<PAGE>

                                 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, 2002

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 or 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:

<TABLE>
<CAPTION>
Title of each class                           Name of each exchange on which registered
-------------------                           -----------------------------------------
<S>                                           <C>
Common Stock, par value $.01 per share                           Nasdaq National Market
</TABLE>

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]

Indicate by check mark whether the registrant is an accelerated filer.
(as defined by Exchange Act Rule 12b-2).                        Yes [ ]   No [X]

At June 30, 2002, the aggregate market value of the 10,155,275 shares of Common
Stock held by non-affiliates of the registrant was $24,373,000. At March 15,
2003, there were 10,155,275 outstanding shares of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant's Proxy Statement for its 2003 Annual Meeting of
Shareholders are incorporated by reference in Part III of this report.

<PAGE>

                                TABLE OF CONTENTS
                                -----------------

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
PART I

Item 1      Business                                                                    4

Item 2      Properties                                                                 13

Item 3      Legal Proceedings                                                          14

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      16

Item 6      Selected Financial Data                                                    17

Item 7      Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                                      18

Item 7A     Quantitative and Qualitative Disclosures About Market Risk                 28

Item 8      Financial Statements and Supplementary Data                                28

Item 9      Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure                                                       28


PART III                                                                               28

PART IV

Item 14     Controls and Procedures                                                    29

Item 15     Exhibits, Financial Statement Schedules, and Reports on Form 8-K           29

            Signature Page                                                             31
</TABLE>

2

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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 secure both new contracts and the renewal of existing contracts; the
ability to meet financial covenants; 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

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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. In 1999, the Company 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.

The combined Company is one of the largest and most comprehensive providers of
juvenile rehabilitative services with 19 facilities and approximately 2,800
juveniles in its care. In addition, the Company is a leading developer and
operator of adult correctional facilities, operating 12 facilities representing
approximately 4,500 beds. On a combined basis, as of December 31, 2002, the
Company provided services in 15 states, representing approximately 7,300 beds
including aftercare services.

Revenues for the year ended December 31, 2002 were $160.4 million versus $174.4
million in 2001. Contribution from operations was $15.5 million for 2002
compared to $13.1 million in 2001, with net income of $2.4 million or $0.23 per
diluted share in 2002 compared to a net loss of $5.9 million or $0.58 per
diluted share for 2001. Diluted shares were 10.2 million in both 2002 and 2001.

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

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

In its nine secure adult facilities, the Company not only provides adult inmates
with housing but also with other basic services, including health care,
transportation and food service. In addition, the Company remains committed to
providing a variety of rehabilitative and educational services, including
community service and recreational programs for adult inmates where appropriate.

The Company'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, the Company provides life skills training, case management, home
confinement supervision and family reunification programs from these facilities.
The Company believes that community correctional facilities help reduce
recidivism, resulting in prison beds being available for more violent offenders
and, in appropriate cases, represent cost-effective alternatives for
jurisdictions to prisons.

The Company 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
approximately 600 juveniles in the State of Georgia as well as for juveniles who
have completed residential programs throughout the Company's system.

The Company's juvenile division operates largely under the YSI brand name. The
YSI Care Continuum, designed for juvenile offenders, is a comprehensive,
community-based approach that strives to be the difference between returning to
old patterns or moving forward, once an offender re-enters the community.
Specific YSI Care Continuum programs and

4

<PAGE>

services for juveniles include:

     .  The Discovery Network, addressing education, prevention, and
        intervention for delinquent sexual misconduct;
     .  The Choices Network, focusing on education, prevention and intervention
        surrounding substance abuse and sales;
     .  The Bridges Program, dealing with trust and emotional stability issues
        for youth experiencing continued out-of-home placements due to temporary
        or permanent severing of parental custody;
     .  The Futures Network, teaching specialized coping skills and intervention
        services to pre-adolescent delinquent youth;
     .  The Athena Program, addressing gender identity development, sex role
        stereotyping, surviving sexual abuse, and juvenile prostitution among
        high-risk delinquent girls;
     .  The Florian Program, providing specialized education, intervention and
        prevention services for pre-adolescent fire setter and the arson actions
        of emotionally disturbed delinquent youth:
     .  Youthful Offender programs, which are designed specifically for young
        adults aged 18-25, who are under the continuing jurisdiction of juvenile
        courts; and
     .  The Genesis Treatment Program, providing comprehensive residential
        psychiatric services for males between 12 and 21 years of age,
        including: dual diagnosis, treatment of post-traumatic stress disorders,
        such as sexual and physical abuse, and educational services.

The Company's innovative programs address the root causes and issues behind
adult and juvenile anti-behavior. The Company 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. 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 to
teach participants basic life skills, while reinforcing the principle that
success begins with appropriate, acceptable behavior.

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
and continually evaluates and audits its programs and believes the reputation of
its programs will lead to continued business opportunities.

The Company 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

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

Adult/Community Corrections: At year-end 2002, the Adult/Community Corrections
Division operated 12 facilities in five states, for a total of approximately
4,500 beds. During the year 2002, revenues from the Adult/Community Corrections
programs comprised 34.7% of the Company's consolidated revenue, and 62.1% of the
consolidated contribution margin. During the year 2002, 16.6% of the Company's
consolidated revenues were earned from various US Government agencies.

Juvenile: At year-end 2002, the Juvenile Division operated 19 facilities in 11
states approximating 2,800 beds including aftercare. During the year 2002,
revenues from the Juvenile Division comprised 65.3% of the Company's
consolidated revenues, and 37.9% of the consolidated contribution margin. During
the year 2002, 12.9% and 10.1% of the Company's consolidated revenues were
earned from the Florida and Maryland Departments of Juvenile Justice,
respectively.

5

<PAGE>

Marketing and Business Development

The Company 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.
Additional marketing efforts are conducted locally by the Facility
Administrators to fill empty beds on an as-needed basis, and in anticipation of
future vacancies.

The Company 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.

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 usually 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:

     .  the current size and growth projections of the available correctional
        and detention population;
     .  whether or not a minimum capacity level is guaranteed;
     .  the willingness of the contracting authority to allow CSC to house
        populations of similar classification within the proposed facility for
        other governmental agencies; and
     .  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. Since
incarceration costs generally grow faster than many other parts of budget items,
in an attempt to address these budgetary pressures, governmental agencies
responsible for correctional and detention facilities are privatizing
facilities. As of year-end 2001 (the most recent available data), privately
operated adult prison facilities held 91,828 prisoners, up 5.1% from 2000. This
accounted for 6.5% of all Federal and State adult inmates, up from 4.6% at
year-end 2000.

An estimated 2.1 million adult inmates are held in Federal and State prisons,
and local jails. On December 31, 2001, State adult prisons were operating
between full capacity and 15% above capacity, while Federal adult prisons were
operating at 31% above capacity.

The services in which the juvenile justice system has seen the greatest growth
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. The Company has
two juvenile facilities that became Medicaid providers during 2002 and the
Company's Florida facilities began receiving Medicaid funds in 2001, as the
additional services provided qualified for reimbursement under Medicaid. The
Company plans to seek this certification at other applicable juvenile
facilities.


6

<PAGE>

Competition

The Company 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. The Company 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. The Company's main competitors in the
adult division include but are not limited to Corrections Corporation of
America, Wackenhut Corrections Corporation, and Cornell Corrections. The
Company's primary competitors in the Juvenile Division are Ramsay Youth Services
and Secure Corp.

Facilities

The Company 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. The Company 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.

The Company 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

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Adult Division

The following information is provided with respect to the facilities for which
CSC had management contracts as of March 15, 2003:

<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                 750              Prison                     State              Leased (3)
   Florence, Arizona (1997)

Arizona State Prison, Phoenix West             450              Prison                     State              Owned (4)
   Phoenix, Arizona (1996)

Bronx Community Corrections Center              60       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          Federal/County           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)

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

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

Seattle INS Detention Center                   200          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

8

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     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)  The facility was sold to an unrelated not-for-profit entity, and has been
     subsequently leased back by the Company for an initial lease term of ten
     years, renewable at the option of the State for an additional ten years.
(4)  See Part II, Item 7, "Management's Discussion and Analysis of Financial
     Condition and Results of Operations - Liquidity and Capital Resources" for
     a discussion of the sale of this facility by the Company.


Juvenile Division

<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>
Bartow Youth Training Center                     50       Secure & Residential             State               Managed
   Bartow, Florida (1995) (3)                              Treatment Facility

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                           325       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)(4)                                   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                                  125        Non Secure Academy          Multi-State             Owned
   Elmore, Minnesota (1998)                                     Facility

Forest Ridge Youth Services                     140        Non Secure Female           Multi-State             Owned
   Wallingford, Iowa (1993)                                 Academy Facility
</TABLE>

9

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<TABLE>
<S>                                          <C>         <C>                          <C>                  <C>
Genesis Treatment Agency                         51          Secure Sexual                City/                Owned
   Newport News, Virginia (1997)                          Delinquent Juveniles         Multi-County
                                                           Treatment Facility

Hemphill County Juvenile Detention              120         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

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

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
   Dallas, Georgia (1999)

Polk City Youth Training Center                 350         Secure Treatment               State               Managed
   Polk City, Florida (1997)(5)                                 Facility

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

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

Tarkio Academy                                  302      Secure Academy Sexual         Multi-State           Subleased
   Tarkio, Missouri (1994)                                 Offender Facility
</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.
(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)  The facility contract was reduced by the State of Florida from 74 bed to 50
     beds effective June 30, 2002. The Company's agreement to manage the
     facility expires March 31, 2003, and has been awarded to a different
     provider.
(4)  The Company's agreement to manage the facility expires June 30, 2003, and
     has been awarded to a different provider.
(5)  The Company's agreement to manage the facility expires March 31, 2003, and
     has been awarded to a different provider.

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Facility Changes During the Year 2002

During 2002, the Company discontinued its operations of the following
facilities:

     1)   Bowie County Detention Center (Juvenile);
     2)   Victor Cullen Academy (Juvenile);
     3)   Summit View Corrections Center (Juvenile)
     4)   Snowden Cottage (Juvenile)
     5)   Judge Roger Hashem Detention Center (Juvenile)

The Company ceased operations of the Bowie County Detention Center due to lack
of occupancy. The Victor Cullen Academy was closed by the State of Maryland,
until a future use for the facility could be determined. The State of Nevada
elected to terminate the Company's management agreement at the Summit View
Corrections Center, as the State no longer had a need for the facility. The
contract at the Snowden Cottage expired, and was subsequently awarded to a
different provider. The Company elected to terminate its contract at the Judge
Roger Hashem Detention Center, due to lack of financial viability.

In addition, the Company will discontinue its operation of four additional
juvenile facilities in 2003. The Polk Youth Development Center, Cypress Creek
Academy and Bartow Youth Training Academy contracts expire in 2003, and have
been awarded to a different provider. Lastly, the government of Puerto Rico
elected to terminate the Company's contract at the Bayamon Treatment Center,
effective January 31, 2003, due to its desire to eliminate private providers
under the new government regime.

Facility Management Contracts

The Company 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.

The Company is required by its contracts to maintain certain levels of insurance
coverage for general liability, workers' compensation, vehicle liability and
property loss or damage. The Company 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

The Company 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. The Company, either directly or through subcontractors, also
provides health care, including medical, dental and psychiatric services, and
food service.

The Company'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. The Company 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.

11

<PAGE>

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, the Company 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. The Company manages all of the facilities it has designed and
constructed or redesigned and renovated.

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

Employees

At January 31, 2003, CSC had approximately 3,400 employees, consisting of
corporate and facility employees. Each of CSC's facilities is led by an
experienced facility administrator, warden, or executive director. Other
facility personnel include administrative, security, medical, food service,
counseling, classification and educational and vocational training personnel.
The Company 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 are required to
participate in at least 160 hours of paid training prior to their direct contact
with offenders or detainees. This is in addition to any and all specific
training requirements mandated by the contracting agency. Training is requisite
for all new hires, regardless of classification, is outcome based, and requires
observable or measurable levels of performance competency. Training consists of
approximately 40 hours relating to CSC policies, operational procedures,
management philosophy, 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. All CSC training programs meet or exceed
applicable American Correctional Association (ACA) licensing requirements.

In addition to comprehensive pre-service training, all Company personnel are
required to complete 40 hours of in-service training annually. Mandatory annual
training plans are interfaced between state and federal laws, policies, ACA
Standards for Adult and Juvenile Facilities and course lesson plans. Some of the
topics include: use of force or behavioral management programs; security
procedures; suicide precautions; interpersonal communications; cultural
sensitivity; first aid and CPR; and safety procedures. CSC's training matrix is
designed to provide the flexibility needed to incorporate specialized training
mandated by the contracting agency, such as an overview of the criminal justice
or juvenile justice system.

The Company places dignity, professionalism and respect for all, as its
benchmark and is committed to providing quality training programs for newly
hired employees to prepare them for a challenging and rewarding career in the
corrections field. The Company also provides scheduled annual refresher training
to veteran employees to maintain their proficiencies and adherence to the
Company's commitment to provide quality service to its contracting agencies.

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

12

<PAGE>

training to veteran employees to maintain their proficiencies and adherence to
the Company's commitment to provide quality service to its contracting agencies.

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.

The Company 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.

The failure to comply with any applicable laws, rules or regulations or the loss
of any required license could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, the
current and future operations of the Company may be subject to additional
regulations as a result of, among other factors, new statutes and regulations
and changes in the manner in which existing statutes and regulations are or may
be interpreted or applied. Any such additional regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.

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, Reflections Treatment Agency, Tarkio Academy,
Keweenaw Academy, Florence West Prison, Frio County Jail, Brooklyn Community
Correctional Center, Bronx Community Correctional Center, and Fort Worth
Community Corrections Center.

The Company owns its facilities located in Chamberlain, South Dakota;
Springfield, South Dakota; Elmore, Minnesota; portions of the Frio County, Texas
facility; Forest Ridge, Iowa; portions of the Eagle Lake, Texas expansion; and
Newport News, Virginia. For accounting purposes, the Phoenix, Arizona facility
is recognized as a Company asset, but is legally owned by an unrelated third
party.

During 2002, the Company sold a property owned in Bryan, Texas, from which the
Company formerly operated the Los Hermanos Ranch program (which it closed in
November 1999).

Additionally, the Company was involved in a transaction with an unrelated
not-for-profit entity, whereby the ownership of the Phoenix, Arizona facility
will eventually be passed to the State of Arizona over the passage of time, or
the occurrence of certain events. In accordance with generally accepted
accounting principles, the Company has not recorded the transaction as a sale,
and the assets and associated liabilities remain on the financial statements of
the Company; however, legal title to the property is held by the not-for-profit
entity.

The Florence, Arizona facility was sold to an unrelated not-for-profit entity in
December 2002, and has been subsequently leased back by the Company for an
initial lease term of ten years, renewable for an additional ten years at

13

<PAGE>

the option of the State.

The Company also owns the following properties, which were acquired by the
Company in anticipation of future development projects, but 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

The nature of the Company's business results in claims and litigation against
the Company for damages arising from the conduct of its employees and others.
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 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.

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, 2002; or
(b) the claims asserted against the Company depart from those asserted in the
normal course of the Company's business:

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 Immigration and Naturalization
   Service (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.

2. Alexander, Rickey, et al. v. Correctional Services Corporation, Unidentified
   CSC Employees, Knyvette Reyes,

14

<PAGE>

   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 proceedings and trial is currently scheduled for
   July, 2003. 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. In addition, the punitive damages sought
   by the plaintiffs are not insurable. 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. City of Tallulah v. Trans-American Development Assoc. and 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.

4. 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 former 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 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 2003. This
   matter is covered by the Company's general liability insurance policy.
   However, 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

15

<PAGE>

   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.

5. Scianetti, Adorno, Womble and Johnson v. Correctional Services Corporation,
   Case No. 01 CV 9170 in the United States District Court for the Southern
   District of New York.

   Plaintiffs, each a former resident of the LeMarquis Community Correctional
   Center, allege that a former employee of the Company sexually assaulted and
   battered them while they were housed at the LeMarquis Community Correctional
   Center formerly operated by the Company in Manhattan. Each Plaintiff has
   brought causes of action for negligence against CSC. Each Plaintiff seeks
   $50,000,000 in compensatory damages from the company. 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. In
   addition, the punitive damages sought by the plaintiffs are not insurable.
   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.

   During fiscal year 2002, the Company resolved the following matter, which had
   previously been reported in the Company's Annual Report on Form 10-K:

   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. During
   fiscal year 2002, the Company received summary judgment on the claims
   asserted by Plaintiffs Frederick Lewis, Lojann Hooee, Larson Rogers, Cynthia
   Varga and Sheila Dunham, and the Company's Employment Practices Liability
   Insurance carrier settled the claims of each of the remaining Plaintiffs.
   This matter has now been resolved.

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

No matters were submitted to the stockholders during the fourth quarter of 2002.


                                     PART II

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

The common stock of the Company 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
                                                        ----        ---
          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

          2002

          First Quarter                                 3.13        1.36

          Second Quarter                                2.43        1.97

          Third Quarter                                 2.51        1.80

          Fourth Quarter                                2.90        1.95

On February 25, 2003, there were 364 holders of record and approximately 1,400
beneficial shareholders registered in nominee and street name. The Company paid
no cash dividends in the years ended December 31, 2002 and 2001.

16

<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,
                                                         2002          2001          2000          1999       1998 (1)
                                                     -------------------------------------------------------------------
<S>                                                  <C>            <C>           <C>           <C>          <C>
Revenues                                              $ 160,408     $ 174,418     $ 210,812     $ 233,918    $ 188,454
                                                     -------------------------------------------------------------------
Operating expenses                                      144,935       160,885       185,447       205,662      166,443
Startup costs (1)                                            --           406           155         1,177        8,171
General and administrative (2)                            9,117        13,207        13,344        13,555       20,769
Restructuring and impairment                              1,926         4,356            --            --           --
Loss contract costs                                       1,544         1,150            --            --           --
Merger costs and related restructuring charges               --            --            --        12,052        1,109
Other operating (income) expenses                        (1,526)        1,313        (1,115)        1,874        2,327
                                                     -------------------------------------------------------------------
Operating income (loss)                                   4,412        (6,899)       12,981          (402)     (10,365)
Interest expense, net (2)                                 2,326         2,183         3,483         3,413        2,961
                                                     -------------------------------------------------------------------
Income (loss) before income taxes, extraordinary          2,086        (9,082)        9,498        (3,815)     (13,326)
   gain on extinguishment of debt and cumulative
   change in accounting principle
Income tax (benefit) provision                             (277)       (3,202)        3,710           429       (1,593)
                                                     -------------------------------------------------------------------
Income (loss) before extraordinary gain on                2,363        (5,880)        5,788        (4,244)     (11,733)
   extinguishment of debt and cumulative effect
   of change in accounting principle
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)                                   $   2,363     $  (5,880)    $   5,788     $  (3,528)   $ (16,596)
                                                     ===================================================================
Net earnings (loss) per share:
    Basic                                             $    0.23     $   (0.58)    $    0.51     $   (0.31)   $   (1.53)
    Diluted                                           $    0.23     $   (0.58)    $    0.51     $   (0.31)   $   (1.53)
Balance sheet data:
    Working capital (deficit)                         $  17,171     $  (7,855)    $  18,831     $  22,281    $  23,167
    Total assets                                         88,088        86,083        96,775       111,198      125,314
    Long-term debt, net of current portion               20,258           314        16,338        32,944       44,064
    Shareholders' equity                                 50,008        47,645        53,738        50,738       51,006
</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 1998 through 2000 balances
     to conform to the 2002 and 2001 presentation.

17

<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 19 facilities and approximately 2,800 juveniles in
its care. In addition, the Company is a leading developer and operator of adult
correctional facilities operating 12 facilities representing approximately 4,500
beds. On a combined basis, as of December 31, 2002, the Company provided
services in 15 states, representing approximately 7,300 beds including aftercare
services.

     Results of Operations

     The following table sets forth certain operating data as a percentage of
total revenues:

                                               Percentage of Total Revenues
                                                 Years Ended December 31,
                                                 ------------------------

                                                 2002       2001       2000
                                            ----------------------------------
     Revenues                                   100.0%     100.0%     100.0%
                                            ----------------------------------
     Facility expenses:
          Operating                              90.3%      92.3%      88.0%
          Startup costs                            --        0.2%        --
                                            ----------------------------------
                                                 90.3%      92.5%      88.0%
                                            ----------------------------------
     Contribution from operations                 9.7%       7.5%      12.0%
                                            ----------------------------------
     Other operating expenses:
          General and administrative              5.7%       7.6%       6.3%
          Legal settlement                         --        0.2%        --
          Restructuring and impairment            1.2%       2.5%        --
          Loss contract costs                     1.0%       0.7%        --
          Loss (gain) on sale of assets          (1.0)%      0.5%      (0.5)%
                                            ----------------------------------
                                                  6.9%      11.5%       5.8%
                                            ----------------------------------
     Operating income (loss)                      2.8%      (4.0)%      6.2%
     Interest expense, net                        1.5%       1.2%       1.7%
                                            ----------------------------------
     Income (loss) before income taxes            1.3%      (5.2)%      4.5%
     Income tax provision (benefit)              (0.2)%     (1.8)%      1.8%
                                            ----------------------------------
     Net income (loss)                            1.5%      (3.4)%      2.7%
                                            ==================================


Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenue decreased by $14.0 million or 8.0% for the year ended December 31, 2002
to $160.4 million compared to the same period in 2001. The decrease was
primarily due to:

..    a decrease of $13.6 million from the discontinuance of nine programs, 479
     beds in five facilities discontinued in conjunction with the Company's 2001
     restructuring initiative, where the Company planned to discontinue
     operations of various unprofitable facilities; and
..    a decrease of $600,000 in other revenues primarily due to the 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; offset by
..    an increase of $200,000 generated from net occupancy level and per diem
     rate changes at existing facilities.

Operating expenses decreased $16.0 million or 9.9% for the year ended December
31, 2002 to $144.9 million compared to the same period in 2001 primarily due to
the closing of the nine facilities mentioned above.

18

<PAGE>

As a percentage of revenues, operating expenses decreased to 90.3% for the
twelve months ended December 31, 2002 from 92.3% for the twelve months ended
December 31, 2001. Although the Company made significant improvements in cost
control initiatives, those improvements were partially offset by the increased
cost of healthcare and workers compensation insurance, as well as other fixed
costs at the facilities, including, rent, certain administrative salaries, and
depreciation expense.

Startup costs were $406,000 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. The Salinas facility was never operational, and was sold to the Puerto
Rican government in November 2002.

General and administrative expenses decreased to $9.1 million for the twelve
months ended December 31, 2002, compared to $13.2 million for the twelve months
ended December 31, 2001. As a percentage of revenues, general and administrative
expenses decreased to 5.7% for the twelve months ended December 31, 2002 from
7.6% for the same period in 2001. The decrease is due primarily to the results
of the restructuring initiative formulated during the third quarter of 2001.
Other charges that were included in general and administrative expenses for the
year ended December 31, 2001 include: $1.3 million of additional accounts
receivable allowance, established 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.

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 recognized a $1.5 million loss on facility contracts for the year
ended December 31, 2002. The charge primarily relates to the Company's Keweenaw,
Michigan juvenile facility which, as a result of low utilization by the
contracting agencies, is expected to incur losses of $1.3 million over the
remaining contract period. The Company also recorded a $220,000 loss reserve for
estimated contract losses through the contract termination at the Bayamon,
Puerto Rico juvenile facility, which ended January 31, 2003.

During the same period in 2001, the Company recorded costs of approximately $1.2
million for various contracts that required the related facility to incur losses
to fulfill the contracts. The facilities were closed during the year ended
December 31, 2002.

The Company recorded a charge for the impairment of assets during the year ended
December 31, 2002, related to the Keweenaw, Michigan facility, in the amount of
$1.9 million, the net book value of the assets at December 31, 2002. During the
same period in 2001, the Company recorded a restructuring and impairment charge
of $4.4 million consisting of $205,000 paid in severance for terminated
employees; lease termination costs at a facility closed under the plan in the
amount of $270,000; and a $3.9 million impairment of assets related to the
facilities being closed under the restructuring initiative, and assets held
primarily for future use, where plans for development had been abandoned.

During the twelve months ended December 31, 2002, the Company recorded a gain on
the disposal of assets of $1.5 million primarily related to the sale of the
Salinas, Puerto Rico facility to the Puerto Rican government for $15.0 million.
The facility was constructed by the Company, and was completed in 2001, but had
never been operational, due to the Puerto Rican government's inability to
fulfill its contract with the Company, and provide inmates for the facility.

The Company recorded a loss on the disposal of assets of $938,000 for the same
period in 2001. The loss related 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 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 $2.3 million for the twelve months
ended December 31, 2002 compared to $2.2 million for the twelve months ended
December 31, 2001, a net increase in interest expense of approximately

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<PAGE>

$100,000.

For the twelve months ended December 31, 2002, the Company recognized an income
tax benefit of $277,000 compared to an income tax benefit of $3.2 million for
the twelve months ended December 31, 2001. The Company's effective tax rate for
the year ended December 31, 2002 was (13.3)% compared to 35.3% for the
comparable period in 2001. For the 2002 period, the Company recognized a $1.4
million tax benefit principally attributable to a change in estimate of the
recoverability of deferred tax assets associated with exiting Puerto Rico
operations.

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:

..    an increase of $5.2 million generated from a full twelve months of revenue
     for two facilities opened in 2000 (248 beds); and
..    an increase of $3.1 million from per diem rate increases at existing
     facilities: offset by
..    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);
..    a net decrease of $8.7 million generated from net occupancy level decreases
     in existing facilities; and
..    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.

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 cost 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
                                                           =============

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<PAGE>

As part of the restructuring initiative, the Company formulated a plan to
consolidate and restructure its corporate office, sell certain assets, and close
seven unprofitable facilities through August 31, 2002. The Company recorded a
restructuring and impairment charge of $4.4 million consisting of $205,000 paid
in severance for terminated employees; lease termination costs at a facility
closed under the plan in the amount of $270,000; and a $3.9 million impairment
of assets related to the facilities being closed under the restructuring
initiative, 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 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.

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 working capital at December 31, 2002 of $17.2 million, compared
to a working capital deficit of $7.9 million at December 31, 2001. The Company's
current ratio increased to 2.0 at December 31, 2002, from 0.8 at December 31,
2001. The increase in the current ratio is primarily attributable to the
reduction of bank debt and additional cash on hand, due to the Company's asset
sales during 2002.

Net cash of $2.6 million was provided by operating activities for the year ended
December 31, 2002 as compared to $12.5 million provided by operations for the
year ended December 31, 2001. The decrease is primarily attributable to the
decrease in accounts receivable from 2000 to 2001, due to the termination of
contracts at various facilities at the end of 2000 (approximately 3,000 beds).

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<PAGE>

Net cash of $21.5 million was provided by investing activities during the year
ended December 31, 2002 as compared to $4.9 million used during the year ended
December 31, 2001. The $16.6 million increase in cash provided was primarily
attributable to the sale of the Salinas, Puerto Rico facility to the Puerto
Rican government for $15.0 million and the sale of the Florence facility for
$10.4 million in 2002.

Net cash of $20.7 million was used in financing activities in the year ended
December 31, 2002 as compared to $6.8 million used in financing activities in
the year ended December 31, 2001. During 2002 the Company's primary financing
activities primarily consisted of net repayments of senior debt of $29.2
million, compared to $6.7 million during the same period in 2001. The Company
also repurchased common stock for $213,000 during the year ended December 31,
2001.

At December 31, 2002, the Company had no outstanding debt under its Credit
Agreement with GE Capital, and had approximately $14.2 million in availability
under that facility. At December 31, 2001 the Company had $16.0 million
outstanding under the revolving line of credit and $14.2 million outstanding
under the operating lease-financing facility with Fleet National Bank, N.A.
(Fleet). The Company had $2.5 million in availability under its revolving line
of credit with Fleet at December 31, 2001.

The amended Credit and Master Agreement with Fleet matured on October 30, 2002,
at which time the Company entered into a new long-term financing agreement with
GE Capital. The new agreement is subject to compliance with various financial
covenants and borrowing base criteria. The Company is in compliance with all
covenants as of December 31, 2002. The new agreement estabished the following
two credit components:

..    a $12 million term loan that was scheduled to mature on September 25, 2004
     and accrued interest at the lesser of LIBOR plus 5% or prime plus 3%, with
     monthly principal payments of $50,000 plus interest and a balloon payment
     of approximately $10.8 million due upon maturity. The term loan was paid in
     full on November 28, 2002 when the Company sold its Salinas, Puerto Rico
     facility. The term loan was secured by mortgages on certain real property
     owned by the Company.

..    a $19 million revolving line of credit that matures on September 25, 2005
     and accrues interest at the lesser of LIBOR plus 4.0%, or prime plus 2.0%.
     The proceeds were used primarily to satisfy the Company's revolver balance
     under its former credit agreement, which became due October 30, 2002. As of
     December 31, 2002, there is no outstanding balance under this revolving
     line of credit. The Company's availability under the revolver is
     approximately $14.2 million as of December 31, 2002, which takes into
     consideration collateral limitations and outstanding letters of credit
     totaling $3.2 million. The revolving line of credit is secured by all
     assets of the Company, except for real property.

During the year ended December 31, 2002, the Company sold its Phoenix, Arizona
facility to a not-for-profit entity and received proceeds of approximately $8.5
million, which was used to reduce existing bank debt. The not-for-profit entity
used proceeds from contract revenue bonds issued through the Maricopa County
Industrial Development Authority to purchase the facility from CSC. Neither CSC
nor the State of Arizona is obligated to repay the bonds. The bond payments are
payable exclusively from the revenue generated by the facility's operations, or
from the disposition of the facility. However, due to certain guarantee
obligations of the Company with respect to the purchase of the facility by the
State from the not-for-profit entity, and applicable generally accepted
accounting principles, the Company was not permitted to record the transaction
as a sale for accounting purposes. Therefore, the assets and associated
liabilities remain on the financial statements of the Company. Legal title to
the property is held by the not-for-profit entity. The ownership of the Phoenix,
Arizona facility will eventually be passed to the State of Arizona over the
passage of time, or when the State of Arizona exercises its option to purchase
the facility. The Company's non-recourse liability with respect to the debt
service payments is $8.3 million as of December 31, 2002, and matures in 2022,
or upon the State of Arizona's exercise of its option to purchase the facility.
On either of those occurrences a sale shall be deemed to have occurred, and the
Company will recognize a $1.8 million gain.

The Florence, Arizona facility was sold by the Company to an unrelated
not-for-profit entity in December 2002 for approximately $10.4 million, which
was used to pay down bank debt, and has been subsequently leased back by the
Company for an initial ten-year lease term, renewable for an additional ten
years at the option of the State. The leaseback qualifies as a capital lease,
and is paid from the revenues of the Florence, Arizona facility. The Company has
a capital lease obligation of approximately $10.4 million as of December 31,
2002.

The Company has made non-refundable deposits of approximately $430,000, and had
construction commitments of approximately $2.1 million at December 31, 2002,
related to a project the Company was awarded in July 2002 to

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<PAGE>

construct a 500-bed detention center in Tacoma, Washington, which will be used
principally by the INS. The Company currently operates a 200-bed (INS) facility
in Seattle, Washington, which will be closed upon completion of the new
detention center. The agreement has an initial term of five years, subject to
annual renewals. The Company is currently structuring a financing arrangement by
means of the issuance of non-recourse bonds through the Washington Economic
Development Finance Authority (WEDFA) for approximately $71.7 million. The debt
holder would be a subsidiary of the Company, CSC of Tacoma LLC, a single member
LLC. The Company expects to be reimbursed for all construction-related
expenditures from the bond sale proceeds; however, there can be no assurance
that the Company will be able to obtain financing to fund this project. The
Company has no other construction commitments as of December 31, 2002.

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 assurance that the Company's
operations together with amounts available under the revolving line of credit,
which expires in 2005, will continue to be sufficient to finance its existing
level of operations, fund start-up costs and meet its debt service obligations.

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. Under this
program, the Company repurchased shares during 2001 and 2000 at a cost of
approximately $3.0 million.

Critical Accounting Policies

The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. The Company routinely evaluates its estimates based on
historical experience and on various other assumptions that management believes
are reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. A summary of our
significant accounting policies is described in Note A to our financial
statements included herein. The significant accounting policies and estimates,
which we believe are the most critical to aid in fully understanding and
evaluating our reported financial results, include the following:

Revenue Recognition and Accounts Receivable

Facility management revenues are recognized as services are provided based on a
net rate per day per inmate or on a fixed monthly rate.

The Company extends credit to the government agencies with which it contracts
and other parties in the normal course of business. Further, the Company
regularly reviews outstanding receivables, and provides estimated losses through
an allowance for doubtful accounts. In evaluating the level of established
reserves, the Company makes judgments regarding its customers' ability to make
required payments, economic events and other factors. As the financial condition
of these parties change, circumstances develop or additional information becomes
available, adjustments to the allowance for doubtful accounts may be required.

Asset Impairments

As of December 31, 2002, the Company had approximately $39.2 million in
long-lived property and equipment and assets under capital leases. The Company
evaluates the recoverability of the carrying values of its long-lived assets,
other than intangibles, when events suggest that impairment may have occurred.
In these circumstances, the Company utilizes estimates of undiscounted cash
flows to determine if impairment exists. If impairment exists, it is measured as
the amount by which the carrying amount of the asset exceeds the estimated fair
value of the asset. During 2002, the

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<PAGE>

Company recognized asset impairments of approximately $1.9 million.

Income Taxes

Deferred tax assets and liabilities are recognized as the difference between the
book basis and tax basis of assets and liabilities. In providing for allowances
for deferred taxes, the Company considers current tax regulations, estimates of
future taxable income and available tax planning strategies. If tax regulations,
operating results or the ability to implement tax-planning strategies vary,
adjustments to the carrying value of deferred tax assets and liabilities may be
required. For the 2002 period, the Company recognized a $1.4 million tax benefit
principally attributable to a change in estimate of the recoverability of
deferred tax assets associated with exiting Puerto Rico operations.

Loss Contracts

The Company evaluates the future profitability of its contracts when events
suggest that the contract may not be profitable over its remaining term. The
Company measures the estimated future losses as the present value of the
estimated net cash flows over the remainder of the contract from the time of
measurement, with consideration first given to asset impairments as discussed
above. During 2002, the Company recognized a $1.5 million loss on facility
contracts for the year ended December 31, 2002. The charge primarily relates to
the Company's Keweenaw, Michigan juvenile facility which, as a result of low
utilization by the contracting agencies, is expected to incur losses of $1.3
million over the remaining contract period. The Company also recorded a $220,000
loss reserve for estimated contract losses through the contract termination at
the Bayamon, Puerto Rico juvenile facility, which ended January 31, 2003.

New Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 is effective for all business combinations completed after June 30, 2001.
SFAS No. 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 No. 142. The
Company adopted SFAS No. 142 , effective January 1, 2002. The Company analyzed
net goodwill at the juvenile division reporting level, as of January 1, 2003,
and its assessment is that there is no impairment of goodwill. There is no
purchased goodwill associated with the adult division. No amortization expense
was recognized for the twelve months ended December 31, 2002. The Company
recognized amortization expense related to goodwill of $370,000 for each of the
twelve months ended December 31, 2001 and 2000.

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 adoption of this standard did not affect the Company's
financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application

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<PAGE>

encouraged. Management does not believe that adoption of this standard will have
a material effect on the Company's financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which: (i) amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation; (ii) amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation; and (iii) requires disclosure about those
effects in interim financial information. The Company has not adopted the fair
value based method of accounting for stock-based employee compensation. Items
(ii) and (iii) of the new requirements in SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company has adopted the reporting requirements of item (ii) and will include the
reporting requirements of item (iii) beginning in its first interim period after
December 15, 2002

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirement for Guarantors, including Indirect
Guarantors of Indebtedness to Others (FIN 45). FIN 45 creates new disclosure and
liability recognition requirements for certain guarantees, including obligations
to stand ready to perform. The initial recognition and measurement requirements
of FIN 45 are effective prospectively for guarantees issued or modified after
December 31, 2002, and the disclosure requirements are effective for financial
statement periods ending after December 15, 2002. In accordance with FIN 45, the
Company has disclosed guarantee information.

On January 31, 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). FIN 46 clarifies existing accounting
for whether variable interest entities should be consolidated in financial
statements based upon the investees' ability to finance its activities without
additional financial support and whether investors possess characteristics of a
controlling financial interest. FIN 46 applies to years or interim periods
beginning after June 15, 2003 with certain disclosure provisions required for
financial statements issued after January 31, 2003. The Company currently does
not have investments in any variable interest entities.

                                  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.

The Non-Renewal or Termination of Our Facility Management Contracts, Which
Generally Range from One to

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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 31% of its 2002 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, 2002, seven
contracts representing approximately 1,245 beds are up for renewal in 2003.
Three contracts representing 500 beds have been awarded to other providers,
beginning in April 2003.

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 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

26

<PAGE>

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.

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 Become 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.

27

<PAGE>

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.

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 note payable
accrues interest at fixed rates of interest. There are no outstanding borrowings
under the variable rate Credit Agreement

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
                                    2003      2004      2005      2006      2007     after     Total     Value
                                    ----      ----      ----      ----      ----     -----     -----     -----
<S>                                <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Fixed rate debt (in thousands)     $    3    $    3    $    4    $  302    $    -    $    -    $  312    $  312
                                   ======    ======    ======    ======    ======    ======    ======    ======
</TABLE>

Weighted Average Interest
 Rate at December 31, 2002    10.00%
                              ------


Item 8.    Financial Statements and Supplementary Data.

     The information required by this item is contained on Pages F-1 thru F-30
hereof.

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

     None


                                    PART III

The information required by Items 10, 11, 12, and 13 of Form 10-K will be
contained in, and is incorporated by reference from, the proxy statement for the
Company's 2003 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report.

28

<PAGE>

                                     PART IV

Item 14.    Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer (collectively,
the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for the Company. Such officers have concluded
(based upon their evaluation of these controls and procedures as of a date
within 90 days of the filing of this report) that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in this report is accumulated and communicated to the
Company's management, including its principal executive officers as appropriate,
to allow timely decisions regarding required disclosure.

The Certifying Officers also have indicated that there were no significant
changes in the Company's internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.

Item 15.    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-30 of this Form 10-K.

            (2)  None filed

            (3)  Exhibits (listed in (c) below)

      (b)   None filed

      (c)   Exhibits:

   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.(6)
*  10.1     CSC's 1993 Stock Option Plan, as amended.(6)
*  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)
*  10.74    Employment Agreement dated September 29, 1999 between CSC and James
            F. Slattery.(5)
   10.74.1  Loan and Security Agreement, dated October 30, 2002, between CSC and
            General Electric Capital Corporation. (7)
*  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
   99.1     Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant
            to Section 906 of the Sarbanes-Oxley Act of 2002.

29

<PAGE>

   99.2     Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant
            to Section 906 of the Sarbanes-Oxley Act of 2002.

(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
     Registration Statement on Form S-1 (Registration Number 333-6457).
(7)  Incorporated by reference to exhibit of the same number filed with CSC's
     Form 10-Q for the nine months ended September 30, 2002.
*    Management Contract or Compensatory Plan or Arrangement.

30

<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: March 31, 2003

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.

<TABLE>
<CAPTION>
Signature                       Title                                                      Date
<S>                             <C>                                                        <C>
  /s/ James F. Slattery         President and
----------------------------
James F. Slattery               Chief Executive Officer  (Principal Executive Officer)     March 31, 2003


  /s/ Thomas C. Rapone          Executive Vice President and Chief Operating Officer       March 31, 2003
----------------------------
Thomas C. Rapone


  /s/ Bernard A. Wagner         Senior Vice President and
----------------------------
Bernard A. Wagner               Chief Financial Officer (Principal Financial Officer)      March 31, 2003


  /s/ Aaron Speisman            Executive Vice President and Director                      March 31, 2003
----------------------------
Aaron Speisman


  /s/ Stuart Gerson             Chairman of the Board                                      March 31, 2003
----------------------------
Stuart Gerson


  /s/ Shimmie Horn              Director                                                   March 31, 2003
----------------------------
Shimmie Horn


  /s/ Bobbie L. Huskey          Director                                                   March 31, 2003
----------------------------
Bobbie L. Huskey


  /s/ Melvin T. Stith           Director                                                   March 31, 2003
----------------------------
Melvin T. Stith


  /s/ Chet Borgida              Director                                                   March 31, 2003
----------------------------
Chet Borgida
</TABLE>

31

<PAGE>

                                 CERTIFICATIONS

I, James F. Slattery, certify that:

1. I have reviewed this annual report on Form 10-K of Correctional Services
   Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report;

3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

   a) designed such disclosure controls and procedures to ensure that material
      information relating to the registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities,
      particularly during the period in which this annual report is being
      prepared;

   b) evaluated the effectiveness of the registrant's disclosure controls and
      procedures as of a date within 90 days prior to the filing date of this
      annual report (the "Evaluation Date"); and

   c) presented in this annual report our conclusions about the effectiveness of
      the disclosure controls and procedures based on our evaluation as of the
      Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
   most recent evaluation, to the registrant's auditors and the audit committee
   of registrant's board of directors (or persons performing the equivalent
   functions):

   a) all significant deficiencies in the design or operation of internal
      controls which could adversely affect the registrant's ability to record,
      process, summarize and report financial data and have identified for the
      registrant's auditors any material weaknesses in internal controls; and

   b) any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls; and

6. The registrant's other certifying officers and I have indicated in this
   annual report whether or not there were significant changes in internal
   controls or in other factors that could significantly affect internal
   controls subsequent to the date of our most recent evaluation, including any
   corrective actions with regard to significant deficiencies and material
   weaknesses.

Date: March 31, 2003

   /s/ James F. Slattery
---------------------------------
James F. Slattery
President and Chief Executive Officer

32

<PAGE>

                                 CERTIFICATIONS

I, Bernard A. Wagner, certify that:

1. I have reviewed this annual report on Form 10-K of Correctional Services
   Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report;

3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

   a) designed such disclosure controls and procedures to ensure that material
      information relating to the registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities,
      particularly during the period in which this annual report is being
      prepared;

   b) evaluated the effectiveness of the registrant's disclosure controls and
      procedures as of a date within 90 days prior to the filing date of this
      annual report (the "Evaluation Date"); and

   c) presented in this annual report our conclusions about the effectiveness of
      the disclosure controls and procedures based on our evaluation as of the
      Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
   most recent evaluation, to the registrant's auditors and the audit committee
   of registrant's board of directors (or persons performing the equivalent
   functions):

   a) all significant deficiencies in the design or operation of internal
      controls which could adversely affect the registrant's ability to record,
      process, summarize and report financial data and have identified for the
      registrant's auditors any material weaknesses in internal controls; and

   b) any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls; and

6. The registrant's other certifying officers and I have indicated in this
   annual report whether or not there were significant changes in internal
   controls or in other factors that could significantly affect internal
   controls subsequent to the date of our most recent evaluation, including any
   corrective actions with regard to significant deficiencies and material
   weaknesses.

Date: March 31, 2003

   /s/ Bernard A. Wagner
------------------------------
Bernard A. Wagner
Senior Vice President and
Chief Financial Officer

33

<PAGE>

                                 C O N T E N T S

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Certified Public Accountants                           F-2

   Consolidated Balance Sheets as of December 31, 2002 and 2001              F-3

   Consolidated Statements of Operations for the years ended
      December 31, 2002, 2001, and 2000                                      F-4

   Consolidated Statement of Stockholders' Equity for the years ended
      December 31, 2002, 2001, and 2000                                      F-5

   Consolidated Statements of Cash Flows for the years ended
      December 31, 2002, 2001, and 2000                                      F-6

   Notes to Consolidated Financial Statements                                F-7
</TABLE>



<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, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. 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, 2002 and
2001, and the consolidated results of their operations and consolidated cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note A to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002.



                                        /s/ GRANT THORNTON LLP

Tampa, Florida
March 7, 2003



                                      F-2

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
ASSETS                                                                                     December 31,
                                                                                    --------------------------
                                                                                        2002          2001
                                                                                    --------------------------
<S>                                                                                 <C>             <C>
CURRENT ASSETS
  Cash and cash equivalents                                                           $  4,327      $    932
  Restricted cash                                                                        1,861            33
  Accounts receivable, net                                                              24,468        25,761
  Deferred tax asset                                                                     3,008         2,037
  Prepaid expenses and other current assets                                              1,329         1,506
                                                                                    --------------------------
     Total current assets                                                               34,993        30,269

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET                                     39,204        40,978

OTHER ASSETS
  Deferred tax asset, net of current portion                                             8,122         8,625
  Goodwill, net                                                                            679           679
  Other                                                                                  5,090         5,532
                                                                                    --------------------------

TOTAL ASSETS                                                                          $ 88,088      $ 86,083
                                                                                    ==========================

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                                                    $  1,031      $  5,798
  Accrued liabilities                                                                   15,821        13,854
  Current portion of restructuring, impairment and loss contract reserve                   472         2,462
  Current portion of loans payable and other long-term liabilities                         278        16,000
  Current portion of capital lease obligation                                              220             -
  Subordinated debt                                                                          -            10
                                                                                    --------------------------
     Total current liabilities                                                          17,822        38,124

LONG TERM LIABILITIES
  Capital lease obligation                                                              10,183             -
  Other long-term liabilities                                                            8,694             -
  Loss contract reserve, net of current portion                                          1,072             -
  Loans payable                                                                            309           314

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 shares issued and 10,155 shares  outstanding in 2002
     and 2001                                                                              114           114
  Additional paid-in capital                                                            82,797        82,797
  Accumulated deficit                                                                  (29,912)      (32,275)
  Treasury stock, at cost                                                               (2,991)       (2,991)
                                                                                    --------------------------
                                                                                        50,008        47,645
                                                                                    --------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $ 88,088      $ 86,083
                                                                                    ==========================
</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>
                                                                      Years Ended December 31,
                                                            ----------------------------------------------
                                                                2002             2001            2000
                                                            ----------------------------------------------
<S>                                                         <C>               <C>             <C>
Revenues                                                     $  160,408       $  174,418      $  210,812
                                                            ----------------------------------------------

Facility expenses:
     Operating                                                  144,935          160,885         185,447
     Startup costs                                                    -              406             155
                                                            ----------------------------------------------
                                                                144,935          161,291         185,602
                                                            ----------------------------------------------

Contribution from operations                                     15,473           13,127          25,210
Other operating expenses:
     General and administrative                                   9,117           13,207          13,344
     Restructuring and impairment                                 1,926            4,356               -
     Loss contract costs                                          1,544            1,150               -
     Loss (gain) on disposal of assets                           (1,526)             938          (1,115)
     Legal settlement                                                 -              375               -
                                                            ----------------------------------------------
                                                                 11,061           20,026          12,229
                                                            ----------------------------------------------

Operating income (loss)                                           4,412           (6,899)         12,981
Interest expense, net                                             2,326            2,183           3,483
                                                            ----------------------------------------------

Income (loss) before income taxes                                 2,086           (9,082)          9,498
Income tax provision (benefit)                                     (277)          (3,202)          3,710
                                                            ----------------------------------------------

Net income (loss)                                            $    2,363       $   (5,880)     $    5,788
                                                            ==============================================

Basic and diluted income (loss) per share:
          Net income (loss) per share                        $     0.23       $    (0.58)     $     0.51
                                                            ==============================================

Number of shares used to compute EPS:
       Basic                                                     10,155           10,181          11,366
       Diluted                                                   10,195           10,181          11,367
</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, 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

Net income                                                                           2,363                       2,363
                                                ------------------------------------------------------------------------

Balance at December 31, 2002                       $     114     $  82,797      $  (29,912)    $  (2,991)    $  50,008
                                                ========================================================================
</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,
                                                                        ---------------------------------------------------
                                                                              2002               2001             2000
                                                                        ---------------------------------------------------
<S>                                                                     <C>                  <C>               <C>
Cash flows from operating activities:
  Net income (loss)                                                        $    2,363        $    (5,880)      $    5,788
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Depreciation and amortization                                             4,091              3,789            4,548
      Deferred income tax expense (benefit)                                      (468)            (3,305)           2,930
      Loss (gain) on disposal of fixed assets, net                             (1,526)               938           (1,115)
      Changes in operating assets and liabilities:
          Restricted cash                                                      (1,828)                59              100
          Accounts receivable                                                   1,293             11,215           (1,208)
          Prepaid expenses and other current assets                               177              1,167              397
          Accounts payable and accrued liabilities                             (2,800)              (368)          (1,709)
          Restructuring, impairment and loss contract reserves                  1,287              4,863                -
                                                                        ---------------------------------------------------
                Net cash provided by operating activities:                      2,589             12,478            9,731
                                                                        ---------------------------------------------------
Cash flows from investing activities:
  Capital expenditures                                                         (2,800)            (8,795)          (3,656)
  Proceeds from the sale of property, equipment and leasehold
    improvements                                                               24,725                619            4,355
  Collection of notes receivable                                                    -              3,730                -
  Other assets                                                                   (461)              (431)             (47)
                                                                        ---------------------------------------------------
                Net cash provided by (used in) investing activities:           21,464             (4,877)             652
                                                                        ---------------------------------------------------
Cash flows from financing activities:
  Borrowings (payments) on revolver, net                                      (17,186)             6,000             (751)
  Payments on term note                                                       (12,000)           (12,693)               -
  Other long-term obligation                                                    8,276                  -                -
  Payment of subordinated debt                                                    (10)                 -          (14,180)
  Stock repurchase                                                                  -               (213)          (2,778)
  Long-term portion of prepaid lease                                              262                104              399
  Adjustment for overpaid warrants                                                  -                  -              (10)
                                                                        ---------------------------------------------------
                Net cash used in financing activities:                        (20,658)            (6,802)         (17,320)
                                                                        ---------------------------------------------------
Net increase (decrease) in cash and cash equivalents                            3,395                799           (6,937)
Cash and cash equivalents at beginning of period                                  932                133            7,070
                                                                        ---------------------------------------------------

Cash and cash equivalents at end of period                                 $    4,327        $       932       $      133
                                                                        ===================================================

Non-cash investing activities
  Property exchanged for a note receivable                                 $      414        $         -       $    3,812
                                                                        ===================================================
  Property sold pursuant to a sale-leaseback transaction, recognized
    as a capital lease                                                     $   10,403        $         -       $        -
                                                                        ===================================================
  Property previously held under the operating lease-financing
    facility, financed by senior debt credit facility                      $   13,184        $         -       $        -
                                                                        ===================================================
  Assets written off against restructuring reserve                         $    2,204        $     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                                                               $    1,286        $     1,720       $    3,846
                                                                        ===================================================
    Income taxes                                                           $      (65)       $       (26)      $      872
                                                                        ===================================================
</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, 2002 include the
     accounts of Correctional Services Corporation and its wholly owned
     subsidiaries:

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

     All significant intercompany balances and transactions have been
     eliminated.

2. Use of Estimates in Consolidated Financial Statements

     In preparing consolidated financial statements in conformity with
     accounting principles generally accepted in the United States of America,
     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-7

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

3. New Accounting Pronouncements

     On July 2001, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Standards (SFAS) No. 141, Business
     Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
     No. 141 is effective for all business combinations completed after June 30,
     2001. SFAS No. 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 No. 142. The Company adopted SFAS No. 142 , effective January 1, 2002.
     The Company analyzed net goodwill at the juvenile division reporting level,
     as of January 1, 2002, and its assessment is that there is no impairment of
     goodwill. There is no purchased goodwill associated with the adult
     division.

     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 adoption of this
     standard did not affect the Company's financial position or results of
     operations.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
     with Exit or Disposal Activities. This statement addresses financial
     accounting and reporting for costs associated with exit or disposal
     activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
     Liability Recognition for Certain Employee Termination Benefits and Other
     Costs to Exit an Activity (including Certain Costs Incurred in a
     Restructuring). The provisions of this Statement are effective for exit or
     disposal activities that are initiated after December 31, 2002, with early
     application encouraged. Management does not believe that adoption of this
     standard will have a material effect on the Company's financial position or
     results of operations.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
     Compensation - Transition and Disclosure, which: (i) amends SFAS No. 123,
     Accounting for Stock-Based Compensation, to provide alternative methods of
     transition for an entity that voluntarily changes to the fair value based
     method of accounting for stock-based employee compensation; (ii) amends the
     disclosure provisions of SFAS No. 123 to require prominent disclosure about
     the effects on reported net income of an entity's accounting policy
     decisions with respect to stock-based employee compensation; and (iii)
     requires disclosure about those effects in interim financial information.
     The Company has not adopted the fair value based method of accounting for
     stock-based employee compensation. Items (ii) and (iii) of the new
     requirements in SFAS No. 148 are effective for financial statements for
     fiscal years ending after December 15, 2002. The Company has adopted the
     reporting requirements of item (ii) and will include the reporting
     requirements of item (iii) beginning in its first interim period after
     December 15, 2002

     In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
     Accounting and Disclosure Requirement for Guarantors, including Indirect
     Guarantors of Indebtedness to Others (FIN 45). FIN 45 creates new
     disclosure and liability recognition requirements for certain guarantees,
     including obligations to stand ready to perform. The initial recognition
     and measurement requirements of FIN 45 are effective prospectively for
     guarantees issued or modified after December 31, 2002, and the disclosure
     requirements are effective for financial statement periods ending after
     December 15, 2002. In accordance with FIN 45, the Company has disclosed
     guarantee information.

                                      F-8

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

     On January 31, 2003, the FASB issued FASB Interpretation No. 46,
     Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 clarifies
     existing accounting for whether variable interest entities should be
     consolidated in financial statements based upon the investees ability to
     finance its activities without additional financial support and whether
     investors possess characteristics of a controlling financial interest. FIN
     46 applies to years or interim periods beginning after June 15, 2003 with
     certain disclosure provisions required for financial statements issued
     after January 31, 2003. The Company currently does not have investments in
     any variable interest entities.

4. Revenue Recognition and Contract Provisions

     Facility management revenues are recognized as services are provided based
     on a net rate per day per inmate or on a fixed monthly rate. 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. 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. Certain contracts
     are renewable at the option of the customer for up to 20 years.

     Certain revenues are accrued, based on population levels or other pertinent
     available data. Subsequent adjustments to revenue are recorded when actual
     levels are known or can be reasonably estimated. Included in accounts
     receivables at December 31, 2002 and 2001 is approximately $885,000 and
     $738,000, respectively, of unbilled receivables associated with accrued
     revenues.

     One of the Company's significant programs operates under a contract whereby
     revenues 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 $15.8 million, $15.5 million,
     and $15.0 million, have been recorded for the years ended December 31,
     2002, 2001, and 2000, 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.

     The majority of the Company's receivables are due from federal, state and
     local government agencies. Payment terms vary based on the particular
     institutions. The Company performs periodic evaluations of the
     collectibility of its receivables and does not require collateral on its
     accounts receivable. The Company determines its allowance by considering a
     number of factors, including the length of time trade accounts receivable
     are past due, the Company's previous loss history, and the customers
     current ability to pay its obligation to the Company. The Company
     writes-off accounts receivable when they become uncollectible, and payments
     subsequently received on such receivables are credited to the allowance for
     doubtful accounts. Accounts receivable are presented net of an allowance
     for doubtful accounts of $637,000 and $2.9 million at December 31, 2002 and
     2001, respectively. The Company recognized a provision for doubtful
     accounts of $330,000, $1.5 million, and $927,000 for the years ended
     December 31, 2002, 2001 and 2000, respectively.

     The Company evaluates the future profitability of its contracts when events
     suggest that the contract may not be profitable over the remaining term of
     the contract. The Company measures the estimated future losses as the
     present value of the estimated net cash flows over the remainder of the
     contract from the time of measurement.

                                      F-9

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

5. 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 restricted cash at December 31, 2002 is a $1.4 million
     certificate of deposit securing a letter of credit of the same amount,
     related to the Phoenix, Arizona facility transaction (see NOTE J - OTHER
     LONG TERM OBLIGATIONS), and approximately $434,000 in an escrow account,
     set aside as collateral on the Company's note payable. The restricted cash
     balance of $33,000 at December 31, 2001 relates to a major maintenance and
     repair reserve fund established by the Company as required by certain
     contracts.

6. 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. Repairs and maintenance
     costs are expensed as incurred.

7. Assets Held Under Capital Leases

     Assets held under capital leases are recorded at the lower of the net
     present value of the minimum lease payments or the fair value of the leased
     asset at the inception of the lease. Amortization expense is recognized
     using the straight-line method over the shorter of the estimated useful
     life of the asset or the term of the related lease.

                                      F-10

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

8.  Goodwill

     Goodwill representing the excess of the cost over the net assets of
     acquired businesses is stated at cost and, through 2001, was amortized over
     10 years using the straight-line method. Amortization expense for the years
     ended December 31, 2002, 2001, and 2000 was $0, $370,000 and $370,000,
     respectively. Accumulated amortization was $3.0 million at both December
     31, 2002 and 2001. The Company adopted the provisions of SFAS No. 142,
     Goodwill and Other Intangible Assets, effective January 1, 2002, and
     accordingly discontinued the amortization of goodwill. Based on the
     Company's evaluations of goodwill in accordance with the provisions of SFAS
     No. 142, there is no asset impairment associated with goodwill as of
     January 1, 2002, or during the period ended December 31, 2002.

     The information presented below reflects adjustments to information
     reported in 2001 and 2000 as if SFAS No. 142 had been applied in those
     years (in thousands, except for earnings-per-share amounts):

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                                    -----------------------------------------------
                                                          2002            2001            2000
                                                    -----------------------------------------------
          <S>                                       <C>               <C>            <C>
          Net income (loss), as reported                   $2,363         $(5,880)         $5,788
            Addback: Goodwill amortization                      -             222             222
                                                    -----------------------------------------------
          Pro forma net income (loss)                      $2,363         $(5,658)         $6,010
                                                    ===============================================

          Basic earnings per share:
            Net income (loss), as reported                 $ 0.23         $ (0.58)         $ 0.51
              Addback: Goodwill amortization                    -            0.02            0.02
                                                    -----------------------------------------------
            Pro forma net income (loss)                    $ 0.23         $ (0.56)         $ 0.53
                                                    ===============================================

          Diluted earnings per share:
            Net income (loss), as reported                 $ 0.23         $ (0.58)         $ 0.51
              Addback: Goodwill amortization                    -            0.02            0.02
                                                    -----------------------------------------------
            Pro forma net income (loss)                    $ 0.23         $ (0.56)         $ 0.53
                                                    ===============================================
</TABLE>

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. During
     2002 the Company implemented actions to improve the operations of a certain
     facility and estimated that those actions would result in future
     profitability of those operations. However, the result of those activities
     did not sufficiently impact the results of operations and accordingly
     management reassessed impairment associated with this facility during the
     forth quarter of 2002. Based on the Company's analysis of long-lived assets
     in accordance SFAS No. 144, Accounting for the Impairment or Disposal of
     Long-Lived Assets), the Company recognized an impairment of long-lived
     assets amounting to approximately $1.9 million during the fourth quarter of
     2002.

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.

                                      F-11

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

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. The average quarterly 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

     The Company follows SFAS No. 123, which establishes a fair value based
     method of accounting for stock-based employee compensation plans; however,
     the Company has elected to account for its employee stock compensation
     plans using the intrinsic value method under Accounting Principles Board
     Opinion No. 25 with pro forma disclosures of net earnings and earnings per
     share, as if the fair value based method of accounting defined in SFAS No.
     123 had been applied.

     Had compensation cost for the Company's stock option plan been determined
     on the fair value at the grant dates for stock-based employee compensation
     arrangements consistent with the method required by SFAS No. 123, the
     Company's net income (loss) and net income (loss) per common share would
     have been the pro forma amounts indicated below (see also NOTE P - STOCK
     OPTIONS):

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                -------------------------------------------------
                                                                        2002            2001            2000
                                                                -------------------------------------------------
         <S>                                                    <C>                <C>             <C>
         Net income (loss), as reported                                  $2,363         $(5,880)         $5,788
           Deduct: Total stock-based compensation expense
           determined under fair value based methods for all
           awards, net of related tax effects                              (212)           (564)           (943)
                                                                -------------------------------------------------
         Pro forma net income (loss)                                     $2,151         $(6,444)         $4,845
                                                                =================================================

         Income (loss) per common share - basic
           As reported                                                   $ 0.23         $ (0.58)         $ 0.51
           Pro forma                                                       0.21           (0.63)           0.43

         Income (loss) per common share - diluted
           As reported                                                   $ 0.23         $ (0.58)         $ 0.51
           Pro forma                                                       0.21           (0.63)           0.43
</TABLE>

13. Comprehensive Income

     The Company's comprehensive income (loss) is equivalent to net income
     (loss) for the years ended December 31, 2002, 2001, and 2000.

14. 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 no shares during the year ended December 31,
     2002. 93,000 shares and 1.1 million shares were repurchased during the
     years ended December 31, 2001 and 2000, respectively, at a cost of $213,000
     and $2.8 million, respectively.

                                      F-12

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

15. Legal Costs

     The Company recognizes legal costs related to the defense or assertion of
     legal claims when the related services have been rendered. Legal costs that
     are associated with specific facility operations are recognized in facility
     operating expenses. Other legal costs are recognized in general and
     administrative expense.

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 and Restricted Cash

     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.

NOTE C - PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                        ------------------------------
                                                              2002           2001
                                                        ------------------------------
     <S>                                                <C>               <C>
     Prepaid insurance                                     $      557     $      211
     Prepaid real estate taxes                                      4             68
     Prepaid and refundable (payable) income taxes                (98)            29
     Prepaid rent - current portion                               384            333
     Prepaid expenses                                             476            841
     Other current assets                                           6             24
                                                        ------------------------------
                                                           $    1,329     $    1,506
                                                        ==============================
</TABLE>

                                      F-13



<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,
                                              -------------------------------
                                                     2002            2001
                                              -------------------------------

     Buildings and land                           $  27,554       $  38,018
     Equipment                                        9,296          10,109
     Capital lease assets                            10,403               -
     Leasehold improvements                          10,423           9,803
                                              -------------------------------
                                                     57,676          57,930

     Less accumulated depreciation                   18,472          16,952
                                              -------------------------------
                                                  $  39,204       $  40,978
                                              ===============================


Depreciation expense for the years ended December 31, 2002, 2001, and 2000 was
approximately $3.0 million, $3.4 million, and $4.1 million, respectively.

During December 2002, the Company sold its Florence, Arizona facility to an
unrelated not-for-profit entity for approximately $10.4 million. The Company
leased back the property under an agreement that is classified as a capital
lease and recognized capital lease assets of $10.4 million paid. The capital
lease assets will be amortized over the lesser of their remaining estimated
economic life or the 20-year lease period. There is no accumulated amortization
as of December 31, 2002.

NOTE E - OTHER ASSETS

Other assets consist of the following (in thousands):

                                                       December 31,
                                              -------------------------------
                                                     2002            2001
                                              -------------------------------

     Deferred financing costs, net                $     922       $     700
     Deposits                                           800             759
     Prepaid rent - net of current portion            2,796           3,058
     Other                                              572           1,015
                                              -------------------------------
                                                  $   5,090       $   5,532
                                              ===============================

                                      F-14

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE F - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    December 31,
                                                            -----------------------------
                                                                 2002            2001
                                                            -----------------------------
     <S>                                                    <C>              <C>
     Accrued expenses                                         $    6,447     $    5,965
     Accrued interest                                                 31            204
     Accrued medical claims and premiums                           1,688          1,768
     Accrued worker's compensation claims and premiums             1,571          1,194
     Payroll and related taxes                                     4,594          3,965
     Other                                                         1,490            758
                                                            -----------------------------
                                                              $   15,821     $   13,854
                                                            =============================
</TABLE>

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

NOTE G - RESTRUCTURING, IMPAIRMENT AND LOSS CONTRACT RESERVES

During the fourth quarter of 2002, the Company recorded charges of $3.3 million
arising from a loss contract and the impairment of property, equipment and
leasehold improvements at its Keweenaw, Michigan facility. The estimated future
losses on contracts is based on management's estimate of future results of
operations. The impairment of the aforementioned assets is based on the present
value of the estimated future cash flows of the facility in relation to the book
value of the assets. The Company also recorded a loss contract reserve of
$220,000 related to its Bayamon, Puerto Rico facility. The related charges are
as follows:

     Loss contracts                                           $  1,544
     Asset impairment                                            1,926
                                                          -------------

                                                              $  3,470
                                                          =============

The composition of loss contract reserves as of December 31, 2002 is as follows:

     Current portion                                               472
     Non-current portion                                         1,072
                                                          -------------
                                                              $  1,544
                                                          =============

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
                                                          =============

                                      F-15

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE G - RESTRUCTURING, IMPAIRMENT AND LOSS CONTRACT RESERVES (continued)

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.

In connection with the 2001 restructuring, the Company closed one facility
during 2001 and four facilities during 2002, resulting in the elimination of 343
positions, including the elimination of positions at the corporate office. There
is no reserve associated with the 2001 restructuring and impairment charges as
of December 31, 2002.

NOTE H - LOANS PAYABLE

Loans payable consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                           -----------------------------
                                                                                2002           2001
                                                                           -----------------------------
     <S>                                                                   <C>              <C>
     Revolving line of credit that matured October 2002. Interest was
     payable at LIBOR plus 3.50% or prime plus 2.00%.                        $        -     $   16,000

     Revolving line of credit maturing September 25, 2005. Interest
     payable at LIBOR plus 4.00% or prime plus 2.00% and is payable
     monthly.                                                                         -              -

     Note 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 restricted cash in the amount of
     $434,000 in 2002.                                                              312            314
                                                                           -----------------------------
                                                                                    312         16,314
     Less current portion                                                             3         16,000
                                                                           -----------------------------
                                                                             $      309     $      314
                                                                           =============================
</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).
The financing arrangement was secured by all of the assets of the Company, and
restricted the payment of dividends.

                                      F-16

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE H - LOANS PAYABLE (continued)

The amended Agreement with Fleet matured on October 30, 2002, at which time the
Company entered into a new long-term financing agreement with GE Capital
("Credit Agreement"). The Credit Agreement is subject to compliance with various
financial covenants based on a minimum net worth and EBITDA requirements, and
borrowing base criteria. The Company is in compliance with all covenants as of
December 31, 2002. In association with the Credit Agreement, the Company
incurred $995,000 in loan fees, which are being amortized as interest expense
over the term of the Credit Agreement, and are included in Other Assets as of
December 31, 2002. The Credit Agreement is secured by all of the assets of the
Company under the original terms of the Credit Agreement and consists of the
following components:

..    a $12 million term loan that matures on September 25, 2004, accrues
     interest at the lesser of LIBOR plus 5% or prime plus 3%, with monthly
     principal payments of $50,000 plus interest and a balloon payment of
     approximately $10.8 million due upon maturity. The term loan was paid in
     full on November 28, 2002 when the Company sold its Salinas, Puerto Rico
     facility. The term loan was secured by mortgages on certain real property
     owned by the Company.

..    a $19 million revolving line of credit that matures on September 25, 2005,
     and accrues interest at the lesser of LIBOR plus 4.0%, or prime plus 2.0%.
     The Company also incurs a monthly fee based on 0.5% of its unused line of
     credit, coupled with an annual fee of $75,000, payable quarterly. The
     proceeds were used primarily to satisfy the Company's revolver balance
     under its former credit agreement, which became due October 30, 2002. As of
     December 31, 2002, there is no outstanding balance under this revolving
     line of credit. Available borrowings under the revolving line of credit
     amount to approximately $14.2 million as of December 31, 2002, which takes
     into consideration collateral limitations and outstanding letters of credit
     totaling $3.2 million.

     At December 31, 2002 aggregate maturities of loans payable were as follows
     (in thousands):

          Year ending December 31,
         ---------------------------------------------------
          2003                                     $       3
          2004                                             3
          2005                                             4
          2006                                           302
          2007                                             -
          Thereafter                                       -
                                                 -----------
          Total                                    $     312
                                                 ===========


NOTE I - CAPITAL LEASE OBLIGATION AND DEFERRED GAIN

During December 2002, the Company sold its Florence, Arizona facility to an
unrelated not-for-profit entity for approximately $10.4 million. The Company
leases back the property under a non-recourse agreement that is classified as a
capital lease, with a term of twenty years. The $692,000 gain on the sale is
being deferred and recognized ratably over the life of the lease, and is
included in other long-term liabilities in the financial statements. Under the
sale-leaseback transaction discussed above, the underlying financing was
provided by a municipal bond issuance with the proceeds loaned to the
not-for-profit entity. As a result, cash otherwise due to the company under its
contract with the state, is first used to pay bond debt service and other costs.
Therefore, while the company recognizes revenue for the full amount under its
contract, a portion of the associated cash is not received by the Company and is
treated as a reduction in its capital lease obligation and interest expense.

                                      F-17

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE I - CAPITAL LEASE OBLIGATION AND DEFERRED GAIN (continued)

Future minimum capital lease payments are as follows (in thousands):

          Year ending December 31,
         ----------------------------------------------------
          2003                                     $   1,042
          2004                                         1,055
          2005                                         1,057
          2006                                         1,054
          2007                                         1,055
          Thereafter                                  15,835
                                                 -----------
          Total lease payments                        21,098
          Less imputed interest at 7.9%              (10,695)
                                                 -----------
                                                      10,403
          Less current portion                          (220)
                                                 -----------
                                                   $  10,183
                                                 ===========

NOTE J - OTHER LONG TERM OBLIGATIONS

On July 31, 2002, the Company entered into a transaction with an unrelated
not-for-profit entity with respect to the Company's Phoenix, Arizona facility
and received approximately $8.5 million from the issuance of tax-exempt contract
revenue bonds, issued by the Industrial Development Authority of Maricopa
County, Arizona. The bondholders have a security interest in the facility. The
bonds will be paid exclusively from revenue generated by the facility, and are
non-recourse to the Company. The Company used the proceeds to reduce the balance
of its revolving line of credit facility. In conjunction with the transaction,
the State of Arizona has an option to purchase the facility for an initial
purchase price of $8.5 million. The State's option price will decline over time.
In the event that the State exercises its option, there may be a shortfall
between the proceeds of the sale and the funds needed to redeem the bonds. The
Company has provided to the bondholders a letter of credit, secured by a
certificate of deposit, which would be utilized to fund the aforementioned
shortfall, if any. The letter of credit has an initial balance of $1.4 million
and decreases over time as the calculated difference between the sale proceeds
that would be due from the State and the unpaid principal balance of the bonds
narrows. After 2010, the sale proceeds from the State would be sufficient to
satisfy the redemption requirement. The Company will continue to operate the
facility under a management agreement through 2012, subject to two five-year
renewal options, exercisable by the State. Due to the Company's continuing
involvement in the operation of the facility, and its partial guarantee of the
redemption proceeds by virtue of the letter of credit, the Company has not
recorded the transaction as a sale in accordance with SFAS No. 66, Accounting
for Sales of Real Estate and SFAS No. 98 Accounting for Leases. On the date of
the transaction, the book value of the facility in the amount of $8.7 million
and accumulated depreciation of $2.1 million continued to be reflected in the
Company's financial statements. The Company has also recorded a long-term
obligation initially equal to the net proceeds from the transaction in the
amount of $8.4 million. Upon the earliest occurrence of either 1) the State
exercising its purchase option, 2) the expiration or termination of the
Company's management agreement with the State or 3) when conditions exist such
that the transaction is deemed to have been a sale in accordance with the
generally accepted accounting principles, as discussed above, the sales
transaction will be reflected in the financial statements and a gain of
approximately $1.9 million will be recorded.

During December 2002, the Company sold its Florence, Arizona facility to an
unrelated not-for-profit entity for approximately $10.4 million. The Company
leases back the property under a non-recourse agreement that is classified as a
capital lease, with a term of twenty years (see NOTE I - CAPITAL LEASE
OBLIGATION AND DEFERRED GAIN). The $692,000 gain on the sale is being deferred
and recognized ratably over the life of the lease, and is included in other
long-term liabilities in the financial statements.

                                      F-18

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE J - OTHER LONG TERM OBLIGATIONS

At December 31, 2002 aggregate maturities of other long-term obligations are as
follows (in thousands):

          Years ending December 31,
         ---------------------------------------------------
          2003                                     $     275
          2004                                           280
          2005                                           299
          2006                                           320
          2007                                           342
          Thereafter                                   7,453
                                                 -----------

          Total                                    $   8,969
                                                 ===========


NOTE K - 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, 2002 are as follows (in thousands):

                                                                     Related
         Year ending December 31,                      Total       Companies
         --------------------------------------------------------------------
         2003                                        $ 3,305          $  818
         2004                                          2,247             360
         2005                                          1,466             368
         2006                                          1,218             390
         2007                                            848             397
         Thereafter                                    3,615           1,635
                                                 ----------------------------
                                                     $12,699          $3,968
                                                 ============================


The Company leases a facility from a related party. The President, a Vice
President, and a stockholder of the Company own less than 55% of the 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, 2002, 2001 and 2000.

The Company leases a second facility from a related party. A stockholder of the
Company owns 10% of the related party. The lease commenced October 1, 1996 and
expired September 30, 2001. The Company extended the lease agreement ten years,
effective October 1, 2001. In addition to the base rent, the Company pays taxes,
insurance, repairs and maintenance on this facility. The Company paid $363,000,
$242,000, and $201,000 in rent payments for the years ended December 31, 2002,
2001 and 2000, respectively.

The Company leased a third building from a related party. The President and a
stockholder of the Company own 33% of the 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 in rent
payments for the year ended December 31, 2000.

Rental expense of operating leases and machinery and equipment for the years
ended December 31, 2002, 2001, and 2000, aggregated $5.1 million, $6.2 million,
and $6.8 million, respectively.

                                      F-19

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE L - INCOME TAXES

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

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                   ------------------------------------
                                                        2002       2001        2000
                                                   ------------------------------------
         <S>                                       <C>           <C>          <C>
         Current:
           Federal                                    $     -    $      -     $   114
           State and local                                191         103         666

         Deferred:
           Federal, state and local                      (468)     (3,305)      2,930
                                                   ------------------------------------
                                                      $  (277)   $ (3,202)    $ 3,710
                                                   ====================================
</TABLE>

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,
                                                   ------------------------------------
                                                       2002        2001        2000
                                                   ------------------------------------
         <S>                                       <C>           <C>        <C>
         Statutory federal rate                         34.0%       34.0%       34.0%

         State taxes, net of federal tax benefit         5.6         4.7         6.5

         Non-deductible items                            4.9        (1.8)       (0.4)

         Valuation allowance and reconciliation        (53.5)       (2.1)       (3.4)

         Other                                          (4.3)        0.5         2.4
                                                   ------------------------------------

                                                       (13.3)%      35.3%       39.1%
                                                   ====================================
</TABLE>

At December 31, 2002, the Company had net operating loss carryforwards of
approximately $15.1 million, $32.2 million and $4.7 million for federal, state,
and foreign income tax purposes, respectively, that expire in periods beginning
in 2007 through 2022. At December 31, 2002, the Company also had an Alternative
Minimum Tax (AMT) credit of approximately $588,000, 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 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.

During December 2002, the Company recognized a $1.4 million decrease in its
deferred tax asset valuation allowance principally associated with the expected
exiting of Puerto Rico operations and related tax attributes of intercompany
loans and investments.

                                      F-20

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE L - 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,
                                            ----------------------------------
                                                   2002              2001
                                            ----------------------------------

     Restructuring and impairment              $     1,902       $     1,136
     Vacation accrual                                  444               214
     Startup and development costs                     138               614
     Accrued expenses                                1,475             1,306
     Depreciation                                    1,225               672
     Net operating loss carryforwards                6,576             6,994
     Alternative minimum tax credit                    588               562
     Other                                             695             2,450
                                            ----------------------------------
                                                    13,043            13,948
     Valuation allowance                            (1,913)           (3,286)
                                            ----------------------------------
                                                    11,130            10,662
     Less: current portion                          (3,008)           (2,037)
                                            ----------------------------------
                                               $     8,122       $     8,625
                                            ==================================


NOTE M - COMMITMENTS AND CONTINGENCIES

1.   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.

                                      F-21

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE M - COMMITMENTS AND CONTINGENCIES (continued)

2.   Legal Matters

     The nature of the Company's business results in claims and litigation
     against the Company for damages arising from the conduct of its employees
     and others. 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 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.
     The Company believes that the outcome of these claims will not have a
     material adverse effect on its financial condition or results of
     operations.

     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, in total, $500,000,000 in
     compensatory damages and $500,000 000 in 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 proceedings
     and trial is currently scheduled for July, 2003. 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. In
     addition, the punitive damages sought by the plaintiffs are not insurable.
     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-22

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE M - COMMITMENTS AND CONTINGENCIES (continued)

     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.

     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 former 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 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, 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.

     Plaintiffs, each a former resident of the LeMarquis Community Correctional
     Center, allege that a former employee of the Company sexually assaulted and
     battered them while they were housed at the LeMarquis Community
     Correctional Center formerly operated by the Company in Manhattan. Each
     Plaintiff has brought causes of action for negligence against CSC. Each
     Plaintiff seeks $50,000,000 in compensatory damages from the company. 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. In addition, the punitive damages sought by the plaintiffs are not
     insurable. 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-23

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE M - 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 reached a final
     agreement to accept $600,000 to settle the outstanding receivables, and was
     paid in full during 2002.

     The Company has initiated legal action against the Puerto Rican government
     to recover unpaid revenues and receive reimbursement for costs and damages.
     The Company has approximately $1.6 million in receivables and approximately
     $560,000 in leasehold improvements and equipment as of December 31, 2002,
     pending resolution of the aforementioned lawsuit.

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
     agreement was renewed on September 29, 2002, and is subject to renewal on
     September 29, 2003. 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, as adjusted by the gain
     on the disposal of assets, and the charges related to the impairment of
     assets and loss contracts, such bonus not to exceed $200,000.

     On April 15, 2002, the Company entered into an employment agreement with
     its Chief Operating Officer. The agreement is in effect for a term of two
     years and provides for a minimum annual salary of $192,500, plus executive
     benefits, a temporary housing allowance, and bonuses, payable from time to
     time in such amounts as may be determined by the Company. The agreement
     also granted options to purchase 50,000 shares of the Company's common
     stock, with the options vesting ratable over three years from the grant
     date.

6.   Concentrations of Credit Risk

     The Company's contracts in 2002, 2001, and 2000 with government agencies
     where revenues exceeded 10% of the Company's total consolidated revenues
     were as follows:

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                          -------------------------------------------
                                                                 2002          2001         2000
                                                          -------------------------------------------
     <S>                                                  <C>                <C>          <C>
     Florida Department of Juvenile Justice                       13%           11%          10%
     Texas Department of Criminal Justice                          8%           13%          13%
     Various Other Agencies in the State of Texas                 13%           15%          13%
     Various Federal Agencies                                     17%            9%           9%
     State of Maryland Department of Juvenile Justice             10%           13%          11%
</TABLE>

                                      F-24

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE M - COMMITMENTS AND CONTINGENCIES (continued)

7.   Construction Commitments

     The Company has made non-refundable deposits of approximately $430,000, and
     had construction commitments of approximately $2.1 million at December 31,
     2002 related to a project the Company was awarded in July 2002 to construct
     a 500-bed detention center in Tacoma, Washington, which will be used
     principally by the INS. The Company currently operates a 200-bed
     Immigration and Naturalization Service (INS) facility in Seattle,
     Washington, which will be closed upon completion of the new detention
     center. The agreement has an initial term of five years, subject to annual
     renewals. The Company is currently structuring a financing arrangement by
     means of the issuance of non-recourse bonds through the Washington Economic
     Development Finance Authority (WEDFA) for approximately $71.7 million. The
     debt holder would be a subsidiary of the Company, CSC of Tacoma LLC, a
     single member LLC. The Company expects to be reimbursed for all
     construction-related expenditures from the bond sale proceeds; however,
     there can be no assurances that the Company will be able to obtain
     financing to fund this project. The Company has no other construction
     commitments as of December 31, 2002.

8.   Letters of Credit

     The Company obtained letters of credit in the amount of $2.6 million in
     favor of worker's compensation insurance carriers for the policy periods of
     February 2001 through February 2003, that are renewed quarterly, as deemed
     contractually necessary.

     In August 2002, the Company obtained a $1.4 million letter of credit with
     Fleet Bank, in favor of the State of Arizona, related to the Phoenix West
     facility transaction discussed in NOTE J - OTHER LONG TERM OBLIGATIONS. The
     letter of credit is secured by a $1.4 million certificate of deposit,
     included in the Company's restricted cash balance at December 31, 2002. The
     letter of credit balance decreases over time as the calculated difference
     between the sale proceeds that would be due from the State upon purchase of
     the facility, and the unpaid principal balance of the bonds narrows. After
     2010, the sale proceeds from the State would be sufficient to satisfy the
     redemption requirement.

     In the ordinary course of its business, the Company is required to
     collateralize certain contractual obligations with letters of credit in
     favor of the other party to the contract. The amounts of these letters of
     credit are approximately $600,000.

9.   Indemnifications

     The Company indemnified its officers and directors against costs and
     expenses related to shareholder and other claims (i.e., only actions taken
     in their capacity as officers and directors) that are not covered by the
     Company's directors and officers insurance policy. This indemnification is
     ongoing and does not include a limit on the maximum potential future
     payments, nor are there any recourse provisions or collateral that may
     offset the cost. As of December 31, 2002, the Company has not recorded a
     liability for any obligations arising as a result of these
     indemnifications.

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

     As of December 31, 2002, the Company has no obligation arising as a result
     of these indemnifications.

                                      F-25

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE N - 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 juveniles; 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. 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. At
December 31, 2002, the Company has not reserved any of the approximately
$673,000 receivable from the State, as the Company does not believe that it is
probable that the asset has been impaired and, accordingly, expects collection
of the full amount of the receivable.


NOTE O - 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,
                                                              --------------------------------------
                                                                  2002         2001         2000
                                                              --------------------------------------
     <S>                                                      <C>            <C>          <C>
     Numerator:
        Net income (loss)                                       $  2,363     $ (5,880)    $  5,788
                                                              ======================================

     Denominator:
        Basic income (loss) per share:
        Weighted average shares outstanding                       10,155       10,181       11,366
        Effect of dilutive securities - stock options
           and warrants                                               40            -            1
                                                              --------------------------------------

        Denominator for diluted income (loss) per share           10,195       10,181       11,367
                                                              ======================================

        Net income (loss) per common share - basic              $   0.23     $  (0.58)    $   0.51
                                                              ======================================
        Net income (loss) per common share - diluted            $   0.23     $  (0.58)    $   0.51
                                                              ======================================
</TABLE>

                                      F-26

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE O - EARNINGS (LOSS) PER SHARE (continued)

During the years ended December 10, 2002, 2001, and 2000, there were
approximately 691,000, 838,000 and 907,000 common stock equivalents,
respectively, that were excluded from the calculation of earnings per share
because their effect would have been anti-dilutive. There were no dilutive
securities during the year ended December 31, 2001.

NOTE P - 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.

For purposes of the pro forma presentation in NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, 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, 2002, 2001, and
2000.

<TABLE>
<CAPTION>
                                         Years Ended December 31,
                              ------------------------------------------------
                                  2002             2001             2000
                              ------------------------------------------------
     <S>                      <C>              <C>              <C>
     Volatility                         75%              75%              75%
     Risk free rate                   5.00%            5.00%            5.50%
     Expected life                  3 years          3 years          3 years
</TABLE>

The weighted average fair value of options granted during 2002, 2001, and 2000,
for which the exercise price equals the market price on the grant date was
$0.24, $1.16, and $2.16, respectively.

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.

                                      F-27

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE P - STOCK OPTIONS (continued)

Stock option activity during 2002, 2001, and 2000 is summarized below:

                                                        Weighted-Average
                                             Options      Exercise Price
                                       ----------------------------------

     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
        Granted                              250,000                1.73
        Exercised                                  -                   -
        Canceled                            (357,500)               8.71
                                       ---------------
     Balance, December 31, 2002              730,750                6.33
                                       ===============


The following table summarizes information concerning currently outstanding and
exercisable stock options at December 31, 2002:

                                            Weighted-Average
                                                   Remaining    Weighted-Average
               Range of          Number     Contractual Life      Exercise Price
        Exercise Prices     Outstanding              (Years)           ($/share)
     ---------------------------------------------------------------------------
        $  1.61 -  4.12         317,500                  8.2             $  1.90
           4.12 -  6.18          13,000                  7.1                4.32
           6.18 -  8.25         210,000                  6.2                7.48
           8.25 - 10.31          15,000                  3.3                8.75
          10.31 - 12.37           5,000                  1.0               10.75
          12.37 - 14.44         170,250                  0.2               12.98
                          --------------
                                730,750                  2.3                6.33
                          ==============

                                            Weighted-Average
               Range of          Number       Exercise Price
        Exercise Prices     Exercisable            ($/share)
     --------------------------------------------------------
        $  1.61 -  4.12          29,333              $  2.47
           4.12 -  6.18           8,667                 4.32
           6.18 -  8.25         210,000                 7.48
           8.25 - 10.31          15,000                 8.75
          10.31 - 12.37           5,000                10.75
          12.37 - 14.44         170,250                12.98
                          --------------
                                438,250                 9.21
                          ==============

                                      F-28

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE Q - EMPLOYEE BENEFIT PLANS

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 $11,000 in 2002, and $10,500 in
2001 and 2000. For the years ended 2001 and 2000, the Company had two separate
plans, both established prior to the merger in 1999, for CSC and YSI employees.
Beginning January 1, 2002, the Company merged the plans into a single plan for
employees. The Company accrued or contributed $120,000, $119,000, and $154,000,
in 2002, 2001, and 2000, respectively, to the plan. No Company contributions
were made to the YSI plan for the 2001 and 2000 plan years.

NOTE R - SELF INSURANCE

The Company has obtained an aggregate excess workers' compensation policy, which
limits the Company's exposure to a maximum of $4.5 million and $3.5 million as
of December 31, 2002 and 2001, respectively. The estimated insurance liability
totaling $1.3 million and $1.1 million on December 31, 2002 and 2001,
respectively, is based upon review by the Company of claims filed through
December 31, 2002, 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, 2002 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, 2002 and represents the Company's estimated liability as of
December 31, 2002.

NOTE S - RELATED PARTY TRANSACTIONS

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 the President pay for all
leasehold renovations, and other associated costs incurred by the Company of
approximately $558,000. The President paid these costs in full during 2001.

A director of CSC is a member of a law firm that provides legal services as the
Company's legal counsel. Payments to this firm amounted to approximately
$47,000, $98,000, and $270,000 in legal fees from the Company for the years
ended December 31, 2002, 2001 and 2000, respectively.

NOTE T - SUBSEQUENT EVENTS

On February 26, 2003, the Company was assessed a $300,000 civil penalty by the
New York Temporary State Commission on Lobbying, related to deficiencies in its
reporting of lobbying activities between January 1, 2000 and June 30, 2001. The
penalty was accrued for in 2002 and paid in full in March 2003.

                                      F-29

<PAGE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE U - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2001 and 2002 (in thousands).

<TABLE>
<CAPTION>
                             First Quarter         Second Quarter         Third Quarter        Fourth Quarter
                        -----------------------------------------------------------------------------------------
                            2002       2001       2002       2001       2002       2001       2002        2001
                        -----------------------------------------------------------------------------------------
<S>                     <C>          <C>        <C>        <C>        <C>        <C>        <C>        <C>
Revenues                  $ 40,057   $ 45,090   $ 40,611   $ 44,394   $ 39,129   $ 42,344   $ 40,611   $ 42,590
Operating Expenses          38,595     45,306     38,920     44,435     37,713     50,375     40,768     41,201
                        -----------------------------------------------------------------------------------------
Operating income
 (loss)                      1,462       (216)     1,691        (41)     1,416     (8,031)      (157)     1,389
Other income
 (expense) including
 income taxes                 (921)      (351)    (1,063)      (380)      (944)     2,732        879       (982)
                        -----------------------------------------------------------------------------------------
Net income (loss)         $    541      ($567)  $    628      ($421)  $    472    ($5,299)  $    722   $    407
                        =========================================================================================

Basic and diluted
 earnings (loss) per
 share:
Net income (loss)         $   0.05     ($0.06)  $   0.06     ($0.04)  $   0.05     ($0.52)  $   0.07   $   0.04
                        =========================================================================================
</TABLE>

                                      F-30