<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


           For the Quarter Ended               Commission File Number
                June 30, 1998                           0-23284
          -----------------------                      ---------


                       YOUTH SERVICES INTERNATIONAL, INC.
 -------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


                 Maryland                             52-1715690
                ----------                           ------------
          (State of Incorporation)       (I.R.S. Employer Identification Number)

          2 Park Center Court, Suite 200, Owings Mills, Maryland, 21117
 -------------------------------------------------------------------------------
                    (Address of principal executive offices)


               Registrant's telephone number, including area code:
                                  410-356-8600
                                  ------------


                                 Not Applicable
 -------------------------------------------------------------------------------
               (Former name, former address and former fiscal year
                          if changed since last report)


Number of shares of common stock outstanding on June 30, 1998: 11,282,088

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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      
                             -----       -----

<PAGE>   2


                       YOUTH SERVICES INTERNATIONAL, INC.

                                INDEX - FORM 10-Q

                                  June 30, 1998



<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                     PAGE
                                                                                   ----
<S>              <C>                                                                 <C>
Item 1.          Consolidated Financial Statements

                 Consolidated Statements of  Operations -
                 For the Three Months  and Six Months Ended
                 June  30, 1998 and 1997                                              2

                 Consolidated Balance Sheets -
                 As of  June 30,  1998 and December 31, 1997                          3

                 Consolidated Statements of Cash Flows-
                 For the  Six Months Ended June 30, 1998 and 1997                     5

                 Notes to Consolidated Financial Statements                           7

Item 2.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operations                        9

PART II - OTHER INFORMATION

Item 1           Legal Procedings

Items 2 through 4 have been omitted since the item is either inapplicable or the
answer is negative.

Item 5           Other Information

Item 6           Exhibits and Reports on Form 8-K                                    14

Signatures                                                                           15
</TABLE>



                                       1
<PAGE>   3


               YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        (IN $000'S EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                    JUNE 30,                        JUNE 30,
                                                            ----------------------------   ----------------------------
                                                                1998           1997             1998            1997
                                                            -----------    -------------   ------------    ------------
<S>                                                         <C>             <C>             <C>             <C>
REVENUES                                                    $   21,892      $   31,204      $   44,919      $   60,046

PROGRAM EXPENSES:
      Direct operating                                          21,055          26,257          39,324          52,287
      Start-up costs                                               215               -             493               -
                                                            -----------     -----------     -----------     -----------
CONTRIBUTION FROM OPERATIONS                                       622           4,947           5,102           7,759

OTHER OPERATING EXPENSES:
      Development costs                                            719             253           1,151             506
      General and administrative                                 2,216           2,423           3,984           4,846
      Costs related to pooling of interests transaction            306               -             306               -
      Loss on sale of behavioral health business                     -               -               -          27,000
                                                            -----------     -----------     -----------     -----------
(LOSS) INCOME  FROM OPERATIONS                                  (2,619)          2,271            (339)        (24,593)

INTEREST AND OTHER EXPENSE, net                                   (333)           (622)           (732)         (1,627)
                                                            -----------     -----------     -----------     -----------

(LOSS) INCOME BEFORE TAXES                                      (2,952)          1,649          (1,071)        (26,220)

INCOME TAX (BENEFIT) EXPENSE                                    (1,031)            525            (378)         (5,850)
                                                            -----------     -----------     -----------     -----------

NET (LOSS) INCOME                                           $   (1,921)     $    1,124      $     (693)     $  (20,370)
                                                            ===========     ===========     ===========     ===========
(LOSS) EARNINGS PER SHARE:
      Basic                                                 $    (0.17)     $     0.10      $    (0.06)     $    (1.92)
                                                            ===========     ===========     ===========     ===========
      Diluted                                               $    (0.17)     $     0.10      $    (0.06)     $    (1.92)
                                                            ===========     ===========     ===========     ===========
WEIGHTED AVERAGE  SHARES OUTSTANDING:
      Basic                                                     11,266          10,899          11,219          10,636
                                                            ===========     ===========      ==========     ===========
      Diluted                                                   11,266          11,255          11,219          10,636
                                                            ===========     ===========      ==========     ===========
</TABLE>


 

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


                                       2
<PAGE>   4

                                                                  PAGE 1 OF 2

               YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (IN 000'S)

<TABLE>
<CAPTION>
                                     ASSETS

                                                         JUNE 30,        DECEMBER 31,
                                                          1998              1997
                                                     ----------------   -------------
                                                        (unaudited)        (audited)
<S>                                                   <C>               <C>
CURRENT ASSETS:
       Cash                                             $      8,696     $     8,015
       Restricted cash                                            73             264
       Accounts receivable, net                               14,188          15,475
       Other receivables                                       2,561           2,343
       Proceeds receivable from sale of behavioral
         health business                                           -           4,500
       Prepaid expenses, supplies and other                    1,938           1,724
       Deferred tax asset                                          -             769
                                                      ---------------   -------------

             Total current assets                             27,456          33,090
                                                      ---------------   -------------

PROPERTY, EQUIPMENT AND IMPROVEMENTS:
       Land                                                    2,003           1,976
       Leasehold improvements                                 10,874           9,401
       Program equipment                                       2,313           1,949
       Buildings                                              10,355           8,715
       Office furniture and equipment                          3,387           3,339
       Vehicles                                                1,775           1,675
                                                      ---------------   -------------
                                                              30,707          27,055

       Accumulated depreciation                               (7,276)         (6,013)
                                                      ---------------   -------------
            Property, equipment and improvements, net         23,431          21,042
                                                      ---------------   -------------

OTHER ASSETS:
       Deferred debt issue costs, net                          1,695           1,819
       Goodwill, net                                           1,975           2,165
       Deferred tax asset                                      7,160           6,512
       Other assets, net                                       1,134           1,739
                                                      ---------------   -------------
                                                              11,964          12,235
                                                      ---------------   -------------

            Total assets                                    $ 62,851        $ 66,367
                                                      ===============   =============
</TABLE>

 


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


                                       3
<PAGE>   5

              YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (IN 000'S)

<TABLE>
<CAPTION>
                      LIABILITIES AND SHAREHOLDERS' EQUITY

                                                               JUNE 30,      DECEMBER 31,
                                                                 1998            1997
                                                            --------------  --------------
                                                              (unaudited)      (audited)
<S>                                                         <C>             <C>
CURRENT LIABILITIES:
       Accounts payable and accrued expenses                 $     6,571     $     8,047
       Deferred revenue                                               84           1,243
       Current portion of long-term obligations                      287             664
                                                            --------------  --------------
            Total current liabilities                              6,942           9,954

CAPITAL LEASE OBLIGATIONS, less current portion                        3               5

7% CONVERTIBLE SUBORDINATED DEBENTURES                            32,200          32,200

12% SUBORDINATED DEBENTURES, net of
       unamortized discount                                            -             797

LONG-TERM DEBT, less current portion                                  72              76
                                                            --------------  --------------

            Total liabilities                                     39,217          43,032
                                                            --------------  --------------

SHAREHOLDERS' EQUITY
       Common stock, $.01 par value:  70,000,000 shares
         authorized, 11,282,088 and 10,241,198 issued and
         outstanding, respectively                                   113             102
       Additional paid-in capital                                 34,662          33,621
       Accumulated deficit                                       (11,141)        (10,388)
                                                            --------------  --------------

            Total shareholders' equity                            23,634          23,335
                                                            --------------  --------------

            Total liabilities and shareholders' equity       $    62,851     $    66,367
                                                            ==============  ==============
</TABLE>



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

                                       4
<PAGE>   6
                                                                     PAGE 1 OF 2

              YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (IN 000'S)

<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                                                           JUNE 30,
                                                               ------------------------------
                                                                   1998              1997
                                                               -------------    -------------
<S>                                                            <C>              <C>
OPERATING ACTIVITIES:
       Net loss                                                 $      (693)     $  (20,370)
       Adjustments to reconcile net loss to
          net cash provided by operating
          activities:
          Stock granted as compensation                                  15              45
          Depreciation and amortization                               1,786           3,110
          Loss on sale of property, equipment and
            improvements                                                 13              50
          Loss on sale of behavioral health business                      -          27,000
          Loss on sale of investments                                     -             203
          Write off of other assets                                     321               -
          Deferred income taxes                                         121          (6,485)
          Tax benefit realized due to exercise of
            nonqualified stock options                                  208               -
          Net change in operating assets and liabilities             (1,246)             43
                                                               -------------    -------------
Net cash provided by operating activities                               525           3,596
                                                               -------------    -------------

INVESTING ACTIVITIES:
       Purchases of property, equipment and improvements             (3,729)         (2,865)
       Proceeds from sale of property, equipment and
          improvements                                                   22             728
       Cash paid for business acquired, net of cash
          received                                                        -            (628)
       Proceeds from sale of behavioral health business               4,500               -
       Collections of notes receivable                                   36              63
       Proceeds from sale of investments                                  -           5,101
       Other long-term assets                                          (262)           (439)
                                                               -------------    -------------
Net cash provided by investing activities                               567           1,960
                                                               -------------    -------------
FINANCING ACTIVITIES:
       Repayments of short-term borrowings,
          long-term borrowings and capital lease obligations         (1,180)        (11,334)
       Proceeds from long term borrowings                                 -              96
       Dividend distribution                                            (60)              -
       Proceeds from issuance of common stock
          under stock option and stock purchase
          plans, net                                                    829           2,536
                                                               -------------    -------------
Net cash used in financing activities                                  (411)         (8,702)
                                                               -------------    -------------
NET INCREASE (DECREASE) IN CASH                                         681          (3,146)
CASH, beginning of period                                             8,015           3,491
                                                               -------------    -------------
CASH, end of period                                             $     8,696      $      345
                                                               =============    =============
</TABLE>

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



                                       5
<PAGE>   7
                                                                     PAGE 2 OF 2

             YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (IN 000'S)

<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                                                        JUNE 30,
                                                          ----------------------------------
                                                                1998               1997
                                                          --------------      --------------
<S>                                                       <C>                 <C>
CHANGES IN OPERATING ASSETS AND
       LIABILITIES, NET OF EFFECTS OF BUSINESS
       ACQUISITIONS AND DISPOSITIONS:
       Restricted cash                                     $       191         $       -
       Accounts receivable                                       1,287                 653
       Other receivables                                           249                 -
       Prepaid expenses, supplies and other                       (214)              1,863
       Deposits                                                     (7)                 40
       Accounts payable and accrued expenses                    (1,593)             (1,141)
       Deferred revenue                                         (1,159)             (1,372)
                                                          --------------      --------------

Net change in operating assets and liabilities             $    (1,246)        $        43
                                                          ==============      ==============

SUPPLEMENTAL DISCLOSURE:

       Cash paid for interest                              $     1,282         $     1,621
                                                          ==============      ==============

       Cash paid for taxes                                 $       248         $        78
                                                          ==============      ==============
</TABLE>




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


                                       6
<PAGE>   8

                       YOUTH SERVICES INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  FINANCIAL INFORMATION

      In management's opinion, the accompanying interim unaudited consolidated
financial statements include all adjustments, consisting only of normal,
recurring adjustments, necessary for a fair presentation of Youth Services
International, Inc.'s ("YSI's" or the "Company's") financial position at June
30, 1998 and the results of its operations for the three months and the six
months ended June 30, 1998 and 1997 and its cash flows for the six months ended
June 30, 1998 and 1997. The accompanying audited consolidated balance sheet as
of December 31, 1997 is presented herein as set forth in YSI's Form 10-K for the
year ended December 31, 1997, after giving effect to certain reclassifications
to conform to current year presentation. The statements herein are presented in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
YSI's consolidated financial statements on Form 10-K have been omitted from
these statements, as permitted under the applicable rules and regulations.
Readers of these statements should refer to the consolidated financial
statements and notes thereto as of December 31, 1997 and 1996 and June 30, 1996
and for the periods then ended filed with the Securities and Exchange Commission
on Form 10-K.

      Operating results for the three months and the six months ended June 30,
1998 and 1997 are not necessarily indicative of the results that may be expected
for a full fiscal year.

2.    POOLING OF INTERESTS BUSINESS COMBINATION

      On June 30, 1998, the Company exchanged 866,772 shares of the Company's
common stock for all of the common stock of Community Corrections, Inc. (CCI).
CCI operates residential boot camp and detention facilities with a total
capacity of 353 beds in Texas and provides aftercare services to adjudicated
youth in Georgia. CCI was a Subchapter S corporation for federal income tax
purposes whereby the earnings of the corporation pass through to the respective
owners. It was the policy of CCI to distribute necessary amounts to the owners
on a periodic basis in order to allow them to fund their personal tax
liabilities attributable to the earnings of CCI. During the six months ended
June 30, 1998, income tax dividends were distributed to the owners totaling
approximately $60,000. CCI will be included in the Company's federal income tax
return effective June 30, 1998.
                  
      The above transaction has been accounted for as pooling of interests and,
accordingly, the consolidated financial statements for the periods presented
have been restated to include the accounts of CCI.

      Revenue and net income of the separate companies for the periods preceding
the CCI merger were as follows:



                                       7
<PAGE>   9

<TABLE>
<CAPTION>
                                                                           Pro Forma
                                          Revenue        Net Income        Net Income
--------------------------------------------------------------------------------------
<S>                                      <C>              <C>              <C>
Three months ended
June 30, 1998
     YSI                              $   19,559          $  (2,088)       $  (2,088)
     CCI                                   2,333                167              110
                                      ------------------------------------------------
     Combined                         $   21,892          $  (1,921)       $  (1,978)
                                      ------------------------------------------------
Three months ended
June 30, 1997
     YSI, as previously
        reported                      $   29,064          $     887        $     887
     CCI                                   2,140                237              156
                                      ------------------------------------------------
     Combined                         $   31,204          $   1,124        $   1,043
                                      ------------------------------------------------
Six  months ended
June 30, 1998
     YSI                              $   40,407          $    (976)       $    (976)
     CCI                                   4,512                283              187
                                      ------------------------------------------------
     Combined                         $   44,919          $    (693)       $    (789)
                                      ------------------------------------------------
Six months ended
June 30, 1997
     YSI, as previously
        reported                      $   56,314          $ (20,476)       $ (20,476)
     CCI                                   3,732                106               70
                                      ------------------------------------------------
     Combined                         $   60,046          $ (20,370)       $ (20,406)
                                      ------------------------------------------------
</TABLE>


      Pro forma net income reflects adjustments to net income to record an
estimated provision for income taxes for each period presented assuming CCI was
a taxpaying entity.

3.    SALE OF BEHAVIORAL HEALTH BUSINESS

      In the fourth quarter of 1997, the Company consummated the sale of its
behavioral health business, other than its two behavioral health programs in
Texas, for $20,400,000, resulting in a net loss on sale of $20,898,000. The
Company originally estimated the loss on this sale to be $27,000,000 and
recognized a loss of this amount upon the commitment to sell the business during
the quarter ended March 31, 1997. Due to its receipt of sale proceeds in excess
of its estimate, the Company recognized a gain of $6,102,000 at the sale date.
Included in the Consolidated Statement of Operations for the six months ended
June 30, 1998 is $1,020,000 of revenues related to the behavioral health
facilities sold.


                                       8
<PAGE>   10



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

      YSI operates programs designed to provide educational, developmental and
rehabilitative services to troubled youth who have been adjudicated. As of June
30, 1998, including programs operated by CCI, YSI operated 28 residential
programs in twelve states.

      Revenues are derived from the Company's operation of its programs pursuant
to contracts with governmental entities and management agreements with private
operators which are generally not-for-profit entities that contract with
governmental entities. Generally, the Company's contracts provide for per diem
payments based upon program occupancy. The Company recognizes revenues from its
fixed per diem and management contracts when the Company performs the services
pursuant to such contracts. One of the Company's significant programs operates
under a "cost-plus" gross maximum price reimbursement contract for which 
revenues are recognized as reimbursable costs are incurred. Under this
contract, contract revenues are recorded at amounts that are expected to be
realized. This contract has certain costs subject to audit and adjustment as
determined through negotiations with government representatives.  Subsequent
adjustments, if any, resulting from the audit process are  recorded when known.
 
 

      Program direct operating expenses are principally comprised of salaries
and related benefits of personnel, insurance, security expenses, transportation
costs, depreciation, meal costs and rent, utilities and other occupancy expenses
associated with the operation of the Company's programs at its facilities.

      Start-up costs are principally comprised of expenses associated with the
hiring and training of staff required to obtain licensing prior to admitting
students into a new program.

      Contribution from operations consists of revenues minus program direct
operating expenses and start-up costs. Contribution from operations, in general,
is lower in the initial stages of a program's development primarily because of
start-up costs and other costs incurred during the period prior to the
achievement of stable occupancy. Contribution from operations as a percentage of
revenue is greater under some of the Company's contracts with unaffiliated,
not-for-profit entities because the not-for-profit entities are responsible for
certain elements of operating the programs and incur some of the costs.
Therefore, in these instances, the Company earns its margin on a lower base of
revenues and expenses.

      Development costs are principally comprised of payroll and travel costs
for personnel associated with the Company's efforts to expand into new markets.

      General and administrative costs are principally comprised of salaries and
related benefits of personnel, insurance and rent, utilities and other occupancy
expenses associated with the operation of the Company's executive offices and
the management of the Company's operations.


RECENT DEVELOPMENTS

      On June 19, 1998, the Company announced that it had hired SunTrust
Equitable Securities to evaluate financial and strategic alternatives to
enhance shareholder value. As a result of these efforts, the Company is
currently in discussions with several parties regarding possible transactions
intended to accomplish that result. Although these discussions have progressed
past the preliminary phases, there can be no assurances as to if or when any
transaction will occur.
   
      On June 30, 1998, the Company exchanged 866,772 shares of the Company's
common stock for all of the common stock of Community Corrections, Inc. (CCI).
CCI operates residential boot camp and detention facilities with a total
capacity of 353 beds in Texas and provides aftercare services to adjudicated
youth in Georgia. The transaction was accounted for as pooling of interests.


                                       9
<PAGE>   11




RESULTS OF OPERATIONS

         The following table sets forth selected items from the Company's
consolidated financial statements (including the results of CCI) expressed as a
percentage of total revenues:

<TABLE>
<CAPTION>
                                                           FOR THE THREE MONTHS ENDED    FOR THE SIX MONTHS ENDED
                                                                     JUNE 30,                       JUNE 30,
                                                           ------------------------      ------------------------
                                                              1998          1997            1998         1997    
                                                           -----------  -----------      -----------  -----------
<S>                                                        <C>          <C>              <C>          <C>
Revenues                                                        100.0 %      100.0 %          100.0 %      100.0 %

Program expenses:
     Direct operating                                            96.2         84.1             87.5         87.1
     Start-up costs                                               1.0          -                1.1          -
                                                           -----------  -----------      -----------  -----------

Contribution from operations                                      2.8         15.9             11.4         12.9

Other operating expenses:
     Development costs                                            3.3          0.8              2.6          0.8
     General and administrative                                  10.1          7.8              8.9          8.1
     Costs related to pooling of interests transaction            1.4          -                0.7          -
     Loss on sale of behavioral health business                   -            -                -           45.0
                                                           -----------  -----------      -----------  -----------

(Loss) income from operations                                   (12.0)         7.3             (0.8)       (41.0)

Interest and other expenses, net                                 (1.5)        (2.0)            (1.6)        (2.7)
                                                           -----------  -----------      -----------  -----------

(Loss) income  before taxes                                     (13.5)         5.3             (2.4)       (43.7)

Income tax  (benefit) expense                                    (4.7)         1.7             (0.9)        (9.8)
                                                           -----------  -----------      -----------  -----------

Net (loss) income                                                (8.8)%        3.6 %           (1.5)%      (33.9)%
                                                           -----------  -----------      -----------  -----------
</TABLE>

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

      Revenues. Revenues decreased $9,312,000, or 29.8%, to $21,892,000 for the
three months ended June 30, 1998 from $31,204,000 for the three months ended
June 30, 1997. This net decrease resulted primarily from the sale of behavioral
health programs in October 1997. Revenues from the programs that were sold
were $10,151,000 for the three months ended June 30, 1997. Also contributing to
the decrease was a $798,000 bad debt charge recognized by certain not-for-profit
companies with whom the Company has management agreements which, based upon such
management agreements, serve to decrease the revenues of the Company by the same
amount. Excluding the effects of this charge, the revenues of the juvenile
justice programs existing at June 30, 1997 (including the CCI programs and the
two behavioral health programs in Texas that were not sold) increased by
$599,000 due primarily to increases in the number of youth served in such
programs. The net revenue decrease also was partially offset by the addition of
five new juvenile justice programs subsequent to June 30, 1997 which provided
revenues for the three months ended June 30, 1998 of $1,038,000. The average
residential census for the Company's juvenile justice programs (including the
CCI programs and the two behavioral health programs in Texas that were not sold)
increased 4.4% to 2,282 youth for the three months ended June 30, 1998 from
2,186 youth for the three months ended June 30, 1997.


                                       10
<PAGE>   12

      Program Direct Operating Expenses. Program direct operating expenses
decreased $5,202,000, or 19.8%, to $21,055,000 for the three months ended June
30, 1998 from $26,257,000 for the three months ended June 30, 1997. The decrease
resulted primarily from the sale of behavioral health programs in October 1997.
Program direct operating expenses for the behavioral health programs that were
sold was $8,947,000 for the three months ended June 30, 1997. Program direct 
operating expenses of the juvenile justice business (including the CCI programs 
and the two behavioral health programs in Texas that were not sold) increased 
$3,745,000 for the three months ended June 30, 1998 versus the comparable 1997 
period. The increases in program direct operating expenses for these businesses 
resulted primarily from the effect of $1,562,000 of adjustments to accruals and 
reserves in the quarter ended June 30, 1998 associated primarily with 
collectibility of accounts receivable, recoverability of certain program 
expenses and self-insurance of employee medical costs. The increase between 
periods further resulted from $1,303,000 of additional operating expenses in the
quarter ended June 30, 1998 attributable to the five juvenile justice programs 
that commenced operation after June 30, 1997 and increases of $880,000 from
juvenile justice programs existing at June 30, 1997 (including the CCI programs
and the two behavioral health programs in Texas that were not sold) resulting
primarily from an increase in the number of youth served in such programs. As a
percentage of revenues, program direct operating expenses were 96.2% and 84.1% 
for the three months ended June 30, 1998 and 1997, respectively. Salaries and 
related employee benefits constituted approximately 67.2% of program direct
operating expenses for the three months ended June 30, 1998 compared to 74.9% of
program direct operating expenses for the three months ended June 30, 1997.

      Start-up Costs. Start-up costs were $215,000 for the three months ended
June 30, 1998 compared to $0 for the three months ended June 30, 1997. All
start-up costs in the quarter ended June 30, 1998 relate to the start-up of the
Chanute Transition Center which opened in July 1998. There were no start-up
projects during the 1997 period.

      Contribution from Operations. Contribution from operations, which includes
the effects of start-up costs in each period, decreased $4,325,000, or 87.4%,
for the three months ended June 30, 1998 to $622,000 from $4,947,000 for the
three months ended June 30, 1997. Contribution from operations decreased as a
percentage of revenues to 2.8% for the three months ended June 30, 1998 compared
to 15.9% for the three months ended June 30, 1997. Excluding the adjustments to
revenue and program expenses described above and the start-up costs, the
contribution from operations would have been $3,197,000 or 14.1% of revenues (as
so adjusted) for the quarter ended June 30, 1998.

      Development Costs. For the three months ended June 30, 1998, development
costs increased $466,000, or 184.2%, to $719,000 from $253,000 for the three
months ended June 30, 1997. This increase was primarily due to $170,000 of
costs related to the Company's proposal efforts in South Africa and the
Company's focus on growth which has resulted in the hiring of individuals
specifically targeting development activities in new markets that have
increased personnel costs, as well as travel, supplies and other expenditures.

      General and Administrative Expenses. For the three months ended June 30,
1998, general and administrative expenses decreased $207,000, or 8.5%, to
$2,216,000 from $2,423,000 for the three months ended June 30, 1997. This
decrease is primarily due to savings attributable to the sale of the behavioral
health business as well as other administrative staff reductions. General and
administrative expenses were 10.1% of revenues for the quarter ended June 30,
1998 compared to 7.8% for the three months ended June 30, 1997.

      Net Interest and Other Expense. Net interest and other expense decreased
$289,000, or 46.5%, to $333,000 for the three months ended June 30, 1998 from
$622,000 for the three months ended June 30, 1997. The decrease was primarily
attributable to the repayment of the 12% subordinated debentures in early
January 1998 as well as the disposition of the behavioral health business whose
liabilities included a significant amount of capital lease obligations.

         Income Taxes. The income tax benefit was $1,031,000, representing an
effective tax rate of 34.9% for the three months ended June 30, 1998 as compared
to a provision for income taxes of $525,000, representing 


                                       11
<PAGE>   13

an effective tax rate of 31.8% for the three months ended June 30, 1997. The
effective tax rate fluctuations between periods primarily is due to the effect
of CCI earnings in each period for which no tax provisions are recorded due to
CCI's Subchapter S status during these periods.

      Net Loss. Net loss was $1,921,000, or $0.17 per share on a basic and
diluted basis, for the three months ended June 30, 1998 compared to a net income
of $1,124,000, or $0.10 per share on a basic and diluted basis, for the three
months ended June 30, 1997.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

      Revenues. Revenues decreased $15,127,000, or 25.2%, to $44,919,000 for the
six months ended June 30, 1998 from $60,046,000 for the six months ended June
30, 1997. This net decrease resulted primarily from the sale of behavioral
health programs in October 1997. Revenues from the programs that were
sold were $20,083,000 for the six months ended June 30, 1997. This decrease was
partially offset by $1,020,000 of revenues related to these businesses that were
recorded in the six months ended June 30, 1998. Also contributing to the
decrease was a $798,000 bad debt charge in the six months ended June 30, 1998
recognized by certain not-for-profit companies with whom the Company has
management agreements which, based upon such management agreements, serve to
decrease the revenues of the Company by the same amount. The decrease was 
partially offset by the addition of five new juvenile justice programs 
subsequent to June 30, 1997 which provided revenues of $1,891,000 and an 
increase in the number of youth served in the juvenile justice programs existing
at June 30, 1997 (including the CCI programs and the two behavioral health 
programs in Texas that were not sold) which generated an increase of $2,843,000.
The average residential census for the Company's juvenile justice programs 
(including the CCI programs and the two behavioral health programs in Texas that
were not sold) increased 7.9% to 2,253 youth for the six months ended June 30, 
1998 from 2,089 youth for the six months ended June 30, 1997.

      Program Direct Operating Expenses. Program direct operating expenses
decreased $12,963,000, or 24.8%, to $39,324,000 for the six months ended June
30, 1998 from $52,287,000 for the six months ended June 30, 1997. The decrease
resulted primarily from the sale of behavioral health programs in October 1997.
Program direct operating expenses for the behavioral health programs that were
sold was $18,883,000 for the six months ended June 30, 1997. Program direct 
operating expenses of the juvenile justice business (including the CCI programs
and the two behavioral health programs in Texas that were not sold) increased 
$5,920,000 for the six months ended June 30, 1998 versus the comparable 1997 
period. The increases in program direct operating expenses for these businesses
resulted from the effect of $1,562,000 of adjustments to accruals and reserves 
in the six months ended June 30, 1998 associated with collectibility of accounts
receivable, recoverability of certain program expenses and self-insurance of
employee medical costs. The increase between periods further resulted from
$2,053,000 of additional operating expenses in the six months ended June 30,
1998 attributable to the five programs that commenced operation after June 30,
1997 and increases of $2,305,000 attributable to juvenile justice programs
existing at June 30, 1997 (including the CCI programs and the two behavioral
health programs in Texas that were not sold) primarily due to an increase in the
number of youth served in these facilities. As a percentage of revenues, program
direct operating expenses were 87.5% and 87.1% for the six months ended June 30,
1998 and 1997, respectively. Salaries and related employee benefits constituted
approximately 69.1% of program direct operating expenses for the six months
ended June 30, 1998 compared to 72.2% of program direct operating expenses for
the six months ended June 30, 1997.

      Start-up Costs. Start-up costs were $493,000 for the six months ended June
30, 1998 compared to $0 for the six months ended June 30, 1997. All start-up
costs in the 1998 period relate to the Elmore Academy and the Chanute Transition
Center "de novo" projects. There were no start-up projects during the 1997
period.

      Contribution from Operations. Contribution from operations, which includes
the effects of start-up costs in each period, decreased $2,657,000, or 34.2%,
for the six months ended June 30, 1998 to $5,102,000 from $7,759,000 for the six
months ended June 30, 1997. Contribution from operations decreased as a
percentage of revenues to 11.4% for the six months ended June 30, 1998 compared
to 12.9% for the six 


                                       12
<PAGE>   14

months ended June 30, 1997. Excluding the adjustments to revenue and program
expenses described above and the start-up costs, the contribution from
operations would have been $7,955,000 or 17.4% of revenues (as so adjusted) for
the quarter ended June 30, 1998.

      Development Costs. For the six months ended June 30, 1998, development
costs increased $645,000, or 127.5%, to $1,151,000 from $506,000 for the six
months ended June 30, 1997. This increase was primarily due to $170,000 of
costs related to the Company's proposal efforts in South Africa and the
Company's focus on growth which has resulted in the hiring of individuals
specifically targeting development activities in new  markets that have
increased personnel costs, as well as travel,  supplies and other expenditures.

      General and Administrative Expenses. For the six months ended June 30,
1998, general and administrative expenses decreased $862,000, or 17.8%, to
$3,984,000 from $4,846,000 for the six months ended June 30, 1997. This decrease
is primarily due to savings attributable to the sale of the behavioral health
business as well as other administrative staff reductions. As a percentage of
revenues, general, and administrative expenses increased to 8.9% for the six
months ended June 30, 1998 from 8.1% for the six months ended June 30, 1997.

      Net Interest and Other Expense. Net interest and other expense decreased
$895,000, or 55.0%, to $732,000 for the six months ended June 30, 1998 from
$1,627,000 for the six months ended June 30, 1997. The decrease was primarily
attributable to the repayment of the 12% subordinated debentures in early
January 1998, as well as the disposition of the behavioral health business whose
liabilities included a significant amount of capital lease obligations.

      Income Taxes. The income tax benefit was $378,000, representing an
effective tax rate of 35.3% for the six months ended June 30, 1998 as compared
to an income tax benefit of $5,850,000, representing an effective tax rate of
22.3% for the six months ended June 30, 1997. The increase in the effective tax
benefit rate was primarily attributable to the non-deductibility of a large
component of the goodwill in the 1997 period related to the behavioral health
business which was included in the $27,000,000 loss on sale of behavioral health
business. The effective tax rate fluctuations between periods is also due to the
effect of CCI earnings in each period for which no tax provisions are recorded
due to CCI's Subchapter S status during these periods.

      Net Loss. Net loss was $693,000, or $0.06 per share on a basic and diluted
basis, for the six months ended June 30, 1998 compared to a net loss of
$20,370,000, or $1.92 per share on a basic and diluted basis, for the six months
ended June 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

      At June 30, 1998, the Company had $8,696,000 in cash and $20,514,000 of
working capital. Net cash provided by operating activities was $525,000 for the
six months ended June 30, 1998 compared to net cash provided by operating
activities of $3,596,000 for the six months ended June 30, 1997. This decrease
resulted primarily from a decline in operating earnings between years.

      Net cash provided by investing activities was $567,000 for the six months
ended June 30, 1998, comprised primarily of $3,729,000 used to fund capital
expenditures offset by the proceeds from the sale of the behavioral health
business of $4,500,000.

      Net cash used in financing activities was $411,000 for the six months
ended June 30, 1998, comprised primarily of repayments of short-term borrowings
and long-term debt of $1,180,000 offset by $829,000 of proceeds from stock
option exercises.

      The Company has a Revolving Line of Credit agreement with a bank for the
lesser of $20,000,000 or the sum of 85% of the eligible accounts receivable and
95% of the cash and cash equivalents on deposit with 


                                       13
<PAGE>   15

the bank. Amounts drawn under this line of credit bear interest at LIBOR plus
150 basis points and are payable on demand. As of June 30, 1998, the Company had
no outstanding balance for this agreement.

YEAR 2000

The Company continues to assess the potential impact of the Year 2000 on its
computer software and is developing plans to address any deficiencies. Although
the Company has not yet estimated the total costs needed for Year 2000
compliance, the Company currently believes it will be able to upgrade and
enhance its computer software systems to recognize years beginning with 2000 and
that the cost to do so will not be material to its financial position,
liquidity, or results of operations.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this report contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise from the date hereof. Readers should
carefully review the risk factors described in the documents filed by the
Company with the Securities and Exchange Commission.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      The Company is not a party to any legal proceedings other than routine
litigation which the Company does not believe is significant to its future
financial position or results of operations.

ITEMS 2 through 4 have been omitted since the item is either inapplicable or the
answer is negative.

ITEM 5   OTHER INFORMATION

     In order to present a proposal at the 1999 Annual Meeting of Stockholders,
a YSI shareholder must provide written notice of the proposal to the Company no
later than March 15, 1999.  The Company intends to use discretionary voting
authority with respect to any matter that is brought before the 1999 annual
meeting of shareholders of which the Company has not received written notice by
March 15, 1999. The address to which such written notice must be sent is Youth
Services International, Inc, 2 Park Center Court, Suite 200, Owings Mills,
Maryland  21117, Attention:

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

<TABLE>
<CAPTION>
        EXHIBIT NO.               DESCRIPTION
       -------------  ---------------------------------------
       <S>            <C>
           11         Computation of Per Share Earnings

           27         Financial Data Schedule
</TABLE>



SIGNATURES



      Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                          YOUTH SERVICES
                          INTERNATIONAL, INC.
                         
                          By:  /s/MARK S. DEMILIO
                          -------------------------
                          Mark S. Demilio
                          Acting Chief Financial Officer and
                          Treasurer

 Date:      August 14, 1998





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