMPANIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008

REVENUES	$	103,279		$	95,187		$	308,323		$	285,225
OPERATING EXPENSES, EXCLUDING DEPRECIATION AND AMORTIZATION	74,419			71,234			222,044			209,723
DEPRECIATION AND AMORTIZATION	4,460			4,466			14,093			12,843
GENERAL AND ADMINISTRATIVE EXPENSES	5,806			5,450			18,214			19,217

INCOME FROM OPERATIONS	18,594			14,037			53,972			43,442

INTEREST EXPENSE	6,500			6,162			19,435			19,074
INTEREST INCOME	(124		)	(408		)	(530		)	(1,459		)

INCOME BEFORE PROVISION FOR INCOME TAXES AND NON-CONTROLLING INTEREST	12,218			8,283			35,067			25,827

PROVISION FOR INCOME TAXES	5,012			3,368			14,499			10,931

NET INCOME	7,206			4,915			20,568			14,896

NON-CONTROLLING INTEREST	513			87			1,386			87

INCOME AVAILABLE TO STOCKHOLDERS	$	6,693		$	4,828		$	19,182		$	14,809

EARNINGS PER SHARE:
BASIC	$	.45		$	.33		$	1.29		$	1.01
DILUTED	$	.45		$	.32		$	1.28		$	1.00

NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC	14,886			14,734			14,880			14,715
DILUTED	14,995			14,915			14,968			14,867

COMPREHENSIVE INCOME:
Net income	$	7,206		$	4,915		$	20,568		$	14,896
Other comprehensive income, net of tax: Unrealized gain on derivative instruments, net of tax provision of $324 and $406 in 2008	—			467			—			584
Total other comprehensive income, net of tax	7,206			5,382			20,568			15,480
Comprehensive income attributable to non-controlling interest	513			87			1,386			87
Comprehensive income attributable to Cornell Companies, Inc.	$	6,693		$	5,295		$	19,182		$	15,393

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

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CORNELL COMPANIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(Unaudited)

(in thousands, except share data)

	Common Stock			Additional										Accumulated Other			Non-		Total
		Par		Paid-In			Retained		Treasury Stock					Comprehensive			Controlling		Stockholders’			Comprehensive
	Shares	Value		Capital			Earnings		Shares		Cost			Income			Interest		Equity			Income

BALANCES AT DECEMBER 31, 2008	16,238,685	$	16	$	164,746		$	73,318	1,506,163		$	(12,034	)	$	1,676		$	445	$	228,167		$	—

NET INCOME	—	—		—			19,182		—		—			—			1,386		20,568			19,182
COMPREHENSIVE INCOME	—	—		—			—		—		—			—			—		—			$	19,182
EXERCISE OF STOCK OPTIONS	2,550	—		32			—		—		—			—			—		32
INCOME TAX BENEFIT/(EXPENSE) FROM STOCK OPTION EXERCISES	—	—		(71		)	—		—		—			—			—		(71		)
DEFERRED AND OTHER STOCK COMPENSATION	158,783	—		2,347			—		—		—			—			—		2,347
AMORTIZATION OF GAIN ON TERMINATION OF DERIVATIVE	—	—		—			—		—		—			(191		)	—		(191		)
ISSUANCE OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN	—	—		143			—		(18,277	)	146			—			—		289
ISSUANCE OF COMMON STOCK UNDER 2000 DIRECTOR’S STOCK PLAN	12,784	—		337			—		—		—			—			—		337

BALANCES AT SEPTEMBER 30, 2009	16,412,802	$	16	$	167,534		$	92,500	1,487,886		$	(11,888	)	$	1,485		$	1,831	$	251,478

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

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CORNELL COMPANIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

(in thousands, except share data)

	Common Stock			Additional									Accumulated Other		Non-		Total
		Par		Paid-In		Retained		Treasury Stock					Comprehensive		Controlling		Stockholders’		Comprehensive
	Shares	Value		Capital		Earnings		Shares		Cost			Income		Interest		Equity		Income

BALANCES AT DECEMBER 31, 2007	16,068,677	$	16	$	160,319	$	51,127	1,515,046		$	(12,105	)	$	1,092	$	—	$	200,449	$	—

NET INCOME	—	—		—		14,896		—		—			—		87		14,809		14,809
UNREALIZED GAIN ON DERIVATIVE INSTRUMENTS, NET OF TAXES OF $406	—	—		—		—		—		—			584		—		584		584
COMPREHENSIVE INCOME	—	—		—		—		—		—			—		—		—		$	15,393
EXERCISE OF STOCK OPTIONS	36,390	—		444		—		—		—			—		—		444
INCOME TAX BENEFIT/(EXPENSE) FROM STOCK OPTION EXERCISES	—	—		140		—		—		—			—		—		140
DEFERRED AND OTHER STOCK COMPENSATION	144,637	—		2,220		—		—		—			—		—		2,220
ISSUANCE OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN	—	—		82		—		(8,883	)	71			—		—		153
ISSUANCE OF COMMON STOCK UNDER 2000 DIRECTOR’S STOCK PLAN	10,761	—		380		—		—		—			—		—		380

BALANCES AT SEPTEMBER 30, 2008	16,260,465	$	16	$	163,585	$	66,023	1,506,163		$	(12,034	)	$	1,676	$	87	$	219,179

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

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CORNELL COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended
	September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	20,568		$	14,896
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation	13,147			11,386
Amortization of intangibles and other assets	946			1,593
Impairment of long-lived assets	—			250
Amortization of deferred financing costs	950			952
Amortization of Senior Notes discount	138			138
Amortization of gain on termination of derivative	(191		)	—
Stock-based compensation	2,618			2,519
Provision for bad debts	702			1,638
(Gain)loss on sale/disposals of property and equipment	(1,046		)	82
Deferred income taxes	(119		)	341
Change in assets and liabilities:
Accounts receivable	(11,021		)	(12,569		)
Other restricted assets	223			(806		)
Other assets	(1,558		)	(4,747		)
Accounts payable and accrued liabilities	(13,969		)	5,531
Other long-term liabilities	285			(238		)
Net cash provided by operating activities	11,673			20,966

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(14,456		)	(59,282		)
Sales of investment securities	—			250
Proceeds from insurance recoveries and proceeds from sale of property and equipment	2,608			791
Withdrawals from restricted debt payment account, net	4,623			3,702
Net cash used in investing activities	(7,225		)	(54,539		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit	2,000			43,000
Payments of line of credit	(4,000		)	—
Payment of MCF bonds	(12,400		)	(11,400		)
Tax benefit of stock option exercises	—			140
Payments of capital lease obligations	(10		)	(8		)
Proceeds from exercise of stock options and employee stock purchase plan contributions	321			597
Net cash provided by (used in) financing activities	(14,089		)	32,329

NET DECREASE IN CASH AND CASH EQUIVALENTS	(9,641		)	(1,244		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	14,613			3,028
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,972		$	1,784

OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES:
Other comprehensive income, net of tax	$	—		$	584
Common stock issued for board of directors fees	337			380
Purchases and additions to property and equipment included in accounts payable and accrued liabilities	1,844			10,322
Tax benefit/(expense) of stock option exercises	(71		)	—

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

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CORNELL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by Cornell Companies, Inc. (collectively with its subsidiaries and consolidated special purpose entities, unless the context requires otherwise, the “Company,” “we,” “us” or “our”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Estimates were used in the preparation of these financial statements. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2008 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

2. Accounting Policies

See a description of our accounting policies in the Notes to Consolidated Financial Statements included in our 2008 Annual Report on Form 10-K.

3. Stock-Based Compensation

We have an employee stock purchase plan (“ESPP”) under which employees can make contributions to purchase our common stock. Participation in the plan is elected annually by employees. The plan year typically begins each January 1st (the “Beginning Date”) and ends on December 31st (the “Ending Date”). Purchases of common stock are made at the end of the year using the lower of the fair market value on either the Beginning Date or Ending Date, less a 15% discount. O ur employee-stock purchase plan is considered to be a compensatory ESPP, and therefore, we recognize compensation expense over the requisite service period for grants made under the ESPP. Compensation expense of approximately $0.08 million was recognized in each of the nine months ended September 30, 2009 and 2008.

Our stock incentive plans provide for the granting of stock options (both incentive stock options and nonqualified stock options), stock appreciation rights, restricted stock shares and other stock-based awards to officers, directors and employees of the Company. Grants of stock options made to date under these plans vest over periods up to seven years after the date of grant and expire no later than 10 years after grant.

At September 30, 2008, 202,000 shares of restricted stock were outstanding subject to performance-based vesting criteria (32,500 of these restricted shares were considered market-based restricted stock). There were also 52,700 stock options outstanding subject to performance-based vesting criteria. We recognized $0.04 million and $0.6 million of expense associated with these shares of restricted stock and stock options during the three and nine months ended September 30, 2008, respectively.

At September 30, 2009, 317,227 shares of restricted stock were outstanding subject to performance-based vesting criteria (32,500 of these restricted shares were considered market-based restricted stock). There were also 6,260 stock options outstanding subject to performance-based vesting criteria. We recognized $0.4 million and $0.9 million of expense associated with these shares of restricted stock and stock options during the three and nine months ended September 30, 2009, respectively.

The amounts above relate to the impact of recognizing compensation expense related to stock options and restricted stock. Compensation expense related to stock options (6,260 shares) and restricted stock (284,727 shares) that vest based upon performance conditions is not recorded for such performance-based awards until it has been deemed probable that the related performance targets allowing the vesting of these options and restricted stock will be met. We are required to periodically re-assess the probability that these performance-based awards will vest and record expense at that point in time. During the nine months ended September 30, 2009, it was deemed probable that certain performance targets pertaining to certain restricted stock and stock options would be achieved by their vesting date. Accordingly, compensation expense of approximately $0.8 million was recognized in the nine months ended September 30, 2009 related to these stock-based awards.

We recognize expense for our stock-based compensation over the vesting period, or in the case of performance-based awards, during the service period for which the performance target becomes probable of being met, which represents the period in which an employee is required to provide service in exchange for the award. We recognize compensation expense for stock-based awards immediately if the award has immediate vesting.

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Assumptions

The fair values for the significant stock-based awards granted during the nine months ended September 30, 2009 and 2008 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

	Nine Months Ended September 30,
	2009			2008

Risk-free rate of return	1.90		%	3.35		%
Expected life of award	6.0 years			5.7 years
Expected dividend yield of stock	0		%	0		%
Expected volatility of stock	50.49		%	38.74		%
Weighted-average fair value	$	8.89		$	9.46

The expected volatility of stock assumption was derived by referring to changes in the Company’s historical common stock prices over a timeframe similar to that of the expected life of the award. We do not believe that future stock volatility will significantly differ from historical stock volatility. Estimated forfeiture rates are derived from historical forfeiture patterns. We believe the historical experience method is the best estimate of forfeitures currently available.

Generally we considered the “simplified” method for “plain vanilla” options to estimate the expected term of options granted during 2009 and 2008 (where appropriate). For those grants during these periods wherein we had sufficient historical or impartial data to better estimate the expected term, we have done so.

Stock-based options award activity during the nine months ended September 30, 2009 was as follows (aggregate intrinsic value in millions):

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value

Outstanding at December 31, 2008	485,699		$	15.03	6.5	$	7.3
Granted	40,000		17.98
Exercised	(2,550	)	12.71
Canceled	(8,467	)	14.11

Outstanding at September 30, 2009	514,682		$	15.29	6.1	$	7.9

Vested and expected to vest at September 30, 2009	513,090		$	15.27	6.1	$	7.7

Exercisable at September 30, 2009	483,912		$	15.02	6.0	$	7.3

The total intrinsic value of stock options exercised during the nine months ended September 30, 2009 and 2008 was $0.01 million and $0.5 million, respectively. Net cash proceeds from the exercise of stock options were approximately $0.03 and $0.6 million for the nine months ended September 30, 2009 and 2008, respectively.

We recognized $0.1 million and $0.4 million of expense associated with stock options during the three and nine months ended September 30, 2009. As of September 30, 2009, approximately $0.1 million of estimated expense with respect to time-based nonvested stock-based options awards has yet to be recognized and will be amortized into expense over the employee’s remaining requisite service period of approximately 6.6 months.

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The following table summarizes information with respect to stock options outstanding and exercisable at September 30, 2009.

Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price

$3.75 to $10.00	18,865	2.0	$	5.72	18,865	$	5.72
$10.01 to $13.50	150,917	4.9	12.83		148,917	12.82
$13.51 to $14.50	193,200	5.9	13.95		189,240	13.94
$14.51 to $25.00	151,700	8.1	20.62		126,890	20.58
	514,682	6.1	$	15.29	483,912	$	15.02

Stock-based award activity for nonvested awards during the nine months ended September 30, 2009 is as follows:

	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2008	95,118		$	16.09
Granted	40,000		17.98
Vested	(104,348	)	15.81
Canceled	—		—

Nonvested at September 30, 2009	30,770		$	19.51

Restricted Stock

We have previously issued restricted stock under certain employment agreements and stock incentive plans which vests either over a specific period of time, generally three to five years, or which will vest subject to certain market or performance conditions. During the nine months ended September 30, 2009, we issued restricted stock as part of our normal equity awards under our 2006 Incentive Plan. These shares of restricted common stock are subject to restrictions on transfer and certain conditions to vesting.

Restricted stock activity for the nine months ended September 30, 2009 was as follows:

	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2008	403,124		$	22.44
Granted	176,800		16.81
Vested	(55,693	)	21.95
Canceled	(657	)	22.27

Nonvested at September 30, 2009	523,574		$	20.59

We recognized $0.4 million and $1.2 million of expense associated with nonvested time-based restricted stock awards during the three and nine months ended September 30, 2009, respectively. As of September 30, 2009, approximately $2.0 million of estimated expense with respect to nonvested time-based restricted stock awards had yet to be recognized and will be amortized over a weighted average period of 2.0 years. Approximately $5.0 million of estimated expense with respect to nonvested performance-based restricted stock option awards had yet to be recognized as of September 30, 2009.

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4. Intangible Assets

Intangible assets at September 30, 2009 and December 31, 2008 consisted of the following (in thousands):

	September 30, 2009			December 31, 2008

Non-compete agreements	$	8,200		$	8,200
Accumulated amortization — non-compete agreements	(8,142		)	(7,595		)
Acquired contract value	6,240			6,240
Accumulated amortization — contract value	(4,924		)	(4,525		)
Identified intangibles, net	1,374			2,320
Goodwill	13,308			13,308
Total intangibles	$	14,682		$	15,628

There were no changes in the carrying amount of goodwill in the nine months ended September 30, 2009.

Amortization expense for our non-compete agreements was approximately $0.2 million for each of the three months ended September 30, 2009 and 2008 and approximately $0.5 million and $0.6 million for the nine months ended September 30, 2009 and 2008, respectively.

Amortization expense for our acquired contract value was approximately $0.1 million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively, and approximately $0.4 million and $0.8 million for the nine months ended September 30, 2009 and 2008, respectively.

5. Fair Value Measurements

On January 1, 2008 we adopted a newly issued accounting standard for fair value measurements of financial assets and liabilities which did not have a material financial impact on our consolidated results of operations or financial condition. On January 1, 2009, we adopted the provisions of this new accounting pronouncement for applying fair value to non-financial assets, liabilities and transactions on a non-recurring basis. Adoption of the provisions for fair value measurements on a non-recurring basis did not have a material effect on our financial position, results of operations or cash flows.

As defined in this accounting standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (“exit price”). Additionally, this pronouncement requires disclosure that establishes a framework for measuring fair value and expands disclosures about fair value measurements. Additionally, it requires that fair value measurements be classified and disclosed in one of the following categories:

Level 1		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2		Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

As required, financial assets and liabilities are classified based on the lowest level of input that is significant for the fair value measurement. The following table summarizes the valuation of our financial assets and liabilities by pricing levels as of September 30, 2009:

	Fair Value as of September 30, 2009 (in thousands)
	Level 1		Level 2		Level 3		Total
Assets:
Corporate Bonds	$	—	$	3,907	$	—	$	3,907
Money Market Funds	—		42,778		—		42,778

The corporate bonds and money market funds are carried in debt service fund and other restricted assets and the debt service reserve fund in the accompanying balance sheet. The fair value measurements for corporate bonds and money-market funds are based upon the quoted price for similar assets in markets that are not active, multiplied by the number of shares owned, exclusive of any

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transaction costs and without any adjustments to reflect discounts that may be applied to selling a large block of the securities at one time. The Company does not believe that the changes in fair value of these assets will materially differ from the amounts that could be realized upon settlement or that the changes in fair value will have a material effect on the Company’s results of operations, liquidity and capital resources.

This accounting standard requires a reconciliation of the beginning and ending balances for fair value measurements using Level 3 inputs. We had no such assets or liabilities which were measured at fair value on a recurring basis using significant unobservable inputs (level 3) during the three and nine months ended September 30, 2009.

6. Recent Accounting Standards

In December 2007, the FASB revised the authoritative guidance for business combinations which establishes principles and requirements for how the acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Our adoption of this revised guidance on January 1, 2009 did not have any impact on our consolidated results of operations or financial condition as we did not have any business combination activity in the nine months ended September 30, 2009.

Additionally, the FASB amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under the current guidance concerning business combinations and other U.S. generally accepted accounting principles. This new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Our adoption of the new guidance on January 1, 2009 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued authoritative guidance which established new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The new guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. This guidance clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, it requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Additionally, there are expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We adopted the new guidance on January 1, 2009 and applied the provisions to our 2009 financial statements and retroactively to all prior periods presented.

In March 2008, the FASB issued new authoritative guidance to improve financial reporting about derivatives and hedging activities by requiring enhanced qualitative and quantitative disclosures regarding derivative instruments, gains and losses on such instruments and their effects on an entity’s financial position, financial performance and cash flows. Our adoption of this new guidance on January 1, 2009 did not have a significant impact on our consolidated financial position, results of operations or cash flows.

In May 2008, the FASB issue new authoritative guidance which establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before the financial statements are issued. This guidance sets forth (1) the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date and (3) the disclosures an entity should make about such events or transactions. Management has performed a review of our subsequent events and transactions through November 6, 2009, which is the date the financial statements are issued.

In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification became the single source for all authoritative GAAP recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and did not have an affect on our financial position, results of operations or cash flows.

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7. Future Accounting Requirements

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment applies to the financial reporting of a transfer of financial assets; the effects of a transfer on an entity’s financial position, financial performance and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. It eliminates (1) the exceptions for qualifying special-purpose entities from the consolidation guidance and (2) the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. The provisions of this amendment must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The requirements in the amendment must be applied to transfers occurring on or after the effective date. We are currently evaluating the impact, if any, that such requirements may have on our financial statements once adopted.

In June 2009, the FASB also issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. Earlier application is prohibited. We are currently evaluating the impact, if any, that this amendment may have on our financial statements once adopted.

8. Credit Facilities

At September 30, 2009 and December 31, 2008, our long-term debt consisted of the following (in thousands):

	September 30, 2009			December 31, 2008

Debt of Cornell Companies, Inc.:
Senior Notes, unsecured, due July 2012 with an interest rate of 10.75%, net of discount	$	111,494		$	111,356
Revolving Line of Credit due December 2011 with an interest rate of LIBOR plus 1.50% to 2.25% or prime plus 0.00% to 0.75% (the “Amended Credit Facility”)	73,000			75,000
Capital lease obligations	17			26
Subtotal	184,511			186,382

Debt of Special Purpose Entity:
8.47% Bonds due 2016	121,700			134,100

Total consolidated debt	306,211			320,482

Less: current maturities	(13,413		)	(12,412		)

Consolidated long-term debt	$	292,798		$	308,070

Long-Term Credit Facilities. Our Amended Credit Facility provides for borrowings up to $100.0 million (including letters of credit) and matures in December 2011. At our election, outstanding borrowings bear interest at either the LIBOR rate plus a margin ranging from 1.50% to 2.25% or a rate which ranges from 0.00% to 0.75% above the applicable prime rate. The applicable margins are subject to adjustments based on our total leverage ratio. The available commitment under our Amended Credit Facility was approximately $12.1 million at September 30, 2009. We had outstanding borrowings under our Amended Credit Facility of $73.0 million and we had outstanding letters of credit of approximately $14.9 million at September 30, 2009. Subject to certain requirements, we have the right to increase the commitments under our Amended Credit Facility up to $150.0 million, although the indenture for our Senior Notes limits our ability, subject to certain conditions, to expand the Amended Credit Facility beyond $100.0 million. We can provide no assurance that all of the banks that have made commitments to us under our Amended Credit Facility would be willing to participate in an expansion to the Amended Credit Facility should we desire to do so. The Amended Credit

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Facility is collateralized by substantially all of our assets, including the assets and stock of all of our subsidiaries. The Amended Credit Facility is not secured by the assets of Municipal Corrections Finance, LP, a special purpose entity (“MCF”).

Our Amended Credit Facility contains financial and other restrictive covenants that limit our ability to engage in certain activities. Our ability to borrow under the Amended Credit Facility is subject to compliance with certain financial covenants, including bank leverage, total leverage and fixed charge coverage ratios. At September 30, 2009, we were in compliance with all such covenants. Our Amended Credit Facility includes other restrictions that, among other things, limit our ability to incur indebtedness; grant liens; engage in mergers, consolidations and liquidations; make investments, restricted payment and asset dispositions; enter into transactions with affiliates; and engage in sale/leaseback transactions.

MCF is obligated for the outstanding balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47% per annum and are payable in semi-annual installments of interest and annual installments of principal. All unpaid principal and accrued interest on the bonds is due on the earlier of August 1, 2016 (maturity) or as noted under the bond documents.

The bonds are limited, nonrecourse obligations of MCF and secured by the property and equipment, bond reserves, assignment of subleases and substantially all assets related to the facilities included in the 2001 Sale and Leaseback Transaction (in which we sold eleven facilities to MCF). The bonds are not guaranteed by Cornell.

In June 2004, we issued $112.0 million in principal of 10.75% Senior Notes the (“Senior Notes”) due July 1, 2012. The Senior Notes are unsecured senior indebtedness and are guaranteed by all of our existing and future subsidiaries (collectively, the “Guarantors”). The Senior Notes are not guaranteed by MCF (the “Non-Guarantor”). Interest on the Senior Notes is payable semi-annually on January 1 and July 1 of each year, commencing January 1, 2005. On or after July 1, 2008, we may redeem all or a portion of the Senior Notes at the redemption prices (expressed as a percentage of the principal amount) listed below, plus accrued and unpaid interest, if any, on the Senior Notes redeemed, to the applicable date of redemption, if redeemed during the 12-month period commencing on July 1 of each of the years indicated below:

Year	Percentages

2008	105.375	%
2009	102.688	%
2010 and thereafter	100.000	%

Upon the occurrence of specified change of control events, unless we have exercised our option to redeem all the Senior Notes as described above, each holder will have the right to require us to repurchase all or a portion of such holder’s Senior Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, to the applicable date of purchase. The Senior Notes were issued under an indenture which limits our ability and the ability of our Guarantors to, among other things, incur additional indebtedness, pay dividends or make other distributions, make other restricted payments and investments, create liens, incur restrictions on the ability of the Guarantors to pay dividends or other payments to us, enter into transactions with affiliates, and engage in mergers, consolidations and certain sales of assets.

9. Income Taxes

At December 31, 2008, the total amount of our unrecognized tax benefits was approximately $2.5 million. There were no material changes to the total amount of our unrecognized tax benefits in the three and nine months ended September 30, 2009.

Estimated interest and penalties related to the underpayment of income taxes are classified as a component of income tax expense in the accompanying Consolidated Statements of Income and Comprehensive Income. There were no material changes to our accrued interest and penalties in the three and nine months ended September 30, 2009. Accrued interest and penalties were approximately $0.2 million at September 30, 2009 and December 31, 2008.

We are subject to income tax in the United States and many of the individual states we operate in. We currently have significant operations in Texas, California, Oklahoma, Georgia, Illinois and Pennsylvania. State income tax returns are generally subject to examination for a period of three to five years after filing. The state impact of any changes made to the federal return remains subject to examination by various states for a period up to one year after formal notification to the state. We are open to United States Federal Income Tax examinations for the tax years December 31, 2005 through December 31, 2008. The audit of our 2006 federal income tax return by the Internal Revenue Service was recently concluded without material findings.

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We have state operating loss carryforwards of approximately $34.4 million on which we have provided a valuation allowance of $3.0 million. These net operating losses expire beginning in 2008 through 2032.

We do not anticipate a significant change in the balance of our unrecognized tax benefits within the next 12 months.

10. Earnings Per Share

Basic earnings per share (“EPS”) are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of outstanding common stock options and restricted common shares granted under our various option and other incentive plans. As of January 1, 2009, instruments with nonforfeitable dividend rights granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two-class method. For our fiscal year beginning January 1, 2009, since our restricted common stock grants (including both vested and those unvested due to either time or performance requirements) convey nonforfeitable rights to dividends while outstanding, they are included in both basic and fully diluted ESP calculations. All prior-period EPS data has been adjusted retrospectively to conform to the calculation of EPS.

For the three months ended September 30, 2009, there were 101,700 shares ($22.16 average price) of stock options that were not included in the computation of diluted EPS because to do so would have been anti-dilutive. For the three months ended September 30, 2008, there were no anti-dilutive shares. For the nine months ended September 30, 2009 and 2008, there were 141,700 shares ($20.98 average price) and 19,200 shares ($24.56 average price), respectively, of stock options that were not included in the computation of diluted EPS because to do so would have been anti-dilutive.

The following table summarizes the calculation of net earnings and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings per share (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008

Income available to stockholders	$	6,693	$	4,828	$	19,182	$	14,809

Weighted average basic common shares outstanding	14,886		14,734		14,880		14,715
Weighted average common share equivalents outstanding	109		181		88		152

Weighted average diluted common shares and common share equivalents outstanding	14,995		14,915		14,968		14,867

Basic income per share	$	.45	$	.33	$	1.29	$	1.01

Diluted income per share	$	.45	$	.32	$	1.28	$	1.00

11. Commitments and Contingencies

Financial Guarantees

During the normal course of business, we enter into contracts that contain a variety of representations and warranties and provide general indemnifications. Our maximum exposure under these arrangements is unknown as this would involve future claims that may be made against us that have not yet occurred. However, based on experience, we believe the risk of loss to be remote.

Legal Proceedings

We are party to various legal proceedings, including those noted below. While management presently believes that the ultimate outcome of these proceedings will not have a material adverse effect on our financial position, overall trends in results of operations or cash flows, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include

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monetary damages or equitable relief and could have a material adverse impact on the net income of the period in which the ruling occurs or in future periods.

Valencia County Detention Center

In April 2007, a lawsuit was filed against the Company in the Federal District Court in Albuquerque, New Mexico, by Joe Torres and Eufrasio Armijo, who each alleged that he was strip searched at the Valencia County Detention Center (“VCDC”) in New Mexico in violation of his federal rights under the Fourth, Fourteenth and Eighth amendments to the U.S. Constitution. The claimants also alleged violation of their rights under state law and sought to bring the case as a class action on behalf of themselves and all detainees at VCDC during the applicable statutes of limitation. The plaintiffs sought damages and declaratory and injunctive relief. Valencia County is also a named defendant in the case and operated the VCDC for a significantly greater portion of the period covered by the lawsuit.

In December 2008, the parties agreed to a proposed stipulation of settlement and, in July 2009, the Court granted final approval of the settlement. The settlement amount under the terms of the agreement is $3.3 million. Cornell’s portion of the stipulated settlement, based on the number of inmates housed at VCDC during the time Cornell operated the facility in comparison to the number of inmates housed at the facility during the time Valencia County operated the facility, is $1.2 million and was funded principally through our general liability and professional liability coverage. The claims administration process is underway and we expect it to be completed in the fourth quarter of 2009.

In the year ended December 31, 2007, we previously provided insurance reserves for this matter (as part of our regular review of reported and unreported claims) totaling approximately $0.5 million. During the fourth quarter of 2008, we recorded an additional settlement charge of approximately $0.7 million and the related reimbursement from our general liability and professional liability insurance. The charge and reimbursement were recognized in general and administrative expenses for the year ended December 31, 2008. The reimbursement was funded by the insurance carrier in the first quarter of 2009 into a settlement account, where it will remain until payments are made to the settlement class members.

12. FINANCIAL INSTRUMENTS

The carrying amounts of our financial instruments, including cash and cash equivalents, investment securities, accounts receivable and accounts payable and accrued expenses, approximate fair value due to the short term maturities of these financial instruments. At December 31, 2008, the carrying amount of consolidated debt was $320.5 million, and the estimated fair value was $308.0 million. At September 30, 2009, the carrying amount was $306.2 million, and the estimated fair value was $313.2 million. The estimated fair value of long-term debt is based primarily on quoted market prices or discounted cash flow analysis for the same or similar assets.

13. Derivative Financial Instruments And Guarantees

Debt Service Reserve Fund and Bond Fund Payment Account

In August 2001, MCF, a special purpose entity, completed a bond offering to finance the 2001 Sale and Leaseback Transaction in which we sold eleven facilities to MCF. In connection with this bond offering, two reserve fund accounts were established by MCF pursuant to the terms of the indenture: (1) MCF’s Debt Service Reserve Fund, aggregating approximately $23.4 million at September 30, 2009, was established to: (a) make payments on MCF’s outstanding bonds in the event we (as lessee) should fail to make the scheduled rental payments to MCF or (b) to the extent payments were not made under (a), then to make final debt service payments on the then outstanding bonds and (2) MCF’s Bond Fund Payment Account (as reported in Bond Fund Payment Account and other restricted assets in our Consolidated Balance Sheet) aggregating approximately $3.9 million at September 30, 2009, was established to accumulate the monthly lease payments that MCF receives from us until such funds are used to pay MCF’s semi-annual bond interest payments and annual bond principal payments, with any excess to pay certain other expenses and to make certain transfers. These reserve funds are invested in short-term money markets and commercial paper. Both reserve fund accounts were subject to agreements with the MCF Equity Investors (Lehman Brothers, Inc. (“Lehman”)) whereby guaranteed rates of return of 3.0% and 5.08%, respectively, were provided for the balances in the Debt Service Reserve Fund and the Bond Fund Payment Account. The guaranteed rates of return were characterized as cash flow hedge derivative instruments. At inception, the derivatives instruments had an aggregate fair value of $4.0 million, which was recorded as a decrease to the equity investment in MCF made by the MCF Equity Investors (MCF minority interest) and as a liability in our Consolidated Balance Sheets. Changes in the fair value of the derivative instruments were recorded as an adjustment to other long-term liabilities and reported as other comprehensive income (loss) in our Consolidated Statements of Operations and Comprehensive Income. Due to the bankruptcy of Lehman in 2008, the derivative instruments no longer qualified as a hedge and were de-designated. Amounts included in accumulated other comprehensive income are reclassified into earnings during the same periods in which interest is earned on debt service reserve funds. Changes in the fair

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value of these derivatives after de-designation were recorded to earnings. At December 31, 2008, the fair value was determined to be zero. The derivatives were terminated by MCF in the first quarter of 2009 with a fair value of zero.

In connection with MCF’s bond offering, Lehman also provided a guarantee of the Debt Service Reserve Fund if a bankruptcy of the Company were to occur and a trustee for the estate of the Company were to include the Debt Service Reserve Fund as an asset of the Company’s estate. This guarantee was characterized as an insurance contract and its fair value was being amortized to expenses over the life of the debt. Due to the bankruptcy of Lehman in 2008, the full carrying value of the insurance guarantee was determined to be unrecoverable. Accordingly, we recorded a charge of $1.3 million in the year ended December 31, 2008.

14. Segment Disclosure

Our three operating divisions are our reportable segments. The Adult Secure Services segment consists of the operations of secure adult incarceration facilities. The Abraxas Youth and Family Services segment consists of providing residential treatment and educational programs and non-residential community-based programs to juveniles between the ages of 10 and 17 who have either been adjudicated or suffer from behavioral problems. The Adult Community-Based Services segment consists of providing pre-release and halfway house programs for adult offenders who are either on probation or serving the last three to six-months of their sentences on parole and preparing for re-entry into society at large as well as community-based treatment and education programs as an alternative to incarceration. All of our customers and long-lived assets are located in the United States of America. The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies in Note 2 in our 2008 Annual Report on Form 10-K. Intangible assets are not included in each segment’s reportable assets, and the amortization of intangible assets is not included in the determination of a reportable segment’s operating income. We evaluate performance based on income or loss from operations before general and administrative expenses, amortization of intangibles, interest and income taxes. Corporate and other assets are comprised primarily of cash, investment securities available for sale, accounts receivable, debt service and debt service reserve funds, deposits, property and equipment, deferred taxes, deferred costs and other assets. Corporate and other expense from operations primarily consists of depreciation and amortization on the corporate office facilities and equipment and specific general and administrative charges pertaining to corporate personnel. Such expenses are presented separately, as they cannot be readily identified for allocation to a particular segment.

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The only significant non-cash item reported in the respective segment’s income from operations is depreciation and amortization (excluding intangibles) (in thousands).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008

Revenues:
Adult secure services	$	57,686		$	51,470		$	173,819		$	151,673
Abraxas youth and family services	26,679			26,231			80,075			80,891
Adult community-based services	18,914			17,486			54,429			52,661
Total revenues	$	103,279		$	95,187		$	308,323		$	285,225

Income from operations:
Adult secure services	$	15,932		$	13,896		$	50,545		$	44,782
Abraxas youth and family services	2,289			1,696			6,216			5,831
Adult community-based services	6,469			4,603			17,099			14,090
Subtotal	24,690			20,195			73,860			64,703
General and administrative expense	(5,806		)	(5,450		)	(18,214		)	(19,217		)
Amortization of intangibles	(50		)	(484		)	(946		)	(1,458		)
Corporate and other	(240		)	(224		)	(728		)	(586		)
Total income from operations	$	18,594		$	14,037		$	53,972		$	43,442

	September 30,		December 31,
	2009		2008
Assets:
Adult secure services	$	364,906	$	358,406
Abraxas youth and family services	113,941		105,991
Adult community-based services	62,484		60,170
Intangible assets, net	14,682		15,628
Corporate and other	79,935		96,726
Total assets	$	635,948	$	636,921

15. Guarantor Disclosures

We completed an offering of $112.0 million in principal of 10.75% Senior Notes in June 2004 that are due July 1, 2012. The Senior Notes are guaranteed by each of our subsidiaries (the Guarantor Subsidiaries which are 100% owned). These guarantees are joint and several obligations of the Guarantor Subsidiaries. MCF does not guarantee the Senior Notes (Non-Guarantor Subsidiary). The following condensed consolidating financial information presents the financial condition, results of operations and cash flows of the Guarantor Subsidiaries and the Non-Guarantor Subsidiary, together with the consolidating adjustments necessary to present our results on a consolidated basis.

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Condensed Consolidating Balance Sheet as of September 30, 2009 (in thousands)

	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiary		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	4,773		$	170	$	29	$	—		$	4,972
Accounts receivable	1,504			77,950		40		—			79,494
Restricted assets	—			3,589		23,315		—			26,904
Prepaids and other	14,608			1,656		—		—			16,264
Total current assets	20,885			83,365		23,384		—			127,634
Property and equipment, net	48			317,908		139,600		(5,612		)	451,944
Other assets:
Debt service reserve fund	—			—		23,370		—			23,370
Deferred costs and other	64,793			25,053		4,866		(61,712		)	33,000
Investment in subsidiaries	97,670			1,856		—		(99,526		)	—
Total assets	$	183,396		$	428,182	$	191,220	$	(166,850	)	$	635,948

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable and accrued liabilities	$	39,648		$	14,760	$	1,741	$	1,283		$	57,432
Current portion of long-term debt	—			13		13,400		—			13,413
Total current liabilities	39,648			14,773		15,141		1,283			70,845
Long-term debt, net of current portion	184,492			6		108,300		—			292,798
Deferred tax liabilities	17,740			94		—		1,020			18,854
Other long-term liabilities	5,916			76		61,750		(65,769		)	1,973
Intercompany	(315,878		)	317,040		—		(1,162		)	—
Total liabilities	(68,082		)	331,989		185,191		(64,628		)	384,470
Total Cornell Companies, Inc. stockholders’ equity	249,647			96,193		6,029		(102,222		)	249,647
Non-controlling interest	1,831			—		—		—			1,831
Total stockholders’ equity	251,478			96,193		6,029		(102,222		)	251,478
Total liabilities and stockholders’ equity	$	183,396		$	428,182	$	191,220	$	(166,850	)	$	635,948

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Condensed Consolidating Balance Sheet as of December 31, 2008 (in thousands)

	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiary		Eliminations			Consolidated
Assets

Current Assets:
Cash and cash equivalents	$	14,291		$	265	$	57	$	—		$	14,613
Accounts receivable	2,045			66,921		422		—			69,388
Restricted assets	—			3,432		27,938		—			31,370
Prepaids and other	13,875			1,644		—		—			15,519
Total current assets	30,211			72,262		28,417		—			130,890
Property and equipment, net	101			312,446		141,975		(4,168		)	450,354
Other assets:
Debt service reserve fund	—			—		23,750		—			23,750
Deferred costs and other	60,322			23,267		5,367		(57,029		)	31,927
Investments in subsidiaries	73,642			1,856		—		(75,498		)	—
Total assets	$	164,276		$	409,831	$	199,509	$	(136,695	)	$	636,921

Liabilities and stockholders’ equity

Current liabilities:
Accounts payable and accrued liabilities	$	48,373		$	15,515	$	4,883	$	322		$	69,093
Current portion of long-term debt	—			12		12,400		—			12,412
Total current liabilities	48,373			15,527		17,283		322			81,505
Long-term debt, net of current portion	186,356			14		121,700		—			308,070
Deferred tax liabilities	16,246			94		—		1,151			17,491
Other long-term liabilities	5,851			113		56,733		(61,009		)	1,688
Intercompany	(320,717		)	320,722		—		(5		)	—
Total liabilities	(63,891		)	336,470		195,716		(59,541		)	408,754
Total Cornell Companies, Inc. stockholders’ equity	227,722			73,361		3,793		(77,154		)	227,722
Non-controlling interest	445			—		—		—			445
Total stockholders’ equity	228,167			73,361		3,793		(77,154		)	228,167
Total liabilities and stockholders’ equity	$	164,276		$	409,831	$	199,509	$	(136,695	)	$	636,921

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Condensed Consolidating Statement of Operations for the three months ended September 30, 2009 (in thousands) (unaudited)

	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiary		Eliminations			Consolidated

Revenues	$	4,505		$	118,658	$	4,502	$	(24,386	)	$	103,279
Operating expenses, excluding depreciation and amortization	4,226			94,459		34		(24,300		)	74,419
Depreciation and amortization	—			3,580		880		—			4,460
General and administrative expenses	5,788			—		18		—			5,806
Income (loss) from operations	(5,509		)	20,619		3,570		(86		)	18,594
Overhead allocations	(8,672		)	8,672		—		—			—
Interest, net	2,430			1,331		2,832		(217		)	6,376
Equity earnings in subsidiaries	10,616			—		—		(10,616		)	—
Income before provision for income taxes and non-controlling interest	11,349			10,616		738		(10,485		)	12,218
Provision for income taxes	4,656			—		—		356			5,012
Net income	6,693			10,616		738		(10,841		)	7,206
Non-controlling interest	—			—		—		513			513
Income available to stockholders	$	6,693		$	10,616	$	738	$	(11,354	)	$	6,693

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Condensed Consolidating Statement of Operations for the three months ended September 30, 2008 (in thousands) (unaudited)

	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiary		Eliminations			Consolidated

Revenues	$	4,502		$	108,050	$	4,502	$	(21,867	)	$	95,187
Operating expenses, excluding depreciation and amortization	4,976			87,989		11		(21,742		)	71,234
Depreciation and amortization	—			3,570		1,056		(160		)	4,466
General and administrative expenses	5,429			—		21		—			5,450
Income (loss) from operations	(5,903		)	16,491		3,414		35			14,037
Overhead allocations	(8,760		)	8,760		—		—			—
Interest, net	1,811			1,274		2,732		(63		)	5,754
Equity earnings in subsidiaries	6,849			—		—		(6,849		)	—
Income from provision for income taxes and non-controlling interest	7,895			6,457		682		(6,751		)	8,283
Provision for income taxes	3,067			—		—		301			3,368
Net income	4,828			6,457		682		(7,052		)	4,915
Non-controlling interest	—			—		—		87			87
Income available to stockholders	$	4,828		$	6,457	$	682	$	(7,139	)	$	4,828

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Condensed Consolidating Statement of Operations for the nine months ended September 30, 2009 (in thousands) (unaudited)

	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiary		Eliminations			Consolidated

Revenues	$	13,509		$	354,461	$	13,506	$	(73,153	)	$	308,323
Operating expenses, excluding depreciation and amortization	14,574			280,170		187		(72,887		)	222,044
Depreciation and amortization	—			11,442		2,641		10			14,093
General and administrative expenses	18,158			—		56		—			18,214
Income (loss) from operations	(19,223		)	62,849		10,622		(276		)	53,972
Overhead allocations	(28,270		)	28,270		—		—			—
Interest, net	6,903			4,005		8,652		(655		)	18,905
Equity earnings in subsidiaries	30,574			—		—		(30,574		)	—
Income before provision for income taxes and non-controlling interest	32,718			30,574		1,970		(30,195		)	35,067
Provision for income taxes	13,536			—		—		963			14,499
Net income	19,182			30,574		1,970		(31,158		)	20,568
Non-controlling interest	—			—		—		1,386			1,386
Income available to stockholders	$	19,182		$	30,574	$	1,970	$	(32,544	)	$	19,182

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Condensed Consolidating Statement of Operations for the nine months ended September 30, 2008 (in thousands) (unaudited)

	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiary		Eliminations			Consolidated

Revenues	$	13,506		$	324,295	$	13,506	$	(66,082	)	$	285,225
Operating expenses, excluding depreciation and amortization	12,165			263,302		41		(65,785		)	209,723
Depreciation and amortization	—			10,154		3,167		(478		)	12,843
General and administrative expenses	19,161			—		56		—			19,217
Income (loss) from operations	(17,820		)	50,839		10,242		181			43,442
Overhead allocations	(26,419		)	26,419		—		—			—
Interest, net	5,698			3,820		8,284		(187		)	17,615
Equity earnings in subsidiaries	21,904			—		—		(21,904		)	—
Income before provision for income taxes and non-controlling interest	24,805			20,600		1,958		(21,536		)	25,827
Provision for income taxes	9,996			—		—		935			10,931
Net income	14,809			20,600		1,958		(22,471		)	14,896
Non-controlling interest	—			—		—		87			87
Income available to stockholders	$	14,809		$	20,600	$	1,958	$	(22,558	)	$	14,809

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Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2009 (in thousands) (unaudited)

	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiary			Consolidated
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	(7,839	)	$	11,763		$	7,749		$	11,673

Cash flows from investing activities:
Capital expenditures	—			(14,456		)	—			( 14,456		)
Proceeds from insurance recoveries on property and equipment	—			2,608			—			2,608
Withdrawals from restricted debt payment account, net	—			—			4,623			4,623
Net cash provided by (used in) investing activities	$	—		$	(11,848	)	$	4,623		$	(7,225	)

Cash flows from financing activities:
Proceeds from line of credit	2,000			—			—			2,000
Payments of line of credit	(4,000		)	—			—			(4,000		)
Payment of MCF bonds	—			—			(12,400		)	(12,400		)
Payments on capital lease obligations	—			(10		)	—			(10		)
Proceeds from exercise of stock options	321			—			—			321
Net cash used in financing activities	$	(1,679	)	$	(10	)	$	(12,400	)	$	(14,089	)

Net decrease in cash and cash equivalents	(9,518		)	(95		)	(28		)	(9,641		)

Cash and cash equivalents at beginning of period	14,291			265			57			14,613

Cash and cash equivalents at end of period	$	4,773		$	170		$	29		$	4,972

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Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2008 (in thousands) (unaudited)

	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiary			Consolidated
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	(44,986	)	$	58,271		$	7,681		$	20,966

Cash flows from investing activities:
Capital expenditures	—			(59,282		)	—			(59,282		)
Sales of investment securities	250			—			—			250
Proceeds from the sale of fixed assets	—			791			—			791
Withdrawals from restricted debt payment account, net	—			—			3,702			3,702
Net cash provided by (used in) investing activities	$	250		$	(58,491	)	$	3,702		$	(54,539	)

Cash flows from financing activities:
Proceeds from line of credit	43,000			—			—			43,000
Payment of MCF bonds	—			—			(11,400		)	(11,400		)
Tax benefit of stock option exercises	140			—			—			140
Payments on capital lease obligations	—			(8		)	—			(8		)
Proceeds from exercise of stock options	597			—			—			597
Net cash provided by (used in) financing activities	$	43,737		$	(8	)	$	(11,400	)	$	32,329

Net decrease in cash and cash equivalents	(999		)	(228		)	(17		)	(1,244		)

Cash and cash equivalents at beginning of period	2,565			408			55			3,028

Cash and cash equivalents at end of period	$	1,566		$	180		$	38		$	1,784

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Cornell Companies, Inc. is a leading provider of correctional, detention, educational, rehabilitation and treatment services outsourced by federal, state, county and local government agencies. We provide a diversified portfolio of services for adults and juveniles through our three operating divisions: (1) Adult Secure Services; (2) Abraxas Youth and Family Services and (3) Adult Community-Based Services. At September 30, 2009, we operated 68 facilities with a total service capacity of 20,597 and had one vacant facility with a service capacity of 70 beds. Our facilities are located in 15 states and the District of Columbia.

The following table sets forth for the periods indicated total residential service capacity and contracted beds in operation at the end of the periods shown, average contract occupancy percentages and total non-residential service capacity.

	September 30,		September 30,
	2009		2008
Residential
Service capacity (1)	18,334		17,788
Contracted beds in operation (end of period) (2)	17,480		17,017
Average contract occupancy based on contracted beds in operation (3) (4)	91.6	%	92.7	%
Non-Residential
Service capacity (5)	2,333		2,403

(1) Residential service capacity is comprised of the number of beds currently available for service in our residential facilities.

(2) At certain residential facilities, the contracted capacity is lower than the facility’s service capacity. We could increase a facility’s contracted capacity by obtaining additional contracts or by renegotiating existing contracts to increase the number of beds covered. However, we may not be able to obtain contracts that provide occupancy levels at a facility’s service capacity or be able to maintain current contracted capacities in future periods.

(3) Occupancy percentages reflect less than normalized occupancy during the start-up phase of any applicable facility, resulting in a lower average occupancy in periods when we have substantial start-up activities.

(4) Average contract occupancy percentages are calculated based on actual occupancy for the period as a percentage of the contracted capacity for residential facilities in operation. These percentages do not reflect the operations of non-residential community-based programs. At certain residential facilities, our contracted capacity is lower than the facility’s service capacity. Additionally, certain facilities have and are currently operating above the contracted capacity. As a result, average contract occupancy percentages can exceed 100% if the average actual occupancy exceeded contracted capacity.

(5) Service capacity for non-residential programs is based on either contractual terms or an estimate of the number of clients to be served. We update these estimates at least annually based on the program’s budget and other factors.

Our operating results for the nine months ended September 30, 2009 were impacted by a few significant events. We completed the 700 bed expansion at D. Ray James Prison at the beginning of April 2009 and continued construction on a new 1,250 bed facility in Hudson, Colorado. Our 2008 results of operation were positively affected by a 300 bed expansion at the D. Ray James Prison which we activated in February 2008. In addition, in the nine months ended September 30, 2008, we recorded a contract-based revenue adjustment of approximately $1.5 million at the Regional Correctional Center (“RCC”) for the contract year ended March 2008.

Although we believe we will continue to see steady demand across our various business segments and customer base (federal, state and local) in 2010, we are monitoring the declining economic trends (which began in 2008) and the related impact on government budget plans and the effect tightened spending plans could have on our business (with respect to possible areas including utilization, per diem rates, etc.) We expect one of the key areas of focus for our performance for the remainder of 2009 to be our ability to manage our facility construction currently in process in Hudson, Colorado and the related activation of this facility in the fourth quarter of 2009 (for our contract with the State of Alaska Department of Corrections (“Alaska DOC”)). We also plan to remain focused on our operating margins, on increasing utilization (particularly in the Abraxas division) and improving customer mix as we believe those initiatives are key elements of our financial performance.

Management Overview

Demand . Our business is driven generally by demand for incarceration or treatment services, and specifically by demand for private incarceration or treatment services, within our three primary business segments: Adult Secure Services; Abraxas Youth and Family Services; and Adult Community-Based Services. The demand for adult and juvenile corrections and treatment services has

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generally increased at a steady rate over the past ten years, largely as a result of increasing sentence terms and/or mandatory sentences for criminals and as well a greater range of criminal acts, increasing demand for incarceration of illegal aliens and a public recognition of the need to provide services to juveniles that will improve the possibility that they will lead productive lives. Moreover, demand for our services is also affected by the amount of available capacity in the government systems to enable governments to provide the services themselves, as well as desire and ability of these systems to add additional capacity. In addition, the balance between community-based corrections treatment of adults as an alternative to traditional incarceration continues to be analyzed by many political and societal parties. Among other things, we monitor federal, state and industry communications and statistics relative to trends in prison populations, juvenile justice statistics and initiatives, and developments in alternatives to traditional incarceration or detention of adults for opportunities to expand our scope or delivery of services.

The federal government contracts with private providers for the incarceration of adults, whether they are serving prison sentences, detained as illegal aliens, detained in anticipation of pending judicial administration or transitioning from prison to society. Chief among the federal agencies which use private providers are the Federal Bureau of Prisons (“BOP”), U.S. Immigration and Customs Enforcement (“ICE”) and United States Marshalls Service (“USMS”). We provide adult secure and adult community-based services to the federal government. Most of the federal involvement in juvenile administration in the federal system is handled via Medicare and Medicaid assistance to state governments. Although there are circumstances in which we may contract with a federal agency on a sole source basis, the primary means by which we secure a contract with a federal agency is via the RFP bidding process. From time to time, we contract to provide management services to a local governmental unit who then bids on a federal contract.

States and smaller governmental units remain divided on the issue of private prisons and private provision of juvenile and community-based programs, although a majority of states permit private provision for our services. We anticipate that increasing budget pressure on states and smaller governmental units may cause more states and smaller governmental units to consider utilizing private providers such as us to provide these services on a more economical basis. We believe capital budget constraints among prison agencies may encourage them to continue to explore outsourcing to private operators as an alternative to deploying their own capital for prison construction or major refurbishment. Although it varies from governmental unit to governmental unit, the primary political forces who typically oppose privatization of prisons are organized labor and religious groups.

Private juvenile and community-based programs are utilized by states and local governmental units and are organized on a profit and not-for-profit basis. We monitor opportunities in these segments via our corporate and business division development officers. Many opportunities are typically not published in any formal manner and, accordingly, we believe that taking the initiative at the state and local levels is key in developing sole source opportunities.

Performance . We track a number of factors as we monitor financial performance. Chief among them are:

· capacity (the number of beds within each business segment’s facilities),

· occupancy (utilization),

· per diem reimbursement rates,

· revenues,

· operating margins, and

· operating expenses.

Capacity. Capacity, commonly expressed in terms of number of beds, is primarily impacted by the number and size of the facilities we own or lease and the facilities we operate on behalf of a third party owner or lessee. We view capacity as one of the measures of our development efforts, through which we may increase capacity by adding new projects or by expanding existing projects (as we have done in 2007 through 2009 at several of our facilities including Great Plains Correctional Facility and D. Ray James Prison). As part of the evaluation of our development efforts, we will assess (a) whether a given development project was brought into service in accordance with our expectation as to time and expense; and (b) the number of projects in development or under consideration at the relevant point in time. In addition to the focus on new projects, capacity will reflect our success in renewing and maintaining existing contracts and facilities. It will also reflect any closure of programs or facilities due to underutilization or failure to earn an adequate risk-adjusted rate of return. We must also be cognizant of the possibility that state or local budgetary limitations may cause the contractual commitment to a given facility to be reduced or even eliminated, which would require us to either secure an alternate customer or close the operation.

Occupancy. Occupancy is typically expressed in terms of percentage of contract capacity utilized. We look at occupancy to assess the efficacy of both our efforts to market our facilities and our efforts to retain existing customers or contracts. Because revenue varies directly with occupancy, occupancy is a principal driver of our revenues. Our industry experiences significant economies of scale, whereby as occupancy rises, operating costs per resident decline. Some of our contracts are “take-or-pay,” meaning that the agency making use of the facility is obligated to pay for beds even though they are not used. Historically, occupancy percentages in many of our facilities have been high and we are mindful of the need to maintain such occupancy levels. As new

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development projects are brought into service, occupancy percentages may decline until the projects reach full utilization (as, for example, with the activation of the 1,100 bed expansion at Great Plains Correctional Facility during the fourth quarter of 2008 and the 700 bed expansion at D. Ray James Prison during the second quarter of 2009). Where we have commitments for utilization before the commencement of operations, occupancy percentages reflect the speed at which a facility achieves full service/implementation. However, we may decide to undertake development projects without written commitments to make full use of a facility. In these instances, we have performed our own assessment of the existing or anticipated demand, based on discussions with local government or other potential customer representatives and our analysis of other factors, of the demand for services at the facility. There is no assurance that we would recover our initial investment in these projects. We will monitor occupancy as a measure of the accuracy of our estimation of the demand for the services of a development facility and will incorporate this information in future assessments of potential projects. In addition, the ramp phase for our youth facilities is typically longer than that experienced in our adult facilities, which will impact our occupancy in the Abraxas Youth and Family Services division in a given period.

Per Diem Reimbursement Rates. Per diem reimbursement rates are another key element of our gross revenue and operating margin since per diem contracts represent a majority of our revenues (approximately 61.0% and 61.2% for the three and nine months ended September 30, 2009, respectively). Per diem rates are a function of negotiation between management and a governmental unit at the inception of a contract or through the bidding process. Actual per diem rates vary dramatically across our business segments, as well as within each business segment, depending upon the particular service or program provided. The initial per diem rates often change during the term of a contract in accordance with a schedule. The amount of the change can be a fixed amount set forth within the contract, an amount determined by formulas set forth within the contract or an amount determined by negotiations between management and the governmental unit (often these negotiations are along the same lines as the original per diem negotiation — a review of expenses and approval of an amount to recompense for expenses and assure the potential of an operating profit). In recent years, as budgetary pressures on governmental units have increased, some of our customers have negotiated relief from formulaic increase provisions within their agreements or have declined to include in their appropriation legislation amounts that would increase the per diem rates payable under the contract. Based on the economic turmoil which began in the second half of 2008, we are expecting such pressures to continue through the remainder of 2009 and likely into 2010 for many of our customers. In similar prior situations we have attempted to mitigate the impact of these developments by negotiating services provided, obtaining commitments for increased volume and other measures. We may also choose to consider terminating an existing relationship at a given facility and replacing it with a new customer (as was done with our Great Plains Correctional Facility in 2007).

Revenues. We derive substantially all of our revenues from providing adult corrections and treatment and juvenile justice, educational and treatment services outsourced by federal, state and local government agencies in the United States. Revenues for our services are generally recognized on a per diem rate based upon the number of occupant days or hours served for the period, on a guaranteed take-or-pay basis or on a cost-plus reimbursement basis. For the three months ended September 30, 2009, our revenue base consisted of 61.0% for services provided under per diem contracts, 34.0% for services provided under take-or-pay and management contracts, 2.9% for services provided under cost-plus reimbursement contracts, 1.9% for services provided under fee-for-service contracts and 0.2% from other miscellaneous sources. For the three months ended September 30, 2008, our revenue base consisted of 54.3% for services provided under per diem contracts, 40.2% for services provided under take-or-pay and management contracts, 3.4% for services provided under cost-plus reimbursement contracts, 1.9% for services provided under fee-for-service contracts and 0.2% from other miscellaneous sources. For the nine months ended September 30, 2009 our revenue base consisted of 61.2% for services provided under per diem contracts, 33.5% for services provided under take-or-pay and management contracts, 3.3% for services provided under cost-plus reimbursement contracts, 1.8% for services provided under fee-for-service contracts and 0.2% from other miscellaneous sources. For the nine months ended September 30, 2008 our revenue base consisted of 52.4% for services provided under per diem contracts, 41.6% for services provided under take-or-pay and management contracts, 3.8% for services provided under cost-plus reimbursement contracts, 2.0% for services provided under fee-for-service contracts and 0.2% from other miscellaneous sources. The increase in revenues in the respective 2009 periods provided under per diem contracts (and the corresponding decrease in revenues provided under take-or-pay and management contracts) primarily reflects the transition of our contract with the Arizona Department of Corrections from a take-or-pay contract to a per diem contract upon the activation (and subsequent ramp in the fourth quarter of 2008) of its 1,100 bed expansion. In addition, we also terminated several management contracts in 2008 (including Salt Lake Valley Detention Center and Lincoln County Detention Center in September 2008 and February 2008, respectively).

Revenues can fluctuate from year to year due to changes in government funding policies, changes in the number or types of clients referred to our facilities by governmental agencies, changes in the types of services delivered to our customers, the opening of new facilities or the expansion of existing facilities and the termination of contracts for a facility or the closure of a facility.

Factors considered in determining billing rates to charge include: (1) the programs specified by the contract and the related staffing levels; (2) wage levels customary in the respective geographic areas; (3) whether the proposed facility is to be leased or purchased; and (4) the anticipated average occupancy levels that could reasonably be expected to be maintained and the duration of time required to reach such occupancy levels.

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Revenues-Adult Secure Services. Revenues for our Adult Secure Services division are primarily generated from per diem, take-or-pay and management contracts. For the three months ended September 30, 2009 and 2008, we realized average per diem rates on our adult secure facilities of approximately $53.72 and $53.12, respectively. For the nine months ended September 30, 2009 and 2008, we realized average per diem rates of approximately $54.25 and $54.00, respectively. The average per diem rate for the nine months ended September 30, 2008 benefited from a contract-based revenue adjustment for the contract year ended March 2008 in the amount of approximately $1.5 million at the RCC. We periodically have experienced pressure from contracting governmental agencies to limit or even reduce per diem rates. Many of these governmental entities are under severe budget pressures and we anticipate that these agencies may periodically approach us in the remainder of 2009 and likely in 2010 about per diem rate concessions (or decline to provide funding for contractual rate increases). Decreases in, or the lack of anticipated increases in, per diem rates could adversely impact our operating margin.

Revenues-Abraxas Youth and Family Services. Revenues for our Abraxas Youth and Family Services division are primarily generated from per diem, fee-for-service and cost-plus reimbursement contracts. For the three months ended September 30, 2009 and 2008, we realized average per diem rates on our residential youth and family services facilities of approximately $195.74 and $193.89, respectively. For the nine months ended September 30, 2009 and 2008, we realized average per diem rates of approximately $195.88 and $191.03, respectively. The increase in the average per diem rate for 2009 reflects the continued ramp-up of the Abraxas Academy (reactivated in the fourth quarter of 2006), the reactivation of the Hector Garza Residential Treatment Center in August 2007 as well as changes in the mix of services provided and customers served at our other facilities. For the three months ended September 30, 2009 and 2008, we realized average fee-for-service rates for our non-residential community-based Abraxas Youth and Family Services facilities and programs, including rates that are limited by Medicaid and other private insurance providers, of approximately $45.91 and $45.32, respectively. For the nine months ended September 30, 2009 and 2008, we realized average fee for service rates of approximately $45.36 and $47.85, respectively. The fluctuation in the average fee-for-service rates for 2009 and 2008 is due to changes in the mix of services provided at our non-residential facilities. The majority of our Abraxas Youth and Family Services contracts renew annually.

Revenues-Adult Community-Based Services. Revenues for our Adult Community-Based Services division are primarily generated from per diem and fee-for-service contracts. For the three months ended September 30, 2009 and 2008, we realized average per diem rates on our residential adult community-based facilities of approximately $66.47 and $68.46, respectively. For the nine months ended September 30, 2009 and 2008, we realized average per diem rates on our residential Adult Community-Based Services facilities of approximately $66.97 and $66.44, respectively. For the three months ended September 30, 2009 and 2008, we realized average fee-for-service rates on our non-residential Adult Community-Based Services facilities and programs of approximately $12.22 and $11.90, respectively. For the nine months ended September 30, 2009 and 2008, we realized average fee-for-service rates on our non-residential Adult Community-Based Services facilities and programs of approximately $9.93 and $13.71, respectively. Our average fee-for-service rates fluctuate from year to year principally due to changes in the mix of services provided by our various Adult Community-Based Services programs and facilities.

Operating Margins. We have historically experienced higher operating margins in our Adult Secure Services and Adult Community-Based Services divisions as compared to our Abraxas Youth and Family Services division. Our operating margin, in a given period, will be impacted by those facilities which may either be underutilized, dormant or have been reactivated during the period. As previously discussed, we have reactivated several facilities, including the Abraxas Academy and the Hector Garza Residential Treatment Center in 2006 and 2007, respectively. We have also expanded several of our Adult Secure facilities during 2008 and 2009 (D. Ray James Prison, Great Plains Correctional Facility and Walnut Grove Youth Correctional Facility, for example), which provides the opportunity to leverage existing infrastructure. Additionally, our operating margins within a division can vary from facility to facility based on whether a facility is owned or leased, the level of competition for the contract award, the proposed length of the contract, the mix of services provided, the occupancy levels for a facility, the level of capital commitment required with respect to a facility, the anticipated changes in operating costs over the term of the contract and our ability to increase a facility’s contract revenue. Under take-or-pay contracts, such as the contract at the Moshannon Valley Correctional Center, operating margins are typically higher during the early stages of the contract as the facility’s population ramps up (as revenues are received at contract percentages regardless of actual occupancy). As the variable costs (primarily resident-related and certain facility costs) increase with the growth in population, operating margins will generally decline to a stabilized level. Following its activation in April 2006, we experienced such operating margin impact pertaining to the Moshannon Valley Correctional Center in the third and fourth quarters of 2006. A decline in occupancy at our Abraxas Youth and Family Services facilities can have a more significant negative impact on operating margins than a decline in occupancy in our Adult Secure Services division due to the longer periods typically required to ramp resident population at a youth facility (given the relative facility scale influences present in these divisions).

We have experienced and expect to continue to experience interim period operating margin fluctuations due to factors such as the number of calendar days in the period, higher payroll taxes (generally in the first half of the year) and salary and wage increases and insurance cost increases that are incurred prior to certain contract rate increases. Periodically, many of the governmental agencies with

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whom we contract may experience budgetary pressures and may approach us to limit or reduce per diem rates (including contractual price increases as well). We have seen indications of such customer behavior in 2009 and believe it will continue into 2010. Decreases in, or the lack of anticipated increases in, per diem rates could adversely impact our operating margin. Additionally, a decrease in per diem rates without a corresponding decrease in operating expenses could also adversely impact our operating margin.

Operating Expenses. We track several different areas of our operating expenses. Foremost among these expenses are employee compensation and benefits and expenses, risk related areas such as general liability, medical and worker’s compensation, client/inmate costs such as food, clothing, medical and programming costs, financing costs and administrative overhead expenses. Increases or decreases in one or more of these expenses, such as our experience with rising insurance costs, can have a material effect on our financial performance. Operating expenses are also impacted by decisions to close or terminate a particular program or facility. Such decisions are based on our assessments of operating results, operating efficiency and risk-adjusted returns and are an ongoing part of our portfolio management. In addition, decisions to restructure employee positions will typically increase period costs initially (at the time of such actions), but generally reduce post-restructuring expense levels.

We are responsible for all facility operating costs, except for certain debt service and interest or lease payments for facilities where we have a management contract only. At these facilities, the facility owner is responsible for all debt service and interest or lease payments related to the facility. We are responsible for all other operating expenses at these facilities. We operated 13 and 16 facilities under management contracts at September 30, 2009 and 2008, respectively. Included in the facilities under management contracts at September 30, 2009 were the Walnut Grove Youth Correctional Facility and the eight Los Angeles County Jails, which represented 1,714 beds of service capacity, or approximately 82.5%, of the residential service capacity represented by management contracts.

A majority of our facility operating costs consists of fixed costs. These fixed costs include lease and rental expense, insurance, utilities and depreciation. As a result, when we commence operation of new or expanded facilities, fixed operating costs may increase. The amount of our variable operating costs, including food, medical services, supplies and clothing, depend on occupancy levels at the facilities. Our largest single operating cost, facility payroll expense and related employment taxes and expenses, has both a fixed and a variable component. We can adjust a facility’s staffing levels and the related payroll expense to a certain extent based on occupancy at a facility; however a minimum fixed number of employees is required to operate and maintain any facility regardless of occupancy levels. Personnel costs are subject to increases in tightening labor markets based on local economic environments and other conditions.

We incur pre-opening and start-up expenses including payroll, benefits, training and other operating costs prior to opening a new or expanded facility and during the period of operation while occupancy is ramping up. These costs vary by contract (and also the pace/scale of the activation and related population ramp). Since pre-opening and start-up costs are generally factored into the revenue per diem rate that is charged to the contracting agency, we typically expect to recover these upfront costs over the life of the contract. Because occupancy rates during a facility’s start-up phase typically result in capacity under-utilization for at least 90 to 180 days, we may incur additional post-opening start-up costs. The ramp phase for our youth facilities is typically longer than that experienced in adult facilities. We do not anticipate post-opening start-up costs at any adult secure facilities operated under any future contracts with the BOP which are take-or-pay contracts, meaning that the BOP will pay at least 80.0% of the contractual monthly revenue once the facility opens, regardless of actual occupancy.

Newly opened facilities are staffed according to applicable regulatory or contractual requirements when we begin receiving offenders or clients. Offenders or clients are typically assigned to a newly opened facility on a phased-in basis over a one- to six-month period. Our start-up period for new juvenile operations is 12 months from the date we begin recognizing revenue unless break-even occupancy levels are achieved before then. The actual time required to ramp a juvenile facility (with an approximate capacity, for example, of 100 to 200 beds) may be a period of one to three years. Our start-up period for new adult operations is nine months from the date we begin recognizing revenue unless break-even occupancy levels are achieved before then. The approximate time to ramp an adult facility of approximately 1,000 beds may be a period of three to six months, depending upon the customer requirements. Acceleration of the ramp pace may also increase the pre-opening start-up costs (primarily related to costs such as personnel, training, etc.). Although we typically recover these upfront costs over the life of the contract, quarterly results can be substantially affected by the timing of the commencement of operations as well as the development and construction of new facilities.

Working capital requirements generally increase immediately prior to commencing management of a new or expanded facility as we incur start-up costs and purchase necessary equipment and supplies before facility management revenue is realized.

General and administrative expenses consist primarily of costs for corporate and administrative personnel who provide senior management, legal, finance, accounting, human resources, investor relations, payroll and information systems, costs of business development and outside professional and consulting fees.

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Recent Developments

D. Ray James Prison

In August 2007, we announced that we were initiating a second expansion of the D. Ray James Prison. This expansion project increased the facility’s service capacity by an additional 700 beds for a total service capacity of approximately 2,800 beds. This expansion project began in the first quarter of 2008 and was completed in the second quarter of 2009. We are currently marketing this additional expansion to multiple customers, but we can make no assurances as to who the customer will be (or what the possible timing might be).

Hudson, Colorado

In August 2008, we entered into an agreement pursuant to which we will lease a new 1,250 male bed adult secure facility in Hudson, Colorado. The facility is owned by a third party and is being built on land we sold to the third party. We retained approximately 270 acres out of the original 320 acres we acquired in 2007. We anticipate the construction, which began in the third quarter of 2008, to be completed in November 2009. We have entered into a contract with the Alaska DOC to house up to 1,000 state prisoners at the facility. The contract became effective on September 16, 2009 and has an initial term through June 30, 2012, with annual renewal options for the period July 1, 2012 through October 31, 2019. Under the contract, the Alaska DOC will house up to 1,000 adult male inmates at the Facility, with an agreed-upon 800-bed guarantee. The intake of approximately 850 inmates is expected to commence in late November 2009 and be completed by late December 2009.

Liquidity and Capital Resources

General . Our primary capital requirements are for (1) purchases, construction or renovation of new facilities, (2) expansions of existing facilities, (3) working capital, (4) pre-opening and start-up costs related to new operating contracts, (5) acquisitions, (6) information systems hardware and software, and (7) furniture, fixtures and equipment. Working capital requirements generally increase immediately prior to commencing management of a new or expanded facility as we incur start-up costs and purchase necessary equipment and supplies before facility management revenue is realized.

Cash Flows From Operating Activities. Cash provided by operations was approximately $11.7 million for the nine months ended September 30, 2009 compared to $21.0 million for the nine months ended September 30, 2008. The decrease from the prior period was principally due (1) an increase of approximately $5.7 million in net income in the nine months ended September 30, 2009, (2) a decrease in accounts payable and accrued liabilities in the nine months ended September 30, 2009 due to the timing and amount of vendor payments and (3) an increase in accounts receivable-trade (refer to “Management’s Discussion and Analysis of Operations - Liquidity and Capital Resources - Future Liquidity” for more information concerning this increase).

Cash Flows From Investing Activities . Cash used in investing activities was approximately $7.2 million for the nine months ended September 30, 2009 due to capital expenditures of $14.5 million related to the facility expansion projects at the D. Ray James Prison, as well as certain infrastructure work at our Hudson, Colorado facility, offset by insurance proceeds of $2.6 million (related to damages sustained at the Reid Community Residential Facility during Hurricane Ike in September 2008 and damages sustained at our disaster recovery site in 2009). Additionally, we had net withdrawals from the restricted debt payment account of $4.6 million. Cash used in investing activities was approximately $54.5 million for the nine months ended September 30, 2008 due to capital expenditures of $59.3 million related primarily to the expansion projects at the D. Ray James Prison and the Great Plains Correctional Facility. These payments were partially offset by net withdrawals from the restricted debt payment account of $3.7 million and proceeds of $0.8 million from the sale of certain property. Additionally, we had sales of investment securities of $0.3 million.

Cash Flows From Financing Activities . Cash used in financing activities was approximately $14.1 million for the nine months ended September 30, 2009 due primarily to MCF’s annual bond principal payment of $12.4 million in July 2009. Additionally, we had borrowings of $2.0 million and payments of $4.0 million on our Amended Credit Facility, and proceeds of $0.3 million from the exercise of stock options and employee stock purchase plan contributions. Cash provided by financing activities was approximately $32.3 million for the nine months ended September 30, 2008 due primarily to borrowings on our Amended Credit Facility of $43.0 million and proceeds from the exercise of stock options of $0.6 million. These were partially offset by MCF’s annual principal payment of $11.4 million in July 2008.

Treasury Stock Repurchases. We did not purchase any of our common stock in the nine months ended September 30, 2009 and 2008.

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approximately $12.1 million at September 30, 2009. We had outstanding borrowings under our Amended Credit Facility of $73.0 million and we had outstanding letters of credit of approximately $14.9 million at September 30, 2009. Subject to certain requirements, we have the right to increase the commitments under our Amended Credit Facility up to $150.0 million, although the indenture for our Senior Notes limits our ability, subject to certain conditions, to expand the Amended Credit Facility beyond $100.0 million. We can provide no assurance that all of the banks that have made commitments to us under our Amended Credit Facility would be willing to participate in an expansion to the Amended Credit Facility should we desire to do so. The Amended Credit Facility is collateralized by substantially all of our assets, including the assets and stock of all of our subsidiaries. The Amended Credit Facility is not secured by the assets of MCF, a special purpose entity.

Year	Percentages

2008	105.375	%
2009	102.688	%
2010 and thereafter	100.000	%

Future Liquidity

Our shelf registration statement under Form S-3 for potential offerings from time to time of up to $75.0 million in gross proceeds of debt securities, common stock, preferred stock, warrants or certain other securities was declared effective by the Securities and Exchange Commission in September 2008.

We expect to use existing cash balances, internally generated cash flows and borrowings from our Amended Credit Facility to fulfill anticipated obligations such as capital expenditures, working-capital needs and scheduled debt maturities over at least the next twelve months. As of September 30, 2009, we had approximately $12.1 million of available capacity under our Amended Credit Facility. We will continue to analyze our capital structure, including a potential refinancing of our Senior Notes and financing for our expected future capital expenditures, including any potential acquisitions. We will consider potential acquisitions from time to time. Our principal focus for acquisitions is anticipated to be in our Adult Secure and Adult Community-Based divisions, although we

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would also consider attractively priced acquisitions in our Abraxas Youth and Family Services division. We may decide to use internally generated funds, bank financing, equity issuances, debt issuances or a combination of any of the foregoing to finance our future capital needs. We may also seek, from time to time, to retire or purchase some of our common stock and/or outstanding debt through cash purchases in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In September 2009 we adopted a stock repurchase plan under rule 10b5-1 of the Securities Exchange Act of 1934 (“the Company 10b5-1 Plan”) to facilitate the repurchase of our common stock pursuant to the stock repurchase program authorized by our Board of Directors in July 2009. The Company 10b5-1 Plan, which provides for up to $10.0 million in purchases, will be in effect through December 2010, subject to certain price, volume and timing constraints as specified in the Company 10b5-1 Plan. At September 30, 2009, we believe we have sufficient liquidity necessary to complete those projects for which we have outstanding commitments.

Our internally generated cash flow is directly related to our business. Should the private corrections and juvenile businesses deteriorate, or should we experience poor results in our operations, cash flow from operations may be reduced. We have, however, continued to generate positive cash flow from operating activities over recent years and expect that cash flow will continue to be positive over the next year. Our access to debt and equity markets may be reduced or closed to us due to a variety of events, including, among others, industry conditions, general economic conditions, market conditions, credit rating agency downgrades of our debt and/or market perceptions of us and our industry. The volatility seen in the financial markets beginning in the third quarter of 2008 has continued into the third quarter of 2009 and is expected to be present (at some level) for the near term. Such volatility could result in decreased availability of capital at economical terms (or at various times) and could also put additional financial and budgetary pressure on our customers. Such conditions could potentially result in our inability to pursue additional future growth opportunities (such as facility expansions or new facility construction) and, if coupled with unexpected client, operational or other issues affecting our cash flow, in a need to seek additional financing at terms we would otherwise not accept.

In addition, our accounts receivable are with federal, state, county and local government agencies, which we believe generally reduces our credit risk. However, it is possible that situations such as continuing budget resolutions, delayed passage of budgets or budget pressures may increase the length of repayment of certain of these receivables. For example, during 2009 the State of California notified vendors providing services to the state that it would temporarily issue IOU’s. We received IOU’s from the State of California which were subsequently paid in full during the third quarter of 2009. We do not currently hold any IOU’s from the State of California. In addition, delays in the passage of budgets (such as experienced in the State of Pennsylvania in 2009) may lead to temporary delays in the repayment of our receivables from operations in such states. This would lead to a temporary increase in our receivables, as evidenced by the increase in our accounts receivable-trade at September 30, 2009. As the State of Pennsylvania did not pass a fiscal 2010 budget until mid-October 2009, the majority of the cities and counties in Pennsylvania chose to defer their payments (during the state budget impasse present through the third quarter of 2009) until the state budget had been adopted. While we will closely monitor such situations, we do not currently expect this to have a significant negative impact on the repayment of our receivables related to our facilities in such locations.

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Results of Operations

The following table sets forth for the periods indicated the percentages of revenue represented by certain items in our historical consolidated statements of operations.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses, excluding depreciation and amortization	72.1		74.9		72.1		73.5
Depreciation and amortization	4.3		4.7		4.6		4.5
General and administrative expenses	5.6		5.7		5.9		6.7
Income from operations	18.0		14.7		17.4		15.3
Interest expense, net	6.2		6.0		6.1		6.2
Income before provision for income taxes	11.8		8.7		11.3		9.1
Provision for income taxes	4.8		3.5		4.7		3.9
Net income	7.0		5.2		6.6		5.2
Non-controlling interest	0.5		0.1		0.4		—
Income available to stockholders	6.5	%	5.1	%	6.2	%	5.2	%

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Revenues . Revenues increased approximately $8.1 million, or 8.5%, to $103.3 million for the three months ended September 30, 2009 from $95.2 million for the three months ended September 30, 2008.

Adult Secure Services. Adult Secure Services revenues increased approximately $6.2 million, or 12.0%, to $57.7 million for the three months ended September 30, 2009 from $51.5 million for the three months ended September 30, 2008 due primarily to (1) an increase in revenues of $4.1 million at the Great Plains Correctional Facility due to increased occupancy as a result of a facility expansion completed in September 2008, (2) an increase in revenues of $1.1 million at the RCC due to improved occupancy and (3) an increase in revenues of $0.7 million at the Walnut Grove Youth Correctional Facility due to a facility expansion completed in the third quarter of 2008. The remaining net increase in revenues of $0.3 million was due to various insignificant fluctuations in revenues at our other Adult Secure Services facilities.

At September 30, 2009, we operated ten Adult Secure Services facilities with an aggregate service capacity of 13,541. Average contract occupancy was 86.5% for the three months ended September 30, 2009 compared to 89.9% for the three months ended September 30, 2008. The decrease in the average contract occupancy is primarily due to (1) the additional capacity brought into operations in September 2008 at Walnut Grove, which we began ramping during the fourth quarter of 2008, (2) under-utilization at certain California facilities and (3) the activation of the second expansion at the D. Ray James Prison in April 2009. The average per diem rate for our Adult Secure Services facilities was approximately $53.72 and $53.12 for the three months ended September 30, 2009 and 2008, respectively.

Abraxas Youth and Family Services. Abraxas Youth and Family Services revenues increased approximately $0.5 million, or 1.9%, to $26.7 million for the three months ended September 30, 2009 from $26.2 million for the three months ended September 30, 2008 due primarily to (1) an increase in revenues of $1.0 million at the Cornell Abraxas 1 facility (“A-1”) due to improved occupancy, (2) an increase in revenues of $0.7 million at the Texas Adolescent Treatment Center (“TATC”) due to improved occupancy and (3) an increase in revenues of $0.6 million at the Hector Garza Residential Treatment Center due to improved occupancy. The increase in revenues due to the above was offset, in part, by a decrease in revenues of $0.8 million due to the termination of our management contract for the Salt Lake Valley Detention Center as of September 2008. The remaining net decrease in revenues of $1.0 million was due to various immaterial fluctuations in revenues at our other Abraxas Youth and Family Services facilities and programs.

At September 30, 2009, we operated 17 residential Abraxas Youth and Family Services facilities and 10 non-residential Abraxas Youth and Family Services community-based programs with an aggregate service capacity of 3,096. Additionally, we had one facility that was vacant at September 30, 2009 with a service capacity of 70 beds. Average contract occupancy for the three months ended September 30, 2009 was 87.4% compared to 74.6% for the three months ended September 30, 2008. The increase in the average contract occupancy in 2009 was due to increased occupancy/higher utilization at such facilities as TATC, A-1 and the Hector Garza Residential Treatment Center.

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The average per diem rate for our residential Abraxas Youth and Family Services facilities was approximately $195.74 for the three months ended September 30, 2009 compared to $193.89 for the three months ended September 30, 2008. Our average fee-for-service rate for our non-residential Abraxas Youth and Family Services community-based facilities and programs was approximately $45.91 for the three months ended September 30, 2009 compared to $45.32 for the three months ended September 30, 2008. Our average fee-for-service rate can fluctuate from period-to-period depending on the mix of services provided at our various Abraxas Youth and Family Services facilities and programs.

Adult Community-Based Services. Adult Community-Based Services revenues increased approximately $1.4 million, or 8.0%, to $18.9 million for the three months ended September 30, 2009 from $17.5 million for the three months ended September 30, 2008 due to various immaterial fluctuations in revenues spread across our Adult Community-Based Services facilities and programs.

At September 30, 2009, we operated 28 residential Adult Community-Based Services facilities and three non-residential Adult Community-Based Services programs with an aggregate service capacity of 3,960. Average contract occupancy was 113.6% for the three months ended September 30, 2009 compared to 99.6% for the three months ended September 30, 2008. The average per di em rate for our residential Adult Community-Based Services facilities was approximately $66.47 for the three months ended September 30, 2009 compared to $68.46 for the three months ended September 30, 2008. The average fee-for-service rate for our non-residential Adult Community-Based Services programs was approximately $12.22 for the three months ended September 30, 2009 compared to $11.90 for the three months ended September 30, 2008. Our average fee-for-service rates fluctuate as a result of changes in the mix of services provided by our various Adult Community-Based Services programs and facilities.

Operating Expenses . Operating expenses, excluding depreciation and amortization, increased approximately $3.2 million, or 4.5%, to $74.4 million for the three months ended September 30, 2009 from $71.2 million for the three months ended September 30, 2008.

Adult Secure Services. Adult Secure Services operating expenses increased approximately $3.8 million, or 10.9%, to $38.7 million for the three months ended September 30, 2009 from $34.9 million for the three months ended September 30, 2008 due primarily to (1) an increase in operating expenses of $2.2 million at the Great Plains Correctional Facility due to increased occupancy as a result of a facility expansion completed in September 2008 and (2) an increase in operating expenses of $0.7 million at RCC due to increased occupancy. The remaining net increase in operating expenses of approximately $0.9 million was due to various immaterial fluctuations in operating expenses at our other Adult Secure Services facilities as well as a decrease in divisional operating expenses in the 2009 period.

As a percentage of segment revenues, Adult Secure Services operating expenses were 67.2% for the three months ended September 30, 2009 compared to 67.8% for the three months ended September 30, 2008.

Abraxas Youth and Family Services. Abraxas Youth and Family Services division operating expenses decreased approximately $0.1 million, or 0.4%, to $23.7 million for the three months ended September 30, 2009 from $23.8 million for the three months ended September 30, 2008 due primarily to a decrease in operating expense of $1.0 million due to the termination of our management contract for the Salt Lake Valley Detention Center as of September 2008. This decrease was offset, in part, by (1) an increase in operating expenses of $0.6 million at the Hector Garza Residential Treatment Center due to improved occupancy and (2) an increase in operating expenses of $0.4 million at TATC due to increased occupancy. The remaining net decrease in operating expenses of approximately $0.1 million was due to various immaterial fluctuations in operating expenses at our other Abraxas Youth and Family Services facilities and programs.

As a percentage of segment revenues, Abraxas Youth and Family Services operating expenses were 88.7% for the three months ended September 30, 2009 compared to 90.8% for the three months ended September 30, 2008. The reduction in the operating expense ratio in 2009 was principally due to the increased utilization at those facilities noted.

Adult Community-Based Services. Adult Community-Based Services operating expenses decreased approximately $0.5 million, or 4.0%, to $12.0 million for the three months ended September 30, 2009 from $12.5 million for the three months ended September 30, 2008. The decrease in operating expenses was due primarily to a gain of $0.2 million related to final insurance recoveries in excess of property carrying values at the Reid Community Residential Facility damaged in Hurricane Ike in September 2008. This gain is reflected in operating expenses for the three months ended September 30, 2009. The remaining decrease in operating expenses of approximately $0.3 million was due to immaterial fluctuations in operating expenses at our various Adult Community-Based Services facilities and programs between the two periods.

As a percentage of segment revenues, Adult Community-Based Services operating expenses were 63.5% for the three months ended September 30, 2009 compared to 71.5% for the three months ended September 30, 2008. The improvement in the operating

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margin was primarily due to the increased utilization across the various facilities and programs during the period as well as the gain on insurance recovery recognized in the three months ended September 30, 2009 as discussed above.

Depreciation and Amortization . Depreciation and amortization expense was approximately $4.5 million and $4.5 million for the three months ended September 30, 2009 and 2008, respectively. Depreciation expense increased approximately $0.4 million primarily due to the facility expansions at the Great Plains Correctional Facility and the D. Ray James Prison. Amortization of intangibles was approximately $0.1 million and $0.5 million for the three months ended September 30, 2009 and 2008, respectively.

General and Administrative Expenses. General and administrative expenses increased approximately $0.3 million, or 5.5%, to $5.8 million for the three months ended September 30, 2009 compared to $5.5 million for the three months ended September 30, 2008. The increase was due primarily to increased stock-based compensation expense in the three months ended September 30, 2009 as compared to the same period of 2008.

Interest. Interest expense, net of interest income, increased to approximately $6.4 million for the three months ended September 30, 2009 from $5.8 million for the three months ended September 30, 2008. The increase in net interest expense was primarily due to a reduction in capitalized interest in the three months ended September 30, 2009. Capitalized interest for the three months ended September 30, 2008 was approximately $1.0 million and related to the facility expansion projects at the Great Plains Correctional Facility and the D. Ray James Prison. There was no interest capitalized during the three months ended September 30, 2009. This increase in net interest expense was offset by lower interest expense of approximately $0.3 million on our Amended Credit Facility due to lower average interest rates in the 2009 period. Additionally, MCF made an annual bond principal payment of $12.4 million on July 31, 2009 which reduced bond interest expense for the three months ended September 30, 2009 by approximately $0.3 million as compared to the same period of 2008.

Income Taxes. For the three months ended September 30, 2009, we recognized a provision for income taxes at an estimated effective rate of 41.0%. For the three months ended September 30, 2008, we recognized a provision for income taxes at an estimated effective rate of 40.7%. The change in our estimated effective tax rate in 2009 was related to an increase in operating income across certain of our business segments, the decreased impact of certain non-deductible expenses and the utilization of various tax credits.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Revenues . Revenues increased approximately $23.1 million, or 8.1%, to $308.3 million for the nine months ended September 30, 2009 from $285.2 million for the nine months ended September 30, 2008.

Adult Secure Services. Adult Secure Services revenues increased approximately $22.1 million, or 14.6%, to $173.8 million for the nine months ended September 30, 2009 from $151.7 million for the nine months ended September 30, 2008 due primarily to (1) an increase in revenues of approximately $14.3 million at the Great Plains Correctional Facility due to increased occupancy as a result of a facility expansion completed in September 2008, (2) an increase in revenues of $3.5 million at RCC due to improved occupancy, (3) an increase in revenues of $2.3 million at Walnut Grove due to a facility expansion completed in the third quarter of 2008, and (4) an increase in revenues of $1.4 million at the Big Spring Correctional Center due to increased occupancy. The increase in revenues due to the above was offset, in part, by a decrease in revenues of $0.9 million at the Mesa Verde Community Correctional Center due to a decrease in occupancy. The remaining net increase in revenues of approximately $1.5 million was due to various insignificant fluctuations in revenues at our other Adult Secure Services facilities.

Average contract occupancy for the nine months ended September 30, 2009 was 88.5% compared to 92.5% for the nine months ended September 30, 2008. The average per diem rate for our Adult Secure Services facilities was approximately $54.25 and $54.00 for the nine months ended September 30, 2009 and 2008, respectively. The decrease in the average contract occupancy is primarily due to (1) the additional capacity brought into operations in September 2008 at Walnut Grove, which we began ramping during the fourth quarter of 2008, (2) under-utilization at certain California facilities and (3) the activation of the second expansion at D. Ray James Prison in April 2009.

Abraxas Youth and Family Services. Abraxas Youth and Family Services revenues decreased approximately $0.8 million, or 1.0%, to $80.1 million for the nine months ended September 30, 2009 from $80.9 million for the nine months ended September 30, 2008 due to (1) a decrease in revenues of $2.7 million due to the termination of our management contract for the Salt Lake Valley Detention Center as of September 2008, (2) a decrease in revenues of $1.2 million due to the termination of our management contract for the Reading Alternative Education School Program as of June 2008 and (3) a decrease in revenues of $0.6 million due to the termination of our management contract for the State Reintegration Program as of June 30, 2009. The decrease in revenues due to the above was offset by (1) an increase in revenues of $1.0 million at the Abraxas Academy due to increased occupancy, (2) an increase in revenues of $1.7 million at TATC due to improved occupancy, (3) an increase in revenues of $1.0 million at the Hector Garza Residential Treatment Center due to increased occupancy and (4) an increase in revenues of $1.0 million at A-1 due to improved occupancy. The remaining

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net decrease in revenues of $1.0 million was due to various insignificant fluctuations at our other Abraxas Youth and Family Services facilities and programs.

Average contract occupancy was 86.9% and 80.5% for the nine months ended September 30, 2009 and 2008, respectively. The increase in the 2009 average contract occupancy was primarily a result of higher utilization of the Hector Garza Residential Treatment Center, the Abraxas Academy and TATC facilities. The average per diem rate for our residential Abraxas Youth and Family Services facilities was approximately $195.88 and $191.03 for the nine months ended September 30, 2009 and 2008, respectively. The increase in the 2009 average per diem rate reflects the continued ramp-up of the Abraxas Academy, increased utilization at A-1 and our San Antonio facilities, as well as changes in the mix of services provided at other facilities. The average fee-for-service rate for our non-residential Abraxas Youth and Family Services community-based facilities and programs was approximately $45.36 and $47.85 for the nine months ended September 30, 2009 and 2008, respectively. The decrease in the average fee-for-service rate for 2009 was due to changes in the mix of services provided by our various non-residential Abraxas Youth and Family Services facilities and programs.

Adult Community-Based Services. Adult Community-Based Services revenues increased approximately $1.7 million, or 3.2%, to $54.4 million for the nine months ended September 30, 2009 from $52.7 million for the nine months ended September 30, 2008 due to various immaterial fluctuations in revenues among our various Adult Community-Based Services facilities and programs.

Average contract occupancy was 109.4% and 100.4% for the nine months ended September 30, 2009 and 2008. The average per diem rate for our residential Adult Community-Based Services facilities was $66.97 and $66.44 for the nine months ended September 30, 2009 and 2008, respectively. The average fee-for-service rate for our non-residential Adult Community-Based Services programs was $9.93 and $13.71 for the nine months ended September 30, 2009 and 2008, respectively. The decrease in the average fee-for-service rate for 2009 was due to changes in the mix of services provided by our various non-residential Adult Community-Based Services facilities and programs.

Operating Expenses. Operating expenses, excluding depreciation and amortization, increased approximately $12.3 million, or 5.9%, to $222.0 million for the nine months ended September 30, 2009 from $209.7 million for the nine months ended September 30, 2008.

Adult Secure Services. Adult Secure Services operating expenses increased approximately $14.9 million, or 15.0%, to $114.3 million for the nine months ended September 30, 2009 from $99.4 million for the nine months ended September 30, 2008 due to (1) an increase in operating expenses of $6.7 million at the Great Plains Correctional Facility due to increased occupancy as a result of a facility expansion completed in September 2008, (2) an increase in operating expenses of $1.2 million at the D. Ray James Prison due to increased occupancy as a result of facility expansions completed in February 2008 and April 2009, (3) an increase in operating expenses of $2.5 million at the Big Spring Correctional Center due to improved occupancy, (4) an increase in operating expenses of $1.1 million at Walnut Grove due to increased occupancy as a result of a facility expansion completed in third quarter of 2008 and (5) an increase in operating expenses of $1.5 million at RCC due to improved occupancy. The remaining net increase in operating expenses of $1.9 million was due to various insignificant fluctuations in operating expenses at our other Adult Secure Services facilities as well as an increase in divisional operating expenses of approximately $1.0 million in the 2009 period.

As a percentage of segment revenues, Adult Secure Services operating expenses were 65.8% for the nine months ended September 30, 2009 compared to 65.5% for the nine months ended September 30, 2008. The 2008 operating margin was favorably impacted by a $1.5 million contract-based revenue adjustment at the RCC for the contract year ended March 2008 (which we recognized in March 2008).

Abraxas Youth and Family Services. Abraxas Youth and Family Services operating expenses decreased approximately $1.2 million, or 1.6%, to $71.7 million for the nine months ended September 30, 2009 from $72.9 million for the nine months ended September 30, 2008 due primarily to (1) a decrease in operating expenses of $2.8 million due to the termination of our management contract for the Salt Lake Valley Detention Center as of September 2008 and (2) a decrease in operating expenses of $0.9 million due to the termination of our management contract for the Reading Alternative Education School Program as of June 2008. The decrease in operating expenses due to the above was offset, in part, by (1) an increase in operating expenses of $1.3 million at the Abraxas Academy due to improved occupancy, (2) an increase in operating expenses of $1.6 million at the Hector Garza Residential Treatment Center due to improved occupancy and (3) an increase in operating expenses of $1.2 million at TATC due to improved occupancy. T he remaining net decrease in operating expenses of approximately $1.6 million was due to various immaterial fluctuations in operating expenses at our other Abraxas Youth and Family Services facilities and programs.

As a percentage of segment revenues, Abraxas Youth and Family Services operating expenses were 89.5% and 90.1% for the nine months ended September 30, 2009 and 2008, respectively.

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Adult Community-Based Services. Adult Community-Based Services operating expenses decreased approximately $1.4 million, or 3.7%, to $36.0 million for the nine months ended September 30, 2009 from $37.4 million for the nine months ended September 30, 2008 due to (1) a decrease in operating expenses of $0.6 million due to the termination of our management contract for the Lincoln County Detention Center in May 2008 and (2) a decrease in operating expenses of $0.5 million due to the termination of our management contracts for several county jails in California. Additionally, we recorded a gain of $0.6 million related to insurance recoveries in excess of property carrying values at the Reid Community Residential Facility damaged in Hurricane Ike in September 2008. This gain is reflected in operating expenses for the nine months ended September 30, 2009. The remaining net increase in operating expenses of $0.9 million was due to immaterial fluctuations in operating expenses at our other Adult Community-Based Services facilities and programs. As a percentage of segment revenues, Adult Community-Based Services operating expenses were 66.2% for the nine months ended September 30, 2009 compared to 71.0% for the nine months ended September 30, 2008.

Impairment of Long-Lived Assets. We evaluate the realization of our long-lived assets at least annually or when changes in circumstances or a specific triggering event indicates that the carrying value of the asset may not be recoverable. As part of our evaluation, we make judgments regarding such factors as estimated market values and the potential future operating results and undiscounted cash flows associated with individual facilities or assets. Additionally, should we decide to sell a facility or other such asset, realization is evaluated based on the estimated sales price based on the best market information available. In conjunction with our review of certain of our long-lived assets based on estimated market values associated with these assets, we determined that our carrying value for a currently vacant site of land was not fully recoverable and exceeded its fair value and, as a result, we recorded an impairment charge of $0.3 million in the nine months ended September 30, 2008. This charge is reflected in general and administrative expenses in the accompanying financial statements for the 2008 period. We did not have any impairment charges in the nine months ended September 30, 2009.

Depreciation and Amortization . Depreciation and amortization expense was approximately $14.1 million and $12.8 million for the nine months ended September 30, 2009 and 2008, respectively. Depreciation of property and equipment increased approximately $1.8 million due primarily to depreciation expense related to the facility expansions at the Great Plains Correctional Facility and the D. Ray James Prison. Amortization of intangibles was approximately $0.9 million and $1.5 million for the nine months ended September 30, 2009 and 2008, respectively.

General and Administrative Expenses. General and administrative expenses decreased approximately $1.0 million, or 5.2%, to approximately $18.2 million for the nine months ended September 30, 2009 from $19.2 million for the nine months ended September 30, 2008 due primarily to lower legal and other professional expenses in the 2009 period.

Interest. Interest expense, net of interest income, increased to approximately $18.9 million for the nine months ended September 30, 2009 from $17.6 million for the nine months ended September 30, 2008. The net increase in interest expense was primarily due to lower capitalized interest in the nine months ended September 30, 2009 as compared to the same period of 2008. Capitalized interest was approximately $0.7 million in the nine months ended September 30, 2009 and related to the 700 bed facility expansion project at the D. Ray James Prison. For the nine months ended September 30, 2008, we capitalized interest of approximately $2.3 million related to the expansion projects at the D. Ray James Prison and the Great Plains Correctional Facility. Additionally, interest income decreased by approximately $0.8 million in the 2009 period due to lower investment balances and decreased interest rates. This increase in net interest expense was offset by lower interest expense of approximately $0.2 million on our Amended Credit Facility due to lower average interest rates in the 2009 period. Additionally, MCF made annual bond principal payments of $11.4 million in July 2008 and $12.4 million on July 31, 2009 which reduced bond interest expense for the nine months ended September 30, 2009 by approximately $0.7 million as compared to the same period of 2008.

Income Taxes. For the nine months ended September 30, 2009, we recognized a provision for income taxes at an estimated effective rate of 41.3%. For the nine months ended September 30, 2008, we recognized a provision for income taxes at an estimated effective rate of 42.3%. The change in our estimated effective tax rate in 2009 was related to an increase in operating income across certain of our business segments, the decreased impact of certain non-deductible expenses and the utilization of various tax credits.

Contractual Uncertainties Related to Certain Facilities

Regional Correctional Center. The Office of Federal Detention Trustee (“OFDT”) holds the contract for the use of the RCC on behalf of ICE, USMS and the BOP with Bernalillo County, New Mexico (the “County”) through an intergovernmental services agreement, and we have an operating and management agreement with the County. In July 2007, we were notified by ICE that it was removing all ICE detainees from the RCC and the removal was completed in early August 2007. The facility is still being utilized by the USMS, and since May 2008 by the BOP, but not at its full capacity. In February 2008, ICE informed us that it would not resume use of the facility. In February 2008, OFDT attempted to unilaterally amend its agreement with the County to reduce the number of minimum annual guaranteed mandays under the agreement from 182,500 to 66,300. Neither we nor the County believe OFDT has the

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right to unilaterally amend the contract in this manner, and OFDT has been informed of our position. Although either party to the intergovernmental services agreement has the right to terminate upon 180 days notice, neither party has exercised such right as of September 30, 2009. During the third quarter 2009, we filed a claim against the United States, acting through the United States Department of Justice, OFDT and ICE (collectively “Defendants”) for breach of contract and breach of the duty of good faith and fair dealing, arising out of the Defendants’ improper modification of the intergovernmental services agreement (the “Contract”) and subsequent failure to pay for the shortfalls in the 2007-2008 and 2008-2009 minimum annual guaranteed mandays specified in the Contract.

There is a pending lawsuit against the County concerning the County jail system, known as the “McClendon” case. In 1994, plaintiffs sued the County in federal district court in the District of New Mexico over conditions at the county jail, which was then located at what is now the Regional Correctional Center and run by the County. The County subsequently built their new Metropolitan Detention Center to house the County inmates and also negotiated two stipulated agreements in 2004 designed to end the McClendon lawsuit. These stipulated settlements covered the Metropolitan Detention Facility and were approved by the Court in 2005 (the “2005 settlement agreements”).

In March 2009, the Federal Judge presiding over the case issued an Order based on motions filed by Plaintiffs class counsel asking the Judge to reform the 2005 settlement agreements to allow for access to the RCC. In those motions, the Plaintiffs also requested alternative relief in the form of withdrawal of the Court’s approval of the 2005 settlement agreements. Based on our interpretation of the Order, the Judge denied Plaintiffs’ request for access to the RCC, granted the alternative relief requested, withdrew her approval of the 2005 settlement agreements and granted the option to Plaintiffs to rescind their 2005 settlement agreements. The Plaintiffs chose to rescind the 2005 settlement agreements. In the Order, the Judge concluded that the RCC, at least to the extent it is used to house detainees by Bernalillo County pursuant to the intergovernmental services agreement, is part of the county jail system. The County has informed us that it does not believe McClendon should apply to the RCC and the County has filed an appeal of the Order to the U.S. Court of Appeals for the Tenth Circuit. We are not a party to this lawsuit and the ramifications of the Court’s Order to our operation of the RCC are unclear.

The 2005 settlement agreements imposed various conditions on the Metropolitan Detention Center that resulted in material increases to its operating costs. The effect of the rescission of the 2005 settlement agreements is unclear since those settlement agreements replaced prior settlement agreements approved in 1996. We do not believe we are contractually obligated to bear any incremental costs of complying with any settlement agreements in the McClendon case although the County has expressed to us that it may want us to absorb a portion of any costs that would be incurred. We currently plan to continue to operate the facility and also continue with our marketing plans for the RCC.

Revenues for this facility were approximately $10.1 million and $6.6 million (including a $1.5 million contract-based revenue adjustment for the contract year ended March 31, 2008, for which the related receivable is carried in accounts receivable-trade at September 30, 2009) for the nine months ended September 30, 2009 and 2008, respectively. The net carrying value of the leasehold improvements for this facility was approximately $0.8 million and $1.1 million at September 30, 2009 and December 31, 2008, respectively. Our lease for this facility requires monthly rent payments of approximately $0.13 million for the remaining term of the lease (which was extended through June 2010). To date, although we have several federal agencies using the RCC, the facility still has available capacity. Our inability to expand the existing population with current or new customers or any disruption of our operations due to activity in the McClendon case could have an adverse effect on our financial condition, results of operations and cash flows. We believe no impairment to the carrying value of the leasehold improvements for this facility has occurred.

Hector Garza Residential Treatment Center. In October 2005, we initiated the temporary closure of this MCF leased facility in San Antonio, Texas. We reactivated the facility during the third quarter of 2007. The net carrying value for this facility was approximately $3.9 and $4.0 million at September 30, 2009 and December 31, 2008, respectively. We believe that no impairment to the carrying value of this facility has occurred due to existing (and increasing) demand from current customers (including the Texas Youth Commission) and anticipated incremental demand from additional multiple customers to whom the facility is being marketed (including several current and anticipated requests for proposal).

Realization of long-lived assets

We review our long-lived assets (including our facilities at a facility-by-facility level) for impairment at least annually or when changes in circumstances or a triggering event indicates that the carrying amount of the asset may not be recoverable in accordance GAAP. GAAP requires that long-lived assets to be held and used recognize an impairment loss only if the carrying amount of the long-lived asset is not recoverable from its estimated future undiscounted cash flows and to measure an impairment loss as the difference between the carrying value and the fair value of the asset. Assets to be disposed of by sale are recorded at the lower of their carrying amount or fair value less estimated selling costs. We estimate projections of undiscounted cash flows, and also fair value, based upon the best information available, which may include expected future discounted cash flows to be produced by the asset

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and/or available market prices. Factors that significantly influence estimated future cash flows include the periods and levels of occupancy for the facility, expected per diem or reimbursement rates, assumptions regarding the levels of staffing, services and future operating and capital expenditures necessary to generate forecasted revenues, related costs for these activities and future rate of increases or decreases associated with these factors. Information typically utilized will also include relevant terms of existing contracts (for similar services and customers), market knowledge of customer demand (both present and anticipated) and related pricing, market competitors, and our historical experience (as to areas including customer requirements, contract terms, operating requirements/costs, occupancy trends, etc.). We may also consider the results of any appraisals if a fair value is necessary. Estimates for factors such as per diem or reimbursement rates may be highly subjective, particularly in circumstances where there is no current operating contract in place and changes in the assumptions and estimates could result in the recognition of impairment charges.

The most subjective estimates made in our impairment analysis for 2008 related to Cornell Abraxas 1 and the Hector Garza Residential Treatment Center, particularly with respect to estimated occupancy. The approximate carrying values at December 31, 2008 for Cornell Abraxas 1 and the Hector Garza Residential Treatment Center were $10.4 million and $4.0 million, respectively. The estimated undiscounted future cash flow values exceeded the carrying values noted for the facilities, and all facilities had operating contracts in place. During 2009, there were no significant events that caused us to believe that an impairment of these facilities during the current period had occurred.

We may be required to record an impairment charge in the future if we are unable to successfully negotiate a replacement contract on any of our facilities for which we currently have an operating contract.

Contractual Obligations and Commercial Commitments . We have assumed various financial obligations and commitments in the ordinary course of conducting our business. We have contractual obligations requiring future cash payments under our existing contractual arrangements, such as management, consultative and non-competition agreements.

We maintain operating leases in the ordinary course of our business activities. These leases include those for operating facilities, office space and office and operating equipment, and the terms of these agreements range from 2008 until 2075. As of September 30, 2009, our total commitment under these operating leases was approximately $116.6 million.

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The following table details our known future cash payments (on an undiscounted basis) related to various contractual obligations as of September 30, 2009 (in thousands):

	Payments Due by Period
					2010 -		2012 -
	Total		2009		2011		2013		Thereafter

Contractual Obligations:
Long-term debt — principal
· Cornell Companies, Inc.	$	112,000	$	—	$	—	$	112,000	$	—
· Special Purpose Entity	121,700		—		28,000		33,000		60,700
Long-term debt — interest
· Cornell Companies, Inc.	33,110		3,010		24,080		6,020		—
· Special Purpose Entity	44,578		—		19,482		14,534		10,562
Revolving line of credit-principal
· Cornell Companies, Inc.	73,000		—		73,000		—		—
Revolving line of credit-interest
· Cornell Companies, Inc.	700		490		210		—		—
Capital lease obligations
· Cornell Companies, Inc.	17		3		14		—		—
Construction commitments	3,483		3,483		—		—		—
Operating leases	116,570		1,850		25,689		21,876		67,155
Consultative and non-compete agreements	120		110		10		—		—
Total contractual cash obligations	$	505,278	$	8,946	$	170,485	$	187,430	$	138,417

Approximately $2.8 million of unrecognized tax benefits have been recorded as liabilities as of September 30, 2009 but are not included in the contractual obligations table above because we are uncertain as to if or when such amounts may be settled. Related to the unrecognized tax benefits not included in the table above, we have also recorded a liability for potential penalties of approximately $0.1 million and for interest of approximately $0.1 million as of September 30, 2009.

We enter into letters of credit in the ordinary course of operating and financing activities. As of September 30, 2009, we had outstanding letters of credit of approximately $14.9 million primarily for certain workers’ compensation insurance and other operating obligations. The following table details our letters of credit commitments as of September 30, 2009 (in thousands):

	Total		Amount of Commitment Expiration Per Period
	Amounts		Less than						More Than
	Committed		1 Year		1-3 Years		3-5 Years		5 Years
Commercial Commitments:
Standby letters of credit	$	14,949	$	14,199	$	750	$	—	$	—

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we are exposed to market risk, primarily from changes in interest rates. We continually monitor exposure to market risk and develop appropriate strategies to manage this risk. We are not exposed to any other significant market risks, including commodity price risk or, foreign currency exchange risk or interest rate risks from the use of derivative financial instruments.

Credit Risk

Due to the short duration of our investments, changes in market interest rates would not have a significant impact on their fair value. In addition, our accounts receivables are with federal, state, county and local government agencies, which we believe reduces our credit risk. However, it is possible that such situations as continuing budget resolutions, delayed passage of budgets or budget pressures may increase the length of repayment of certain receivables. During the third quarter of 2009 the State of California notified vendors providing services to the state that it would temporarily issue IOU’s. We received IOU’s from the State of California which were subsequently repaid prior to September 30, 2009, and we do not presently hold any IOU’s from the State of California. In addition, delays in the passage of budgets (such as experienced in the State of Pennsylvania in 2009) may lead to temporary delays in

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the repayment of our receivables from operations in such states. This would lead to a temporary increase in our receivables, as evidenced by the increase in our accounts receivable-trade at September 30, 2009. As the State of Pennsylvania did not pass a fiscal 2010 budget until mid-October 2009, the majority of the cities and counties in Pennsylvania chose to defer their payments (during the state budget impasse present through the third quarter of 2009) until the state budget had been adopted. While we closely monitor such situations, we do not currently expect such this to have a permanent impact on the repayment of our receivables related to our facilities.

Interest Rate Exposure

Our exposure to changes in interest rates primarily results from our Amended Credit Facility, as these borrowings have floating interest rates. The debt on our consolidated financial statements at September 30, 2009 with fixed interest rates consist of the 8.47% Bonds issued by MCF, a special purpose entity, in August 2001 in connection with the 2001 Sale and Leaseback Transaction and $112.0 million of Senior Notes. The detrimental effect of a hypothetical 100 basis point increase in interest rates on our current borrowings under our Amended Credit Facility would be to reduce income before provision for income taxes by approximately $0.5 million for the nine months ended September 30, 2009. At September 30, 2009, the fair value of our consolidated fixed rate debt was approximately $313.2 million based upon quoted market prices or discounted future cash flows using the same or similar securities.

Inflation

Other than personnel, offender medical costs at certain facilities, and employee medical and worker’s compensation insurance costs, we believe that inflation has not had a material effect on our results of operations during the past two years. We have experienced significant increases in offender medical costs and employee medical and worker’s compensation insurance costs, and we have also experienced higher personnel costs during the past two years. Most of our facility management contracts provide for payments of either fixed per diem fees or per diem fees that increase by only small amounts during the term of the contracts. Inflation could substantially increase our personnel costs (the largest component of our operating expenses), medical and insurance costs or other operating expenses at rates faster than any increases in contract revenues. Food costs (part of our resident/inmate care costs) have also been subject to rising prices in 2008 and 2009. We believe we have limited our exposure through long-term contracts with fixed term pricing.

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ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information disclosed in our annual and periodic reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, we designed these disclosure controls and procedures to ensure that this information is accumulated and communicated to management, including the chief executive officer (CEO) and chief financial officer (CFO), to allow timely decisions regarding required disclosures. SEC rules require that we disclose the conclusions of our CEO and CFO about the effectiveness of our disclosure controls and procedures.

We do not expect that our disclosure controls and procedures will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitation in a cost-effective control system, misstatements due to error or fraud could occur and not be detected.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, and as required by paragraph (b) of Rules 13a-15 and 15d-15 of the Exchange Act, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period required by this report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective as of that date.

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Changes in Internal Control over Financial Reporting

In connection with the evaluation as required by paragraph (d) of Rules 13a-15 and 15d-15 of the Exchange Act, we have not identified any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under Exchange Act) during our fiscal quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings.

See Part I, Item 1. Note 9 to the Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 1A. Risk Factors.

The risk factors as previously disclosed in our Form 10-K for the fiscal year ended December 31, 2008 are incorporated herein by this reference. There are no material changes to such risk factors.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

ITEM 3. Defaults Upon Senior Securities.

None.

ITEM 4. Submission of Matters to a Vote of Security Holders.

None.

ITEM 5. Other Information.

None.

ITEM 6. Exhibits.

31.1*		Section 302 Certification of Chief Executive Officer
31.2*		Section 302 Certification of Chief Financial Officer
32.1**		Section 906 Certification of Chief Executive Officer
32.2**		Section 906 Certification of Chief Financial Officer

*		Filed herewith.
**		Furnished herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CORNELL COMPANIES, INC.


Date: November 6, 2009	By:	/s/ James E. Hyman
		JAMES E. HYMAN
		Chief Executive Officer, President and Chairman
		of the Board (Principal Executive Officer)


Date: November 6, 2009	By:	/s/ John R. Nieser
		JOHN R. NIESER
		Senior Vice President, Chief Financial Officer
		and Treasurer (Principal Financial Officer and
		Principal Accounting Officer)