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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

[X]        Annual Report Pursuant to Section 13 or 15(d) of the Securities
           Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

[_]        Transition Report to Section 13 or 15(d) of the Securities Exchange
           Act of 1934 For the transition period from __________to__________.

                          Commission File No.: 0-23038


                        CORRECTIONAL SERVICES CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


                DELAWARE                                        11-3182580
                --------                                        ----------
    (State of other jurisdiction of                          (I.R.S. Employer
     incorporation or organization)                         Identification No.)

  1819 MAIN STREET, SARASOTA, FLORIDA                              34236
  -----------------------------------                              -----
(Address of principal executive office)                          (Zip Code)


       Registrant's telephone number, including area code: (941) 953-9199

           Securities registered pursuant to Section 12(b) of the Act:

                                      None.

           Securities registered pursuant to Section 12(g) of the Act:

                               Title of each class
                               -------------------
                     Common Stock, par value $.01 per share

                    Name of each exchange on which registered
                    -----------------------------------------
                             Nasdaq National Market

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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  [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrant as of the close of business on March 15, 2002
was approximately $18,279,495 based on the closing sale price of the common
stock on the Nasdaq National Market consolidated tape on that date.

Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of the close of business on March 15, 2002:

Common Stock, $.01 par value                                   10,155,275 Shares
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<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE
                                     PART I

Item 1   Business ........................................................    4

Item 2   Properties ......................................................   13

Item 3   Legal Proceedings ...............................................   13

Item 4   Submission of Matters to a Vote of Security Holders .............   16



                                     PART II

Item 5   Market for Registrant's Common Equity and Related
           Stockholder Matters ...........................................   17

Item 6   Selected Financial Data .........................................   18

Item 7   Management's Discussion and Analysis of Financial
           Condition and Results of Operations ...........................   19

Item 7A  Quantitative and Qualitative Disclosures About Market Risk ......   28

Item 8   Financial Statements and Supplementary Data .....................   29

Item 9   Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure ..........................................   29


                                    PART III

Item 10  Directors and Executive Officers of the Registrant ..............   29

Item 11  Executive Compensation ..........................................   31

Item 12  Security Ownership of Certain Beneficial Owners and Management ..   33

Item 13  Certain Relationships and Related Transactions ..................   34


                                     PART IV

Item 14  Exhibits, Financial Statement Schedules, and Reports on Form 8-K    36

         Signature Page ..................................................   38

                                        2
<PAGE>

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and 21E of the Securities
Exchange Act of 1934, as amended, which are not historical facts and involve
risks and uncertainties. These include statements regarding the expectations,
beliefs, intentions or strategies regarding the future. The Company intends that
all forward-looking statements be subject to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements reflect the Company's views as of the date they are made with respect
to future events and financial performance, but are subject to many
uncertainties and risks which could cause the actual results of the Company to
differ materially from any future results expressed or implied by such
forward-looking statements. Examples of such uncertainties and risks include,
but are not limited to: fluctuations in occupancy levels and labor costs; the
ability to sell assets or enter into sale lease-back transactions; the ability
to secure both new contracts and the renewal of existing contracts; the
availability of financing; the ability to reduce various operating costs; and
public resistance to privatization. Additional risk factors include those
discussed in reports filed by the Company from time to time on Forms 10-K, 10-Q
and 8-K. The Company does not undertake any obligation to update any
forward-looking statements.

                                        3
<PAGE>
                                     PART I

ITEM 1. BUSINESS.

GENERAL

Correctional Services Corporation ("CSC" or the "Company") was incorporated in
Delaware on October 28, 1993 to acquire all of the outstanding capital stock of
a number of affiliated corporations engaged in the operation of correctional and
detention facilities. CSC later acquired Youth Services International ("YSI"), a
leading national provider of private educational, developmental and
rehabilitative programs to adjudicated juveniles, through a merger accounted for
as a pooling of interests. In the merger, CSC issued 3,114,614 shares of CSC
common stock in exchange for all of the outstanding common stock of YSI. The
merger closed March 31, 1999.

The combined Company is one of the largest and most comprehensive providers of
juvenile rehabilitative services with 25 facilities and approximately 3,700
juveniles in its care. In addition, the Company is a leading developer and
operator of adult correctional facilities, operating 11 facilities representing
approximately 4,300 beds. On a combined basis, as of December 31, 2001, the
Company provided services in 15 states and Puerto Rico, representing
approximately 8,000 beds including aftercare services.

Revenues for the year ended December 31, 2001 were $174.4 million versus $210.8
million in 2000. Contribution from operations was $13.1 million for 2001
compared to $25.2 million in 2000, with a net loss of $5.9 million or $(0.58)
per diluted share compared to net income of $5.8 million or $0.51 per diluted
share in the similar period of 2000. Diluted shares were 10.2 million and 11.4
million in 2001 and 2000, respectively.

CSC operates a wide range of correctional facilities targeted toward solving the
specialized needs of governmental agencies. CSC's adult/community corrections
division specializes in facilities that service, among other populations:

    o   substance abuse offenders;
    o   parole violators;
    o   pre-trial detainees;
    o   sex offenders; and
    o   community correctional program residents.

CSC's juvenile division operates largely under the YSI brand name and focuses on
facilities that provide:

    o   intensive treatment programs that include educational and vocational
        services;
    o   treatment for habitual offenders;
    o   specialized female services;
    o   detention services;
    o   sexual behavior disorder treatment programs;
    o   substance abuse programs;
    o   academy training programs;
    o   high impact treatment programs; and
    o   legislatively mandated boot camps.

CSC believes its programs, by instilling the qualities of self-respect, respect
for others and their property, personal responsibility and family values, can
help reduce the recidivism rate of program participants and hopefully help to
prevent adult incarceration. To that end, CSC's juvenile programs are comprised
of four major components: education; vocational training; socialization; and
recreation. Behavioral management principles intended to dramatically change the
thinking and behavior of program participants are consistently applied
throughout each segment of programming in order to teach participants basic life
skills, while reinforcing the principle that success begins with appropriate,
acceptable behavior.

                                        4
<PAGE>

In addition to providing fundamental residential services for adult and juvenile
offenders, CSC has developed a broad range of programs intended to reduce
recidivism, including: basic, special, and vocational education; substance abuse
treatment and counseling; life skills training; behavioral modification
counseling; and comprehensive aftercare programs. In all of its facilities, CSC
strives to provide the highest quality services designed to reduce recidivism.
CSC continually evaluates and audits its programs and believes the reputation of
its programs will lead to continued business opportunities.

CSC is also a leading provider of design and construction services for juvenile
and adult correctional facilities, including project consulting, the design,
development and construction of new correctional and detention facilities and
the redesign and renovation of existing facilities. These services usually are
provided in conjunction with an agreement for CSC to operate the facility upon
completion of the construction or renovation.


OPERATIONAL DIVISIONS

CSC has organized its operations into two divisions: Adult/Community Corrections
and Juvenile (YSI).

ADULT/COMMUNITY CORRECTIONS. At year-end 2001, the Adult/Community Corrections
Division operated 11 facilities in four states, six in Texas, two in New York,
two in Arizona and one in Washington, for a total of 4,300 beds. During the year
2001, revenues from the Adult/Community Corrections programs comprised 32.0% of
the Company's consolidated revenue, and 54.8% of the consolidated contribution
margin. During the year 2001, 12.9% of the Company's consolidated revenues were
earned from the Texas Department of Criminal Justice. In its eight secure adult
facilities, CSC not only provides adult inmates with housing but also with other
basic services, including health care, transportation and food service. In
addition, CSC remains committed to providing a variety of rehabilitative and
educational services, including community service and recreational programs for
adult inmates where appropriate.

CSC's three Community Corrections facilities are non-secure residential
facilities for adult male and female offenders transitioning from institutional
to independent living. Qualified offenders may spend the last six months of
their sentence in a community corrections program. These programs assist the
offender in the reunification process with family and the community. Independent
research has indicated that successful reunification can play a key role in
recidivism reduction, which is the primary goal of any corrections operation. To
that end, CSC provides life skills training, case management, home confinement
supervision and family reunification programs from these facilities. CSC
believes that community correctional facilities help reduce recidivism, result
in prison beds being available for more violent offenders and, in appropriate
cases, represent cost-effective alternatives for jurisdictions to prisons.

JUVENILE. The Juvenile Division operates 25 facilities in 12 states and Puerto
Rico. During the year 2001, revenues from the Juvenile Division comprised 68.0%
of the Company's consolidated revenues, and 45.2% of the consolidated
contribution margin. During the year 2001, 11.3% and 12.7% of the Company's
consolidated revenues were earned from the Florida and Maryland Departments of
Juvenile Justice, respectively. The Company's juvenile facilities house youths
aged 10 to 20 and represent a total of approximately 3,700 beds (excluding
aftercare services provided by certain facilities outside of Georgia). CSC
manages secure and non-secure juvenile offender facilities for low, medium, and
high risk youths in highly structured programs, including military-style boot
camps, wilderness programs, secure education and training centers, academy
programs, high impact programs servicing lower level or first time offenders and
detention facilities. In addition, the Company also provides non-residential
aftercare programs. The Company provides aftercare services for over 600
juveniles in the State of Georgia as well as for juveniles who have completed
residential programs throughout the Company's system.


MARKETING AND BUSINESS DEVELOPMENT

CSC engages in extensive marketing and business development on a national basis.
Marketing efforts are spearheaded by CSC's business development team in
conjunction with CSC's executive officers and outside consultants.

CSC receives frequent inquiries from or on behalf of governmental agencies. Upon
receiving such an inquiry, CSC determines whether there is an existing or future
need for CSC's services, whether the legal and political climate is conducive to
privatized correctional operations and whether or not the project is
commercially viable.

                                        5
<PAGE>

CONTRACT AWARD PROCESS

Most governmental procurement and purchasing activities are controlled by
procurement regulations that take the form of a Request for a Proposal ("RFP"),
and to date most of CSC's new business has resulted from responding to these
requests. Interested parties submit proposals in response to an RFP within a
time period of 15 to 120 days from the time that the RFP is issued. A typical
RFP requires a bidder to provide detailed information, including the services to
be provided by the bidder, the bidder's experience and qualifications and the
price at which the bidder is willing to provide the services. From time to time,
CSC engages independent consultants to assist in responding to the RFPs.
Approximately six to eighteen months is generally required from the issuance of
the RFP to the contract award.

Before responding to an RFP, CSC researches and evaluates, among other factors:

    o   the current size and growth projections of the available correctional
        and detention population;
    o   whether or not a minimum capacity level is guaranteed;
    o   the willingness of the contracting authority to allow CSC to house
        populations of similar classification within the proposed facility for
        other governmental agencies; and
    o   the willingness of the contracting authority to allow CSC to make
        adjustments in operating activities, such as work force reductions in
        the event the actual population is less than the contracted capacity.

Under the RFP, the bidder may be required to design and construct a new facility
or to redesign and renovate an existing facility at its own cost. In such event,
CSC's ability to obtain the contract award is dependent upon its ability to
obtain the necessary financing or fund such costs internally.

In addition to issuing formal RFPs, governmental agencies may use a procedure
known as Purchase of Services or Requests for Qualification ("RFQ"). In the case
of an RFQ, the requesting agency selects a firm it believes is most qualified to
provide the necessary services and then negotiates the terms of the contract,
including the price at which the services are to be provided.


MARKET

The Company believes there is a growing acceptance of privatization of
governmental services. Correctional and detention functions traditionally
performed by federal, state and local governments have faced continuing pressure
to control costs and reduce the number of governmental employees. Further,
despite recent decreases in the overall crime and incarceration rates, the
number of adults under some form of correctional supervision (including
probation and parole) has grown to almost 6.5 million in 2000 (most recent
available data). Additionally, incarceration costs generally grow faster than
many other parts of budget items. In an attempt to address these pressures,
governmental agencies responsible for correctional and detention facilities are
privatizing facilities. As of June 30, 2000 (the most recent available data),
privately operated prison facilities held 76,010 of 1.9 million total inmates
held in custody, up 9.1% since year-end 1999. This accounted for 5.8% of all
State inmates, up from 5.4% at year-end 1999.

An estimated 1.9 million inmates are held in the nation's prisons and local
jails due to sentencing guidelines and the increased popularity of "3 strikes"
laws. According to the Department of Justice, the prison population rose an
estimated 1,585 new inmates per week, or 68%, from 1990 through midyear 2000. On
December 31, 2000, State prisons were operating between full capacity and 15%
above capacity, while Federal prisons were operating at 31% above capacity.

An increasing population of adolescents are reaching the age where historically
they begin to commit crimes that bring them before the juvenile courts. The
services that the juvenile justice system has had the greatest growth in are
residential services for children committing crimes who have serious emotional
and behavioral problems. The public and private sector have had to adjust to
providing services for children who are dually diagnosed, have drug and alcohol
addictions and/or sex offending and fire setting histories. The Company has
developed treatment programs to address these growing needs, and has focused
their efforts to capture a share of this growing market.

                                        6
<PAGE>

COMPETITION

CSC competes on the basis of cost, quality and range of services offered, its
experience in managing facilities, the reputation of its personnel and its
ability to design, finance and construct new facilities. Some of CSC's
competitors have greater resources than CSC. CSC also competes in some markets
with local companies that may have a better understanding of local conditions
and a better ability to gain political and public acceptance. In addition, CSC's
Community Corrections and Juvenile operations compete with governmental and
not-for-profit entities. CSC's main competitors include but are not limited to
Corrections Corporation of America, Wackenhut Corrections Corporation, and
Cornell Corrections.


FACILITIES

CSC operates adult and juvenile pre-disposition and post-disposition secure and
non-secure correctional and detention facilities and non-secure community
correctional facilities for federal, state and local correctional agencies.
Pre-adjudication secure detention facilities provide secure residential
detention for individuals awaiting trial and/or the outcome of judicial
proceedings, and for aliens awaiting deportation or the disposition of
deportation hearings. Post-adjudication secure facilities provide secure
incarceration for individuals who have been found guilty of a crime by a court
of law. CSC operates seven types of post-adjudication facilities: 1) secure
prisons (adult); 2) intermediate sanction facilities (adult); 3) high impact
programs (juvenile); 4) academies (juvenile); 5) military-style boot camps
(juvenile); 6) secure treatment and training facilities (adult and juvenile);
and 7) sexually delinquent juvenile programs (juvenile).

Secure prisons and intermediate sanction facilities provide secure correctional
services for individuals who have been found guilty of one or more offenses.
Offenders placed in intermediate sanction facilities are typically persons who
have committed a technical violation of their parole conditions, but whose
offense history or current offense does not warrant incarceration in a prison.
Both types of facilities offer vocational training, substance abuse treatment
and offense specific treatment. High impact programs provide residential
placement for juveniles who are either first time offenders or who were unable
to meet the terms of a non-residential placement. High impact programs are
generally short term with stays of 30 to 90 days, but involve all of the
rehabilitative elements of an academy program. Academies are secure facilities
that range from hardware secure to staff secure. These facilities typically
service juveniles who are repeat offenders and/or violent crime offenders. The
academies emphasize rehabilitative programming, including individual and group
treatment, education, recreation and vocational training. Boot camps provide
intensely structured and regimented residential correctional services, which
emphasize disciplined activities modeled after the training principles of
military boot camps and stress physical challenges, fitness, discipline and
personal appearance. Secure treatment and training facilities provide numerous
services designed to reduce recidivism including educational and vocational
training, life skills, anger control management, and substance abuse counseling
and treatment. Juvenile sex offender programs are generally locked secure and
involve a length of stay from 18 to 24 months.

CSC also operates non-secure residential and non-residential community
corrections programs. Non-secure residential facilities, known as halfway
houses, provide residential correctional services for offenders in need of less
supervision and monitoring than are provided in a secure environment. Offenders
in community corrections facilities are typically allowed to leave the facility
to work in the immediate community and/or participate in community-based
educational and vocational training programs during daytime hours. Generally,
persons in community correctional facilities are serving the last six months of
their sentence. Non-residential programs permit the offender to reside at home
or in some other approved setting under supervision and monitoring by CSC.
Supervision may take the form of either requiring the offender to report to a
correctional facility a specified number of times each week and/or having CSC
employees monitor the offender on a case management basis at his/her work site
and home. In the juvenile division, the non-residential programs take the form
of aftercare programs. Unlike the adult division where a non-residential
supervision program may replace the last part of an adult's residential
supervision, the juvenile division counterpart, the aftercare program, is
strictly post release. The goal of these programs, like adult community
corrections, is to assist the juvenile in effecting a positive return to their
families and communities. Aftercare programs provide the contact, supervision
and support that is needed to further instill the principles learned by the
juvenile during the longer residential program.

                                        7
<PAGE>

ADULT DIVISION

The following information is provided with respect to the facilities for which
CSC had management contracts as of March 15, 2002:
<TABLE><CAPTION>


                                               DESIGN                                     CONTRACTING                 OWNED,
          FACILITY NAME, LOCATION AND         CAPACITY                                    GOVERNMENTAL             LEASED, OR
           YEAR OPERATIONS COMMENCED           BEDS(1)          TYPE OF FACILITY             AGENCY                 MANAGED(2)
           -------------------------           ------          ----------------             ------                  ---------
<S>                                              <C>                 <C>                      <C>                    <C>
Arizona State Prison, Florence                   600                 Prison                   State                  Owned
   Florence, Arizona (1997)

Arizona State Prison, Phoenix West               400                 Prison                   State                  Owned
   Phoenix, Arizona (1996)

Bronx Community Corrections Center               148          Residential Community       Federal Bureau             Leased
   Bronx, New York (1996)                                     Correctional Facility         of Prisons

Brooklyn Community Correctional Center           150          Residential Community       Federal Bureau             Leased
   Brooklyn, New York (1989)                                  Correctional Facility         of Prisons

Dickens County Correctional Center               489           Long Term Detention             State                 Managed
   Spur, Texas (1998)

Fort Worth Community Corrections Center          200               Residential                 State                 Leased
   Fort Worth, Texas (1994)                                   Correctional Facility

Frio County Jail                                 391              Jail/Long Term        County/State/Federal      Part-Leased/
   Pearsall, Texas (1997)                                           Detention                                      Part-Owned

Grenada County Jail                              160                   Jail                    County                Managed
   Grenada, Mississippi (1998) (3)

Jefferson County Downtown Jail                   500              Jail/Long Term            County/State             Managed
   Beaumont, Texas (1998)                                           Detention

Newton County Correctional Facility              872                  Prison               State/Federal             Managed
   Newton, Texas (1998)

Salinas Treatment Center                         144        Secure Treatment Facility     Commonwealth of            Leased
   Salinas, Puerto Rico (2000)(4)                                                          Puerto Rico

Seattle INS Detention Center                     150             Secure Detention               INS                  Managed
   Seattle, Washington (1989)                                        Facility

South Texas Intermediate Sanction                450           Secure Intermediate             State                 Managed
Facility                                                        Sanction Facility
   Houston, Texas (1993)
</TABLE>

(1)     Design capacity is based on the physical space available presently, or
        licensure for offender or residential beds in compliance with relevant
        regulations and contract requirements. In certain cases, the management
        contract for a facility provides for a lower number of beds.

                                       8
<PAGE>
(2)     A managed facility is a facility for which CSC provides management
        services pursuant to a management contract with the applicable
        governmental agency but, unlike a leased or owned facility, CSC has no
        property interest in the facility.
(3)     As part of the Company's restructuring initiative, the Company plans on
        closing the facility during 2002, and consequently it has been excluded
        from the Company's facility and contracted bed totals discussed
        throughout this filing.
(4)     The Company is in negotiations to sell the property to the Commonwealth
        of Puerto Rico, which is currently financed through the Company's
        operating lease-financing facility. The property is idle as of March 15,
        2002. It is unknown if the Company will secure a management contract to
        operate the facility, in conjunction with the sale. The outcome of the
        negotiations is uncertain as of March 15, 2002. Consequently, it has
        been excluded from the Company's facility and contracted bed totals
        discussed throughout this filing.

<TABLE><CAPTION>
JUVENILE DIVISION

                                              DESIGN                                         CONTRACTING                OWNED,
           FACILITY NAME, LOCATION AND       CAPACITY                                        GOVERNMENTAL             LEASED, OR
            YEAR OPERATIONS COMMENCED         BEDS(1)        TYPE OF FACILITY                   AGENCY                 MANAGED(2)
            --------------------------        -------        -----------------                  ------                 ---------
<S>                                            <C>        <C>                                  <C>                     <C>
Bartow Youth Training Center                    74         Secure & Residential                 State                   Managed
   Bartow, Florida (1995)                                   Treatment Facility

Bayamon Treatment Center                       141           Secure Treatment              Commonwealth of              Managed
   Bayamon, Puerto Rico (1998)                                   Facility                    Puerto Rico

Bell County Youth Training Center               96           Secure Detention                   County                  Managed
   Killeen, Texas (1997)                                         Facility

Bill Clayton Detention Center                  152           Secure Treatment                   State                   Managed
   Littlefield, Texas (2000)                                     Facility

Chamberlain Academy                             78              Non Secure                  Multi-State/                Owned
   Chamberlain, South Dakota (1993)                          Academy Facility                 Federal

Charles Hickey School                          355          Secure Academy/High                 State                   Managed
   Baltimore, Maryland(1993)                             Impact/Detention and Sex
                                                             Offender Facility

Colorado County Boot Camp                      156           Secure Detention               Multi-County/             Part Owned/
   Eagle Lake, Texas (1998)                                      Facility                       State                Part Managed

Cypress Creek Academy                          100            Secure Academy                    State                   Managed
   Lecanto, Florida (1997)                                       Facility

Dallas County Secure Post                       96           Secure Treatment                   County                  Managed
Adjudication Facility                                            Facility
   Dallas, Texas (1998)

Dallas Youth Academy                            96           Secure Treatment                   County                  Managed
   Dallas, Texas (1998)                                          Facility

Elmore Academy                                 150      Non Secure Academy Facility         Multi-State                 Owned
   Elmore, Minnesota (1998)

Forest Ridge Youth Services                    140       Non Secure Female Academy          Multi-State                 Owned
   Wallingford, Iowa (1993)                                      Facility
</TABLE>
                                       9
<PAGE>
<TABLE><CAPTION>
<S>                                            <C>      <C>                                   <C>                      <C>
Genesis Treatment Agency                        51       Secure Sexual Delinquent              City/                    Owned
   Newport News, Virginia (1997)                            Juveniles Treatment             Multi-County
                                                                 Facility

Hemphill County Juvenile Detention             100           Secure Boot Camp                   County                  Leased
Center                                                           Facility
   Canadian, Texas (1994)

Hillsborough Academy                            25        Secure Sexual Offender                State                   Managed
   Tampa, Florida (1997)                                         Facility

JoAnn Bridges Academy                           30         Secure Female Academy                State                   Managed
   Greenville, Florida (1998)                                    Facility

Judge Roger Hashem Juvenile Justice Center      64           Secure Detention               Multi-County/               Managed
   Rockdale, Texas (1997) (3)                                    Facility                       State

Keweenaw Academy                               160      Non Secure Academy Facility             State                   Subleased
   Mohawk, Michigan (1997)

Okaloosa County Juvenile Residential            64           Secure Treatment                   State                   Managed
Facility                                                         Facility
   Okaloosa, Florida (1998)

Paulding Regional Youth                        126           Secure Detention                   State                   Managed
Detention Center                                                 Facility
   Paulding, Georgia (1999)

Polk City Youth Training Center                350           Secure Treatment                   State                   Managed
   Polk City, Florida (1997)                                     Facility

Reflections Treatment Agency                    52        Secure Sexual Offender                State                   Leased
   Knoxville, Tennessee (1992)                                   Facility

Snowden Cottage Academy                         18      Non Secure Academy Facility            State                    Managed
   Wilmington, Delaware (1997)

Springfield Academy                            108      Non Secure Academy Facility        State/Federal                Owned
   Springfield, South Dakota (1993)

Summit View Youth Facility                      96           Secure Treatment                   State                   Managed
   Las Vegas, Nevada (2000) (4)                                  Facility

Tarkio Academy                                 302         Secure Academy Sexual            Multi-State                 Subleased
   Tarkio, Missouri (1994)                                   Offender Facility

Texarkana Boot Camp                            124           Secure Boot Camp               Multi-County/               Leased
   Texarkana, Texas (1998)                                       Detention                      State
                                                                 Facility

Victor Cullen Academy                          225        Secure Academy Facility               State                   Managed
   Sabillasville, Maryland (1992) (5)
</TABLE>
                                       10
<PAGE>

(1)     Design capacity is based on the physical space available presently, or
        licensure for offender or residential beds in compliance with relevant
        regulations and contract requirements. In certain cases, the management
        contract for a facility provides for a lower number of beds.
(2)     A managed facility is a facility for which CSC provides management
        services pursuant to a management contract with the applicable
        governmental agency but, unlike a leased or owned facility, CSC has no
        property interest in the facility.
(3)     As part of the Company's restructuring initiative, the Company closed
        the facility in March 2002, and consequently it has been excluded from
        the Company's facility and contracted bed totals discussed throughout
        this filing.
(4)     As part of the Company's restructuring initiative, the Company closed
        the facility in January 2002, and consequently it has been excluded from
        the Company's facility and contracted bed totals discussed throughout
        this filing.
(5)     Subsequent to December 31, 2001, the Company reached an agreement with
        Maryland Department of Juvenile Justice to close the facility, effective
        April 30, 2002. The facility has been excluded from the facility and
        contracted beds totals discussed throughout this filing.


FACILITY CHANGES DURING THE YEAR 2001

During 2001, the Company discontinued its operations of the following
facilities:

    1)  Chanute Transition Center (Juvenile);
    2)  Medina County Detention Center (Juvenile);
    3)  Tarrant County Community Correctional Facility (Adult);
    4)  Caldwell Juvenile Justice Center (Juvenile).

The Company ceased operations of the Medina County Detention Center due to lack
of occupancy. The Chanute Transition Center and Caldwell Juvenile Justice Center
were closed in conjunction with the Company's restructuring initiative,
discussed later. The State of Texas elected to cease operations of the Tarrant
County Community Correctional Facility, ending the Company's management
agreement with the County.

In addition, during 2001, the Company reached agreements to discontinue its
operations of three additional juvenile facilities in 2002. The Company
discontinued operations of the Summit View Youth Correctional Center in January
2002, and the Judge Roger Hashem Juvenile Justice Center in March 2002, and will
discontinue its operation of the Victor Cullen Academy on April 30, 2002.


FACILITY MANAGEMENT CONTRACTS

CSC is primarily compensated on the basis of the population in each of its
facilities on a fixed rate per inmate per day; however, some contracts have a
minimum revenue guarantee. Invoices are generally sent on a monthly basis
detailing the population for the prior month. Occupancy rates for facilities
tend to be low when first opened or when expansions are first available.
However, after a facility passes the start-up period, typically three months,
the occupancy rate tends to stabilize.

CSC is required by its contracts to maintain certain levels of insurance
coverage for general liability, workers' compensation, vehicle liability and
property loss or damage. CSC is also required to indemnify the contracting
agencies for claims and costs arising out of CSC's operations and in certain
cases, to maintain performance bonds.

As is standard in the industry, CSC's contracts are short term in nature,
generally ranging from one to three years and containing multiple renewal
options. Most facility contracts also generally contain clauses that allow the
governmental agency to terminate a contract with or without cause, and are
subject to legislative appropriation of funds.


OPERATING PROCEDURES

CSC is responsible for the overall operation of each facility under its
management, including staff recruitment, general administration of the facility,
security of inmates and employees, supervision of the offenders, and facility
maintenance. CSC, either directly or through subcontractors, also provides
health care, including medical, dental and psychiatric services, and food
service.

                                       11
<PAGE>

CSC's contracts generally require CSC to operate each facility in accordance
with all applicable local, state and federal laws, and rules and regulations. In
addition, adult facilities are generally required to adhere to the guidelines of
the American Correctional Association ("ACA"). The ACA standards, designed to
safeguard the life, health and safety of offenders and personnel, describe
specific objectives with respect to administration, personnel and staff
training, security, medical and health care, food service, inmate supervision
and physical plant requirements. CSC believes the benefits of operating its
facilities in accordance with ACA standards include improved management, better
defense against lawsuits by offenders alleging violations of civil rights, a
more humane environment for personnel and offenders and measurable criteria for
upgrading programs, personnel and the physical plant on a continuous basis.
Several of our facilities are fully accredited by the ACA and certain other
facilities currently are being reviewed for accreditation. It is the Company's
goal to obtain and maintain ACA accreditation for all of its adult facilities,
and for its juvenile facilities when applicable.


FACILITY DESIGN AND CONSTRUCTION

In addition to its facility management services, CSC also consults with various
governmental entities to design and construct new correctional and detention
facilities and renovate older facilities to provide enhanced services to the
population. CSC manages all of the facilities it has designed and constructed or
redesigned and renovated.

Pursuant to CSC's design, construction and management contracts, it is
responsible for overall project development and completion. Typically, CSC
develops the conceptual design for a project, then hires architects, engineers
and construction companies to complete the development. When designing a
particular facility, CSC utilizes, with appropriate modifications, prototype
designs CSC has used in developing other projects. Management of CSC believes
that the use of such prototype designs allows it to reduce cost overruns and
construction delays.


EMPLOYEES

At February 28, 2002, CSC had approximately 3,800 employees, consisting of
corporate and facility employees. Each of CSC's facilities is led by an
experienced facility administrator or executive director. Other facility
personnel include administrative, security, medical, food service, counseling,
classification and educational and vocational training personnel. CSC conducts
background screening checks and drug testing on potential facility employees.
Some of the services rendered at certain facilities, such as medical services,
education or food service are provided by third-party contractors.


EMPLOYEE TRAINING

All jurisdictions require corrections officers and youth workers to complete a
specified amount of training. Generally, CSC employees must undergo at least 160
hours of paid training before being allowed to work in a position that will
bring them in contact with offenders or detainees. This training consists of
approximately 40 hours relating to CSC policies, operational procedures,
management philosophy and ethics, and compliance training, and 120 hours
relating to legal issues, rights of offenders and detainees, techniques of
communication and supervision, improvement of interpersonal skills, and job
training relating to the specific tasks to be held. The Company believes that
its training programs meet or exceed the applicable licensing requirements.

In addition to the comprehensive pre-service training, all Company personnel are
required to complete annual mandatory 40-hour in-service training. Many of the
required annual training topics include the requirements specified in the
American Correctional Associations' Standards for Adult and Juvenile Facilities.
Some of these topics are: use of force or behavior management programs; security
procedures; suicide precautions; interpersonal communications; cultural
sensitivity; first aid and CPR; and safety procedures. In addition to satisfying
ACA standards/guidelines for in-service training, all facilities include
specific, specialized training that may be mandated by the contracting agency;
such as an overview of the criminal justice or juvenile justice system.

The Company is committed to providing quality training programs for newly hired
employees to prepare them for a challenging and rewarding career in the Criminal
Justice or Juvenile Justice field. It also provides continuing education
training to veteran employees to maintain their proficiencies and adherence to
the Company's commitment to provide quality service to its contracting agencies.

                                       12
<PAGE>

INSURANCE

Each management contract with a governmental agency requires CSC to maintain
certain levels of insurance coverage for general liability, workers'
compensation, vehicle liability and property loss or damage and to indemnify the
contracting agency for claims and costs arising out of CSC's operations.

CSC currently maintains primary general liability insurance in the amount of
$3,000,000 and a primary excess liability policy in the amount of $2,000,000,
and an excess umbrella policy in the amount of $25,000,000, covering itself and
each of its subsidiaries, as well as automobile liability insurance, employment
practices liability insurance, workers' compensation insurance, and property and
casualty insurance, in addition to other special forms of insurance. There can
be no assurance that the aggregate amount and kinds of CSC's insurance are
adequate to cover all occurrences or that insurance will be available in the
future. In addition, CSC is unable to secure insurance for some unique business
risks, which may include, but not be limited to, some types of punitive damages
in states where it is prohibited by law.


REGULATION

Generally, providers of correctional services must comply with a variety of
applicable federal, state and local regulations, including educational, health
care and safety regulations administered by a variety of regulatory authorities.
Management contracts frequently include extensive reporting requirements. In
addition, many federal, state and local governments are required to follow
competitive bidding procedures before awarding a contract. Certain jurisdictions
may also require the successful bidder to award subcontracts on a competitive
bid basis and to subcontract to varying degrees with businesses owned by women
or minorities.


ITEM 2. PROPERTIES.

The Company leases office space for its corporate headquarters in Sarasota,
Florida. Additionally, the Company leases office space for a regional office in
New York, New York.

The Company also leases the space for the following facilities: Hemphill County
Juvenile Detention Center, Chanute Transition Center, Reflections Treatment
Agency, Tarkio Academy, Keweenaw Academy, Texarkana Boot Camp, Frio County Jail,
Brooklyn Community Correctional Center, Bronx Community Correctional Center,
Fort Worth Community Corrections Center, and Salinas Treatment Center (which is
financed through the Company's operating lease-financing facility).

The Company owns its facilities located in Florence, Arizona; Phoenix, Arizona;
Chamberlain, South Dakota; Springfield, South Dakota; Elmore, Minnesota;
portions of the Frio County, Texas facility; Forest Ridge, Iowa; portions of
Eagle Lake, Texas expansion; and Newport News, Virginia.

During 2001, the Company also reached an agreement to sell the property owned by
the Company in Bryan, Texas, from which the Company formerly operated the Los
Hermanos Ranch program (which it closed in November 1999), for $450,000. The
Company expects to close this sale on or about April 1, 2002.

The Company also owns, or leases pursuant to its operating lease-financing
facility with Fleet National Bank, the following properties, which were acquired
by the Company in anticipation of future development projects, were never
developed and are now being marketed for sale. These properties are located in
Belle Glade, Florida, Mangonia Park, Florida and Eagle Lake, Texas.


ITEM 3.  LEGAL PROCEEDINGS.

In the ordinary course of its business, the Company routinely is named as a
defendant in legal proceedings filed against the Company by inmates of, or
participants in, the facilities and programs operated by the Company, in which
it is alleged that the Company has been negligent in some aspect of the
operation of its business and/or violated the civil rights of particular inmates
or program participants. The Company also is routinely named as a respondent
and/or defendant in lawsuits and proceedings before the United States Equal
Employment Opportunity Commission and/or the equivalent agencies of the
jurisdictions in which the Company conducts business, in which it is alleged
that the Company is liable under theories of unlawful discrimination, wrongful
discharge and other employment-related theories. The Company believes that most
of these types of claims and charges are without merit and/or that the Company
has meritorious defense to the claims and charges, and vigorously defends
against these types of actions. The Company also

                                       13
<PAGE>

has procured liability insurance to protect the Company against these types of
claims and charges. The Company believes that, except as described below, the
insurance coverage available to the Company for these claims and charges should
be adequate to protect the Company from any material exposure in any given
matter, even if the outcome of the matter is unfavorable to the Company.
However, if all, or a substantial number of these claims, are resolved
unfavorably to the Company, the insurance coverage available to the Company
would not be sufficient to satisfy all of the claims currently pending against
the Company, and such a result would have a material adverse effect on the
Company's results of operations, financial condition and liquidity.

In addition, in the ordinary course of business, the Company also is named, on
occasion, as a defendant in proceedings initiated by third party suppliers of
goods or services in which it is alleged that the Company has breached some
aspect of a contractual agreement with those parties. There are several such
suits currently pending against the Company. The Company does not have insurance
coverage for these types of claims; however, except as described below, the
Company does not consider any of these matters to be material to the Company,
either individually or in the aggregate, or outside the normal course of its
business.

The Company has determined that the following matters should be deemed material
to the Company under applicable SEC regulations, because either: (a) the claims
asserted against the Company in these matters involve amounts that exceed 10% of
the Company's current assets on a consolidated basis as of December 31, 2001:
(b) the amount sought from the Company exceeds the amount of insurance available
to the Company for the claim: or (c) the claims asserted against the Company in
these matters involve amounts that exceed 10% of the Company's current assets on
a consolidated basis as of December 31, 2001, and the Company does not have
insurance coverage available with respect to the claim:

1.    BROWN, SAMSON, ET AL., V. ESMOR CORRECTIONAL SERVICES, INC., ESMOR, INC.,
      ESMOR NEW YORK STATE CORRECTIONAL FACILITIES, INC., ESMOR MANAGEMENT,
      INC., ESMOR MANHATTAN, INC, ESMOR BROOKLYN, INC., ESMOR NEW JERSEY, INC.,
      JAMES SLATTERY AND AARON SPEISMAN, Superior Court of the State of New
      York, No. 8654/96; removed to US District Court for the Southern District
      of New York; transferred to the US District Court for the District of New
      Jersey; DASILVA, JOAQUIN, ET AL., V. ESMOR CORRECTIONAL SERVICES, PORT
      AUTHORITY OF NEW YORK, ET AL., Superior Court of New Jersey, No. UNNL
      1285-96; removed to US District Court for the District of New Jersey;
      JAMA, HAWA ABDI, ET AL. V. ESMOR CORRECTIONAL SERVICES, INC., ET AL., US
      District Court for the District of New Jersey, No. 973093.

      In March 1996, several former detainees in the INS Detention Center that
      the Company formerly operated in Elizabeth, New Jersey filed suit in the
      Supreme Court of the State of New York, County of Bronx on behalf of
      themselves and others similarly situated, alleging personal injuries and
      property damage purportedly caused by the negligent and intentional acts
      of CSC, in which the plaintiffs in the suit claimed $500,000,000 each in
      compensatory and punitive damages. This suit was removed to the United
      States District Court, Southern District of New York, in April 1996. In
      July 1996, seven detainees in the INS Detention Center that the Company
      formerly operated in Elizabeth, New Jersey and certain of their spouses
      filed suit in the Superior Court of New Jersey, County of Union, seeking
      $10,000,000 each in damages arising from alleged mistreatment of the
      detainees. This suit was removed to the United States District Court,
      District of New Jersey, in August 1996. In July 1997, another group of
      former detainees in the INS Detention Center that the Company formerly
      operated in Elizabeth, New Jersey filed suit in the United States District
      Court for the District of New Jersey. The suit claims violations of civil
      rights, personal injury and property damage allegedly caused by the
      negligent and intentional acts of CSC. No monetary damages have been
      stated. Through stipulation, the parties have agreed to try these actions
      in the United States District Court for the District of New Jersey in
      order to streamline the discovery process, minimize costs and avoid
      inconsistent rulings. These matters are currently in the discovery stages
      of the proceeding. Although the Company believes that it has meritorious
      defenses to the claims made in these actions, and is vigorously pursuing
      its defense of these claims, the aggregate amount of the damages claimed
      by the plaintiffs in these cases substantially exceeds the amount of
      insurance coverage available to the Company. Therefore, given the inherent
      uncertainties associated with litigation, no assurance can be given that
      the outcome of this litigation will not have a materially adverse effect
      on the Company.

                                       14
<PAGE>

2.    ALEXANDER, RICKEY, ET AL. V. CORRECTIONAL SERVICES CORPORATION,
      UNIDENTIFIED CSC EMPLOYEES, KNYVETTE REYES, R.N., DR. SAMUEL LEE, D.O., &
      Tony Schaffer, Esq., in the 236th Judicial District Court, Tarrant County,
      Cause No. 236-187481-01.

      In May, 2001, the plaintiffs, the estate and parents of Bryan Alexander, a
      former inmate at the Tarrant County Correctional Facility in Mansfield,
      Texas (which formerly was operated by the Company), brought a wrongful
      death action, in which it has been alleged that the Company's negligent
      and intentional acts, as well as the negligent and intentional acts of the
      other named defendants, proximately caused the death of Bryan Alexander on
      January 9, 2001. Plaintiffs' original Complaint sought $300,000,000 in
      compensatory damages and unspecified punitive damages. Plaintiffs
      subsequently amended their Complaint to delete their demand for
      $300,000,000 in compensatory damages in lieu of a pleading that seeks
      unspecified compensatory and punitive damages in amounts to be proved at
      trial. This case is currently in the discovery stages of the proceeding.
      The Company believes that it has meritorious defenses to the claims made
      by the plaintiffs in this case and is vigorously pursuing its defense;
      however, the amount of the damages originally claimed by the plaintiffs in
      this case substantially exceeds the amount of insurance coverage available
      to the Company. Therefore, given the inherent uncertainties associated
      with litigation, no assurance can be given that the outcome of this
      litigation will not have a materially adverse effect on the Company.

3.    BAILEY, JOANNE; BARNES, SHEA; BERG, IDA; BURROLA, THERESA; COAN, BERTHA;
      DUNHAM, SHEILA; HAWKINSON, ALVIN; HEREDIA, MICHAEL; HOOEE, LOJANN; JAMES,
      ANDREW; LEWIS, FREDERICK; LYONS, FRANK; ROGERS, LARSON; VARGAS, CYNTHIA;
      AND WEBB, CHRISTOPHER VS. CSC & Unknown Persons 1-100, U.S. District
      Court, District of New Mexico, No. CIV-00 0005 JP/DJS.

      Plaintiffs, each a former employee of the McKinley County Jail in Gallup,
      New Mexico, allege various causes of action against CSC relating to their
      employment with CSC and subsequent termination from employment with CSC.
      Plaintiffs originally sought an unspecified amount of compensatory and
      punitive damages from the Company, but, in December 2001, presented
      demands to the Company in the aggregate amount of approximately
      $9,000,000. The Company believes that it has meritorious defenses to the
      claims made by the plaintiffs in this case and is vigorously pursuing its
      defense; however, the amount of the damages originally claimed by the
      plaintiffs in this case substantially exceeds the amount of insurance
      coverage available to the Company. Therefore, given the inherent
      uncertainties associated with litigation, no assurance can be given that
      the outcome of this litigation will not have a materially adverse effect
      on the Company.

4.    CITY OF TALLULAH V. TRANS-AMERICAN DEVELOPMENT ASSOC. & CORRECTIONAL
      SERVICES CORPORATION, 6th Judicial District Court Madison Parish, LA, Case
      No. 2001 000146.

      In June, 2001, the City of Tallulah filed suit against Trans-American
      Development Assoc. & Correctional Services Corporation, alleging that
      either or both parties are obligated to continue to pay to the City an
      annual "management fee" of $150,000 related to the Tallulah Correctional
      Center for Youth, despite the fact that neither party is currently
      operating the facility. The Complaint filed by the City in this matter
      does not specify the amount of damages that the City is seeking, but,
      based on the theory outlined in the City's complaint, the Company has
      estimated that the City likely will seek approximately $3,250,000 in this
      case. The Company believes that the City's case against the Company is
      wholly without merit and is vigorously defending against this claim.
      However, in light of the fact that this matter is not covered by any form
      of insurance available to the Company, and given the inherent
      uncertainties associated with litigation, no assurance can be given that
      the outcome of this litigation will not have a materially adverse effect
      on the Company.

5.    STATE OF ARIZONA V. CORRECTIONAL SERVICES CORPORATION, CORRECTIONAL
      MEDICAL SERVICES, INC. ET AL., in the Superior Court of the State of AZ,
      in and for the County of Maricopa, No. CV2000-000205.

      During 2001, the State of Arizona filed suit against the Company and the
      other named defendants, including Correctional Medical Services, Inc.
      (CMS), the Company's medical services provider at the Arizona RTC/DWI
      Private Prison in Phoenix, Arizona, in which the State seeks
      indemnification from the named defendants for any and all damages and
      losses suffered or incurred by the State in connection with a case
      captioned, VALDEZ, JOSE, MARTINEZ, ZACARIAS & EDWARDA, PARENTS, V.
      MARICOPA COUNTY, CORRECTIONAL MEDICAL SERVICES, INC., ARIZONA DEPARTMENT
      OF CORRECTIONS, STATE OF ARIZONA, CORRECTIONAL SERVICES CORPORATION, ET
      AL., which was tried before a jury in the

                                       15
<PAGE>

      Superior Court of the State of Arizona in and for the County of Maricopa
      in September, 2001. The Valdez case was brought by a former inmate at the
      Phoenix facility whose eyesight deteriorated to near total blindness while
      he was in the custody of the State of Arizona, and incarcerated at various
      facilities, including the Phoenix facility operated by the Company. At
      trial, the jury awarded $6,500,000 in damages against the State of Arizona
      (pursuant to an agreement reached with the plaintiffs prior to trial, the
      Company was not a defendant at the trial of this action and the amount of
      the jury's award was reduced to $5,000,000). The State now seeks
      indemnification for the full amount of the jury award and other costs and
      expenses associated with that case. The Company believes that it has
      meritorious defenses to the State's claims, and that the ultimate
      liability for the claims made in this matter should lie with CMS or the
      other named defendants in the suit, and has asserted similar claims for
      indemnification from CMS and the other named defendants. Hearings and the
      trial on the State's claims and the Company's claims against the other
      defendants are scheduled to occur in 2002. This matter is covered by the
      Company's general liability insurance policy. However, the Company
      recently learned that CMS' insurance carrier is in receivership, thereby
      raising the possibility that CMS may not have sufficient insurance
      proceeds available to it to satisfy the State's claims. In that event, the
      Company's insurance carrier would be obligated, pursuant to the Company's
      contract with the State, to satisfy the State's claims. The effect of this
      scenario would be to reduce the amount of insurance coverage available to
      the Company for other claims arising under the same insurance policy.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The 2001 Annual Meeting of Stockholders of Correctional Services Corporation was
held on October 5, 2001. At the meeting, two (2) proposals were considered and
voted upon with the following results:
<TABLE><CAPTION>

    (1)       To elect seven (7) directors to serve until the next annual
              meeting of stockholders; Results:

                                                 VOTES CAST              VOTES CAST                               BROKER
                   NAME                           IN FAVOR                AGAINST               ABSTAIN          NON VOTES
                   ----                           --------                -------               -------          ---------
             <S>                                <C>                       <C>                     <C>               <C>
              Stuart M. Gerson                   9,489,738                 41,083                  0                 0
              Shimmie Horn                       9,489,738                 41,083                  0                 0
              James F. Slattery                  9,489,738                 41,083                  0                 0
              Aaron Speisman                     9,489,738                 41,083                  0                 0
              Richard P. Staley                  9,489,738                 41,083                  0                 0
              Melvin T. Stith                    9,489,738                 41,083                  0                 0
              Bobbie L. Huskey                   9,489,738                 41,083                  0                 0

    (2)       To ratify the reappointment of Grant Thornton, LLP as Independent
              Auditors of the Company for the year ending December 31, 2001.

              Results:

              NUMBER OF VOTES         NUMBER OF VOTES
               CAST IN FAVOR            CAST AGAINST             ABSTAIN
               -------------            ------------             -------
                 9,493,717                 25,736                 11,368
                 ---------                 ------                 ------
</TABLE>
                                       16
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.


The common stock of CSC is traded on the Nasdaq National Market. Such quotations
represent inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions. The following table sets
forth, for the calendar quarters indicated, the high and low closing sale prices
per share on the Nasdaq National Market, based on published financial sources.

                                                              CSC COMMON
                                                                 STOCK
                                                             SALE PRICE ($)
                                                           HIGH          LOW
        2000
              First Quarter.............................   5.25          3.75
              Second Quarter............................   5.88          2.78
              Third Quarter.............................   5.00          3.13
              Fourth Quarter............................   3.88          1.63

        2001
              First Quarter.............................   3.13          2.13
              Second Quarter............................   2.78          2.00
              Third Quarter.............................   2.65          1.80
              Fourth Quarter............................   2.50          1.65

On February 25, 2002, there were 360 holders of record and approximately 1,500
beneficial shareholders registered in nominee and street name. The Company paid
no cash dividends in the years ended December 31, 2001 and 2000.

                                       17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

The information below is only a summary and should be read in conjunction with
Correctional Services Corporation's historical financial statements and related
notes (in thousands except per share data).
<TABLE><CAPTION>
                                                                              Year Ended December 31,
                                                       2001            2000            1999             1998 (1)        1997
                                                  ------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>              <C>             <C>
Revenues                                            $ 174,418       $ 210,812       $ 233,918        $ 188,454       $ 175,933
                                                  ------------------------------------------------------------------------------
Operating expenses                                    160,885         185,447         205,662          166,443         149,389
Startup costs (1)                                         406             155           1,177            8,171             211
General and administrative (2)                         13,207          13,344          13,555           20,769          17,704
Restructuring and impairment                            4,356               -               -                -               -
Loss contract costs                                     1,150               -               -                -               -
Merger costs and related restructuring charges              -               -          12,052            1,109               -
Loss on sale of behavioral health                           -               -               -                -          20,898
Other operating (income) expenses                       1,313          (1,115)          1,874            2,327               -
                                                  ------------------------------------------------------------------------------
Operating income (loss)                                (6,899)         12,981            (402)         (10,365)        (12,269)
Interest expense, net (2)                              (2,183)         (3,483)         (3,413)          (2,961)         (2,844)
                                                  ------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary
    gain on extinguishment of debt and
    cumulative change in accounting principle          (9,082)          9,498          (3,815)         (13,326)        (15,113)
Income tax benefit (provision)                          3,202          (3,710)           (429)           1,593           1,062
                                                  ------------------------------------------------------------------------------
Income (loss) before extraordinary gain on
    extinguishment of debt and cumulative effect
    of change in accounting principle                  (5,880)          5,788          (4,244)         (11,733)        (14,051)
Extraordinary gain on extinguishment of debt,
    net of tax of $467                                      -               -             716                -               -
Cumulative effect of change in accounting, net
    of tax of $3,180                                        -               -               -           (4,863)              -
                                                  ------------------------------------------------------------------------------
Net earnings (loss)                                  $ (5,880)        $ 5,788         $(3,528)        $(16,596)       $(14,051)
                                                  ==============================================================================
Net earnings (loss) per share:
    Basic                                            $  (0.58)        $  0.51         $ (0.31)        $  (1.53)       $  (1.32)
    Diluted                                          $  (0.58)        $  0.51         $ (0.31)        $  (1.53)       $  (1.32)
BALANCE SHEET DATA:
    Working capital (deficit) (3)                    $ (7,855)        $18,831         $22,281         $ 23,167        $ 29,663
    Total assets                                       86,083          96,775         111,198          125,314         120,750
    Long-term debt, net of current portion                314          16,338          32,944           44,064          33,379
    Shareholders' equity                               47,645          53,738          50,738           51,006          65,503
</TABLE>
-----------
(1)     The 1998 amounts include the effect of the adoption of the AICPA
        Statement of Position 98-5, Accounting for Startup Costs.
(2)     Certain reclassifications have been made to the 1997 through 2000
        balances to conform to the 2001 presentation.
(3)     The working capital deficit for the year ended December 31, 2001
        includes  amounts  outstanding  under the Company's credit facility
        agreement, as the agreement matures in August 2002. Although the Company
        is in discussions with its bank to extend the maturity date or to seek
        alternate sources of long-term financing, there can be no assurances
        that the Company will be successful. Accordingly the entire outstanding
        balance on the revolving line of credit of $16.0 million, is classified
        as short-term.

                                       18
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

GENERAL

The Company is one of the largest and most comprehensive providers of juvenile
rehabilitative services with 25 facilities and approximately 3,700 juveniles in
its care. In addition, the Company is a leading developer and operator of adult
correctional facilities operating 11 facilities representing approximately 4,300
beds. On a combined basis, as of December 31, 2001, the Company provided
services in 15 states and Puerto Rico, representing approximately 8,000 beds
including aftercare services.

The Company's primary source of revenue is generated from the operation of its
facilities pursuant to contracts with federal, state and local governmental
agencies, and management agreements with third parties that contract directly
with governmental agencies. Generally, the Company's contracts are based on a
daily rate per resident, some of which have guaranteed minimum payments; others
provide for fixed monthly payments irrespective of the number of residents
housed. In addition, the Company receives revenue for educational and aftercare
services. The Company recognizes revenue at the time the Company performs the
services pursuant to its contracts.

The Company typically pays all facility operating expenses, except for rent or
lease payments in the case of certain government-provided facilities, or for
facilities for which the Company has only a management contract. Operating
expenses are principally comprised of costs directly attributable to the
management of the facility and care of the residents, which include salaries and
benefits of administrative and direct supervision personnel, food, clothing,
medical services and personal hygiene supplies. Other operating expenses are
comprised of fixed costs, which consist of rent and lease payments, utilities,
insurance, depreciation and professional fees.

The Company also incurs costs as it relates to the start-up of new facilities.
Such costs are principally comprised of expenses associated with the
recruitment, hiring and training of staff, travel of personnel, certain legal
costs and other costs incurred after a contract has been awarded.

Contribution from operations consists of revenues minus facility operating
expenses and start-up costs. Contribution from operations, in general, is lower
in the initial stages of a facility's operations. This is due to the need to
incur a significant portion of the facility's operating expenses while the
facility is in the process of attaining full occupancy.

General and administrative costs primarily consist of salaries and benefits of
non-facility based personnel, insurance, professional fees, rent and utilities
associated with the operation of the Company's corporate offices. In addition,
general and administrative costs consist of development costs principally
comprised of travel, proposal development, legal fees, and various consulting
and other fees incurred prior to the award of a contract.

                                       19
<PAGE>

           RESULTS OF OPERATIONS

           The following table sets forth certain operating data as a percentage
of total revenues:
<TABLE><CAPTION>
                                                              Percentage of Total Revenues
                                                                Years Ended December 31,

                                                            2001           2000          1999
                                                       ------------- ------------- -------------
<S>                                                        <C>           <C>           <C>
    Revenues                                                100.0 %       100.0 %       100.0 %
                                                       ------------- ------------- -------------
    Facility expenses:
         Operating                                          92.3          88.0          87.9
         Startup costs                                       0.2             -           0.5
                                                       ------------- ------------- -------------
                                                            92.5          88.0          88.4
                                                       ------------- ------------- -------------
    Contribution from operations                             7.5          12.0          11.6
                                                       ------------- ------------- -------------
    Other operating expenses:
         General and administrative                          7.6           6.3           5.8

         Legal settlement                                    0.2             -             -

         Restructuring and impairment                        2.5             -             -

         Loss contract costs                                 0.7             -             -

         Loss (gain) on sale of assets                       0.5          (0.5)            -

         Merger costs and related restructuring
           charges                                             -             -           5.2

         Write-off of deferred financing costs                 -             -           0.8
                                                       ------------- ------------- -------------
                                                            11.5           5.8          11.8
                                                       ------------- ------------- -------------
    Operating income (loss)                                 (4.0)          6.2          (0.2)

    Interest expense, net                                   (1.2)         (1.7)         (1.4)
                                                       ------------- ------------- -------------
    Income (loss) before income taxes and
      extraordinary gain on extinguishment of debt          (5.2)          4.5          (1.6)

    Income tax benefit (provision)                           1.8          (1.8)         (0.2)
                                                       ------------- ------------- -------------
    Income (loss) before extraordinary gain on
      extinguishment of debt                                (3.4)          2.7          (1.8)

    Extraordinary gain on extinguishment of debt,
      net of tax                                               -             -           0.3
                                                       ------------- ------------- -------------

    Net income (loss)                                       (3.4)%         2.7%         (1.5)%
                                                       ============= ============= =============
</TABLE>

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Revenue decreased by $36.4 million or 17.3% for the year ended December 31, 2001
to $174.4 million compared to the same period in 2000. The decrease was
primarily due to:

    o   An increase of $5.2 million generated from a full twelve months of
        revenue for two facilities opened in 2000 (248 beds), and

    o   An increase of $3.1 million from per diem rate increases at existing
        facilities, offset by;

    o   A decrease of $34.6 million from the discontinuance of 13 programs (459
        beds in 4 facilities discontinued in 2001, and 2,993 beds in 9
        facilities discontinued in 2000),

    o   A net decrease of $8.7 million generated from net occupancy level
        decreases in existing facilities,

    o   A decrease of $1.4 million in other revenues due to fulfillment of a
        contract with a third party related to the sale of assets in December
        1995 at the Company's Elizabeth, New Jersey facility, and the cessation
        of rental income related to the sale of the Tampa Bay Academy.

Operating expenses decreased $24.6 million or 13.2% for the year ended December
31, 2001 to $160.9 million compared to the same period in 2000 primarily due to
the closing of the 13 facilities mentioned above.

                                       20
<PAGE>

As a percentage of revenues, operating expenses increased to 92.3% for the
twelve months ended December 31, 2001 from 88.0% for the twelve months ended
December 31, 2000. Although the Company made significant improvements in cost
control initiatives, operating expenses as a percentage of revenue increased due
to the rising costs of healthcare decreased occupancy levels, and the Company's
inability to decrease fixed costs at the facilities, including, rent, certain
administrative salaries, and depreciation expense, accordingly.

Startup costs were $406,000 for the twelve months ended December 31, 2001
compared to $155,000 for the twelve months ended December 31, 2000. Startup
costs for the twelve months ended December 31, 2001, related primarily to the
startup of the Salinas, Puerto Rico facility and the relocation of the Genesis
Treatment Program to the Newport News, Virginia property. As of December 31,
2001, the Salinas, Puerto Rico facility had not begun operations. The Company is
in discussions with the Puerto Rican government to determine the future of the
facility, which may consist of the operation of the facility, the sale of the
facility, or a combination thereof.

General and administrative expenses decreased to $13.2 million for the twelve
months ended December 31, 2001, compared to $13.3 million for the twelve months
ended December 31, 2000. As a percentage of revenues, general and administrative
expenses increased to 7.6% for the twelve months ended December 31, 2001 from
6.3% for the same period in 2000. The increase is due to the restructuring
initiative formulated during the third quarter of 2001, and the decreased
revenues due to the closed facilities and population decreases on a same
facility basis of 7.3%. The Company recorded charges of approximately $7.9
million related to corporate restructuring and asset impairments, losses on
contracts of facilities to be closed, and other charges included in general and
administrative expenses as follows:



        Severance pay                                            $ 205,000
        Provision for early termination of a lease                 270,000
        Impairment of assets                                     3,881,000
        Loss contract costs                                      1,150,000
        Other charges included in general and
           administrative expenses                               2,373,000
                                                           ----------------

                                                                $7,879,000
                                                           ================


As part of the restructuring initiative, the Company formulated a plan to
consolidate and restructure its corporate office, sell certain assets, and close
seven facilities through August 31, 2002. The Company recorded a restructuring
and impairment charge of $4.4 million consisting of severance for terminated
employees ($205,000); lease termination costs at a facility closed under the
plan ($270,000); and a $3.9 million impairment of assets related to the
facilities being closed and assets held primarily for future use, where plans
have been abandoned. The Company expects the restructuring plan initiatives to
be completed by August 31, 2002. Based on management's analysis of its contract
obligations, the Company has recorded costs of approximately $1.1 million for
contracts that will require the Company incur losses to fulfill the contracts.
These facilities are included in those scheduled for closure.

Other charges included in general and administrative expenses include $1.3
million of additional accounts receivable allowance primarily for receivables
which have been in dispute over a number of years, including a receivable from a
non-profit entity, and $1.1 million related to reserves established for legal
obligations, and management's estimate of the results of agency audits. This
increase to general and administrative expenses was partially offset by cost
reductions from strategies to reduce general and administrative expenses,
implemented during the first quarter of 2001, and the fourth quarter results of
the restructuring initiative. General and administrative expenses decreased to
5.1% of revenues for the three months ended December 31, 2001, compared to 7.7%
for the same period in 2000.

In addition to less significant settlements included in general and
administrative expenses, the Company recorded a $375,000 legal settlement
related to the Mansfield, Texas facility. The settlement was paid in April 2001.
The settlement paid by the Company exceeded the amount of its insurance
deductible, as certain facts of the case caused the third party insurer to
dispute the enforceability of its policy with the Company. Consequently, the
Company agreed with the third party insurer to pay $375,000.

The Company recorded a loss on the sale of assets of $938,000. The loss relates
primarily to the sale of the 489-bed Dickens County facility, and the sale of
both airplanes previously used to transport residents from the various
contracting jurisdictions to the facilities in the Midwest region. The Company
sold the 489 bed Dickens County Correctional Facility in Dickens, Texas, which
had been held in the operating lease-financing facility, to the host county. The
net proceeds from the sale were approximately $10.7 million, which were used to
reduce the Company's

                                       21
<PAGE>

obligations under its operating lease-financing facility. The Company recorded a
loss on this sale of approximately $441,000 in the third quarter of 2001. The
Company continues to operate the facility under a management agreement with the
County. The Company also recorded a loss of approximately $370,000 on the sale
of two airplanes that were used to transport residents to and from the Company's
Midwest facilities.

Interest expense, net of interest income, was $2.2 million for the twelve months
ended December 31, 2001 compared to $3.5 million for the twelve months ended
December 31, 2000, a net decrease in interest expense of $1.3 million. This
decrease resulted from payments made on the Company's credit facility,
decreasing the outstanding balance on the revolver and delayed drawdown credit
facilities by approximately $6.7 million from December 31, 2000 to December 31,
2001. Additionally the weighted-average interest rate decreased from 9.2% to
6.3% over the same period.

For the twelve months ended December 31, 2001, the Company recognized an income
tax benefit of $3.2 million compared to an income tax provision of $3.7 million
for the twelve months ended December 31, 2000.



YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Revenue decreased by $23.1 million or 9.9% for the year ended December 31, 2000
to $210.8 million compared to the same period in 1999. The decrease was
primarily due to:

    o   An increase of $1.3 million generated from the opening of 2 juvenile
        facilities (248 beds).
    o   A net increase of $8.6 million generated from per diem rate and net
        occupancy level increases in existing facilities.
    o   A decrease of $33.0 million from the discontinuance of 16 programs (911
        beds in 7 facilities discontinued in 2000, and 1,701 beds in 9
        facilities discontinued in 1999.)

Operating expenses decreased $20.2 million or 9.8% for the year ended December
31, 2000 to $185.4 million compared to the same period in 1999 primarily due to
the closing of the 16 facilities mentioned above.

As a percentage of revenues, operating expenses remained relatively constant,
increasing to 88.0% for the twelve months ended December 31, 2000 from 87.9% for
the twelve months ended December 31, 1999. Other factors impacting operating
expenses were increased labor, insurance and utility costs.

Startup costs were $155,000 for the twelve months ended December 31, 2000
compared to $1.2 million for the twelve months ended December 31, 1999. Startup
costs for the twelve months ended December 31, 2000 were incurred related to the
Salinas, Puerto Rico (144 beds) and Las Vegas, Nevada (96 beds) facilities.
Startup for the twelve months ended December 31, 1999, related to the startup of
the South Fulton, Georgia facility (288 beds), 300-bed expansion of the Crowley,
Colorado facility and the 45 bed expansion of the Bayamon, Puerto Rico treatment
facility.

General and administrative expenses decreased to $13.3 million for the twelve
months ended December 31, 2000 from $13.6 million for the twelve months ended
December 31, 1999. The decrease of $211,000 in general and administrative
expenses was primarily attributable to lower costs associated with the full
effect of the YSI merger and a lower level of operations, partially offset by a
$927,000 increase in the reserve recorded against accounts receivable, including
$700,000 reserved against a receivable from a not-for-profit entity.

As a percentage of revenues, general and administrative expenses increased to
6.3% for the twelve months ended December 31, 2000 from 5.8% for the twelve
months ended December 31, 1999. The increase in general and administrative
expenses as a percentage of revenue is a result of the items noted above and the
decrease in revenues related to the discontinued operations at the facilities
noted above.

During the first quarter of 1999, the Company recorded merger costs and related
restructuring charges of approximately $12.1 million ($9.2 million, after taxes
or $0.82 per share) for direct costs related to the merger with YSI and certain
other costs resulting from the restructuring of the newly combined operations.
Direct merger costs consisted primarily of fees to investment bankers,
attorneys, accountants, financial advisors and printing and other direct costs.
Restructuring charges included severance and change in control payments made to
certain former officers and employees of YSI; losses associated with the
write-off of the carrying value of the software used by YSI, which will not be
used by the Company and computer equipment that is incompatible with that used
by the Company; and miscellaneous other costs which included the cancellation of
lease agreements and other long-term commitments.

In September 1999, the Company wrote off $1.9 million of unamortized deferred
financing costs associated with the Company's previously established credit
facility, which was repaid in full on September 1, 1999.

The Company recognized a gain on the sale of assets of $1.1 million during the
year-ended December 31, 2000 primarily related to the discontinuance of
operations at the Crowley, Colorado and McLoud, Oklahoma facilities, and the
sale of

                                       22
<PAGE>

undeveloped land in Pacific, Washington. These gains were partially offset by
the loss on the sale of the Tampa Bay Academy and the write-off of leasehold
improvements due to the closure of the Manhattan, New York facility.

Interest expense, net of interest income, was $3.5 million for the twelve months
ended December 31, 2000 compared to $3.4 million for the twelve months ended
December 31, 1999, a net increase in interest expense of $100,000. This increase
resulted from a decrease in interest income as the Company used available funds
to repay debt and repurchase common stock and increases in the Company's
borrowing rates during 2000.

For the twelve months ended December 31, 2000, the Company recognized an income
tax provision of $3.7 million compared to an income tax provision of $429,000
for the twelve months ended December 31, 1999. The provision in 1999 principally
arose from nondeductible permanent differences and the recognition of a
valuation allowance for certain deferred tax assets. Additionally, $467,000
related to the extraordinary gain on extinguishment of debt associated with the
YSI 7% Convertible Debt, was recognized for the twelve months ended December 31,
1999.


LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations through bank borrowings,
private placements, the sale of public securities and cash generated from
operations.

The Company had a working capital deficit at December 31, 2001 of $7.9 million
compared to working capital of $18.8 million at December 31, 2000. The Company's
current ratio decreased to 0.8 at December 31, 2001, from 1.7 at December 31,
2000. The decrease in the current ratio is primarily attributable to the
classification of senior debt as current, as the Company's financing facility is
scheduled to mature in August 2002.

Net cash of $12.5 million was provided by operating activities for the year
ended December 31, 2001 as compared to $9.7 million provided by operations for
the year ended December 31, 2000.

Net cash of $4.9 million was used by investing activities during the year ended
December 31, 2001 as compared to $652,000 provided during the year ended
December 31, 2000. The $5.6 million increase in cash used was primarily
attributable to the purchase of the Newport News property. Net cash provided by
investing activities for the year ended December 31, 2000, was primarily
attributable to the sale of the Crowley, CO and McLoud, OK facilities, and the
Tampa Bay Academy.

During 2001, the Company effected the sale of a facility leased under it's
operating lease-finacing facility. The net proceeds of $10.7 million were paid
directly to the lienholder.


Net cash of $6.8 million was used in financing activities in the year ended
December 31, 2001 as compared to $17.3 million used in financing activities in
the year ended December 31, 2000. During 2001 the Company's primary financing
activities primarily consisted of net repayments of senior debt of $6.7 million.

During 2000 the Company's primary financing activities consisted of:

    o   Net repayment of senior debt of $750,000.
    o   Repayment of subordinated debt of $14.2 million.
    o   Repurchase of common stock of $2.8 million.

At December 31, 2001 the Company had $16.0 million outstanding under the
revolving line of credit with $2.5 million in availability, and $14.0 million
outstanding under the operating lease-financing facility. As of the June 30,
2001 amendment, there is no additional funding available under the operating
lease-financing facility. The operating lease-financing facility and the
associated assets are not included in the consolidated financial statements of
the Company as this financing facility is treated as an operating lease in
accordance with STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 13,
ACCOUNTING FOR LEASES.

During 2001, the Company's Credit Agreement and Master Agreement (the
"Agreements") with a syndication of banks led by Fleet National Bank (successor
to Summit Bank) were amended effective as of the end of the quarters ended June
30, 2001, September 30, 2001 and December 31, 2001, as a result of the Company's
realization that it likely would not be able to comply with the terms of certain
financial covenants contained in the Agreements, unless those covenants were
amended. Accordingly, as a result of the amendments to the Agreements made
throughout 2001, the Company remained in compliance with all its loan covenants
during 2001 and remained in compliance with those covenants, as amended, as of
December 31, 2001. The Company agreed, in connection with the amendment to the
Agreements made in 2001, that there would be no further financing available to
the Company under the operating lease-financing facility aspect of the
Agreements.

The revolving line of credit, as amended, and the operating lease-financing
facility provided to the Company under the Agreements mature on August 31, 2002.
Although the Company is in discussions with its bank to extend the maturity date

                                       23
<PAGE>

of the credit facilities provided under the Agreement and is seeking alternate
sources of long-term financing, there can be no assurances that the Company will
be successful in either extending the maturity date of its obligations under the
Agreements or in obtaining alternative sources of financing. Accordingly, the
entire outstanding balance on the revolving line of credit of $16.0 million, is
classified as short-term. Additionally, the Company will be required to pay the
lessor of its operating lease-financing facility approximately $14.0 million
upon the termination of its operating lease-financing facility, based on the
current terms of the agreement.

The Company expects to continue to have cash needs as it relates to financing
start-up costs in connection with new contracts that would improve the
profitability of the Company. There can be no assurances that the Company's
operations together with amounts available under the revolving line of credit
will continue to be sufficient to finance its existing level of operations, fund
start-up costs and meet its debt service obligations. Also, a decline in the
Company's financial performance, as a result of decreased occupancy or increases
in operational expenses could negatively impact the Company's ability to meet
its financial covenants included in the Agreement, as amended. If the Company is
unable to generate sufficient cash flow from operations or meet its covenant
requirements, it may be required to further amend or restructure its Agreement,
sell additional assets or obtain additional financing. There can be no assurance
that the Company will be able to obtain further amendments to the Agreements,
sell additional assets or obtain additional financing.

As mentioned above, the Company sold one of its facilities during the third
quarter 2001 and continues to operate the facility under a management agreement.
It is in negotiations to sell one additional facility, which is encumbered by
the Agreement. This sale through municipal revenue bonds is expected to generate
approximately $8 million, which will be utilized to reduce the Company's
borrowings under its Credit Agreement. The Company intends to continue operating
the facility under a management agreement negotiated during the transaction.
There can be no assurances that the Company will be successful in these
negotiations.

TREASURY STOCK

On October 20, 2000, the Company announced that its Board of Directors had
authorized a share repurchase program of up to $10.0 million. The repurchases
are funded from the proceeds of asset sales and excess cash flow. The Company
repurchased 93,000 shares and 1.1 million shares during the years ended December
31, 2001 and 2000, respectively, at a cost of $214,000 and $2.8 million,
respectively.

NEW ACCOUNTING PRONOUNCEMENTS

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, BUSINESS COMBINATIONS,
and SFAS 142, GOODWILL AND INTANGIBLE ASSETS. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
the year beginning January 1, 2002; however certain provisions of that Statement
apply to goodwill and other intangible assets acquired between July 1, 2001 and
the effective date of SFAS 142. The Company will adopt these new standards,
effective January 1, 2002. The Company analyzed net goodwill at the juvenile
division reporting level, as of January 1, 2002, and has determined there is no
expected impairment of goodwill as of January 1, 2002. The Company recognized
amortization expense related to goodwill of $370,000, $370,000 and $362,000 for
the twelve months ended December 31, 2001, 2000 and 1999, respectively.

In July 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is for financial statements issued for fiscal years beginning after
June 15, 2002. The Company has evaluated the impact of the adoption of this
standard on its financial position and results of operations, and does not
believe the effect, if any, to be significant.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company has evaluated the impact of the adoption of this
standard on its financial position and results of operations, and does not
believe the effect, if any, to be significant.

                                       24
<PAGE>

                                  RISK FACTORS

Investors should carefully consider the following factors that may affect future
results, together with the other information contained in this Annual Report on
Form 10-K, in evaluating the Company before purchasing its securities. In
particular, prospective investors should note that this Annual Report on Form
10-K contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and that actual results could differ
materially from those contemplated by such statements. See "Safe Harbor
Statement under the Private Securities Litigation Reform Act of 1995" on page 3
of this Annual Report on Form 10-K. The factors listed below represent certain
important risks the Company believes could cause such results to differ and are
not intended to represent a complete list of the general or specific risks that
may affect the Company. It should be recognized that other risks may be
significant, presently or in the future, and the risks set forth below may
affect the Company to a greater extent than indicated.


DECREASES IN OCCUPANCY LEVELS AT OUR FACILITIES OR RISING COSTS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

While the non-personnel cost structures of the facilities we operate are
relatively fixed, a substantial portion of our revenues are generated under
facility management contracts with government agencies that specify a net rate
per day per inmate or a per diem rate, with no minimum guaranteed occupancy
levels. Under this per diem rate structure, a decrease in occupancy levels may
have a material adverse effect on our financial condition, results of operations
and liquidity. We are dependent upon the governmental agencies with which we
have management contracts to provide inmates for, and maintain the occupancy
level of, our managed facilities. We cannot control those occupancy levels. In
addition, our ability to estimate and control our costs with respect to all of
these contracts is critical to our profitability.

During 2001, the Company experienced a significant decline in the occupancy
levels of certain of its facilities, which has caused its contributions from
operations to decline. Occupancy levels may decline at the Company's facilities
in the future and facilities might not reach occupancy levels required to
produce profitability. In addition, personnel expenses are a material cost of
the Company's operation.


THE NON-RENEWAL OR TERMINATION OF OUR FACILITY MANAGEMENT CONTRACTS, WHICH
GENERALLY RANGE FROM ONE TO THREE YEARS, COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.

As is typical in our industry, our facility management contracts are short-term,
generally ranging from one to three years, with renewal or extension options as
well as termination for convenience clauses in favor of the contracting
governmental agency. Many YSI contracts renew annually. Additionally, the
Company received approximately 37% of its 2001 consolidated revenue from three
agencies: Maryland and Florida Departments of Juvenile Justice, and the Texas
Department of Criminal Justice. Our facility management contracts may not be
renewed or our customers may terminate such contracts in accordance with their
right to do so. The non-renewal or termination of any of these contracts could
materially adversely affect our financial condition, results of operations and
liquidity, including our ability to secure new facility management contracts
from others. Of the multi-year contracts in place as of December 31, 2001, ten
contracts representing approximately 2,674 beds are up for renewal in 2002.

A contracting governmental agency often has a right to terminate a facility
contract with or without cause by giving us adequate notice. At times a
contracting government agency may notify us that we are not in compliance with
certain provisions of a facility contract. Our failure to cure any such
noncompliance could result in termination of the facility contract, which could
materially adversely affect our financial condition, results of operations and
liquidity. If a governmental agency does not receive necessary appropriations,
it could terminate its contract or reduce the management fee payable to us. Even
if funds are appropriated, delays in payments may occur which could have a
material adverse effect on our financial condition, results of operations and
liquidity. We currently lease many of the facilities that we manage. If a
management contract for a leased facility were terminated, we would continue to
be obligated to make lease payments until the lease expires.


OUR ABILITY TO SECURE NEW CONTRACTS TO DEVELOP AND MANAGE CORRECTIONAL DETENTION
FACILITIES DEPENDS ON MANY FACTORS WE CANNOT CONTROL.

Our growth is generally dependent upon our ability to obtain new contracts to
develop and manage new correctional and detention facilities. This depends on a
number of factors we cannot control, including crime rates and sentencing
patterns

                                       25
<PAGE>

in various jurisdictions and acceptance of privatization. Certain jurisdictions
recently have required successful bidders to make a significant capital
investment in connection with the financing of a particular project, a trend
which will require the combined company to have sufficient capital resources to
compete effectively. We may not be able to obtain these capital resources when
needed.


FUTURE ACQUISITIONS MAY INVOLVE SPECIAL RISKS, INCLUDING POSSIBLE ADVERSE
SHORT-TERM EFFECTS ON OUR OPERATING RESULTS, DIVERSION OF MANAGEMENT'S ATTENTION
FROM EXISTING BUSINESS, DEPENDENCE ON KEY PERSONNEL, UNANTICIPATED LIABILITIES
AND COSTS OF AMORTIZATION OF INTANGIBLE ASSETS. ANY OF THESE RISKS COULD
MATERIALLY ADVERSELY AFFECT US.

The Company also intends to grow through selective acquisitions of companies and
individual facilities although there are no current plans or agreements to
acquire any other companies. We may not be able to identify or acquire any new
companies or facilities and we may not be able to profitably manage acquired
operations. Acquisitions involve a number of special risks, including possible
adverse short-term effects on our operating results, diversion of management's
attention from existing business, dependence on retaining, hiring and training
key personnel, risks associated with unanticipated liabilities, and the costs of
amortization of acquired intangible assets, any of which could have a material
adverse effect on our financial condition, results of operations and liquidity.


PUBLIC RESISTANCE TO PRIVATIZATION OF CORRECTIONAL AND DETENTION FACILITIES
COULD RESULT IN OUR INABILITY TO OBTAIN NEW CONTRACTS OR THE LOSS OF EXISTING
CONTRACTS.

The movement toward privatization of correctional and detention facilities has
encountered resistance from certain groups, such as labor unions and others that
believe that correctional and detention facility operations should only be
conducted by governmental agencies. Political changes or changes in attitudes
toward private correctional and detention facilities management in any market in
which we will operate could result in significant changes to the previous
acceptance of privatization in such market and the subsequent loss of facility
management contracts. Further, some sectors of the federal government and some
state and local governments are not legally permitted to delegate their
traditional operating responsibilities for correctional and detention facilities
to private companies.


OPPOSITION TO FACILITY LOCATION MAY ADVERSELY IMPACT THE COMPANY'S ABILITY TO
DEVELOP SITES FOR NEW FACILITY LOCATIONS.

The Company's success in opening new facilities is dependent in part upon its
ability to obtain facility sites that can be leased or acquired on economically
favorable terms. Some locations may be in or near populous areas and, therefore,
may generate legal action or other forms of opposition from residents in areas
surrounding a proposed site. Certain facilities are already located in or
adjacent to such areas and, in one instance, the Company abandoned its plan to
expand a facility after consulting with community leaders who raised concerns
about the expansion. There can be no assurance the Company will be able to open
new facilities or expand existing facilities in any particular location.


OUR FAILURE TO COMPLY WITH UNIQUE GOVERNMENTAL REGULATION COULD RESULT IN
MATERIAL PENALTIES OR NON-RENEWAL OR TERMINATION OF OUR FACILITY MANAGEMENT
CONTRACTS.

The industry in which we operate is subject to extensive federal, state and
local regulations, including education, health care and safety regulations,
which are administered by many regulatory authorities. Some of the regulations
are unique to our industry, and the combination of regulations we face is
unique. We may not always successfully comply with these regulations, and
failure to comply can result in material penalties or non-renewal or termination
of our facility management contracts. Our contracts typically include extensive
reporting requirements, and supervision and on-site monitoring by
representatives of the contracting governmental agencies. Corrections officers
and youth care workers are customarily required to meet certain training
standards and, in some instances, facility personnel are required to be licensed
and subject to background investigation. Certain jurisdictions also require us
to award subcontracts on a competitive basis or to subcontract with businesses
owned by members of minority groups. Our businesses also are subject to
operational and financial audits by the governmental agencies with which we have
contracts. The outcomes of these audits could have a material adverse effect on
our business, financial condition or results of operations.

                                       26
<PAGE>

DISTURBANCES AT ONE OR MORE OF OUR FACILITIES COULD RESULT IN CLOSURE OF THESE
FACILITIES BY THE RELEVANT GOVERNMENTAL ENTITIES AND A LOSS OF OUR CONTRACTS TO
MANAGE THESE FACILITIES.

An escape, riot or other disturbance at one of our facilities could have a
material adverse effect on our financial condition, results of operations and
liquidity. Among other things, the adverse publicity generated as a result of
any such event could have a material adverse effect on our ability to retain an
existing contract or obtain future ones. In addition, if such an event occurs,
there is a possibility that the facility where the event occurred may be shut
down by the relevant governmental entity. A closure of any of our facilities
could have a material adverse effect on our financial condition, results of
operations and liquidity.


INSURANCE COVERAGE MAY BE INADEQUATE OR UNAVAILABLE TO COVER POTENTIAL LIABILITY
RELATED TO MANAGEMENT OF CORRECTIONAL AND DETENTION FACILITIES OR ITS COSTS MAY
ADVERSELY AFFECT RESULTS OF OPERATIONS.

Our management of correctional and detention facilities exposes us to potential
third-party claims or litigation by prisoners or other persons for personal
injury or other damages, including damages resulting from contact with our
facilities, programs, personnel or students (including students who leave our
facilities without our authorization and cause bodily injury or property
damage). Currently, we are subject to actions initiated by former employees,
inmates and detainees alleging assault, sexual harassment, personal injury,
property damage, and other injuries. In addition, our management contracts
generally require us to indemnify the governmental agency against any damages to
which the governmental agency may be subject in connection with such claims or
litigation. We maintain insurance programs that provide coverage for certain
liability risks faced by us, including personal injury, bodily injury, death or
property damage to a third party where we are found to be negligent. There is no
assurance, however, that our insurance will be adequate to cover potential
third-party claims. In addition, we are unable to secure insurance for some
unique business risks, which may include, but not be limited to, some types of
punitive damages in states where it is prohibited by law.

Committed offenders often seek redress in federal courts pursuant to federal
civil rights statutes for alleged violations of their constitutional rights
caused by the overall condition of their confinement or by specific conditions
or incidents. We may be subject to liability if any such claim or proceeding is
made or instituted against us or the state with which we contract or
subcontract.

The Company continues to incur increased costs for insurance. Workers'
compensation and general liability insurance represent significant costs to the
Company.


STAFF RECRUITMENT DIFFICULTIES MAY IMPACT OPERATIONS.

Many of our facilities are located in areas where there are smaller populations
and/or where there are more jobs than available workers. Our choice of employees
is further limited by our drug free workplace status, and licensure and other
policy prohibitions against hiring individuals with past criminal histories.
However, many of our contracts require the Company to have certain numbers and
certain types of employees on duty at the facility at all times. Although the
Company makes rigorous efforts to recruit and retain a sufficient work force, it
is sometimes unable to achieve adequate staffing without significant overtime
expense. This additional expense may adversely effect the Company's results.

                                       27
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company's current financing is subject to variable rates of interest and is
therefore exposed to fluctuations in interest rates. The Company's subordinated
debt and mortgage on property accrues interest at fixed rates of interest.

The table below presents the principal amounts, weighted average interest rates,
fair value and other terms, by year of expected maturity, required to evaluate
the expected cash flows and sensitivity to interest rate changes. Actual
maturities may differ because of prepayment rights.

<TABLE><CAPTION>
                                                                        EXPECTED MATURITY DATES

                                                                                                   THERE                   FAIR
                                           2002       2003       2004       2005        2006       AFTER       TOTAL       VALUE
                                           ----       ----       ----       ----        ----       -----       -----       -----
<S>                                        <C>        <C>        <C>        <C>         <C>        <C>         <C>         <C>
Fixed rate debt (in thousands)             $  3       $  3       $  3       $  4        $  4       $ 297       $ 314       $ 314
                                           ====       ====       ====       ====        ====       =====       =====       =====
Weighted average Interest
 Rate at December 31, 2001      10.00%
                                ======
Variable rate LIBOR debt (in
thousands)                               $16,000      $  -       $  -       $  -        $  -       $   -      $16,000     $16,000
                                         =======      ====       ====       ====        ====       =====      =======     =======
Weighted average interest
 Rate at December 31, 2001       6.26%
                                 =====
</TABLE>

                                       28
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        The information required by this item is contained on Pages F-1 through
        F-28 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.


        None

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

        Information Regarding Directors and Officers

        The following table sets forth the Directors and Executive Officers of
        the Company, together with their respective ages and positions.


Name                            Age       Position with CSC
----                            ---       -----------------
Stuart M. Gerson (1)(2)(4)       58       Chairman of the Board
James F. Slattery                52       President and Chief Executive Officer
Aaron Speisman (2)(3)            51       Executive Vice President and Director
Bernard A. Wagner                53       Senior Vice President, Chief Financial
                                            Officer and Treasurer
Richard P. Staley (2)            70       Senior Vice President and Director
Shimmie Horn (1)                 29       Director
Bobbie L. Huskey (1)(3)(4)       53       Director
Melvin T. Stith (2)(3)           55       Director
Chet Borgida (1)(3)              57       Director

(1)     Member of the Audit Committee
(2)     Member of the Compensation Committee
(3)     Member of the Stock Options Committee
(4)     Member of the Ethics and Compliance Committee

Stuart M. Gerson was elected a director of CSC in June 1994, and appointed
Chairman of the Board in November 2001. Since March 1993, Mr. Gerson has been a
member of the law firm of Epstein Becker & Green, P.C. From January 1993 to
March 1993, he was acting Attorney General of the United States. From January
1989 to January 1993, Mr. Gerson was the Assistant U.S. Attorney General for the
Civil Division of the Department of Justice.

James F. Slattery co-founded CSC in October 1987 and has been its President,
Chief Executive Officer and a director since CSC's inception and Chairman from
August 1994 to November 2001. Prior to co-founding CSC, Mr. Slattery had been a
managing partner of Merco Properties, Inc., a hotel operation company, Vice
President of Coastal Investment Group, a real estate development company, and
had held several management positions with the Sheraton Hotel Corporation.

Aaron Speisman co-founded CSC in October 1987 and has been its Executive Vice
President and a director since CSC's inception. From October 1987 to March 1994,
Mr. Speisman also served as Chief Financial Officer of CSC. Since June 1, 1996,
Mr. Speisman has been employed by CSC on a part-time basis.

Bernard A. Wagner joined the Company as Senior Vice President and Chief
Financial Officer in May 2001. Since 1992, Mr. Wagner held various positions
with Uniroyal Technology Corporation, most recently as Vice President and Chief
Financial Officer of its High Performance Plastics, Inc. subsidiary. Prior to
this position, Mr. Wagner was Director of Accounting for the company's Polycast
Technology division and Director of Finance and Accounting at the corporate
headquarters. Mr. Wagner is a Florida CPA.

Richard P. Staley has served as a Director since May 1994. From 1988 to 1998,
Mr. Staley was the Company's Senior Vice President of Operations and in 1999 was
named Senior Vice President of Strategic Planning. From 1984 to 1987,

                                       29
<PAGE>

Mr. Staley was the Evaluation and Compliance Director for Corrections
Corporation of America and, from 1953 to 1983, held various positions with the
United States Department of Justice, Immigration and Naturalization Service. Mr.
Staley is a certified American Correctional Association standards auditor for
jail and detention facilities.

Shimmie Horn was elected a director of CSC in June 1996. Mr. Horn is President
of Iroquois Properties, Inc., a real estate holding company. Mr. Horn, received
a B.A. degree in Economics from Yeshiva College in 1993, and graduated from the
Benjamin Cardozo School of Law in 1996. He is the son of the late Morris Horn,
the former Chairman of the Board and a founder of CSC, and Esther Horn, a
principal stockholder of CSC.

Bobbie L. Huskey was a director of Youth Services International, Inc., which was
acquired by CSC in March 1999, at which time Ms. Huskey became a director of the
Company. Ms. Huskey has been president of Huskey & Associates since 1984 and has
29 years in corrections, specializing in juvenile justice planning, facilities
and program development. She has served as a consultant to more than one-half of
the states in the U.S. Ms. Huskey has hands-on experience in juvenile justice
facilities, having worked with delinquent girls in a treatment facility in
Kentucky and has served in executive leadership positions in corrections in
Virginia, Indiana and Chicago. She has held every elective office in the
American Correctional Association, including president, and was a member of the
association's executive committee for 12 years. Ms. Huskey has authored numerous
articles and appeared on national news programs discussing corrections and
juvenile justice issues. She has won national awards including the E.R. Cass
Award for outstanding achievement in the correctional field.

Melvin T. Stith was elected a director of the Company in November 1994. Since
July 1991, Mr. Stith has been Dean of the Florida State University College of
Business. From December 1989 to July 1991, Mr. Stith was Chairman of the
Marketing Department of the Florida State University College of Business where
he was also a Professor. Mr. Stith is also a director of Sprint and United
Telephone of Florida.

Chet Borgida was appointed a director in November 2001. Since June 2001, Mr.
Borgida has been a Senior Vice-President and Chief Financial Officer of Cross
Media Marketing Corporation. From 1977 to May 2001, Mr. Borgida was a partner
with Grant Thornton LLP, the Company's independent auditors.


COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and persons who own more than ten percent of a registered
class of the Company's equity securities (collectively, the "Reporting
Persons"), to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish the Company with copies of
these reports. The Company believes that the Reporting Persons complied with all
filing requirements applicable to them during the year ended December 31, 2001.

30
<PAGE>

ITEM 11.EXECUTIVE COMPENSATION.

The following table sets forth a summary of the compensation paid by CSC during
the three fiscal years ended December 31, 2001, 2000 and 1999 for CSC's Chief
Executive Officer and for CSC's executive officers (the "Named Executives"):

<TABLE><CAPTION>
                           SUMMARY COMPENSATION TABLE

                                                                                                    LONG-TERM
                                                   ANNUAL COMPENSATION                            COMPENSATION

                                                                                            NUMBER OF
                                                                          OTHER ANNUAL     SECURITIES       ALL OTHER
                                                 SALARY       BONUS       COMPENSATION     UNDERLYING     COMPENSATION
NAME AND PRINCIPAL POSITION           YEAR        ($)          ($)           ($)(4)          OPTIONS           (5)
---------------------------           -----       ----         ----          -------         -------           ---
<S>                                   <C>        <C>          <C>             <C>                 <C>         <C>
James F. Slattery                     2001       287,726      200,000         20,244              0           7,176
       Chief Executive Officer        2000       288,744      160,000         11,808              0          14,661
        and President                 1999       270,000      200,000         11,815         40,000           9,625

Bernard A. Wagner (1)                 2001       92,132             0              0         10,000               0
      Senior Vice-President and
      Chief Financial Officer

Michael C. Garretson (3)              2001       216,846            0         12,000(6)           0             129
      Former Executive Vice           2000       213,692            0         12,000(6)           0             516
      President and                   1999       194,307            0         12,000(6)           0             292
      Chief Operating Officer

Ira M. Cotler (2)                     2001       123,577       82,888          3,231              0              27
      Former Executive Vice           2000       208,461       23,334          6,000              0              76
      President and Chief             1999       191,077       82,827          6,000         25,000              67
      Financial Officer
---------------------
</TABLE>
(1)     Bernard A. Wagner was elected Senior Vice-President and Chief Financial
        Officer on October 12, 2001. He worked in the capacity of Chief
        Financial Officer beginning in May 2001.
(2)     Ira M. Cotler resigned from his position as Executive Vice-President
        and Chief Financial Officer effective June 30, 2001.
(3)     Michael C. Garretson resigned from his position as Executive
        Vice-President and Chief Operating Officer, effective January 2002.
(4)     Consists of car lease payments or auto allowance.
(5)     Consists of life insurance premiums.
(6)     Consists of a housing allowance.

                                       31
<PAGE>

EMPLOYMENT AGREEMENT

On September 29, 1999, CSC entered into an employment agreement with its Chief
Executive Officer, James F. Slattery, replacing the existing employment
agreement between the Company and Mr. Slattery dated February 17, 1998. The new
agreement has a term of three years with automatic annual renewal provisions.
Mr. Slattery's minimum annual compensation is $270,000 until September 29, 2000,
thereafter the base compensation will be adjusted through annual costs of living
increases of at least 3.5%. Mr. Slattery also receives use of an automobile,
reimbursement of business expenses, health insurance, related benefits and a
bonus equal to 5% of CSC's pre-tax profits in excess of $1,000,000, such bonus
not to exceed $200,000.

Also, on September 29, 1999, CSC entered into a Change in Control Agreement with
Mr. Slattery which provides for payments of specified benefits to Mr. Slattery
in the event his employment terminates under specified circumstances following a
change in control of CSC. For the purposes of this agreement, a change in
control is deemed to take place whenever:

    o   for any period of two consecutive years beginning on any date from and
        after September 29, 1999, if the Board of Directors at any time during
        or at the end of such period is not comprised so that a majority of the
        directors are either (i) individuals who constitute the Board of
        Directors at the beginning of such period or (ii) individuals who joined
        the Board during such period who were elected or nominated for election
        pursuant to a vote of at least two-thirds of the directors then still in
        office who either were directors at the beginning of the period or whose
        election or nomination for election was previously so approved (but not
        including, for purposes of (i) or (ii), a director designated by a
        person who has entered into an agreement with the Company to effect a
        transaction described in clause (B) of Subsection 1(b) of the Change in
        Control Agreement relating to stockholder approval of a merger, share
        exchange or consolidation of the Company);
    o   the stockholders of CSC approve a merger, share exchange or
        consolidation of CSC with or into any other corporation wherein
        immediately following such merger, the stockholders of CSC prior to the
        transaction own less than 51% of the outstanding voting stock of CSC (if
        it is the survivor of the transaction) or the surviving entity; or
    o   the stockholders of CSC approve a plan of complete liquidation of CSC or
        an agreement for the sale or disposition by CSC of all or substantially
        all CSC's assets.

Benefits made available to Mr. Slattery under the terms of the change in control
agreement in the event that his employment is terminated under the above
specified circumstances may include:

    o   payment of his full base salary through the date of termination at the
        rate in effect at the time notice of termination is given, plus all
        other amounts and benefits to which Mr. Slattery is entitled under his
        employment agreement or pursuant to any plan of CSC in which he is
        participating at the time of termination;
    o   a lump sum severance payment equal to the sum of (A) three times Mr.
        Slattery's annual base salary and incentive bonus in effect immediately
        prior to the occurrence of the change in control and (B) $1,000,000 as
        payment for Mr. Slattery's agreement to extend his agreement not to
        compete under his employment agreement to four years following the date
        of termination;
    o   any deferred compensation allocated or credited to Mr. Slattery or his
        account as of the date of termination;
    o   Certain additional payments to cover any excise tax imposed by Section
        4999 of the Internal Revenue Code;
    o   maintenance of life, disability, accident and health insurance benefits
        substantially similar to those that Mr. Slattery was receiving
        immediately prior to the notice of termination, for the period beginning
        on the date of termination and ending on the earlier of (A) the end of
        the 36th month after the date of termination or (B) the date Mr.
        Slattery becomes eligible for such benefits under any plan offered by an
        employer with which he is employed on a full-time basis; and
    o   All benefits payable to Mr. Slattery under any applicable retirement,
        thrift, and incentive plans as well as any other plan or agreement
        sponsored by CSC or any of its subsidiaries relating to retirement
        benefits.

STOCK OPTIONS

The following table sets forth the value of unexercised stock options held by
the Named Executives. No options were granted to or exercised by the Named
Executives in 2001:
<TABLE><CAPTION>
                       OPTION VALUES AT DECEMBER 31, 2001

                         NUMBER OF SHARES UNDERLYING OPTIONS AT   VALUE OF IN-THE MONEY OPTIONS AT YEAR
    NAME                   YEAR END EXERCISABLE/UNEXERCISABLE         END EXERCISABLE/UNEXERCISABLE
   <S>                              <C>                                          <C>
    James F. Slattery                176,667/13,333                               $0/$0
    Mike Garretson                      90,000/0                                  $0/$0
    Ira Cotler                       116,667/8,333                                $0/$0
    Bernard Wagner                      0/10,000                                  $0/$0
</TABLE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth the beneficial ownership of the Common Stock on
February 25, 2002 by (i) each person known by the Company to own beneficially
more than five percent of such shares, (ii) each director, (iii) each person
named in the Summary Compensation Table under "Executive Compensation" of this
Annual Report on Form 10-K, and (iv) all directors and executive officers as a
group, together with their respective percentage ownership of the outstanding
shares:
<TABLE><CAPTION>

                                              NUMBER OF        ACQUIRABLE          PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER           SHARES       WITHIN 60 DAYS**     OUTSTANDING
------------------------------------           ------       ----------------     -----------
<S>              <C>                           <C>               <C>                 <C>
James F. Slattery(1)......................     777,245           176,667             9.4
Dimension Fund Advisors, Inc (3)..........     719,087                --             7.1
Jacob May/Background America (4) .........     604,100                --             5.9
Esther Horn(1)............................     597,175                --             5.9
Aaron Speisman(1)(5)......................     418,638            26,667             4.4
Ira M. Cotler(1)..........................      18,518(2)        116,667             1.3
Michael C. Garretson(1)...................          --            90,000               *
Stuart Gerson(1)..........................       6,000            50,000               *
Bobbie L. Huskey(1).......................       1,206            30,000               *
Melvin T. Stith(1)........................          --            30,000               *
Shimmie Horn(1)...........................       9,312            16,667               *
Richard P. Staley(1)......................      11,150            28,667               *
Jennifer Anna Speisman 1992 Trust(1)......      83,438                --               *
Joshua Israel Speisman 1992 Trust(1)......      53,438                --               *
Bernard A. Wagner (1).....................          --             3,333               *

All officers and directors as a group
   (ten persons)(6).......................   1,378,945           550,333            19.0
</TABLE>
---------------------
*     LESS THAN 1%
** Consists of shares issuable upon exercise of options unless otherwise noted.

(1)     Address is c/o Correctional Services Corporation, 1819 Main Street,
        Suite 1000, Sarasota, Florida 34236.
(2)     Includes 2,612 shares of CSC common stock owned by his wife, as to which
        he disclaims beneficial ownership.
(3)     Address is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. In a
        Form 13G/A, filed February 12, 2002, Dimension Fund Advisors, Inc.
        reports sole voting power to vote or direct the vote over 719,087
        shares, however, disclaims any beneficial ownership of such shares.
(4)     Address is 1900 Church Street, Suite 400, Nashville, TN  32703.

                                       33
<PAGE>

(5)     Does not include 83,438 shares of Common Stock owned by the Jennifer
        Anna Speisman 1992 Trust and 53,438 shares of Common Stock owned by the
        Joshua Israel Speisman 1992 Trust, trusts for the benefit of Mr.
        Speisman's children, as to which Mr. Speisman disclaims beneficial
        ownership.
(6)     The ten officers and directors include: Ira M. Cotler, Michael C.
        Garretson, Stuart M. Gerson, Shimmie Horn, Bobbie L. Huskey, James F.
        Slattery, Aaron Speisman, Richard P. Staley, Bernard A. Wagner, and
        Melvin T. Stith.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

During the year 2000, the Company subleased a building located at 12-16 East
31st Street, New York, New York from LeMarquis Operating Corp. ("LMOC"), a
corporation owned 25% by Esther Horn and 8% by James F. Slattery. The Company
used the space in the building for the Manhattan and New York Community
Corrections programs. The Company has ceased its operations of these programs
and no longer subleases these buildings.

LMOC leased this building from an unaffiliated party at a total monthly rental
of approximately $33,000. As a result of the lease negotiations, under a
sublease dated as of January 1, 1994, since May 1, 1995, the Company had paid
rent of $18,000 per month above the rent paid by LMOC to the building's owner
for a total monthly rent of approximately $51,420. The Company invested $739,000
in leasehold improvements and did not receive any credit, in terms of a
reduction in rent or otherwise, for these improvements. The terms of this
sublease were not negotiated at arm's length due to the relationship of Mrs.
Horn and Mr. Slattery with both the Company and LMOC.

The negotiation of the sublease, including the renewal terms, was requested by
the Representative of the Underwriters of the Company's February 2, 1994 initial
public offering to substantially track the renewal terms of the Company's
management contract. The negotiations were not subject to the board resolution,
adopted subsequent to the negotiations, relating to affiliated transactions,
although the terms were approved by all of the directors. The initial term of
the Company's sublease expired April 30, 1995, and its first renewal term
expired April 30, 2000. The sublease contained two additional successive
five-year renewal options beginning May 1, 2000 which the Company chose not to
exercise the options and instead occupied the building as a holdover tenant
until its complete cessation of operations on December 31, 2000.

The Company had previously paid $40,000 to LMOC for the renewal options. These
renewal options were separately negotiated between the Board of Directors of the
Company and LMOC. Mr. Slattery participated in such negotiations. Mrs. Horn and
Mr. Slattery received their proportionate shares of rents received by LMOC under
the terms of this sublease.

Previously, residential and commercial tenants of this building paid rent to
LeMarquis Enterprise Corp. ("Enterprises"), a company owned 30% by Mrs. Horn,
28% by Mr. Slattery and 25% by Mr. Speisman, and Enterprises paid all expenses
of operating the residential and commercial portions of the building as well as
a portion of the overall expenses of the building. Beginning February 1994
through December 2000, all of the building's revenues, including rent from the
residential and commercial tenants were received and expenses paid by the
Company. The Company paid $203,000 and $147,000 in rent payments for the years
ended December 31, 2000 and 1999.

The Company leases the entire building located at 988 Myrtle Avenue, Brooklyn,
New York from Myrtle Avenue Family Center, Inc. ("MAFC") pursuant to a five-year
lease which commenced January 1, 1994. The lease established a monthly rental of
$40,000 and contained three five-year renewal options. The Company is currently
in its first option period, which runs from January 1, 1999 through December 31,
2003. The monthly rental payment during the first option period is $40,000. The
monthly rental for the second option period, which runs from January 1, 2004
through December 31, 2008, is $45,000, and the monthly rental for the third
option period, which runs from January 1, 2009 through December 31, 2013, is
$50,000. In addition, the Company pays taxes, insurance, repairs and maintenance
on this building. MAFC is a corporation owned by Mrs. Horn (27.5%) and Messrs.
Slattery (8%) and Speisman (27.5%). The terms of the lease were not negotiated
at arm's length due to their relationship with MAFC and the Company. Messrs.
Slattery and Speisman participated in such negotiations. The Company paid
$480,000 in rent payments for each of the years ended December 31, 2001, 2000
and 1999.

Since October 1, 1996, the Company has leased a building located at 2534 Creston
Avenue, Bronx, New York from Creston Realty Associates, L.P. ("CRA"), the
corporation owned 10% by Esther Horn, from which the Company operates its Bronx
Community Correctional Facility. The original lease term was two years
commencing October 1, 1996 and had three additional one year option periods. The
Company paid $242,000, $201,000 and $194,000 in rent payments for the years
ended December 31, 2001, 2000 and 1999, respectively. The original term of the
lease expired on September 30 2001 and the Company has occupied the premises on
a month-to-month basis since that time while the Company and CRA negotiate the
terms of an extension to the lease. The Company has reached an agreement in

                                       34
<PAGE>

principle with CRA on the terms of a 10-year extension to the lease, effective
retroactively to October 1, 2001, which would increase the annual rent payable
by the Company to $330,000, and provide for biennial increases in annual rent up
to $450,000 per year during the term of the extension. The terms of the
extension also would enable the Company to terminate the lease at the end of any
lease year at its option upon payment to the landlord of the full amount of the
next year's rent as an early termination fee. As with the original lease term,
the Company also would pay taxes, insurance, repairs and maintenance on this
building during the term of the extension. The terms of this lease were not
negotiated at arm's length due to the relationship between the Company, Mrs.
Horn and CRA. The Company expects to finalize the terms of this lease extension
on or about April 1, 2002.

In May 2000, the Company was awarded a contract from the Federal Bureau of
Prisons to operate a community corrections center, often referred to as a
halfway house, in New York, New York. Subject to approval by the Bureau of
Prisons, the Company planned to use a building purchased shortly thereafter by
James Slattery, the Company's President and Chief Executive Officer, as the
facility for the halfway house and paid for certain leasehold renovations and
other costs with respect to the building. Due to community opposition, the
Company was unable to use the building as a halfway house and requested that Mr.
Slattery pay for all leasehold renovations, and other associated costs incurred
by the Company of approximately $558,000. As of December 31, 2001, Mr. Slattery
had paid these costs in full.

Stuart M. Gerson, a director of CSC, is a member of Epstein Becker & Green,
CSC's legal counsel. Epstein Becker & Green received approximately $98,000,
$270,000 and $397,000 in legal fees from CSC for the years ended December 31,
2001, 2000 and 1999, respectively.

On November 29, 2000, Youth Services International Real Property Partnership,
L.L.C., a wholly-owned subsidiary of the Company, entered into an agreement to
sell real property located at 12012 Boyette Road, Riverview, Florida to a
two-person Florida based partnership. Aaron Speisman, a director of CSC, is a
member of that partnership. This contract was reviewed by the independent
directors of the Company and deemed to be at arm's length. The sale closed on
December 29, 2000, and the partnership agreed to pay the Company $3,940,000. A
portion of the purchase price was paid by a promissory note guaranteed by the
members of the partnership in the amount of $480,000. The promissory note was
paid in full during the year ended December 31, 2001.

Pursuant to the terms of a Board of Directors resolution adopted in connection
with the Company's initial public offering, all transactions between the Company
and any of its officers, directors or affiliates (except for wholly-owned
subsidiaries) must be approved by a majority of the unaffiliated members of the
Board of Directors and be on terms no less favorable to the Company than could
be obtained from unaffiliated third parties and be in connection with bona fide
business purposes of the Company.

In the event the Company makes a loan to an individual affiliate (other than a
short-term advance for travel, business expense, relocation or similar ordinary
operating expenditure), such loan must be approved by a majority of the
unaffiliated directors.

                                       35
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.


           (a)  The following documents are filed as part of this report:

                (1)    Financial Statements:

                       The consolidated statements of the Company are
                       included on pages F-1 through F-28 of this Form 10-K.

                (2)    The financial statement schedules prescribed by this
                       Item 14 are not required.

                (3)    Exhibits (All referenced herein to "SEC" shall mean the
                       U.S. Securities and Exchange Commission.)

           (b)  None filed

           (c)  Exhibits:

    2.1         Agreement and Plan of Merger, dated as of September 23, 1998,
                among YSI, CSC and Palm Merger Corp.(9)
    2.2         First Amendment, dated as of January 12, 1999, to the Agreement
                and Plan of Merger, dated as of September 23, 1998, among YSI,
                CSC and Palm Merger Corp.(10)
    2.3         Second Amendment, dated as of March 2, 1999, to the Agreement
                and Plan of Merger, dated as of September 23, 1998, among YSI,
                CSC and Palm Merger Corp.(12)
    3.1         Certificate of Incorporation of CSC dated October 28, 1993.(1)
    3.1.1       Copy of Certificate of Amendment of Certificate of Incorporation
                of CSC dated July 29, 1996.(3)
    3.1.2       Copy of Certificate of Correction to CSC's Certificate of
                Incorporation.(1)
    3.1.3       Copy of Certification of Correction to CSC's Certificate of
                Amendment to CSC's Certificate of Incorporation. (1)
    3.2         CSC's By-Laws.(11)
    4.1         Form of YSI's 7% Convertible Subordinated Debentures Due
                February 1, 2006.(6)
    4.2.1       Amendment to Fiscal and Paying Agency Agreement, dated March 31,
                1999, by and among YSI, The Chase Manhattan Bank, N.A., New
                York, The Chase Manhattan Bank, N.A., London and Chase Manhattan
                Bank Luxembourg S.A.(7)
    4.3         Indenture, dated October 15, 1996, by and between YSI and The
                Chase Manhattan Bank, N.A., as Trustee.
    4.3.1       Amendment to Indenture, dated March 31, 1999, by and between YSI
                and The Chase Manhattan Bank, as Trustee.(7)
  * 10.1        CSC's 1993 Stock Option Plan, as amended.(11)
  * 10.6        Employment Agreement between CSC and Aaron Speisman.(1)
  * 10.6.1      Modification to the Employment Agreement between CSC and Aaron
                Speisman, dated June 13, 1996.(3)
    10.17       Form of Lease between CSC and Myrtle Avenue Family Center,
                Inc.(1)
  * 10.25       1994 Non-Employee Director Stock Option Plan.(2)
    10.44       Lease Agreement between CSC and Creston Realty Associates, L.P.,
                dated October 1, 1996.(3)
    10.61       Sublease for Sarasota, Florida office space dated April 9, 1998
                between Lucent Technologies, Inc. and CSC and Landlord Consent
                to Sublease.(4)
    10.72       Credit Agreement, dated August 31, 1999, between CSC and Summit
                Bank, N.A.(8)
    10.72.1     First Amendment to Credit Agreement, dated November 10, 2000,
                between CSC and Summit Bank, N.A.(13)
    10.72.2     Second Amendment to Credit agreement, dated August 15, 2001,
                between CSC and Fleet National Bank, successor by merger to
                Summit Bank.(14)
    10.72.3     Third Amendment to Credit agreement, dated November 15, 2001,
                between CSC and Fleet National Bank, successor by merger to
                Summit Bank.
    10.72.4     Fourth Amendment to Credit agreement, dated November 28, 2001,
                between CSC and Fleet National Bank, successor by merger to
                Summit Bank.
    10.73       Master Agreement, dated August 31, 1999, between CSC and
                Atlantic Financial Group, Ltd., Summit Bank, N.A. and SunTrust
                Bank.(8)

                                       36
<PAGE>

    10.73.1     First Amendment to Master Agreement dated August 31, 1999,
                between CSC and Atlantic Financial Group, Ltd., Summit Bank,
                N.A. and SunTrust Bank.(13)
    10.73.2     Second Amendment to the Master Agreement, dated August 15, 2001,
                between CSC and Atlantic Financial Group, Ltd., Fleet National
                Bank, successor by merger to Summit Bank, N.A. and SunTrust
                Bank, Nashville, N.A.(14)
    10.73.3     Third Amendment to Master Agreement, dated November 15, 2001,
                between CSC and Atlantic Financial Group, Ltd., Fleet National
                Bank, successor by merger to Summit Bank, N.A. and SunTrust
                Bank, Nashville, N.A.
  * 10.74       Employment Agreement dated September 29, 1999 between CSC and
                James F. Slattery.(5)
  * 10.75       Change in Control Agreement dated September 29, 1999 between CSC
                and James F. Slattery.(5)
    21          List of Subsidiaries - See Page F-7 of This Filing
    23.1        Consent of Grant Thornton L.L.P., CSC's independent public
                accountants


    (1)         Incorporated by reference to exhibit of same number filed with
                CSC's Registration Statement on Form SB-2 (Registration No.
                33-71314-NY).
    (2)         Incorporated by reference to exhibit of same number filed with
                the initial filing of CSC's Annual Report on Form 10-KSB for the
                year ended December 31, 1995.
    (3)         Incorporated by reference to exhibit of same number filed with
                CSC's Annual Report on Form-10-KSB for the year ended December
                31, 1996.
    (4)         Incorporated by reference to exhibit of same number filed with
                CSC's Form 10-Q for the three months ended March 31, 1998.
    (5)         Incorporated by reference to exhibit of same number filed with
                CSC's Form 10-Q for the nine months ended September 30, 1999.
    (6)         Incorporated by reference to exhibit of same number filed with
                CSC's Current Report on Form 8-K filed with the SEC on April 15,
                1999.
    (7)         Incorporated by reference to exhibit of same number filed with
                CSC's Current Report on Form 8-K filed with the SEC on April 22,
                1999.
    (8)         Incorporated by reference to exhibit of same number filed with
                CSC's Current Report on Form 8-K filed with the SEC on September
                29, 1999.
    (9)         Incorporated by reference to CSC's Current Report on Form 8-K,
                filed with the SEC on September 25, 1998.
    (10)        Incorporated by reference to CSC's Current Report on Form 8-K,
                filed with the SEC on January 21, 1999
    (11)        Incorporated by reference to exhibit of same number filed with
                CSC's Registration Statement on Form S-1 (Registration Number
                333-6457).
    (12)        Incorporated by reference to exhibit of same number filed with
                CSC's, Current Report on Form 8-K, filed with the SEC on March
                3, 1999.
    (13)        Incorporated by reference to exhibit of same number filed with
                CSC's Form 8-K on November 10, 2000.
    (14)        Incorporated by reference to exhibit of same number filed with
                CSC's Form 10-Q for the six months ended June 30, 2001.

    *           Management Contract or Compensatory Plan or Arrangement.

                                       37
<PAGE>
                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
                                              CORRECTIONAL SERVICES CORPORATION
                                              Registrant

                                              By: /s/ James F. Slattery
                                                 -------------------------------
                                                  James F. Slattery, President
Dated: April 1, 2002

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

Signature                         Title                           Date
---------                         -----                           ----

/s/ James F. Slattery             President and Chief             April 1, 2002
-------------------------------   Executive Officer
James F. Slattery


/s/ Bernard A. Wagner             Senior Vice President,          April 1, 2002
-------------------------------   Chief Financial Officer
Bernard A. Wagner


/s/ Aaron Speisman                Executive Vice President        April 1, 2002
-------------------------------   and Director
Aaron Speisman


/s/ Richard Staley                Senior Vice President           April 1, 2002
-------------------------------   and Director
Richard Staley


/s/ Stuart Gerson                 Chairman of the Board           April 1, 2002
-------------------------------
Stuart Gerson


/s/ Shimmie Horn                  Director                        April 1, 2002
-------------------------------
Shimmie Horn


/s/ Bobbie L. Huskey              Director                        April 1, 2002
-------------------------------
Bobbie L. Huskey


/s/ Melvin T. Stith               Director                        April 1, 2002
-------------------------------
Melvin T. Stith


/s/ Chet Borgida                  Director                        April 1, 2002
-------------------------------
Chet Borgida
                                       38
<PAGE>

                                    CONTENTS

                                                                           PAGE

Report of Independent Certified Public Accountants                          F-2

    Consolidated Balance Sheets as of December 31, 2001 and 2000            F-3

    Consolidated Statements of Operations for the years ended
       December 31, 2001, 2000, and 1999                                    F-4

    Consolidated Statement of Stockholders' Equity for the years ended
       December 31, 2001, 2000, and 1999                                    F-5

    Consolidated Statements of Cash Flows for the years ended
       December 31, 2001, 2000, and 1999                                    F-6

    Notes to Consolidated Financial Statements                              F-7


                                       F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Correctional Services Corporation

We have audited the accompanying consolidated balance sheets of Correctional
Services Corporation and Subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Correctional Services Corporation and Subsidiaries as of December 31, 2001 and
2000, and the consolidated results of their operations and consolidated cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.


                                                       /s/  GRANT THORNTON LLP

Tampa, Florida
March 8, 2002

                                       F-2
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE><CAPTION>
ASSETS                                                                          December 31,
                                                                       ---------------------------
                                                                           2001           2000
                                                                       ------------   ------------
<S>                                                                    <C>            <C>
CURRENT ASSETS
  Cash and cash equivalents                                            $        932   $        133
  Restricted cash                                                                33             92
  Accounts receivable, net                                                   25,761         36,976
  Notes receivable                                                                -          3,730
  Deferred tax asset                                                          2,037          1,926
  Prepaid expenses and other current assets                                   1,506          2,673
                                                                       ------------   ------------
     Total current assets                                                    30,269         45,530

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET                          40,978         39,543

OTHER ASSETS
  Deferred tax asset                                                          8,625          5,431
  Goodwill, net                                                                 679          1,049
  Other                                                                       5,532          5,222
                                                                       ------------   ------------
                                                                       $     86,083   $     96,775
                                                                       ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                                     $      5,798   $      5,338
  Accrued liabilities                                                        13,854         14,682
  Restructuring and impairment reserve                                        2,462              -
  Subordinated debt                                                              10             10
  Current portion of senior debt                                             16,000          6,669
                                                                       ------------   ------------
     Total current liabilities                                               38,124         26,699

LONG-TERM SENIOR DEBT                                                           314         16,338

COMMITMENTS AND CONTINGENCIES                                                     -              -

STOCKHOLDERS' EQUITY
  Preferred stock, $.01 par value, 1,000 shares authorized,
   none issued and outstanding                                                    -              -
  Common Stock, $.01 par value, 30,000 shares authorized,
   11,373 and 10,155 shares issued and outstanding in 2001,
   respectively, and 11,373 and 10,249 shares issued and
   outstanding in 2000, respectively                                            114            114
  Additional paid-in capital                                                 82,797         82,797
  Accumulated deficit                                                       (32,275)       (26,395)
  Treasury stock, at cost                                                    (2,991)        (2,778)
                                                                       ------------   ------------
                                                                             47,645         53,738
                                                                       ------------   ------------
                                                                       $     86,083   $     96,775
                                                                       ============   ============
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       F-3
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
<TABLE><CAPTION>

                                                                  Year Ended December 31,
                                                        ------------------------------------------
                                                            2001            2000           1999
                                                        ------------   ------------   ------------
<S>                                                     <C>            <C>            <C>
Revenues                                                $    174,418   $    210,812   $    233,918
                                                        ------------   ------------   ------------
Facility expenses:
     Operating                                               160,885        185,447        205,662
     Startup costs                                               406            155          1,177
                                                        ------------   ------------   ------------
                                                             161,291        185,602        206,839
                                                        ------------   ------------   ------------
Contribution from operations                                  13,127         25,210         27,079
Other operating expenses:
     General and administrative                               13,207         13,344         13,555
     Legal settlement                                            375              -              -
     Restructuring and impairment                              4,356              -              -
     Loss contract costs                                       1,150              -              -
     Loss (gain) on disposal of assets                           938         (1,115)             -
     Merger costs and related restructuring charges                -              -         12,052
     Write-off of deferred financing costs                         -              -          1,874
                                                        ------------   ------------   ------------
                                                              20,026         12,229         27,481
                                                        ------------   ------------   ------------
Operating income (loss)                                       (6,899)        12,981           (402)

Interest expense, net                                         (2,183)        (3,483)        (3,413)
                                                        ------------   ------------   ------------
Income (loss) before income taxes and extraordinary
     gain on extinguishment of debt                           (9,082)         9,498         (3,815)
Income tax (provision) benefit                                 3,202         (3,710)          (429)
                                                        ------------   ------------   ------------
Income (loss) before extraordinary gain on
     extinguishment of debt                                   (5,880)         5,788         (4,244)
Extraordinary gain on extinguishment of debt, net of
     tax of $467                                                   -              -            716
                                                        ------------   ------------   ------------
Net income (loss)                                       $     (5,880)  $      5,788   $     (3,528)
                                                        ============   ============   ============
Basic and diluted income (loss) per share:
     Income (loss) before extraordinary gain on
          extinguishment of debt                        $      (0.58)  $       0.51   $      (0.38)
     Extraordinary gain on extinguishment of debt                  -              -           0.07
                                                        ------------   ------------   ------------
          Net income (loss) per share                   $      (0.58)  $       0.51   $      (0.31)
                                                        ============   ============   ============
Number of shares used to compute EPS:
       Basic                                                  10,181         11,366         11,219
       Diluted                                                10,181         11,367         11,219
</TABLE>

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

                                       F-4
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)
<TABLE><CAPTION>
                                                         Additional
                                            Common        Paid-in       Accumulated     Treasury
                                             Stock        Capital        (Deficit)        Stock          Total
                                         ------------   ------------   ------------   ------------   ------------
<S>                                      <C>            <C>            <C>            <C>            <C>
BALANCE AT DECEMBER 31, 1998             $        109   $     79,552   $    (28,655)  $          -   $     51,006

Exercise of stock options                           1            515              -              -            516
Exercise of warrants                                4          2,740              -              -          2,744
Net loss                                            -              -         (3,528)             -         (3,528)
                                         ------------   ------------   ------------   ------------   ------------

BALANCE AT DECEMBER 31, 1999                      114         82,807        (32,183)             -         50,738

Adjustment for overpaid warrants                    -            (10)             -              -            (10)
Stock repurchase                                    -              -              -         (2,778)        (2,778)
Net income                                          -              -          5,788              -          5,788
                                         ------------   ------------   ------------   ------------   ------------

BALANCE AT DECEMBER 31, 2000                      114         82,797        (26,395)        (2,778)        53,738

Stock repurchase                                    -              -              -           (213)          (213)
Net loss                                            -              -         (5,880)             -         (5,880)
                                         ------------   ------------   ------------   ------------   ------------
BALANCE AT DECEMBER 31, 2001             $        114   $     82,797   $    (32,275)  $     (2,991)  $     47,645
                                         ============   ============   ============   ============   ============
</TABLE>

    The accompanying notes are an integral part of this financial statement.

                                       F-5
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE><CAPTION>

                                                                                 Years Ended December 31,
                                                                       ------------------------------------------
                                                                            2001          2000           1999
                                                                       ------------------------------------------
<S>                                                                    <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss)                                                    $     (5,880)  $      5,788   $     (3,528)
  Adjustments to reconcile net income(loss) to net cash
    provided by operating activities:
      Depreciation and amortization                                           3,789          4,548          6,363
      Merger related asset write down                                             -              -          4,831
      Deferred income tax expense (benefit)                                  (3,305)         2,930            945
      Loss (gain) on disposal of fixed assets, net                              938         (1,115)           316
      Gain on extinguishment of debt                                              -              -         (1,628)
      Deferred financing costs                                                    -              -          1,874
      Restructuring and impairment                                            4,863              -              -
      Changes in operating assets and liabilities:
          Restricted cash                                                        59            100            (35)
          Accounts receivable                                                11,215         (1,208)         2,230
          Prepaid expenses and other current assets                           1,167            397          1,410
          Accounts payable and accrued liabilities                             (368)        (1,709)        (6,609)
                                                                       ------------   ------------   ------------
              Net cash provided by operating activities:                     12,478          9,731          6,169
                                                                       ------------   ------------   ------------
Cash flows from investing activities:
    Capital expenditures                                                     (8,795)        (3,656)        (4,137)
    Proceeds from the sale of property, equipment and improvements              619          4,355          1,232
    Collection of notes receivable                                            3,730              -              -
    Other assets                                                               (431)           (47)           480
                                                                       ------------   ------------   ------------
              Net cash provided by (used in) investing activities:           (4,877)           652         (2,425)
                                                                       ------------   ------------   ------------
Cash flows from financing activities:
    Proceeds (payment) on short-term and long-term borrowings, and
         capital lease obligations                                           (6,693)          (751)        11,874
    Payment of subordinated debt                                                  -        (14,180)       (17,483)
    Proceeds from exercise of stock options and warrants                          -              -          3,260
    Debt issuance costs                                                           -              -         (2,363)
    Stock repurchase                                                           (213)        (2,778)             -
    Long-term portion of prepaid lease                                          104            399            399
    Adjustment for overpaid warrants                                              -            (10)             -
                                                                       ------------   ------------   ------------
              Net cash used in financing activities:                         (6,802)       (17,320)        (4,313)
                                                                       ------------   ------------   ------------
Net increase (decrease) in cash and cash equivalents                            799         (6,937)          (569)
Cash and cash equivalents at beginning of period                                133          7,070          7,639
                                                                       ------------   ------------   ------------
Cash and cash equivalents at end of period                             $        932   $        133   $      7,070
                                                                       ============   ============   ============
Non-cash investing activities
    Property exchanged for a note receivable                           $          -   $      3,812   $          -
                                                                       ============   ============   ============
    Assets written off against restructuring reserve                   $      2,401   $          -   $          -
                                                                       ============   ============   ============
    Sale of a facility leased under the Company's operating
      lease-financing facility where proceeds were paid directly
      to the lienholder                                                $     10,650   $          -   $          -
                                                                       ============   ============   ============

Supplemental disclosures of cash flows information:
    Cash paid (refunded) during the period for:
      Interest                                                         $      1,720   $      3,846   $      3,712
                                                                       ============   ============   ============
      Income taxes                                                     $        (26)  $        872   $          8
                                                                       ============   ============   ============
</TABLE>

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

                                       F-6
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Correctional Services Corporation and its subsidiaries (the Company) are
organized to privately operate and manage detention, and correctional facilities
as well as educational, developmental and rehabilitative programs for federal,
state and local government agencies.


1.         PRINCIPLES OF CONSOLIDATION

           The consolidated financial statements as of December 31, 2001 include
           the accounts of Correctional Services Corporation and its wholly
           owned subsidiaries:

           o    Esmor, Inc.
           o    Esmor New Jersey, Inc.
           o    CSC Management de Puerto Rico, Inc.
           o    CSC UK, Ltd.
           o    YSI Holdings, Inc.
           o    YSI Real Property Partnership, LLP
           o    YSI Investment LLC
           o    YSI International Management LLC
           o    FF & E, Inc.
           o    Youth Services International, Inc.
           o    Youth Services International of Iowa, Inc.
           o    Youth Services International of Northern Iowa, Inc.
           o    Youth Services International of South Dakota, Inc.
           o    Youth Services International of Missouri, Inc.
           o    Youth Services International of Central Iowa, Inc.
           o    Youth Services International of Texas, Inc.
           o    Youth Services International of Illinois, Inc.
           o    Youth Services International of Michigan, Inc.

           All significant intercompany balances and transactions have been
           eliminated.


2.         POOLING-OF-INTERESTS BUSINESS COMBINATIONS

           On March 31, 1999, the Company exchanged 3,114,614 shares of the
           Company's common stock for all of the common stock of Youth Services
           International, Inc. (YSI). The merger was accounted for as a
           pooling-of-interests, and accordingly, the accompanying financial
           statements have been retroactively adjusted to include the financial
           position and results of operations of YSI for 1999.

                                       F-7
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

           During the first quarter of 1999, the Company recorded a charge to
           operating expenses of approximately $12.1 million for direct costs
           related to the merger and certain other costs resulting from the
           restructuring of the newly combined operations. In connection with
           the combination, the Company planned to close the YSI corporate
           offices in Maryland, withdraw from a facility in Iowa, and close
           facilities in Texas and Virginia, which were expected to result in
           the elimination of 350 positions. Direct merger costs consisted
           primarily of fees to investment bankers, attorneys, accountants,
           financial advisors and printing and other direct costs. Restructuring
           charges included severance and change in control payments made to
           certain former officers and employees of YSI; losses associated with
           the write-off of the carrying value of the software used by YSI,
           which will not be used by the Company and computer equipment that was
           incompatible with that used by the Company; and miscellaneous other
           costs which included the cancellation of lease agreements and other
           long-term commitments.

           Merger costs and related restructuring charges incurred in 1999 are
           comprised of the following (in thousands):

           Direct merger costs                                      $   4,350
           Restructuring charges:
                Employee severance and change in control payments       2,339
                Write-off of buildings and leasehold improvements       2,661
                Write-off of software and computer equipment            1,749
                Other                                                     953
                                                                    ----------
           Total                                                    $  12,052
                                                                    ==========

           The Company closed the corporate facility and withdrew from the Iowa
           facility, which resulted in the elimination of 273 positions. The
           Texas and Virginia facilities were closed in 2000 and resulted in the
           elimination of 72 positions. At December 31, 2000, all merger and
           restructuring charges had been paid as noted above, except for a
           $300,000 surplus from exit costs which was recognized as a reduction
           in 2000 operating expenses.

3.         USE OF ESTIMATES IN CONSOLIDATED FINANCIAL STATEMENTS

           In preparing consolidated financial statements in conformity with
           accounting principles generally accepted in the United States,
           management makes estimates and assumptions that affect the reported
           amounts of assets and liabilities and disclosures of contingent
           assets and liabilities at the date of the consolidated financial
           statements, as well as the reported amounts of revenues and expenses
           during the reporting period. Actual results could differ from those
           estimates.

                                       F-8
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

4.         NEW ACCOUNTING PRONOUNCEMENTS

           On July 20, 2001, the Financial Accounting Standards Board (FASB)
           issued Statement of Financial Accounting Standards (SFAS) 141,
           BUSINESS COMBINATIONS, and SFAS 142, GOODWILL AND INTANGIBLE ASSETS.
           SFAS 141 is effective for all business combinations completed after
           June 30, 2001. SFAS 142 is effective for the year beginning January
           1, 2002; however certain provisions of that Statement apply to
           goodwill and other intangible assets acquired between July 1, 2001
           and the effective date of SFAS 142. The Company will adopt these new
           standards, effective January 1, 2002. The Company analyzed net
           goodwill at the juvenile division reporting level, as of January 1,
           2002, and has determined there is no expected impairment of goodwill
           as of January 1, 2002. The Company recognized amortization expense
           related to goodwill of $370,000, $370,000 and $362,000 for the twelve
           months ended December 31, 2001, 2000, 1999, respectively.

           In July 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
           RETIREMENT OBLIGATIONS. This statement addresses financial accounting
           and reporting for obligations associated with the retirement of
           tangible long-lived assets and the associated asset retirement costs.
           This Statement applies to all entities. It applies to legal
           obligations associated with the retirement of long-lived assets that
           result from the acquisition, construction, development and (or) the
           normal operation of a long-lived asset, except for certain
           obligations of lessees. This Statement is for financial statements
           issued for fiscal years beginning after June 15, 2002. The Company
           has evaluated the impact of the adoption of this standard on its
           financial position and results of operations, and does not believe
           the effect, if any, to be significant.

           In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
           IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This statement addresses
           financial accounting and reporting for the impairment or disposal of
           long-lived assets and supersedes FASB Statement No. 121, ACCOUNTING
           FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
           BE DISPOSED OF. The provisions of the statement are effective for
           financial statements issued for fiscal years beginning after December
           15, 2001. The Company has evaluated the impact of the adoption of
           this standard on its financial position and results of operations,
           and does not believe the effect, if any, to be significant.

5.         REVENUE RECOGNITION AND CONTRACT PROVISIONS

           Revenues are principally derived pursuant to contracts with federal,
           state and local government agencies and not-for-profit entities that
           contract directly with governmental entities. These contracts
           generally provide for fixed per diem payments based upon program
           occupancy. Revenues on fixed per diem and management contracts are
           recognized as the services are performed.

           One of the Company's significant programs operates under a contract
           whereby revenues are recognized as reimbursable costs are incurred
           through a gross maximum price cost reimbursement arrangement. This
           contract has costs, including indirect costs, subject to audit and
           adjustment by negotiations with government representatives. Contract
           revenues subject to audit relating to this contract of approximately
           $15.5 million, $15.0 million, and $13.8 million have been recorded
           for the years ended December 31, 2001, 2000, and 1999, respectively,
           at amounts which are considered to be earned. Subsequent adjustments
           if any, resulting from the audit process are recorded when known or
           can be reasonably estimated.

           Contract terms with government and not-for-profit entities generally
           range from one to five years in duration and expire at various dates.
           Most of these contracts are subject to termination for convenience by
           the governmental entity.

           The Company performs periodic evaluations of the collectibility of
           its receivables and does not require collateral on its account
           receivable. Losses on uncollectible receivables are provided for in
           the financial statements based on management's expectations. Accounts
           receivable are presented net of an allowance for doubtful accounts of
           $2.9 million and $1.7 million at December 31, 2001 and 2000,
           respectively. The Company recognized a provision for doubtful
           accounts of $1.5 million, $927,000 and $0 for the years ended
           December 31, 2001, 2000 and 1999, respectively.



                                       F-9
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

6.         CASH AND CASH EQUIVALENTS

           The Company considers all highly liquid debt instruments with
           maturities of three months or less when purchased to be cash
           equivalents.

           Included in the restricted cash of $33,000 and $92,000 at December
           31, 2001 and 2000 is a major maintenance and repair reserve fund
           established by the Company as required by certain contracts.

7.         PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

           Property, equipment and leasehold improvements are carried at cost.
           Depreciation of buildings is computed using the straight-line method
           over twenty and thirty year periods. Depreciation of equipment is
           computed using the straight-line method over a five-year period.
           Leasehold improvements are being amortized over the shorter of the
           life of the asset or the applicable lease term (ranging from five to
           twenty years). For tax purposes accelerated methods of depreciation
           are utilized.

8.         GOODWILL

           Goodwill representing the excess of the cost over the net assets of
           acquired businesses is stated at cost and is amortized over 10 years
           using the straight-line method. Amortization expense for the years
           ended December 31, 2001, 2000, and 1999 was $370,000, $370,000, and
           $362,000, respectively. Accumulated amortization at December 31, 2001
           and 2000 was $3.0 million and $2.7 million, respectively. The Company
           will adopt the provisions of SFAS NO. 142 effective January 1, 2002.
           Based on the Company's evaluation of goodwill in accordance with the
           provisions of SFAS NO. 142, it does not anticipate impairment of the
           asset as of January 1, 2002.

9.         ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

           The Company reviews long-lived assets and certain identifiable
           intangibles including goodwill to be held and used or disposed of,
           for impairment whenever events or changes in circumstances indicate
           that the carrying amount of an asset may not be recoverable. The
           Company uses an estimate of the undiscounted cash flows over the
           remaining life of its long-lived assets in measuring whether the
           assets to be held and used will be realizable. An impairment loss is
           recognized to the extent that the sum of discounted estimated future
           cash flows (using the Company's incremental borrowing rate over a
           period of less than 30 years) that is expected to result from the use
           of the asset is less than the carrying value.

                                      F-10
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

10.        INCOME TAXES

           The Company utilizes an asset and liability approach for financial
           accounting and reporting for income taxes. The primary objectives of
           accounting for income taxes are to (a) recognize the amount of tax
           payable for the current year and (b) recognize the amount of deferred
           tax liability or asset based on management's assessment of the tax
           consequences of events that have been reflected in the Company's
           consolidated financial statements.

11.        EARNINGS PER SHARE

           Basic earnings per share is computed by dividing net income (loss) by
           the weighted-average number of common shares outstanding. In the
           computation of diluted earnings per share, the weighted-average
           number of common shares outstanding is adjusted, when the effect is
           not anti-dilutive, for the effect of all common stock equivalents and
           the average share price for the period is used in all cases when
           applying the treasury stock method to potentially dilutive
           outstanding options.

12.        STOCK BASED COMPENSATION

           With respect to stock options granted to employees the Company
           applies the accounting method promulgated by the Accounting
           Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
           EMPLOYEES, to measure and recognize compensation. Management has
           adopted the disclosure provision of the Financial Accounting
           Standards Board No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, for
           accounting related to stock options granted to employees.

13.        COMPREHENSIVE INCOME

           The Company's comprehensive income (loss) is equivalent to net income
           (loss) for the years ended December 31, 2001, 2000, and 1999.

14.        RECLASSIFICATIONS

           Certain reclassifications have been made to 2000 and 1999 amounts to
           conform to the 2001 presentation.

15.        TREASURY STOCK

           On October 20, 2000, the Company announced that its Board of
           Directors had authorized a share repurchase program of up to $10.0
           million. The repurchases are funded from the proceeds of asset sales
           and excess cash flow. The Company repurchased 93,000 shares and 1.1
           million shares during the years ended December 31, 2001 and 2000,
           respectively, at a cost of $213,000 and $2.8 million, respectively.

16.        LEGAL COSTS

           The Company recognizes legal costs related to the defense or
           assertion of legal claims when the related services have been
           rendered.

                                      F-11
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE B- FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

1.         CASH AND CASH EQUIVALENTS

           The carrying amount reasonably approximates fair value because of the
           short maturity of those instruments.

2.         ACCOUNTS AND NOTES RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES

           The carrying amount reasonably approximates fair value because of the
           short-term maturities of these items.

3.         SUBORDINATED PROMISSORY NOTES AND LONG-TERM DEBT

           The fair value of the Company's subordinated promissory notes and
           long-term debt is estimated based upon the quoted market prices for
           the same or similar issues or on the current rates offered to the
           Company for debt of the same remaining maturities. As of December 31,
           2001 and 2000 the estimated fair values of the subordinated
           promissory notes and long-term debt approximated their carrying
           values.


NOTE C- PREPAID EXPENSES AND OTHER CURRENT ASSETS

           Prepaid expenses and other current assets consist of the following
           (in thousands):
                                                           December 31,
                                                    -------------------------
                                                        2001         2000
                                                    ------------ ------------

           Prepaid insurance                        $       211  $       235
           Prepaid real estate taxes                         68          168
           Prepaid and refundable income taxes               29          281
           Prepaid rent - current portion                   333          488
           Prepaid expenses                                 841        1,149
           Other current assets                              24          352
                                                    ------------ ------------
                                                    $     1,506  $     2,673
                                                    ============ ============

                                      F-12
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE D- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements, at cost, consist of the
following (in thousands):
                                                           December 31,
                                                    -------------------------
                                                        2001         2000
                                                    ------------ ------------

           Buildings and land                       $    38,018  $    32,055
           Equipment                                     10,109       11,572
           Leasehold improvements                         9,803       11,449
                                                    ------------ ------------
                                                         57,930       55,076

           Less accumulated depreciation                (16,952)     (15,533)
                                                    ------------ ------------
                                                    $    40,978  $    39,543
                                                    ============ ============

Depreciation expense for the years ended December 31, 2001, 2000, and 1999 was
approximately $3.4 million, $4.1 million, and $4.9 million, respectively.


NOTE E- OTHER ASSETS

Other assets consist of the following (in thousands):

                                                           December 31,
                                                    -------------------------
                                                        2001         2000
                                                    ------------ ------------

           Deferred refinancing costs, net          $       700  $     1,038
           Deposits                                         759          731
           Prepaid rent - net of current portion          3,058        3,162
           Other                                          1,015          291
                                                    ------------ ------------
                                                    $     5,532  $     5,222
                                                    ============ ============

NOTE F- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

                                                           December 31,
                                                    -------------------------
                                                        2001         2000
                                                    ------------ ------------
           Accrued expenses                         $     5,965  $     6,194
           Accrued interest                                 204           16
           Accrued medical claims and premiums            1,768        1,522
           Accrued worker's compensation claims
             and premiums                                 1,194        1,486
           Payroll and related taxes                      3,965        4,495
           Unearned revenue                                  56           70
           Other                                            702          899
                                                    ------------ ------------
                                                    $    13,854  $    14,682
                                                    ============ ============

Included in accounts payable is approximately $2.6 million of outstanding checks
in excess of cash balances for the years ended December 31, 2001 and 2000.

                                      F-13
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE G- RESTRUCTURING AND IMPAIRMENT RESERVE

During the third quarter of 2001, the Company recorded charges of $7.9 million
related to corporate restructuring and asset impairments, losses on contracts of
facilities to be closed, and other charges included in general and
administrative expenses. In connection with the restructuring, the Company
planned to close various facilities expected to result in the elimination of 358
positions. In the aggregate, these facilities had revenues and contributions
from operations of $13.0 million and $(3.0) million, respectively. The related
charges are as follows (in thousands):


           Severance pay                            $     205
           Provision for early termination of
             a lease                                      270
           Impairment of assets                         3,881
           Loss on contracts of facilities to
             be closed                                  1,150
           Other charges included in general and
             administrative expenses                    2,373
                                                    ---------
                                                    $   7,879
                                                    =========

Severance pay relates primarily to the restructuring of the Company's corporate
offices, which resulted in the elimination of 19 positions. Provision for the
early termination of a lease represents the Company's estimate of their
liability upon termination of a lease, which expires in 2006. Charges for
impairment of assets include a $1.3 million charge related to the write-down of
assets at the facilities to be closed, and a $2.6 million charge for properties
where the Company has decided to discontinue the pursuit of future usage, and is
based on fair market value estimates of the properties less costs to sell. Based
on management's analysis of its contract obligations, the Company has recorded
costs of approximately $1.1 million for contracts that will require the Company
incur losses to fulfill the contracts. These facilities are included in those
scheduled for closure. Other charges included in general and administrative
expenses include $1.3 million of additional allowance primarily for receivables
which have been in dispute over a number of years, including a receivable from a
non-profit entity, and $1.1 million related to reserves established for legal
obligations and management's estimate of the results of agency audits.

The remaining reserve associated with the 2001 restructuring and impairment
charges consists of the following on December 31, 2001 (in thousands):

           Contract loss reserves                   $       439
           Impaired property reserves                     1,653
           Other                                            370
                                                    -----------
                                                    $     2,462
                                                    ===========

The remaining impaired property reserve balance relates to anticipated losses on
expected sales of properties that are currently held in the operating
lease-financing facility.

                                      F-14
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H - DEBT

SENIOR DEBT:

Senior debt consists of the following (in thousands):
<TABLE><CAPTION>
                                                                                                December 31,
                                                                                        ---------------------------
                                                                                            2001           2000
                                                                                        ---------------------------
<S>                                                                                     <C>            <C>
       Revolving line of credit expiring August 2002.  As of December 31, 2001,
       interest is payable at LIBOR plus 3.50% and prime plus 2.00%.  The
       weighted-average interest rate at December 31, 2001 was 6.26%.                   $    16,000    $    10,000

       Delayed drawdown term note, principal payments of $1.67 million due quarterly
       began June 30, 2000.  Paid in full in June 2001.                                           -         12,694

       Mortgage payable due in semi-annual installments of $17,083, which
       includes principal plus interest at 10% per annum, due in full October
       2006,
       collateralized by land with a book value of $434,000.                                    314            313
                                                                                        ------------   ------------
                                                                                             16,314         23,007
       Less current portion                                                                 (16,000)        (6,669)
                                                                                        ------------   ------------
                                                                                        $       314    $    16,338
                                                                                        ============   ============
</TABLE>
In November 2000, the Company amended its financing arrangement ("Agreement")
with Fleet National Bank, N.A. ("Fleet"), formerly Summit Bank, N.A. The
amendment to the Agreement allowed the Company the option of utilizing a
percentage of both: (i) excess cash flow (as defined by the Agreement) and (ii)
the proceeds from the sale of certain assets, to repurchase Company stock in
furtherance of the Company's stock repurchase plan (see Treasury Stock below).
Borrowings under the line are subject to compliance with various financial
covenants and borrowing base criteria (which were also amended). The Agreement
was further amended for the quarters ended June 30, 2001, September 30, 2001 and
December 31, 2001, as the Company realized that it would not comply with the
unamended covenants. Accordingly, the Company is in compliance with all such
amended loan covenants as of December 31, 2001. The Agreement restricts the
payment of dividends.

The financing arrangement is secured by all of the assets of the Company and
consists of the following components:

o     $21 million (as amended) revolving line of credit to be used by the
      Company and its subsidiaries for working capital and general corporate
      purposes and to finance the acquisition of facilities, properties and
      other businesses. At December 31, 2001 the Company had $16.0 million
      outstanding under the revolving line of credit and $2.5 million of
      availability.

o     $20 million delayed drawdown credit facility which provided the Company
      with additional financing to be used to fund the redemption of the
      outstanding 7% Convertible Subordinated Debentures. This facility was paid
      in full during June 2001 and is no longer available to the Company.

o     $14 million (as amended) in financing which may be used to purchase land
      and property and to finance the construction of new facilities through an
      operating lease arrangement. As of December 31, 2001, the Company had
      approximately $14.0 million outstanding under this operating
      lease-financing facility. Pursuant to the June 30, 2001 amendment, there
      is no additional funding available under this component of the financing
      arrangement. The related obligations and assets are not included in the
      financial statements of the Company, as this financing facility is treated
      as an operating lease in accordance with SFAS NO. 13, ACCOUNTING FOR
      LEASES.

                                      F-15
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H - DEBT (CONTINUED)

The $21 million revolving line of credit and the $14 million operating
lease-financing facility, as amended, mature on August 31, 2002. Although the
Company is in discussions with its lender to extend the maturity date or,
otherwise, to seek alternative sources of long-term financing, there can be no
assurances that the Company will be successful. Accordingly the entire
outstanding balance on the revolving line of credit of $16.0 million, is
classified as short-term. Additionally, the Company will be obligated to pay
approximately $14.0 million upon the termination of the operating
lease-financing facility.

SUBORDINATED DEBENTURES:

Subordinated debentures consists of the following (in thousands):

                                                              December 31,
                                                       ------------ ------------
                                                           2001         2000
                                                       ------------ ------------
           7% Convertible Subordinated Debentures due
           March 31, 2000 which includes interest
           payable semi-annually in arrears.           $        10  $       10

           Less current portion                                (10)         (10)
                                                       ------------ ------------
                                                       $         -  $         -
                                                       ============ ============

As of December 31, 2001, $10,000 remains outstanding pending receipt of the
original Debentures from the Debenture holders.

At December 31, 2001 aggregate maturities of senior debt and subordinated
debentures were as follows (in thousands):

                      Year ending December 31,
                      -------------------------
                      2002                          $    16,013
                      2003                                    3
                      2004                                    3
                      2005                                    4
                      2006                                    4
                      Thereafter                            297
                                                    ------------
                      Total                         $    16,324
                                                    ============

                                      F-16
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE I - RENTAL AGREEMENTS

The Company has operating leases for certain of its facilities and certain
machinery and equipment which expire at various dates. Substantially all the
facility leases provide for payment by the Company of all property taxes and
insurance.

Future minimum rental commitments under both cancelable and non-cancelable
leases as of December 31, 2001 are as follows (in thousands):

                                                     Related
           Year ending December 31,       Total    Companies
           ------------------------ ------------ ------------
                   2002             $    17,607  $       480
                   2003                   2,639          480
                   2004                   1,845            -
                   2005                   1,085            -
                   2006                     823            -
                   Thereafter             7,584            -
                                    ------------ ------------
                                    $    31,583  $       960
                                    ============ ============

The amounts due in 2002 include payments due under the operating lease-financing
facility as discussed in Note H.

The Company leases a facility from a related party. The lease commenced January
1, 1999 and expires December 31, 2003. Thereafter, the Company has two
successive five-year options to renew. In addition to the base rent, the Company
pays taxes, insurance, repairs and maintenance on this facility. The Company
paid $480,000 in rent payments for each of the years ended December 31, 2001,
2000 and 1999.

The Company leases a second facility from a related party. The lease commenced
October 1, 1996 and expired September 30, 2001. The Company is in negotiations
with the landlord to extend the lease, and has been on a month to month basis
since the lease expired. In addition to the base rent, the Company pays taxes,
insurance, repairs and maintenance on this facility. The Company paid $242,000,
$201,000 and $194,000 in rent payments for the years ended December 31, 2001,
2000 and 1999, respectively.

The Company leased a third building from a related party. The Company ceased
operation of the facility in December 2000. The Company had been operating on a
month to month basis since April 2000. The Company paid $203,000 and $147,000 in
rent payments for the years ended December 31, 2000 and 1999.

Rental expense of operating leases and machinery and equipment for the years
ended December 31, 2001, 2000, and 1999 aggregated $6.2 million, $6.8 million,
and $6.2 million, respectively.

                                      F-17
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J - INCOME TAXES

The income tax expense (benefit) consists of the following (in thousands):

                                             Years Ended December 31,
                                        ----------------------------------
                                           2001        2000        1999
                                        ----------  ----------  ----------
           Current:
             Federal                    $       -   $     114   $    (335)
             State and local                  103         666         286

           Deferred:
             Federal, state and local      (3,305)      2,930         945
                                        ----------  ----------  ----------
                                        $  (3,202)  $   3,710   $     896
                                        ==========  ==========  ==========

The following is a reconciliation of the federal income tax rate and the
effective tax rate as a percentage of pre-tax income (loss):
<TABLE><CAPTION>
                                                         Years Ended December 31,
                                                    ----------------------------------
                                                       2001        2000        1999
                                                    ----------  ----------  ----------
           <S>                                      <C>         <C>         <C>
           Statutory federal rate                         34.0%       34.0%       34.0%
           State taxes, net of federal tax benefit         4.7         6.5         5.1
           Non-deductible items                           (1.8)       (0.4)      (37.3)
           Valuation allowance and reconciliation         (2.1)       (3.4)      (35.0)
           Other                                           0.5         2.4        (0.8)
                                                    ----------  ----------  ----------
                                                          35.3%       39.1%    (34.0)%
                                                    ==========  ==========  ==========
</TABLE>
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $13.6 million, $32.8 million and $2.6 million for federal, state,
and foreign income tax purposes, respectively, that expire in periods beginning
in 2006 through 2021. At December 31, 2001, the Company also had an Alternative
Minimum Tax (AMT) credit of approximately $562,000, which does not expire.

A portion of the net operating loss carryforwards are subject to IRS Section 382
limitations and other limitations, which limit the utilization of the federal
and state net operating loss carryforwards in any given year. Realization of the
portion of the deferred tax asset resulting from the Company's net operating
loss carryforward in certain states and Puerto Rico is not considered more
likely than not. Accordingly, a valuation allowance has been established for the
full amount of those deferred tax assets. The Company, after considering its
pattern of profitability and its anticipated future taxable income, believes it
is more likely than not that the remaining deferred tax assets will be realized.

                                      F-18
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE J - INCOME TAXES - (CONTINUED)

Deferred income taxes reflect the tax effected impact of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. The components of the
Company's deferred tax assets (liabilities) are summarized as follows (in
thousands):

                                                          December 31,
                                                    ----------------------
                                                       2001        2000
                                                    ----------  ----------
           Restructuring and impairment             $    1,136  $        -
           Vacation accrual                                214         284
           Startup and development costs                   614       1,112
           Accrued expenses                              1,306       1,517
           Depreciation                                    672         498
           Net operating loss carryforwards              6,994       5,594
           Alternative minimum tax credit                  562         562
           Other                                         2,450         888
                                                    ----------  ----------
                                                        13,948      10,455
           Valuation allowance                          (3,286)     (3,098)
                                                    ----------  ----------
                                                        10,662       7,357
           Less: current portion                        (2,037)     (1,926)
                                                    ----------  ----------
                                                    $    8,625  $    5,431
                                                    ==========  ==========

NOTE K - COMMON STOCK WARRANTS

The Company issued to individuals and sold to certain underwriters' warrants
associated with the 1994 public offering and the 1995 Private Placement. The
following represents all warrant activity for the years presented:

                                          Public    Underwriter    Total
                                        ----------------------------------
      BALANCE AT DECEMBER 31, 1999
                                                 -      27,643      27,643
      Warrants expired                           -      27,643      27,643
                                        ----------  ----------  ----------
      BALANCE AT DECEMBER 31, 2000               -           -           -
                                        ==========  ==========  ==========

                                      F-19
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE L - COMMITMENTS AND CONTINGENCIES

1.         NEW JERSEY FACILITY CLOSURE

           Due to a disturbance at the Company's Elizabeth, New Jersey facility
           on June 18, 1995, the facility was closed and the INS moved all
           detainees located therein to other facilities. On December 15, 1995,
           the company and a publicly-traded company (the "Buyer"), which also
           operates and manages detention and correctional facilities, entered
           into an asset purchase agreement pursuant to which the Buyer
           purchased the equipment, inventory and supplies, contract rights and
           records, leasehold and land improvements of the Company's New Jersey
           facility for $6.2 million. The purchase price was payable in
           non-interest bearing monthly installments of $123,000 effective
           January 1997, the month the Buyer commenced operations of the
           facility. The Company has no continuing obligation with respect to
           the Elizabeth, New Jersey facility. According to the terms of the
           asset purchase agreement, the monthly payments beginning September
           1999 are contingent upon the renewal of the contract by the INS and
           the Buyer. The INS did re-award the contract to the Buyer in 1999.
           The Company received monthly non-interest bearing payments of
           $123,000, beginning September 1999 through March 2001, and recognized
           income ratably over this period.

2.         LEGAL MATTERS

           In March 1996, several former detainees in the INS Detention Center
           that the Company formerly operated in Elizabeth, New Jersey filed
           suit in the Supreme Court of the State of New York, County of Bronx
           on behalf of themselves and others similarly situated, alleging
           personal injuries and property damage purportedly caused by the
           negligent and intentional acts of CSC, in which the plaintiffs in the
           suit claimed $500,000,000 each in compensatory and punitive damages.
           This suit was removed to the United States District Court, Southern
           District of New York, in April 1996. In July 1996, seven detainees in
           the INS Detention Center that the Company formerly operated in
           Elizabeth, New Jersey and certain of their spouses filed suit in the
           Superior Court of New Jersey, County of Union, seeking $10,000,000
           each in damages arising from alleged mistreatment of the detainees.
           This suit was removed to the United States District Court, District
           of New Jersey, in August 1996. In July 1997, another group of former
           detainees in the INS Detention Center that the Company formerly
           operated in Elizabeth, New Jersey filed suit in the United States
           District Court for the District of New Jersey. The suit claims
           violations of civil rights, personal injury and property damage
           allegedly caused by the negligent and intentional acts of CSC. No
           monetary damages have been stated. Through stipulation, the parties
           have agreed to try these actions in the United States District Court
           for the District of New Jersey in order to streamline the discovery
           process, minimize costs and avoid inconsistent rulings. These matters
           are currently in the discovery stages of the proceeding. Although the
           Company believes that it has meritorious defenses to the claims made
           in these actions, and is vigorously pursuing its defense of these
           claims, the aggregate amount of the damages claimed by the plaintiffs
           in these cases substantially exceeds the amount of insurance coverage
           available to the Company. Therefore, given the inherent uncertainties
           associated with litigation, no assurance can be given that the
           outcome of this litigation will not have a materially adverse effect
           on the Company.

           In May 2001, the plaintiffs, the estate and parents of Bryan
           Alexander, a former inmate at the Tarrant County Correctional
           Facility in Mansfield, Texas (which formerly was operated by the
           Company), brought a wrongful death action, in which it has been
           alleged that the Company's negligent and intentional acts, as well as
           the negligent and intentional acts of the other named defendants,
           proximately caused the death of Bryan Alexander on January 9, 2001.
           Plaintiffs' original Complaint sought $300,000,000 in compensatory
           damages and unspecified punitive damages. Plaintiffs subsequently
           amended their Complaint to delete their demand for $300,000,000 in
           compensatory damages in lieu of a pleading that seeks unspecified
           compensatory and punitive damages in amounts to be proved at trial.
           This case is currently in the discovery stages of the proceeding. The
           Company believes that it has meritorious defenses to the claims made
           by the plaintiffs in this case and is vigorously pursuing its
           defense; however, the amount of the damages originally claimed by the
           plaintiffs in this case substantially exceeds the amount of insurance
           coverage available to the Company. Therefore, given the inherent
           uncertainties associated with litigation, no assurance can be given
           that the outcome of this litigation will not have a materially
           adverse effect on the Company.

           Plaintiffs, each a former employee of the McKinley County Jail in
           Gallup, New Mexico, allege various causes of action against the
           Company relating to their employment with the Company and subsequent
           termination from employment with the Company. Plaintiffs originally
           sought an unspecified amount of compensatory and punitive damages
           from the Company, but, in December 2001, presented demands to the
           Company in the aggregate amount of approximately $9,000,000. The
           Company believes that it has meritorious defenses to the claims made
           by the plaintiffs in this case and is vigorously pursuing its
           defense; however, the amount of the damages originally claimed by the
           plaintiffs in this case substantially exceeds the amount of insurance
           coverage available to the Company. Therefore, given the inherent
           uncertainties associated with litigation, no assurance can be given
           that the outcome of this litigation will not have a materially
           adverse effect on the Company.


                                      F-20
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE L - COMMITMENTS AND CONTINGENCIES (CONTINUED)

3.         CONTRACTS

           Renewal of government contracts is subject to, among other things,
           appropriations of funds by the various levels of government involved
           (federal, state or local). Also, several contracts contain provisions
           whereby the Company may be subject to audit by the government
           agencies involved. These contracts also generally contain
           "termination for the convenience of the government" and "stop work
           order" clauses which generally allow the government to terminate a
           contract without cause. In the event one of the Company's larger
           contracts is terminated, it may have a material adverse effect on the
           Company's operations.

4.         DISPUTED RECEIVABLE

           In April 1999, immediately following the merger with YSI, a
           non-profit entity for whom YSI provided management services elected
           to discontinue all contracted services pursuant to a change in
           control clause of its management agreement with YSI. Upon this
           determination, YSI presented a final bill for management services
           rendered, which the non-profit entity disputed, claiming, among other
           things, that it had been billed incorrectly over the course of the
           management contract. The Company has investigated these claims and in
           order to avoid litigation, the Company has reached an agreement to
           accept $600,000 to settle the outstanding receivables. The Company
           has reserved approximately $2.2 million against the receivable due
           from this non-profit entity at December 31, 2001.

5.         OFFICERS' COMPENSATION

           The Company has an employment agreement with its President, which
           expires September 29, 2002 and is subject to automatic annual
           renewals. The contract provides for minimum annual compensation of
           $270,000, cost of living increases, use of an automobile,
           reimbursement of business expenses, health insurance, related
           benefits and a bonus equal to 5% of pre-tax profits in excess of $1.0
           million, such bonus not to exceed $200,000.

6.         CONCENTRATIONS OF CREDIT RISK

           The Company's contracts in 2001, 2000, and 1999 with government
           agencies where revenues exceeded 10% of the Company's total
           consolidated revenues were as follows:
<TABLE><CAPTION>
                                                                      Years Ended December 31,
                                                                ----------------------------------
                                                                   2001        2000        1999
                                                                ----------  ----------  ----------
          <S>                                                      <C>         <C>         <C>
           Florida Department of Juvenile Justice                   11%         10%         13%
           Texas Department of Criminal Justice                     13%         13%         10%
           Various Other Agencies in the State of Texas             15%         13%         11%
           State of Maryland Department of Juvenile Justice         13%         11%         10%
</TABLE>

7.         FIDUCIARY FUNDS

           The Company has acted as a fiduciary disbursing agent on behalf of a
           governmental entity. Funds received from the governmental entity have
           been paid to the general contractor, which constructed the government
           owned facilities. The Company has no legal rights to the funds or
           the constructed facility, and accordingly, such funds do not appear
           in the accompanying financial statements.

                                      F-21
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE L - COMMITMENTS AND CONTINGENCIES (CONTINUED)

8.         CONSTRUCTION COMMITMENTS

           The Company has no construction contracts related to ongoing projects
as of December 31, 2001.

9.         LETTER OF CREDIT

           In connection with the Company's workmen's compensation insurance
           coverage, the insurance carrier required the Company to obtain a
           $269,000 letter of credit from its bank in favor of the insurance
           carrier. This letter of credit was released in the first quarter of
           2001. In February 2001 the Company engaged a new insurance carrier.
           This carrier required a step-up letter of credit of $1.4 million. In
           February 2002, the Company engaged the prior insurance carrier for
           current services. This carrier requires a step-up letter of credit of
           $1.3 million.

           In November 2001, the Company obtained a $250,000 letter of credit in
           favor of a County with whom the Company has an operating agreement to
           manage their facility. The Company previously leased the facility
           through its operating lease-financing facility, which the County
           purchased through the issuance of revenue bonds in August 2001.


NOTE M - CONTRACT WITH THE STATE OF LOUISIANA

In December 1998, the Company entered into a contract with the State of
Louisiana ("the State") to operate the Tallulah Correctional Center for Youth.
The express terms of this contract obligated the State to maintain the facility
at a full population of 686; however, in light of the conditions at the facility
inherited by the Company and the State's desire to maintain the population of
the facility at less than 686 juveniles on an interim basis, the Company reached
an agreement with the State under which the Company would invoice the State only
for the actual monthly population for a period of six-months from the
commencement of operations by the Company. The Company's agreement was made in
consideration of the State's commitment to honor the terms of the contract and
increase the population to the full capacity or pay for its full utilization,
regardless of the actual population level, at the end of the six month period.
As contemplated by the foregoing agreement, commencing in July 1999, the Company
began billing the State at the 686 population level of the original contract.
These invoices were disputed by the State and the Company received payment only
for the actual number of juveniles housed in the facility. During this period,
in order to be conservative, the Company recognized revenues for a population
level of 620 (the population level the facility was approved to house by the
local judicial authority prior to commencement of operations by the Company)
despite its belief that it was entitled to payment assuming full utilization of
the facility regardless of the court order. In September 1999, the State
unexpectedly indicated it could not commit to achieve the population levels
required by the contract or to pay for the full utilization of the facility as
provided for in the contract during the remaining term of the contract, and
subsequently, the Company discontinued operations of the facility on September
24, 1999. The Company is currently pursuing payment of all funds that would be
owed under the original contract from the commencement of operation as well as
damages for breach of the contract by the State. The Company did not incur any
material losses in conjunction with this closure.

                                      F-22
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE N - EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted income(loss)
per share in accordance with SFAS No. 128:
<TABLE><CAPTION>
                                                         Years Ended December 31,
                                                    ----------------------------------
                                                       2001        2000        1999
                                                    ----------  ----------  ----------
<S>                                                 <C>         <C>         <C>
Numerator:
   Net income (loss)                                $   (5,880) $    5,788  $   (3,528)
                                                    ==========  ==========  ==========
Denominator:
   Basic income (loss) per share:
   Weighted average shares outstanding                  10,181      11,366      11,219

   Effect of dilutive securities - stock options
      and warrants                                           -           1           -
                                                    ----------  ----------  ----------
   Denominator for diluted income loss per share        10,181      11,367      11,219
                                                    ==========  ==========  ==========

   Net income (loss) per common share - basic       $    (0.58) $     0.51  $    (0.31)
                                                    ==========  ==========  ==========
   Net income (loss) per common share - diluted     $    (0.58) $     0.51  $    (0.31)
                                                    ==========  ==========  ==========
</TABLE>

The effect of dilutive securities was not included in the calculation of diluted
net loss per common share in 2001 and 1999, as the effect would have been
anti-dilutive.

NOTE O - STOCK OPTIONS

In October 1993, the Company adopted a stock option plan (the "Stock Option
Plan"). This plan as amended, provides for the granting of both: (i) incentive
stock options to employees and/or officers of the Company and (ii) non-qualified
options to consultants, directors, employees or officers of the Company. The
total number of shares that may be sold pursuant to options granted under the
stock option plan is 1.5 million. The Company, in June 1994, adopted a
Non-employee Directors Stock Option Plan, which provides for the grant of
non-qualified options to purchase up to 150,000 shares of the Company's Common
Stock. In May 1999, the Company adopted the 1999 Non-Employee Director Stock
Option Plan, which provides for the grant of non-qualified options to purchase
up to 300,000 shares of the Company's Common Stock.

Options granted under all plans may not be granted at a price less than the fair
market value of the Common Stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). Options granted under all plans will expire not more than ten years
from the date of grant.

                                      F-23
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE O - STOCK OPTIONS (CONTINUED)

The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB No. 25 and related interpretations in accounting for its plans and
does not recognize compensation expense for its employee and director stock
based compensation plans other than for restricted stock. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology prescribed by
SFAS No. 123, the Company's net income (loss) per share would be adjusted to the
pro forma amounts indicated below:

                                              Years Ended December 31,
                                        ----------------------------------
                                           2001        2000        1999
                                        ----------  ----------  ----------
Net income(loss)
  As reported                           $   (5,880) $    5,788  $   (3,528)
  Pro forma (unaudited)                     (6,444)      4,845      (4,454)

Income(loss) per common share - basic
  As reported                           $    (0.58) $     0.51  $    (0.31)
  Pro forma (unaudited)                      (0.63)       0.43       (0.40)

Income(loss) per common share - diluted
   As reported                          $    (0.58) $     0.51  $    (0.31)
   Pro forma (unaudited)                     (0.63)       0.43       (0.40)

The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended December 31, 2001, 2000, and 1999.

                                              Years Ended December 31,
                                        ----------------------------------
                                           2001        2000        1999
                                        ----------  ----------  ----------
           Volatility                           75%         75%         62%
           Risk free rate                     5.00%       5.50%       5.00%
           Expected life                   3 years     3 years     3 years

The weighted average fair value of options granted during 2001, 2000, and 1999
for which the exercise price equals the market price on the grant date was
$1.16, $2.16, and $3.51, respectively.

                                      F-24
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE O - STOCK OPTIONS - (CONTINUED)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially effect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.

Stock option activity during 2001, 2000, and 1999 is summarized below:

                                                    Weighted-Average
                                         Options     Exercise Price
                                        ----------  ----------------
           Balance, December 31, 1998    1,091,178     $ 16.58
              Granted                      319,001        7.72
              Exercised                   (108,501)       4.67
              Canceled                    (369,553)      28.24
                                        ----------
           Balance, December 31, 1999      932,125       10.34
              Granted                       59,000        4.11
              Exercised                          -          -
              Canceled                     (83,875)      13.67
                                        ----------
           Balance, December 31, 2000      907,250        9.66
              Granted                       75,000        2.23
              Exercised                          -          -
              Canceled                    (144,000)      11.21
                                        ----------
           Balance, December 31, 2001      838,250        8.73
                                        ==========


                                      F-25
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTE O - STOCK OPTIONS (CONTINUED)

The following table summarizes information concerning currently outstanding and
exercisable stock options at December 31, 2001:

                                          Weighted-Average
                                                 Remaining
        Range of           Number         Contractual Life    Weighted-Average
        Exercise Prices    Outstanding             (Years)      Exercise Price
        ----------------   ------------   -----------------   -----------------
        $ 1.90 -   4.12         84,500                 6.3              $ 2.41
          4.12 -   6.18         24,000                 8.1                4.28
          6.18 -   8.25        270,000                 7.3                7.50
          8.25 -  10.31        217,500                 3.9                8.92
         10.31 -  12.37         69,000                 1.3               11.58
         12.37 -  14.44        173,250                 1.2               12.98
                           ------------
                               838,250                 4.3                8.73
                           ============

        Range of           Number         Weighted-Average
        Exercise Prices    Exercisable     Exercise Price
        ----------------   ------------   -----------------
        $ 1.90 -   4.12          3,167              $ 3.88
          4.12 -   6.18          8,333                4.30
          6.18 -   8.25        180,000                7.50
          8.25 -  10.31        217,500                8.92
         10.31 -  12.37         60,667               11.65
         12.37 -  14.44        173,250               12.98
                           ------------
                               642,917                9.79
                           ============

NOTE P - EMPLOYEE BENEFIT

On July 1, 1996, the Company adopted a contributory retirement plan under
Section 401(k) of the Internal Revenue Code, for the benefit of all employees
meeting certain minimum service requirements. Eligible employees can contribute
up to 15% of their salary but not in excess of $10,500 in 2001 and 2000 and
$10,000 in 1999. For the years ended 2001, 2000 and 1999, the Company had two
separate plans, both established prior to the merger in 1999, for CSC and YSI
employees. The Company's contribution under the plan amounts to 20% of the
employees' contributions for the CSC plan. The Company contributed $119,000,
$154,000, and $322,000 in 2001, 2000, and 1999 respectively, to the plan. No
Company contributions were made to the YSI plan for the respective years.
Beginning January 1, 2002, the Company has merged the plans into a single plan
for employees.

                                      F-26
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE Q - SELF INSURANCE

The Company has obtained an aggregate excess workers' compensation policy, which
limits the Company's exposure to a maximum of $3.5 million and $2.5 million as
of December 31, 2001 and 2000, respectively. The estimated insurance liability
totaling $1.1 million and $1.4 million on December 31, 2001 and 2000,
respectively, is based upon review by the Company of claims filed through
December 31, 2001, and represents the Company's estimated exposure on these
claims.

The Company maintains a group health plan subject to a loss limit of $150,000
per individual. At December 31, 2001 the plan had approximately 2,300
participants and a medical insurance liability of $1.8 million. This liability
approximates, on average, two months of claims paid during the year ended
December 31, 2001 and represents the Company's estimated liability as of
December 31, 2001.

NOTE R - RELATED PARTY TRANSACTIONS

In addition to related party transactions disclosed elsewhere, the Company had a
note receivable as of December 31, 2000, from a limited partnership in the
amount of $480,000 related to the sale of the Tampa Bay Academy. The note was
guaranteed by a member of the Board of Directors. Interest was payable quarterly
beginning April 1, 2001 at the Company's quarterly weighted average interest
rate and the note was paid in full during 2001. Cash of approximately $3.3
million was received and a loss of approximately $1.0 million was recorded upon
the sale of the Tampa Bay Academy in December 2000.


                                      F-27
<PAGE>
               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE R - RELATED PARTY TRANSACTIONS (CONTINUED)

In May 2000, the Company was awarded a contract from the Federal Bureau of
Prisons to operate a community corrections center, often referred to as a
halfway house, in New York, New York. Subject to approval by the Bureau of
Prisons, the Company planned to use a building purchased shortly thereafter by
the Company's President and Chief Executive Officer, as the facility for the
halfway house and paid for certain leasehold renovations and other costs with
respect to the building. Due to community opposition, the Company was unable to
use the building as a halfway house and requested that the President/CEO pay for
all leasehold renovations, and other associated costs incurred by the Company of
approximately $558,000. As of December 31, 2001, the President/CEO had paid
these costs in full.

A director of CSC, is a member of a law firm which provides legal services as
the Company's legal counsel. Payments to this firm amounted to approximately
$98,000, $270,000 and $397,000 in legal fees from the Company for the years
ended December 31, 2001, 2000 and 1999, respectively.

NOTE S - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2000 and 2001 (in thousands).
<TABLE><CAPTION>
                                 FIRST QUARTER            SECOND QUARTER             THIRD QUARTER             FOURTH QUARTER
                            -----------------------   -----------------------   -----------------------   -----------------------
                                2000        2001          2000        2001          2000        2001          2000        2001
                            ----------- -----------   ----------- -----------   ----------- -----------   ----------- -----------
<S>                          <C>         <C>           <C>         <C>           <C>         <C>           <C>         <C>
Revenues                     $ 53,709    $ 45,090      $ 52,357    $ 44,394      $ 52,209    $ 42,344      $ 52,537    $ 42,590
Operating Expenses             49,766      45,377        49,273      44,506        48,765      50,468        50,027      40,966
                            ----------- -----------   ----------- -----------   ----------- -----------   ----------- -----------
Operating income (loss)         3,943        (287)        3,084        (112)        3,444      (8,124)        2,510       1,624
Other income (expense)
including income taxes         (2,143)       (280)       (1,747)       (309)       (1,870)      2,825        (1,433)     (1,217)
                            ----------- -----------   ----------- -----------   ----------- -----------   ----------- -----------
Net income (loss)            $  1,800    $   (567)     $  1,337    $   (421)     $  1,574    $ (5,299)     $  1,077    $    407
                            =========== ===========   =========== ===========   =========== ===========   =========== ===========
Basic and diluted earnings
(loss) per share:

Net income (loss)            $   0.16    $  (0.06)     $   0.12    $  (0.04)     $   0.14    $  (0.52)     $   0.10    $   0.04
                            =========== ===========   =========== ===========   =========== ===========   =========== ===========
</TABLE>

                                      F-28