U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-K

     [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934

      For fiscal year ended December 31, 1997

     [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934

      Commission File No.:  0-23038


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

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

                    1819 Main Street, Sarasota, Florida 34236
               (Address of principal executive offices) (Zip Code)

Issuer's telephone number:  (941) 953-9199

Securities registered under Section 12(b) of the Exchange Act:  None.

Securities registered under Section 12(g) of the Exchange Act:


                     Common Stock, par value $.01 per share
                        Warrants to Purchase Common Stock
                                (Title of Class)


     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act 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 [ ]

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-K is not contained in this form,  and no disclosure  will 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]

     Issuer's revenues for its most recent fiscal year are $59,936,101.

The number of shares of Common Stock, par value $.01 per share, outstanding
as of March 13, 1998 is 7,693,854.  The  aggregate  market value of Common Stock
held by non-affiliates of the Company as of March 13, 1998 is $115,407,810.

<PAGE>

                                     PART I

Item 1.  Description of Business.

Corporate Structure

     Correctional  Services  Corporation  (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 corrections and
detention facilities.  All references to the Company include the Company and all
wholly-owned subsidiaries on a consolidated basis.

Description

     The Company is a leading  developer and manager of privatized  correctional
and detention  facilities  in the United  States.  Through its three  divisions,
Adult, Juvenile and Community Corrections,  the Company provides a diverse range
of services to local, state, and federal governmental correctional agencies. The
Company  currently  has  agreements  to operate 26  correctional  and  detention
facilities  in  New York,  Florida,  Arizona,  Texas,  New  Mexico,  Washington,
Mississippi and  Puerto Rico, with a total of  4,641 beds.  The  Company is also
aggressively pursuing other privatized correctional projects both at the request
for proposal ("RFP") stage and the pre-RFP development stage.

     The Company manages both secure and non-secure  facilities.  The Company's
secure facilities  include a detention and processing center for illegal aliens,
adult prisons, adult jails, intermediate sanction facilities, juvenile detention
and  treatment  facilities,  driving while  intoxicated ("DWI") facilities,  and
military-style boot  camps  for  juvenile offenders. Its non-secure facilities
include residential programs,  such  as  community correctional  facilities  for
federal and state offenders  serving the last six months of their sentences, and
non-residential supervision programs.

     In addition to  providing  fundamental  residential  services for adult and
juvenile  offender, the Company has developed a broad range of programs intended
to reduce  recidivism,  including basic and special  education,  substance abuse
treatment  and  counseling,  vocational  training,  life  skills  training,  and
behavioral  modification  counseling.  The  management  services  offered by the
Company range from project consulting to the design,  development and management
of new  correctional and detention  facilities and the redesign,  renovation and
management  of older  facilities.  The Company  believes  its proven  ability to
manage the full  spectrum of  correctional  facilities  and its wide  variety of
programs and services will increase its marketing opportunities.

Operational Divisions

     The Company has  organized  its  operations  into  three divisions:  Adult,
Juvenile and Community Corrections.

     Adult.  The  Adult  Division  operates  9  secure   facilities  located  in
Seattle, Washington;  Houston, Texas;  Del Valle (Travis), Texas; Pearsall (Frio
County), Texas; Mansfield (Tarrant County), Texas; Florence and Phoenix,
Arizona; Grenada, Mississippi;  and Gallup (McKinley County), New Mexico, with
a total of 2,495 beds.  In addition to providing housing for adult inmates, the
Company provides a variety of rehabilitation and educational services.  The
Company also provides health care, transportation, food  services and work  and
recreational programs for adult inmates.

<PAGE>
     Juvenile.  The Juvenile  Division operates 8 facilities  and has  contracts
to  operate 5 additional  facilities  in  Eagle  Lake  (Colorado County), Texas;
(Bayamon Detention and Treatment Centers), Puerto Rico; Salinas, Puerto Rico and
Okaloosa, Florida.  The current facilities are located in Bartow, Polk City, and
Pahokee, Florida; Canadian (Hemphill), Texas; Mansfield (Tarrant County), Texas;
Rockdale (Milam County), Texas; Killeen  (Bell  County),  Texas and Medical Lake
(Spokane), Washington.  The facilities house convicted youths aged 12 to 20, and
represent  a total of 1,692 beds under contract.  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, and detention  facilities.  The
Company  believes  these  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 its program participants.

     Community  Corrections.   The  Community Corrections Division operates four
facilities,  located in Ft. Worth, Texas; and Brooklyn, Manhattan and the Bronx,
New York with a total of  454 beds.  These are non-secure residential facilities
for  adult  male  and  female  offenders  transitioning  from  institutional  to
independent  living.  Offenders are  eligible  for  these  programs  based  upon
the type of  offense  committed  and  behavior  while incarcerated in prison. If
qualified,  offenders  may generally spend the last six months of their sentence
in a community corrections program, whose mission is to reduce the likelihood of
an inmate committing an offense  after release by assisting in the reunification
process with family and  the  community.  Normally,  in  order  to remain in the
program,  offenders must be employed,  participate in substance abuse  programs,
submit to frequent random drug  testing, and pay a predetermined  percentage  of
their earnings to the government to offset the cost of the program.  The Company
supervises these  activities  and  also  provides  life  skills  training,  case
management,  home confinement  supervision  and family reunification programs at
these facilities. The Company believes that community  correctional   facilities
help reduce recidivism,  result in prison beds being available for  more violent
offenders and, in appropriate  cases,  represent cost-effective alternatives to
prisons.

Marketing and Business Development

     The  Company engages in  extensive marketing and business  development on a
national  basis  and  markets  selected  projects  in  the  international arena.
Marketing  efforts  are  spearheaded  by the Company's business development team
in conjunction with the CEO and outside consultants.

    The Company's  business  development department is responsible for marketing
the full  range  of  services  to  clients.  Marketing  responsibilities include
identifying  new  clients,  preparing  and  delivering  formal presentations and
identifying strategic partners.

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

<PAGE>

Contract Award Process

     Most governmental  procurement and purchasing  activities are controlled by
procurement regulations take the form of RFPs, and to date most of the Company's
new  business  results  from  responding to these requests.  Interested  parties
submit  proposals  in  response to an RFP within a time period of 15 to 120 days
from  the time 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,  the  Company engage
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, the Company  researches and evaluates,  among
other  factors:  (i) the current size and growth  projections  of the  available
correctional  and detention  population;  (ii) whether or not a minimum capacity
level is guaranteed; (iii) the willingness of the contracting authority to allow
the Company to house populations of similar  classification  within the proposed
facility  for  other  governmental  agencies;  and (iv) the  willingness  of the
contracting  authority  to allow the Company 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, the Company'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.


Strategic  Acquisitions

     Historically, the Company's growth has been generated internally, primarily
through the competitive bid process.  However, the Company continues to evaluate
strategic acquisitions,  particularly  where an  acquisition  would  enhance the
Company's  capabilities or  add  to the  services  it offers in the correctional
services industry. Acquisitions include companies with one or  more contracts as
well as individual facilities with government agencies.

Market

     Through the United States, there is a growing trend toward privatization of
corrections and  detention  functions  as  governments  of  all types have faced
continuing  pressure  to  control  costs  and  improve  the quality of services.
Further, as a result of the number of crimes committed each year the correspond-
ing number of arrests, incarceration costs generally grow faster than many other
parts of budget items.  In an  attempt  to address these pressures, governmental
agencies responsible for correctional and  detention facilities are increasingly
privatizing facilities.

<PAGE>
     Numerous studies have proven there is a  general shortage of beds available
in detention and treatment facilities.  That fact, coupled with the high rate of
recidivism  and the  public  demand  for longer sentences, has resulted in over-
crowding in these facilities and an increasingly viable market.

     In addition, numerous courts and other  governmental entities in the United
States have mandated that additional services offered to inmates be expanded and
living  conditions  be improved.  Many  governments  do  not  have  the  readily
available resources to make the changes necessary to meet such mandates.

     According  to the  United  State  Department of Justice Office and Juvenile
Justice Delinquency Prevention, "Juvenile Offenders and Victims:  1996 Update of
Violence" and "Juvenile Arrests 1995", in 1996 there were 2.7 million arrests of
persons under 18, up 67% from 1986.  One-fourth of juvenile arrests in 1995 were
of females - a  steady  increase since 1991.  By the year 2010, juvenile arrests
for violent crime are expected to more than double.

     In the international sector, the demand for privately managed facilities is
increasing due to fiscal  pressures,  overcrowding, increasing recidivism and an
overall desire to deliver augmented services while minimizing their cost impact.

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 the
Company's competitors have greater resources than the Company.  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,  the  Company's  Community  Corrections  and
Juvenile Divisions compete with governmental and not-for-profit entities.  The
Company's  main  competitors  include Wackenhut Corrections Corporation, Cornell
Corrections,   Corrections   Corporation   of   America   and    Youth  Services
International.


Recent Events

     CSC Management de Puerto Rico, Inc.  In  July,  1997  the  Company  formed
CSC Management de Puerto Rico, Inc., a Puerto  Rican corporation, to pursue the
operation  and  management  of  facilities in the  Commonwealth of Puerto Rico.
Later  in  the  year, the Company was awarded three contracts  for  the design,
construction,  operation  and  management  of juvenile  treatment and detention
facilities in Bayamon and Salinas, Puerto Rico.

     Correctional Services Corporation (UK), Ltd.  In February, 1998 the Company
formed Correctional Services Corporation (UK) Ltd., a British company, to pursue
correctional  projects  in  the  United Kingdom.  The Company  intends to  build
relationships  with  international  joint  venture  partners  to  maximize   its
capabilities abroad.

     Bayamon and Salinas, Puerto Rico.  In  February  1998,  the  Company signed
contracts  with  the  Juvenile Institutions  Administration  of the Commonwealth
of Puerto Rico to  operate  two Juvenile  Treatment  Centers  and  one  Juvenile
Detention Center.  The Salinas Treatment  Center has a 100 bed capacity and will
be designed, built, owned and operated  by CSC.  It is  estimated that the costs
of  construction  will  be  $11,000,000.   It  is  expected   to  become   fully
operational in the first quarter of 1999.  The Bayamon  Treatment  Center  has a

<PAGE>
141 bed capacity  and is currently undergoing renovation.  Until the renovations
are complete, which is anticipated to be the first quarter of 1999, the facility
will operate  at  a reduced capacity.  The  Company  will  assume  operation  of
the facility in the second quarter of 1998.  The Bayamon Detention  Center has a
120 bed capacity and will begin  accepting residents  in  the  second quarter of
1998.  Each of  the three contracts has a base period of 5 years with one 5 year
renewal  option.  Once completed and  fully  operational  these  facilities are
expected to contribute approximately $15 million in revenue on an annualized
basis.


     New York State Community Corrections Programs. Due to substantially reduced
occupancy  rates  and  the lack of a long-term contract with New York State, the
Company had  previously determined  it  would wind down the operation of its New
York State Community Corrections Program.

     In the  second  quarter  of 1997, the Company closed its Manhattan location
and placed  all  remaining  residents  in its Brooklyn location.  Throughout the
year,  the  Company  continued  its  effort  to  ascertain  the   likelihood  of
increased  population  and a long-term contract.  In the third quarter of 1997,
the Company  understood  the  State  would  be issuing  a  formal  Request  for
Proposal  (RFP) relating  to  its  Community Corrections Programs.  In addition,
the State indicated  to the Company that the population rates would improve.  At
that time the Company decided to re-open its  Manhattan location  and to prepare
to  bid  on  the  pending  RFP.  In February of 1998, the  Company  was  awarded
contracts  to  operate  two  Community  Corrections  Programs  in  its Manhattan
location  for a total capacity of 130.

     Although  the Company  has  recently  signed contracts to operate these two
programs, the  State  has  given  no  minimum  occupancy  guarantee  and did not
increase  the  per diem rate.  It is the Company's belief  that  the populations
in  New York  will  continue  to  fluctuate and the New York operations will not
produce  income  for  the  Company.  The  Company  believes  that the remaining.
balance  of  the accrued closure costs reserves at December 31, 1997 is adequate
to offset the estimated losses associated with this contract.  From  a financial
point  of view,  the Company's decision to  operate  these programs is  based on
its  desire  to  offset the fixed obligations  of  the Company pertaining to the
lease of the buildings. These obligations will continue regardless of whether or
not the Company actually operates a program.

     Fort Worth Community  Corrections  Program.  Due to  substantially  reduced
occupancy  levels  at  its Fort Worth Community Corrections Program, the Company
began  winding  down the operations of the Program in the first quarter of 1997.
Subsequently, the Company  was asked by the Texas Department of Criminal Justice
(TDCJ) to leave  a portion of  the facility open until an alternative site could
be located.

     In August of 1997, the Company signed  an  amendment  to  its contract with
TDCJ which  significantly  lowered  the  expected  population of the facility in
addition to increasing the per diem rate to $33.00 from $29.95.  The Company has
continued to  run  the  Program  at  the  reduced levels pending the locating of
an  alternate  site.  Although  the facility is expected to generate a loss, the
Company  believes  that  the  remaining  balance  of  the  accrued closure costs
reserves  at  December 31, 1997  is  adequate  to  offset  the  estimated losses
associated  with  this  contract.  From  a  financial  viewpoint, the  Company's
decision to continue to  operate the facility is based on its desire  to  offset
the  fixed  obligations  of  the  Company  pertaining  to  the  building.  These
obligations will  continue  regardless  of  whether  or not the Company actually
operates the Program.

<PAGE>

Facilities

     The Company operates both 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-disposition 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-disposition secure facilities provide secure incarceration for individuals
who have been found guilty of a crime  by a court of law.  The Company  operates
four  types  of  post-disposition  facilities:   secure  prisons,  intermediate
sanction   facilities,  military-style   boot  camps,  and secure treatment and
training facilities. 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.  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.

     The Company  also  operates  non-secure  residential and  non-residential
community corrections programs.  Non-secure  residential  facilities,  known as
half-way 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 the Company. 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  Company  employees monitor the offender on a case management
basis at his/her work site and home.

<PAGE>

     The following  information  is provided with respect to the  facilities for
which the Company has  management  contracts:

<TABLE>

FACILITY CONTRACT LISTING

<CAPTION>

Facility Name, Location and                            Contracting        Owned,
Year Operations Commenced    Contracted   Type of      Governmental   Leased, or
                                Beds      Facility       Agency          Managed
                                (1)                                        (2)
<S>                             <C>   <C>                   <C>          <C>
ADULT DIVISION
  Seattle INS Detention Center  150   Secure Detention      INS          Managed
    Seattle, Washington (1989)        Facility

  South Texas Intermediate      400   Secure Intermediate   State        Managed
    Sanction Facility                 Sanction Facility
      Houston, Texas (1993)

  Tarrant County Community      230   Secure Intermediate   County       Managed
    Correctional Facility(3)          Sanction Facility
      Mansfield, Texas (1992)

  Travis County Substance        76   Secure Intermediate   County       Managed
    Abuse Treatment Facility          Sanction Facility
      Del Valle, Texas (1994)

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

 AZ State Prison, Florence      600   State Prison          State          Owned
   Florence, Arizona (1997)

 Gallup                         200   Jail/Long-term        County       Managed
   Gallup, New Mexico (1997)          Detention

 Frio County Jail               279   Jail/Long-term    County/State      Leased
    Pearsall, Texas (1997)            Detention

 Grenada County Jail            160   Jail                  County       Managed
   Grenada, Mississippi
    (1997)


JUVENILE DIVISION
 Tarrant County Community       120   Secure Boot Camp       County      Managed
  Correctional Center(3)              Facility
   Mansfield, Texas (1992)

 Hemphill County Juvenile        60   Secure Boot Camp       County      Leased
  Detention Center                    Facility
   Canadian, Texas (1994)

 Bartow Youth Training Center    74   Secure & Residential   State       Managed
   Bartow, Florida (1995)             Treatment Facility

 Pahokee Youth Training Center  350   Secure Treatment       State       Managed
   Pahokee, Florida  (1997)

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

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

 Okaloosa County Juvenile        65   Half Way House         County        Owned
  Residential Facility
   Okaloosa, Florida (1997)

 Bayamon Detention Center       120   Secure Detention    Commonwealth   Managed
  Bayamon, Puerto Rico                Facility               of PR
   (Est. 1998)

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

 Salinas Treatment Center       100   Secure Treatment    Commonwealth     Owned
  Salinas, Puerto Rico                Facility               of PR
   (Est. 1999)

 Colorado County Boot Camp      100   Secure Detention       County      Managed
  Eagle Lake, Colorado                Facility
   (Est. 1998)

 Judge Roger Hashem Juvenile     64   Secure Detention       County      Managed
  Justice Center                      Facility
   Rockdale, Texas (1997)

 Martin Hall Juvenile Facility   52   Secure Correctional    County      Managed
   Medical Lake, WA (1997)            Facility

<PAGE>

COMMUNITY CORRECTIONS DIVISION
 Brooklyn Community              99   Residential            Federal      Leased
  Correctional Center                 Correctional           Bureau
   Brooklyn, New York (1989)          Facility               of Prisons

 Manhattan Community             60   Residential            Federal      Leased
  Corrections Center                  Correctional           Bureau
   New York, New York (1990)          Facility               of Prisons

 Bronx Community                 40   Residential            Federal      Leased
  Corrections Center                  Correctional           Bureau
   Bronx,  New York (1996)            Facility               of Prisons

 New York State                 130   Residential            State        Leased
  Community Corrections Center        Correctional
   Manhattan, NY (1998)               Facility

 Fort Worth Community           125   Residential            State        Leased
  Corrections Center                  Correctional
   Fort Worth, Texas (1994)           Facility


     (1) The number of beds  under  contract  generally  is an  estimate  in the
contract  by the  contracting  government  agency  of the  number  of  offenders
expected  to be  assigned to the  facility  and not a guarantee  of a minimum or
maximum  number of  offenders  to be so assigned.  Certain  facilities  have bed
capacity in excess of the number of beds under  contract  and  therefore  may be
occupied by a greater  number of  offenders  than is  estimated  pursuant to the
contract.

     (2) A  managed  facility  is a  facility  for which  the  Company  provides
management  services  pursuant  to a  management  contract  with the  applicable
governmental  agency but, unlike a leased or owned facility,  the Company has no
property interest in the facility.  The Company has granted  NationsBank a first
priority  security  interest  in all its  assets.

     (3) This  facility is listed both as part of the Company's  Adult  Division
and its  Juvenile  Division  as the  facility  houses  both  adult and  juvenile
offenders.

</TABLE>

Facility Management Contracts

     The Company  is  compensated on the basis of the population in each of its
facilities on a fixed basis.  Contracts usually either provide fixed per diem
rates and some have a minimum revenue guarantee.  Invoices are sent on a
monthly basis.  Occupancy rates for facilities tend to be low when first opened
or when expansions are first available.  However, after a facility gets beyond
the start-up period (typically 3 months), the occupancy rate tends to
stabilize.

     The Company's contracts generally require the Company to operate each
facility in accordance with all applicable laws, rules and regulations.
Furthermore, 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 the
Company's operations and in certain cases, to maintain performance bonds.

     As is standard in the industry, the Company's contracts are short term in
nature, generally ranging from one to three years and contain multiple renewal
options.  Most facility contracts also generally contain clauses which allow
the governmental agency to terminate a contract without cause.  The Company's
contracts are generally subject to legislative appropriation of funds.  To
date, none of the Company's contracts have been terminated though any of these
methods.

<PAGE>

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.  Certain  facilities  also offer special  rehabilitation  and
educational  programs,  such as academic or vocational  education,  job and life
skills training, counseling, substance abuse programs, and work and recreational
programs.

     The  Company's  contracts  generally  require the  Company to operate  each
facility in accordance with all applicable local,  state and federal laws, rules
and  regulations, and  the standards and guidelines of the American Correctional
Association.  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. The Company's Seattle
INS Detention Center  and  Tarrant  County Community  Correctional  Facility are
fully accredited  by the ACA  and  certain  other facilities currently are being
reviewed  for accreditation.  The Company's  goal is to  obtain and maintain ACA
accreditation for all of its facilities. Richard P. Staley, the Company's Senior
Vice President  and  director, is  a  member  of  the  ACA  and  a certified ACA
standards auditor for jail and detention facilities. James Irving, the Company's
Vice President  for  Juvenile Justice,  is  a past Chairman of the ACA Standards
Committee  and  a  certified  ACA  standard  auditor  for  jail  and  detention
facilities.

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 enhances 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, build and manage 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 utilized, 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.

<PAGE>

Facilities Under Construction

     Construction  is  nearly  complete  on  the  65  bed  juvenile facility in
Okaloosa, Florida.  The facility is scheduled to open in April, 1998.

     Renovations are  underway  in  the  141 bed juvenile treatment facility in
Bayamon, Puerto Rico.  The Company is expected to accept its first residents in
this facility June, 1998.

     Construction will begin on a 100 bed juvenile detention center in Salinas,
Puerto Rico.  The facility will house minimum to medium risk inmates ages 12 to
17 and is expected to be completed in the first quarter of 1999.

Employees

     At March 13, 1998, the Company had approximately 1,730 full-time employees,
consisting of clerical and administrative  personnel,  security personnel,  food
service  personnel  and  facility  administrators.   The  Company  believes  its
relationship with its employees is good.

     Each of the  Company's  facilities  is managed  as a separate  entity by an
experienced   facility   administrator.   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 and education
or training, are provided by third-party contractors.

Employee Training

     All  jurisdictions  require  corrections  officers  to complete a specified
amount of training prior to employment.  In most cases,  Company  employees must
undergo  at least  160  hours of  training  before  being  allowed  to work in a
position  that will bring them in contact  with  offenders  or  detainees.  This
training  consists  of  approximately  40 hours  relating  to Company  policies,
operational  procedures  and  management  philosophy,  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.  Each  Company  employee  having  contact  with
offenders  receives a minimum of 40 hours of additional  training each year, and
each management employee receives a minimum of 24 hours of training each year.

Insurance

     Each management contract with a governmental agency requires the Company 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 the Company's operations.
The Company maintains  general  liability  insurance in the amount of $5,000,000
and  two  umbrella  policies  in  the  amount  of  $5,000,000  and  $20,000,000,
respectively, for itself and each of its subsidiaries. There can be no assurance
that the aggregate  amount and kinds of the Company's  insurance are adequate to
cover all risks it may incur or that  insurance will be available in the future.
In addition,  the Company is unable to secure insurance for some unique business
risks including,  but not limited to, riot and civil commotion or the acts of an
escaped offender.

<PAGE>

Regulations

     The industry in which the Company operates is subject to federal, state and
local regulations which are administered by a variety of regulatory authorities.
Generally,  providers  of  correctional  services  must comply with a variety of
applicable federal,  state and local regulations,  including  education,  health
care and safety regulations.  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.

Litigation

     The  nature  of the  Company's  business  results  in  numerous  claims  or
litigation  against  the Company  for  damages  arising  from the conduct of its
employees or others.  Under the rules of the Securities and Exchange Commission,
the Company is obligated to disclose  lawsuits which involve a claim for damages
in excess of 10% of its current assets  notwithstanding  the Company's belief as
to the merit of the lawsuit and the existence of adequate insurance coverage.

     In May 1993,  a former  employee  of the  Company  filed suit in the United
States  District  Court,   Southern  District  of  New  York,  claiming  he  was
intentionally  assaulted by employees of the Company and claiming  $5,000,000 in
damages on each of six causes of action.  In January  1996,  a lawsuit was filed
with the  Supreme  Court of New  York,  County of  Kings,  by a former  employee
alleging  sexual  harassment  and  discrimination,  physical  assault,  rape and
negligent  screening  of  employees  and  claiming  damages of  $4,000,000  plus
attorney fees.  The Company is awaiting  court rulings  in both  of  these cases
which are expected to result in dismissals of these actions by mid-1998.

     In March 1996, former inmates at one of the Company's facilities 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 negligence and  intentional  acts of the
Company and claiming  $500,000,000  each for compensatory and punitive  damages,
which  suit was  transferred  to the  United  States  District  Court,  Southern
District of New York, in April 1996. In July 1996, seven detainees at one of the
Company's  facilities  (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, which suit was
transferred to the United  States  District  Court, District of New Jersey, in
August 1996.  In July 1997, former detainees of the Company's Elizabeth, New
Jersey facility filed suit in the United States District Court  for the
District of  New Jersey.  The suit claims violation of civil rights, personal
injury and property damage allegedly caused by the negligent and intentional
acts of the Company. No monetary damages have  been  stated.  Through
stipulation, all these actions will now be heard in the United States District
Court for  the  District  of  New Jersey.  This  will streamline the discovery
process, minimize costs and avoid inconsistent rulings.

     The Company believes the claims made in each of the foregoing actions to be
without  merit and will  vigorously  defend such  actions.  The Company  further
believes the outcome of these actions and all other current legal proceedings to
which it is a party will not have a material  adverse effect upon its results of
operations, financial condition or liquidity. However, there is an inherent risk
in any litigation and a decision adverse to the Company could be rendered.

<PAGE>

Risks Associated with Company's Business

     Safe Harbour Statement Under The Private Securities Litigation Reform Act
Of 1995

     This document  contains forward-looking statements involving various risks
and uncertainties.  Actual results could differ materially from those projected
due to factors  which  may  include population fluctuations, acquisition risks,
market  conditions, government funding and availability of financing. These and
other risk  factors  are  outlined in the reports filed by the Company with the
Securities and Exchange Commission.

     Internal Expansion.  The  Company's  growth is generally dependent upon its
ability to obtain contracts to develop and manage new correctional and detention
facilities.  The rate of  such  development   depends  on  a  number of factors,
including crime rates and sentencing patterns in various  jurisdictions  and the
Company's ability to integrate  new  facilities  into its management  structure.
Certain  jurisdictions recently have  required the successful  bidders to make a
significant capital investment in connection with the  financing of a particular
project,  a trend which  will  require  the  Company to have sufficient  capital
resources in order to compete effectively.

     Acquisitions.  The Company intends to grow through internal  expansion  and
through  selective  acquisitions  of  both  companies and individual facilities.
There  can be no assurance that the Company will be able to identify, acquire or
profitably  manage  acquired  operations  or  that  operations  acquired will be
profitable  or  achieve  levels  of  profitability  that  justify  the   related
investment.  Acquisitions involve  a number of special risks, including possible
adverse short-term effects  on  the  Company's  operating results, diversion of
management's  attention  from existing business, dependence on retaining, hiring
and training key  personnel,   risks   associated   with unanticipated  problems
or legal liabilities, and amortization  of  acquired intangible  assets,  any of
which could have a material adverse effect on the Company's financial condition,
results of operations and liquidity.

     Resistance to  Privatization  of  Correctional  and  Detention  Facilities.
Management of correctional and detention   facilities  by  private  entities  is
a relatively  new concept and has not  achieved  complete  acceptance  by either
governments or the public. The movement toward privatization of correctional and
detention  facilities has also encountered  resistance from certain groups, such
as labor  unions,  local  sheriff's  departments,  and groups that  believe that
correctional  and  detention  facility  operations  should only be  conducted by
governmental  agencies. In addition,  changes in the dominant political party in
any market in which the Company operates could result in significant  changes to
the previous acceptance of privatization in such market.  Further,  some sectors
of the federal  government and some state and local  governments are not legally
permitted  to  delegate  their  traditional   management   responsibilities  for
correctional and detention facilities to private companies.

    Contracts Subject to Governmental Funding. The Company's facility management
contracts are subject to either annual or bi-annual governmental appropriations.
A failure by a governmental  agency to receive such appropriations  could result
in termination  of  the contract by such agency or a reduction of the management
fee  payable to the Company. In addition, even if funds are appropriated, delays
in  payments  may  occur  which  could  have  a  material adverse effect on the
Company's  financial  condition,  results   of  operations  and  liquidity.  See
"Business - Facility Management Contracts."

<PAGE>

     Uncertain Occupancy Levels.  The Company is dependent upon the governmental
agency with which it has a  management  contract  to  provide  inmates  for, and
maintain the occupancy level of, the managed facility.  A substantial portion of
the  Company's revenues is generated  under facility  management  contracts that
specify a net rate  per  day  per  inmate  ("per  diem  rate"), with  no minimum
guaranteed  occupancy  levels,  while  most  of  the Company's  facilities  cost
structures  are  relatively  fixed.  Under  such  a per diem rate  structure,  a
decrease in occupancy levels may have a material adverse effect on the Company's
financial  condition,  results  of  operations  and  liquidity.   See  "Business
Facility  Management  Contracts" and "Business-Recent Events."

     Speculative Projects.  The Company makes capital expenditures on personnel,
fixtures, facilities  and  equipment  for facilities where no contracts have yet
been awarded.  If contracts do not  materialize, the initial outlay may be lost.

      In some cases, the  Company  may decide to construct  and  own a  facility
without a contract award when it  believes there is significant shortage of beds
and  a strong likelihood it will be awarded a contract; however, there can be no
assurance that any contract will, in fact, be awarded.  Further, there can be no
assurance that the Company will be able to obtain contracts to construct  and/or
manage new facilities or retain existing contracts upon their expiration.

     Regulation.  The  industry  in which the  Company  operates  is  subject to
a variety of federal,  state and local  regulations,  including  education,
health  care and safety  regulations,  which are administered by various
regulatory  authorities.  The Company's contracts typically include extensive
reporting requirements,  and supervision and  on-site  monitoring  by
representatives  of  the  contracting governmental  agencies.  Corrections
officers  customarily are 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 the
Company to award  subcontracts  on a competitive basis or to subcontract with
businesses owned by members of minority groups. The failure to comply with any
applicable laws, rules or regulations and the loss of any  required  license
could have a material  adverse  effect on the  Company's financial condition,
results of operations and liquidity.  Further, current and future  operations of
the Company may be subject to  additional  regulation as a result of new statues
and regulations or changes in the manner in which existing statutes and
regulations are or may be interpreted or applied,  which could have a material
adverse  effect on the  Company's  financial  condition,  results of operations
and liquidity.

     Dependence on Senior Management.  The success  of the Company's operations
will depend upon the continued services of its  executive management, including
James F. Slattery, Chairman and Chief Executive  Officer, Ira Cotler, Executive
Vice President  and Chief  Financial  Officer, and Michael Garretson, Executive
Vice  President  and  Chief  Operating Officer.  The loss of two or more of the
Company's  senior  management  could  have  an  adverse effect on the Company's
business and financing.  The Company has an employment agreement with all three
executive officers.

     Volatility of Market Price.  From time to time, there may be volatility in
the market  price  for  the  Company's  Common Stock.  Operating results of the
Company  or  of  other  private  prison operators, economic conditions, natural
disasters or incidents at  competitor's facilities could cause the market price

<PAGE>

of  the  Company's  stock to fluctuate.  In addition, in recent years the stock
market has experienced extreme  price  and  volume  fluctuations resulting in a
significant  effect  on  the  market  prices  of  the securities issued by many
companies for reasons unrelated to their operating performance.


Item 2.  Description of Property.

Brooklyn, New York Lease

     The Company leases this building, located at 988 Myrtle Avenue,  Brooklyn,
New York, from Myrtle Avenue Family Center, Inc.  ("MAFC")  pursuant to a lease
which  commenced  January  1,  1994  and expires  December 31, 1998.  The lease
establishes a monthly  rental of $40,000 and contains three five-year  renewal
options.  The monthly  rental for  the  first  option  period,  which runs from
January 1, 1999 through  December 31, 2003, is $40,000.  The monthly rental for
the second option period, which runs from January 1, 2004 through  December 31,
2008, is $45,000,  and the monthly  rental for the third option  period,  which
runs from January 1, 2009 through  December 31, 2013, is $50,000.  In addition,
the Company pays taxes,  insurance,  repairs and  maintenance  on the building.
MAFC is a corporation  owned by Esther Horn (27.5%),  James  F.  Slattery  (8%)
and Aaron Speisman (27.5%), significant stockholders of the Company.  The terms
of the lease  were not negotiated at arms length due to their relationship with
both the Company and MAFC.

Bronx, New York Lease

     The Company leases a building  located at 2534 Creston Avenue,  Bronx,  New
York from Creston Realty Associates,  L.P. ("CRA"), which is owned 10% by Esther
Horn, a significant  stockholder  of the  Company..  The lease term is two years
commencing October 1, 1996 and has three additional one year option periods. The
Company  also pays a base rent of  $180,000  per year which will  escalate  five
percent per year for each of the three year options if they are  exercised.  The
Company pays taxes,  insurance,  repairs and  maintenance on this building which
will be used to house a community  correctional  center. The terms of this lease
were not negotiated at arms length due to the relationship  between the Company,
Ms.  Horn and  CRA.  However,  pursuant  to the  terms  of a Board of  Directors
resolution adopted in connection with the Company's initial public offering, all
transactions  between  the  Company  and  any  of  its  officers,  directors  or
affiliates (except for wholly-owned subsidiaries) must be approved by a majority
of the  unaffiliated  members of the Board of Directors  and be on terms no less
favorable to the Company than could be obtained from unaffiliated  third parties
and be in connection with bona fide business purposes of the Company.

Manhattan, New York Lease

     The Company subleases the building located at 12-16 East 31st Street,  New
York, New York as well as an annex located at 11 East 30th Street, New York, New
York from LeMarquis  Operating Corp.  ("LMOC").  The Company currently  utilizes
approximately  fifty  percent of the  building  for the  LeMarquis  Correctional
Center  and  for  the  New  York  Community  Correctional  Program.  LMOC  is  a
corporation  owned 25% by Ms.  Horn and 8% by Mr.  Slattery.  LMOC  leases  this
building  from an  unaffiliated  party  at a  current  base  monthly  rental  of
approximately  $15,456 (the "Base  Rent"),  plus taxes and other  charges in the
approximate   current   amount  of  $17,346  for  a  total  monthly   rental  of
approximately  $32,802. The Company has the right to use as much of the building
as it requires  for its  business  subject to the rights of certain  residential

<PAGE>

subtenants to remain in the building.  These rights include the right to housing
at a predetermined  rental for an indefinite period of time pursuant to New York
State rent stabilization laws.

     The  Company  pays rent of $18,000 per month above the rent paid by LMOC to
the  building's  owner for a total monthly rent of  approximately  $50,802.  The
Company has, to date, invested $690,000 in leasehold  improvements.  The Company
will not receive any credit,  in terms of a reduction in rent or otherwise,  for
these improvements. The initial term of the Company's sublease expired April 30,
1995 and is in its first  renewal  period  which  expires  April 30,  2000.  The
sublease  contains two additional five-year  renewal  options  beginning May 1,
2000. The monthly rent above the rent paid by LMOC to the building's  owner will
increase to $22,000 per month during the second  renewal term  beginning  May 1,
2000 and to $26,000 per month  during the third  renewal term  beginning  May 1,
2005.


Fort Worth, Texas Lease

     The Company leases the facility located at 600 North Henderson Street, Fort
Worth,  Texas from an unaffiliated  party at a monthly rental of $10,200 for the
period May 16, 1994  through May 15,  1996;  $10,400 for the period May 16, 1996
through May 15,  1997;  $10,815.20  for the period May 16, 1997  through May 15,
1998;  and  $11,252.97  for the period May 16, 1998 through April 15, 1999.  The
lease for these premises  commenced May 16, 1994 and expires April 15, 1999. The
lease  contains three renewal  options.  The term of the first renewal option is
for three years and the second and third renewal options are for two years.  The
Company's rent is to increase four  percent  per  annum during each year of the
renewal term.


Frio County, Texas Lease

     The Company leases the facility at 410 S. Cedar in Pearsall, Texas from the
County for the period ending December 1, 2009.  The Company has  prepaid  twelve
years of rent equaling $4,750,760.  The lease may be extended for one additional
five year period at a price to be negotiated by the parties.


Executive Office Leases

     The Company  leases  approximately  6,400 square feet of  executive  office
space located at 1819 Main Street, Sarasota,  Florida from an unaffiliated party
at  a  base  monthly  rental  of $8,278  for the period  October 1, 1995 through
September 30, 1996;  $8,812 for the period October 1, 1996 through September 30,
1997;  $9,346 for the period October 1, 1997 through  September 30, 1998; $9,880
for  the  period  October 1, 1998  through September 30, 1999; $10,415 for the
period October 1, 1999  through  September 30, 2000.  The  lease  does  not
contain any renewal  options.  On March 1, 1997 the Company entered into a lease
amendment for approximately 1,399 square feet in its existing executive offices.
The lease  amendment  calls for an additional  base rental of $1,924 with annual
increases  of  approximately  $100  per  month on each  October  1st  until  the
expiration of the lease amendment on September 30, 2000.

     The Company also leases an office at 276 Fifth Avenue,  New York,  New York
from an  unaffiliated  party at a monthly rental of $2,231.  The lease for these
premises, which commenced November 1, 1993, expires October 31, 1998.

<PAGE>

Item 3.  Legal Proceedings.

     Information  with  respect  to this  item  is  incorporated  herein  by
reference to Item 1 "Business-Litigation."


Item 4.  Submission of Matters to a Vote of Stockholders.

      None.


                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Material


Item 6.  Management's Discussion and Analysis or Plan of Operation.

	The Company's primary source of revenue is generated from the management
of correctional and detention facilities under federal, state and local
governmental agency contracts.  The majority of the Companies contracts are
based on a daily rate per offender, some of which have guaranteed minimum
payments; others provide for fixed monthly payments irrespective of the number
of offenders housed.

	The Company typically pays all facility operating expenses, except rent
in the case of certain government-provided facilities.  The Company's primary
expenses are categorized as either operating or general and administrative.
Operating expenses consist of payroll (corporate and facility employee
salaries, wages and fringe benefits, and payroll taxes) and resident expenses
which include food, medical services, supplies and clothing.  General and
administrative expenses consist of rent, utilities, insurance, professional
fees, travel and lodging and depreciation and amortization.

	The Company usually incurs development costs, which may range from
$50,000 to $200,000, in responding to a governmental agency RFP.   Such costs
include planning and developing the project, preparing the bid proposal, travel
and legal expenses and consulting fees. If management believes the recovery of
such costs is probable, the costs are deferred until the anticipated contract
has been awarded, at which time the deferred costs are amortized on a straight-
line basis over the term of the contract (including option periods not to
exceed five years).  Development costs of unsuccessful or abandoned bids are
expensed.  The time period from incurring initial development costs on a
project to the commencement of operations ranges from six to eighteen months.

	After a contract has been awarded, the Company incurs start-up costs from
the date of the award until commencement of operations.  Start-up costs include
recruitment, training and travel of personnel and certain legal costs, and are
capitalized until operations commence, at which time such costs are amortized
on a straight-line basis over the term of the contract (including option
periods not to exceed five years).  Revenues generated during this initial
period under per diem contracts increase as the offender population increases.

 In anticipation of the millennium, management has completed a corporate
program which has prepared all Company computer systems and applications for the
year 2000.  No incremental infrastructure costs have been, or will be, incurred
as a result of these enhancements.

<PAGE>

Results of Operations

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

<CAPTION>

                                            Percentage of Total Revenues
                                            ----------------------------
                                                     Years Ended
                                                     December 31,
                                                     -----------
                                              1997       1996       1995
                                              ----       ----       ----
<S>                                           <C>        <C>        <C>
Revenues:
  Resident Fees                                 97.8%      98.0%      96.8%
  Other Income                                   2.2        2.0        3.2
                                               -----      -----      -----
    Total Revenues                             100.0      100.0      100.0
                                               -----      -----      -----
Expenses:
  Operating                                     72.5       69.6       62.7
  General and Administrative                    19.8       27.5       31.5
  Ft. Worth & NYCC Closure Costs                   -       10.6          -
  New Jersey Facility Closure Costs                -          -        2.4
                                               -----      -----      -----
    Total Expenses                              92.3      107.7      106.6
                                               -----      -----      -----
    Operating Income (Loss)                      7.7       (7.7)      (6.6)
Interest Income (Expense), Net                   0.7       (1.5)      (2.2)
                                               -----      -----      -----
    Income (Loss) Before Income Taxes            8.4       (9.2)      (8.8)
  Income Tax Benefit (Expense)                  (3.4)       3.3        3.3
                                               -----      -----      -----
    Net Income (Loss)                            5.0%      (5.9)%     (5.5)%
                                               -----      -----      -----
</TABLE>

Year ended December 31, 1997 Compared to Year ended December 31, 1996

	Revenue increased 90.3% from $31,501,658 for the year ended December 31,
1996 to $59,936,101 for the year ended December 31, 1997. The increase in
revenue from 1996 to 1997 was primarily attributable to the opening of seven new
facilities during 1997 (Bronx, New York, Polk, Florida and Pahokee, Florida in
January 1997; Frio County, Texas in March 1997; Milam County, Texas in June
1997; Gallup, New Mexico in July 1997; and Florence, Arizona in October 1997).
In addition, the Company experienced increased occupancy levels in certain
facilities and generated a full year of revenue in the Bell County, Texas and
Phoenix, Arizona facilities that were opened only a partial year in 1996.
Compensated mandays was 1,115,000 in 1997 and 641,000 in 1996.

	Operating expenses increased 98.2% from $21,928,329 for the year ended
December 31, 1996 to $43,472,402 for the year ended December 31, 1997 primarily
due to increases in payroll and related payroll taxes and benefits related to
the opening of the new facilities.  As a percentage of revenues, operating
expenses increased from 69.6% in 1996 to 72.5% in 1997.  The increase in
operating expenses as a percentage of revenues can be attributed to lower
operating margins on the Company's community corrections programs, the opening
of new facilities and an increase in corporate staff to support the Company's
expanded operations.

	General and administrative expenses increased 37.0% from $8,655,628 for the
year ended December 31, 1996 to $11,859,399 for the year ended December 31,
1997.  The increase in general and administrative expenses was primarily
attributable to the opening of new facilities.  As a percentage of revenues,
general and administrative expenses decreased to 19.8% in 1997 from 27.5% in
1996.  The decrease in general and administrative expenses as a percentage of
revenue is a result of the increase in revenues and the Company's efforts in
controlling fixed costs.

At December 31, 1996 the Company wrote-off $3,329,000 for its Fort Worth,
Texas and New York State Community Corrections programs.  The Company wrote-off

<PAGE>
fixed assets, development and start-up costs and other costs associated with the
closure of each program.

	The operating loss for the year ended December 31, 1996 of $2,411,299 was
attributable principally to the above mentioned facilities closure costs.

	Interest income, net of interest expense, was $444,077 for the year ended
December 31, 1997 compared to interest expense, net of interest income, of
$481,728 for the year ended December 31, 1996, a net change of $925,805.   This
increase resulted from utilizing a portion of the net proceeds received from the
September 1996 public offering of common stock to repay bank indebtedness which
reduced interest expense, and from investing the balance of the net proceeds in
cash equivalents which increased interest income.  Also, interest expense was
reduced by interest capitalized on facilities under construction.  During 1996,
interest of $103,576 was capitalized on the Phoenix facility construction and
during 1997, $371,500 was capitalized on the construction of the Florence,
Arizona facility.

	For the year ended December 31, 1997 the Company recognized a provision for
income taxes of $2,022,853. For the year ended December 31, 1996 the Company
recognized an income tax benefit of $1,025,000 principally from the utilization
of operating losses. The effective tax rate was 35.4% in 1996 and 40.1% in 1997.

	As a result of the foregoing factors, the Company had a net loss of
$1,868,027 or $0.32 per share for the year ended December 31, 1996 compared to
net income of $3,025,524 or $0.39 per share for the year ended December 31,
1997.


Year ended December 31, 1996 Compared to Year ended December 31, 1995

	Revenue increased slightly from $31,490,026 for the year ended December 31,
1995 to $31,501,658 for the year ended December 31, 1996. A full year's revenues
in 1996 generated by the Canadian, Texas facility which began operations in
April, 1995 and the Bartow, Florida facility which began operations in July
1995, as well as revenues generated by the Phoenix, Arizona facility which began
operation in April 1996, were offset by the loss in revenues stemming
principally from the discontinuance of the Company's operations at its
Elizabeth, New Jersey INS facility on June 18, 1995 and lower occupancy rates at
the Company's Fort Worth and Houston, Texas and New York State Community
Corrections facilities.

	Operating expenses increased 11.1% from $19,731,797 for the year ended
December 31, 1995 to $21,928,329 for the year ended December 31, 1996 primarily
due to increases in payroll which increased $1,839,967 or 15.1%.  These changes
resulted primarily from the opening of the facilities noted above, and the
addition of management personnel in the corporate office.  As a percentage of
revenues, operating expenses increased from 62.7% for the year ended
December 31, 1995 to 69.6% for the year ended December 31, 1996.

	General and administrative expenses decreased 12.9% from $9,938,344 for the
year ended December 31, 1995 to $8,655,628 for the year ended December 31, 1996.
The decline in general and administrative expenses was primarily attributable to
the closure of the Elizabeth, New Jersey INS facility in June 1995.  As a
percentage of revenues, general and administrative expenses were 31.6% and 27.5%
for the years ended December 31, 1995 and 1996 respectively.  In addition, at
December 31, 1995 and 1996, the Company wrote-off  $3,909,700 and $3,329,000
respectively in facility closure costs for its Elizabeth, New Jersey INS

<PAGE>
facility (1995) and for its Fort Worth, Texas and New York State Community
Corrections programs (1996).  In each year, the Company wrote-off fixed assets,
development and start-up costs and other costs associated with the closure of
each program.

	The operating losses for the 1995 and 1996 years of  $2,089,815 and
$2,411,299 respectively are attributable principally to the above mentioned
facility closure costs.

	Interest expense, net of interest income, decreased 31.1% from $699,576 for
the year ended December 31, 1995 to $481,728 for the year ended December 31,
1996 This decrease resulted primarily from utilizing a portion of the net
proceeds received from the September 1996 public offering of common stock to
repay bank indebtedness which reduced interest expense, and from investing the
balance of the net proceeds in cash equivalents which increased interest income.

	The income tax benefits of $1,050,000 and $1,025,000 respectively for the
years 1995 and 1996 result principally from the utilization of operating losses
sustained in each year.  The effective tax rate was 37.6% in 1995 and 35.4% in
1996.

	As a result of the foregoing factors, the Company had a net loss of
$1,739,391 or $0.38 per share for the year ended December 31, 1995 compared to a
net loss of $1,868,027 or $0.32 per share for the year ended December 31, 1996.

Liquidity and Capital Resources

	The Company has financed its operations through public and private sales of
securities, cash generated from operations and borrowings from banks.  The
Company had working capital at December 31, 1997 of $6,691,704 compared
$23,560,360 at December 31, 1996.  The Company's current ratio decreased from
5.83 to 1 at December 31, 1996 to 1.58 to 1 at December 31, 1997.  The decrease
is principally attributable to the funding of the construction of the Florence,
Arizona facility, startup costs relating to the Company's new facilities and the
inclusion of the subordinated notes due in July 1998 as a current liability at
December 31, 1997.  The Company's long-term debt to stockholders' equity ratio
was 0.7% at December 31, 1997 as compared to 9.8% at December 31, 1996.

	Net cash provided by operating activities was $3,352,504 for the year ended
December 31, 1997 as compared to $ 1,022,759 for the year ended December 31,
1996.  The change was attributed primarily to increases in net income,
depreciation and amortization, and accounts payable partially offset by an
increase in accounts receivable.  Net cash of $16,119,117 was used in investing
activities during the year ended December 31, 1997 as a result of the capital
xpenditures associated with the construction of the Florence, Arizona facility
and  start-up costs relating to the opening of new facilities.

Net cash of $2,949,532 was used in financing activities in the year ended
December 31, 1997 as compared to $25,738,273 provided by financing activities in
the year ended December 31, 1996.  During 1997 $4,750,760 was used to prepay a
12 year lease for the Frio County facility and was partially offset by
$1,248,800 (net of imputed interest) installment payments received from the
sale of equipment and leasehold improvements. The principal source of funds
provided by financing activities for the year ended December 31, 1996 was the
public offering of Common Stock (see below).

<PAGE>
Financing

	On September 12, 1996 the Company completed a public offering of 2,450,000
shares of Common Stock at $13.625 per share.  Of the 2,450,000 shares of Common
Stock offered, 2,070,000 were sold by the Company and 380,000 shares by certain
stockholders.  The Company did not receive any proceeds from the shares sold by
the stockholders.  The net proceeds received by the Company after deducting
applicable issuance costs and expenses aggregated $25,938,514.  The net proceeds
were used to repay short-term and long-term bank indebtedness in the amount of
$7,198,468, and to finance construction, start-up and related costs of two
Florida facilities, the Florence, Arizona Facility and other facilities and for
general corporate purposes, including the financing of working capital needs.
Also, in October, 1996 pursuant to the underwriters' over-allotment option, the
Company sold an additional 367,500 shares of Common Stock, which aggregated an
additional $4,569,542 in net proceeds.

	Effective December 31, 1995, the Company entered into an $11,000,000
Revolving Credit and Term Loan Agreement (the "Loan Agreement") with
NationsBank, N.A. ("NationsBank").  Pursuant to the terms of the Loan Agreement,
the Company may borrow up to the lesser of $6,000,000 or 85.0% of the Company's
eligible accounts receivable (none outstanding at December 31, 1997).  Loan
proceeds are to be used for working capital, including deferred development and
start-up costs in connection with new or existing facilities.  Interest on the
revolving credit loan is computed, at the Company's option, at either
NationsBank prime rate plus 0.75% or the London International Bank rate plus
3.35%.  On January 14, 1998 the Company extended the term of the revolving
credit portion of its loan agreement until April 3, 1998.  The Company is
currently in negotiations with NationsBank for a new and expanded credit and
lease agreement.

	The Company has granted NationsBank the first priority security interest in
all of its assets. The Company is required to pay NationsBank 0.25% of the
average unused portion of the revolving credit loan.

	During the year ended December 31, 1995, the Company completed a private
placement of 5,676.6 units at $1,000 per unit, each unit consisting of (i) a
ten percent (10.0%) subordinated promissory note due July 1, 1998, in the
principal amount of $1,000, and (ii) four year warrants to purchase 154 shares
of Common Stock at $7.75 per share.  The Company received gross proceeds of
$5,676,600 from the sale of the units of which $365,000 was attributed to the
value of the warrants.

	During such period, the Company also completed the private placement of
496,807 shares of Common Stock at $7.75 per share, receiving gross proceeds of
$3,850,254.  Approximately $8,500,000 of the proceeds of the two placements was
used to finance costs associated with the Company's Phoenix, Arizona facility
and the balance for expenses related to the private placements and for working
capital.

	The Company received $185,388 and $426,890 from the exercise of stock
options and warrants during the years ended December 31, 1997 and 1996
respectively.

	The Company anticipates making cash investments in the acquisition and
construction of new facilities and the expansion of existing facilities.  In
addition, the Company expects to use its cash to finance startup costs in
connection with new contracts.  The Company believes that its cash, cash flow

<PAGE>
from operations, and amounts available under its anticipated credit and lease
agreement will be sufficient to meet its capital requirements for the
foreseeable future.  However, the Company is continuing to evaluate
opportunities, which could require significant outlays of cash.  If such
opportunities are pursued the Company would require additional financing
resources.  Management believes these additional resources may be available
through alternative financing methods.


Item 7.  The  information  required  by  this  Item  is contained on Pages F-1
         through F-30 hereof.


Item 8.  None.


                                    PART III

Item 9.  Directors,  Executive  Officers,  Promoters  and  Control   Persons;
         Compliance with Section 16(a) of the Exchange Act


Executive Officers and Directors

<TABLE>

     The  following  table lists the  executive  officers  and  directors of the
Company, together with their respective ages and offices:

<CAPTION>
Name                  Age   Office

<S>                    <C>  <C>
James F. Slattery      48   President, Chief Executive Officer and Director

Michael C. Garretson   53   Executive Vice President and Chief Operating Officer

Aaron Speisman         50   Executive Vice President, Secretary and Director

Ira M. Cotler          34   Executive Vice President and Chief Financial Officer

Richard P. Staley      66   Senior Vice President and Director

Melvin T. Stith(1)     51   Director

Raymond S. Evans(1)    61   Director

Stuart M. Gerson(1)    54   Director

Shimmie Horn           25   Director

-------------------------

(1)  Member of Audit, Compensation and Stock Option Committees.

     James F. Slattery co-founded  the Company in October 1987 and has been its
President,  Chief Executive Officer and a director since the Company's inception
and Chairman since August 1994.  Prior to co-founding the Company, Mr. Slattery
had  been a  managing  partner  of Merco  Properties,  Inc.,  a hotel  operation
company,  Vice President of Coastal  Investment Group, a real estate development
</TABLE>

<PAGE>
company,  and had held several  management  positions  with the  Sheraton  Hotel
Corporation.

     Michael  C.  Garretson  joined  the  Company  in  August  1994 as its  Vice
President of Business  Development.  In October  1995, he became the Director of
Planning  and Economic  Development  for the City of  Jacksonville,  Florida and
served in such position  until  rejoining  the Company in January  1996,  during
which period he also acted as a consultant  to the Company.  Mr.  Garretson  was
elected Executive Vice President and Chief Operating Officer in March 1996. From
September  1993 to August  1994,  Mr.  Garretson  was Senior Vice  President  of
Wackenhut Corrections Corp., a developer and manager of privatized  correctional
and  detention  facilities,  and from August 1990 to August 1993 was Director of
Area Development for  Euro Disney S.C.A., the operator of a European theme park.

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

     Ira M. Cotler was elected Chief Financial Officer in January, 1998.  He was
elected  the Company's Executive Vice President-Finance in March 1996.  Prior to
joining the Company, from June 1989 to February 1996, Mr. Cotler was employed by
Janney  Montgomery  Scott Inc.,  an  investment banking firm, serving in several
capacities, most recently as Vice President of Corporate Finance.

     Richard P.  Staley has served as the  Company's  Senior Vice  President  of
Operations since November 1988 and as a director since May 1994.   From  1984 to
1987, Mr.  Staley was  the Evaluation  and Compliance  Director for  Corrections
Corporation  of America  and from 1953 to 1983, held  various positions with the
United States  Department of Justice,  Immigration  and  Naturalization Service.
Mr.  Staley is a certified American  Correctional  Association standards auditor
for jail and  detention facilities.

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

     Raymond S. Evans was elected a director in May 1994. For more than the past
five  years,  Mr.  Evans has been a partner of the law firm of  Ruskin,  Moscou,
Evans & Faltischek, P.C.

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

     Shimmie Horn was elected a director of the Company in June 1996.  Mr. Horn,
received a B.A.  degree in Economics from Yeshiva College in 1993, and graduated
from the  Benjamin  Cardozo  School  of Law in  1996.  He is the son of the late
Morris Horn, the former Chairman and a founder of the Company.

<PAGE>

Item 10.    Executive Compensation

     The  following  table sets forth a summary  of the  compensation  earned in
1995, 1996 and 1997 by the Company's  Chief Executive  Officer and by each other
executive  officer  whose  compensation   exceeded  $100,000  in  1997:

<TABLE>
                                                     Summary Compensation Table
<CAPTION>

                                                                                                                    Long Term
                                                         Annual Compensation                              Compensation Awards

                                                                                             Number of Shares       All Other
                                                                          Other Annual     Underlying Options    Compensation
Name and Principal Position     Year         Salary          Bonus       Compensation (1)        Granted                (2)

<S>                             <C>         <C>             <C>               <C>                <C>                  <C>
James F. Slattery               1997        $208,373        $200,000          $17,988                0                $27,270
  President and
  Chief Executive Officer       1996        $208,685             0            $19,984                0                $20,139

                                1995        $189,000             0            $13,010              5,000              $30,263


Michael Garretson               1997        $118,834        $ 75,000          $12,000(3)             0                $   288
  Executive Vice President
                                1996        $112,406        $    507          $13,000(3)         100,000                  0

                                1995        $ 55,926             0                0                6,250                  0


Ira Cotler                      1997        $135,115        $ 75,000          $ 6,000                0                 $   54
  Executive Vice President
  Chief Financial Officer       1996        $107,261        $    507          $50,396(4)         100,000                  0

                                1995          N/A               N/A               N/A               N/A                N/A
------------------

     (1) Consists of car lease payments.

     (2) Consists of life insurance premiums.

     (3) Also includes housing allowance.

     (4) Also includes relocation and related costs.

     In addition to the  compensation  described  above,  for 1995, Mr. Slattery
received S Corporation distributions of $134,400.

</TABLE>

     The following table sets forth information concerning stock options granted
executive officers named in the Summary Compensation Table:

                           Option Grants in 1997:  None
<PAGE>

<TABLE>
     The following table sets forth information concerning stock options granted
executive officers named in the Summary Compensation Table:

<CAPTION>
                         Option Values at December 31, 1997

                                         Number of                     Value of
                                     Shares Underlying            In-The-Money Options
                                    Options at Year End              at Year End
Name                             Exercisable/Unexercisable    Exercisable/Unexercisable
<S>                                     <C>                        <C>
James F. Slattery...............        16,458/ 1,667              $  8,939/$  4,471
Mike Garretson..................        70,832/35,366              $109,199/$ 54,601
Ira Cotler......................        66,666/33,334              $109,199/$ 54,601

</TABLE>

Employment Agreements

     The Company has entered  into an  employment  agreement  with Mr.  Slattery
which expires  February 9, 1999 and provides for minimum annual  compensation of
$189,000,  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 $1,000,000, such bonus not to exceed $200,000.  As
of June 1, 1996, Mr.  Speisman is employed under an agreement which provides for
Mr. Speisman's employment on a part-time basis  at an annual salary of $35,000.

     The Company has entered  into  an employment  agreement with  Mr. Garretson
which expires January 20, 1999 and provides for compensation of $115,000, annual
salary increases,  automobile  allowances,  reimbursement  of business expenses,
health or disability insurance, related benefits, a bonus equal to 3% of pre-tax
profits  in  excess  of $1,000,000, such  bonus  not  to exceed $75,000, and the
grant to purchase 100,000 shares of Common Stock.

     The Company's current employment agreement with Mr. Cotler was extended in
July, 1997 and  has  a  term  of  three  years  with  automatic  annual renewal
provisions.  Mr. Cotler receives $135,000, annual salary increases,  automobile
allowances and a bonus equal to 3% of pre-tax profits in excess  of $1,000,000,
such bonus not to exceed $75,000.

     In October  1989, a subsidiary  of the Company,  entered into an employment
agreement with William Banks.  Under this  agreement,  Mr. Banks was responsible
for developing and implementing  community  relations  projects on behalf of the
Company and for acting as a liaison  between the Company and local community and
civic groups who may have concerns about Company's  facilities being established
in their communities,  and with government officials throughout the State of New
York.  As  compensation,  Mr.  Banks  received 3% of the gross  revenue from all
Federal Bureau of Prisons,  state and local correctional agency contracts within
the State of New York with a guaranteed  minimum  monthly  income of $4,500.  In
December  1993,  Mr. Banks agreed to become a consultant to the Company upon the
same terms and conditions in order to accurately reflect the level and nature of
the services he  provided.  In 1996 and 1997,  Mr.  Banks  earned  approximately
$296,000 and $239,000 respectively.

<PAGE>

     Stock Options

     1993 Stock Option Plan

     Under the 1993 Stock Option Plan (the "1993 Plan") 500,000 shares of Common
Stock are reserved for issuance  upon  exercise of options  designated as either
(i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii)  non-qualified  options.  Under the 1993 Plan, ISOs
may be granted to  employees  and  officers  of the  Company  and  non-qualified
options  may be  granted  to  consultants,  directors  (whether  or not they are
employees), employees or officers of the Company.

     The 1993 Plan is administered by the Company's Stock Option Committee which
determines the persons to whom options will be granted,  the number of shares to
be covered by each option, whether the options granted are intended to be ISO's,
the rate of exercise of each option,  the option  purchase price per share,  the
manner of exercise,  the form of payment upon exercise, and whether restrictions
such as repurchase  rights are to be imposed on the shares  following  exercise.
Options  granted  under the 1993 Plan  expire five years after the date of grant
and 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).  The  aggregate  fair
market value of shares for which ISOs  granted to any  employee are  exercisable
for the first time by such  employee  during any calendar  year (under all stock
option  plans  of the  Company  and any  related  corporation)  may  not  exceed
$100,000.  No options  may be granted  under the 1993 Plan after  October  2003;
however,  options  granted  under the 1993 Plan prior  thereto may extend beyond
that date.  Options granted under the 1993 Plan are not  transferable  during an
optionee's  lifetime  but are  transferable  at  death by will or by the laws of
descent and distribution.

     During fiscal 1995 and 1996, options to purchase 54,375 and 50,700  shares,
respectively,  were granted under the 1993 Plan at exercise  prices ranging from
$4.76 to $20.63 per share.  In 1997,  options to  purchase  155,500 shares  were
granted under the 1993 Plan at exercise prices ranging from $8.75 to $17.88 per
share.


Item 11. Security Ownership of Certain Beneficial Owners and Management

     The following  table sets forth certain  information  as of March 13, 1998,
based on information  obtained from the persons named below, with respect to the
beneficial  ownership of shares of the Company's Common Stock by (i) each person
known by the Company to beneficially own more than 5% of the outstanding  shares
of Common Stock,  (ii) each executive  officer and director of the Company,  and
(iii) all officers and directors of the Company as a group:

<TABLE>

<CAPTION>

Name and Address                                         Amount and Nature of                     Percentage of
Beneficial Owner(1)                                     Beneficial Ownership                  Beneficial Ownership
<S>                                                             <C>                                    <C>
Esther Horn................................                     659,175                                 8.6%
James F. Slattery(2).......................                     788,125                                10.2%
Aaron Speisman(3)..........................                     447,263                                 5.8%
Jennifer Anna Speisman 1992 Trust..........                      83,438                                 1.1%
Joshua Israel Speisman 1992 Trust..........                      83,438                                 1.1%
Ira M. Cotler (4)..........................                     117,368                                 1.5%
Richard P. Staley (5)......................                      62,583                                  *
Michael C. Garretson (6)...................                     106,198                                 1.4%
Raymond S. Evans(7)........................                      17,925                                  *
Stuart Gerson (8)..........................                      26,975                                  *
Melvin T. Stith (9)... ....................                      17,500                                  *
Shimmie Horn (10)..........................                       3,333                                  *
All officers and directors as a group
(nine persons) (2)  (3) (4) (5) (6) (7)
(8) (9) (10)..............................                    2,413,321                                31.4%

------------------------
* Less than 1%

     (1) All  addresses are c/o  Correctional  Services  Corporation, 1819 Main
Street,  Suite 1000,  Sarasota,  Florida 34236.

     (2) Includes  options to purchase  16,458 shares of Common Stock.  Does not
include options to purchase 1,667 shares of Common Stock not exercisable  within
60 days.

     (3) Director and founder.  Does not include  83,438  shares of Common Stock
owned by the Jennifer Anna Speisman 1992 Trust and 83,438 shares of Common Stock
owned by the Joshua Israel  Speisman  1992 Trust,  trusts for the benefit of Mr.
Speisman's children,  as to which Mr. Speisman disclaims  beneficial  ownership.
Includes  options  to  purchase  16,458  shares of  Common  Stock and a Series A
Warrant to purchase 6,700 shares of Common Stock but does not include options to
purchase  1,667  shares of  Common  Stock not  exercisable  within 60 days.

     (4) Includes  2,612 shares of Common Stock owned by his wife as to which he
disclaims beneficial ownership. Also includes options to purchase 100,000 shares
of Common Stock, a Series A Warrant to purchase 3,850 shares of Common Stock and
other  warrants  to purchase  10,906  shares of Common  Stock.

     (5) Includes  options to purchase  62,083 shares of Common Stock.  Does not
include options to purchase 1,667 shares of Common Stock not exercisable within
60 days.

     (6) Consists of options to purchase 106,198 shares of Common Stock.

<PAGE>

     (7) Includes  options to purchase  17,925 shares of Common Stock.  Does not
include options to purchase 10,000 shares of Common Stock not exercisable
within 60 days.

     (8) Consists of options to purchase  23,125  shares of Common  Stock and a
Series A Warrant to  purchase  3,850  shares of Common  Stock.  Does not include
options to purchase  10,000  shares of Common  Stock not  exercisable  within 60
days.

     (9) Consists of options to purchase  17,500  shares of Common Stock.  Does
not include  options to purchase  10,000 shares of Common  Stock not exercisable
within 60 days.

    (10) Consists of options to purchase 3,333 shares of Common Stock.  Does not
include options to purchase 10,000 shares of Common Stock not exercisable within
60 days.

     The Company is unaware of any arrangements  which may result in a change in
control of the Company.

</TABLE>


Item 12. Certain Relationships and Related Transactions

     The Company  subleases a building  located at 12-16 East 31st  Street,  New
York, New York from LeMarquis Operating Corp.  ("LMOC"), a corporation owned 25%
by Ester  Horn  and 8% by James F.  Slattery.  The  Company  currently  utilizes
approximately  fifty  percent  of  the  building  for  the  Manhattan  Community
Corrections and the New York Community  Corrections  programs.  LMOC leases this
building  from an  unaffiliated  party  at a  current  base  monthly  rental  of
approximately  $16,074 (the "Base Rent"),  plus taxes,  currently  approximately
$14,000,  and water and sewer charges,  currently  approximately  $3,500,  for a
total monthly rental of approximately  $33,000. The Company has the right to use
as much of the building as it requires for its business subject to the rights of
certain residential  subtenants to remain in the building.  These rights include
the right to housing at a predetermined  rental for an indefinite period of time
pursuant to New York State rent stabilization laws.

     As a result of the lease negotiations, under a sublease dated as of January
1, 1994, since May 1, 1995, the Company has paid rent of $18,000 per month above
the  rent  paid by LMOC to the  building's  owner  for a total  monthly  rent of
approximately $51,420.  The Company has, to date, invested $739,000 in leasehold
improvements and will not receive any credit, in terms of a reduction in rent or
otherwise,  for  these  improvements.  The  terms  of  this  sublease  were  not
negotiated at arm's length due to the relationship of Mrs. Horn and Mr. Slattery
with both the Company and LMOC. The  negotiation of the sublease,  including the
renewal terms,  was requested by the  Representative  of the Underwriters of the
Company's  February 2, 1994 initial public offering to  substantially  track the
renewal terms of the Company's  management  contract.  The negotiations were not
subject  to the  board  resolution,  adopted  subsequent  to  the  negotiations,
relating to affiliated transactions,  although the terms were approved by all of
the  directors.  The initial term of the  Company's  sublease  expired April 30,
1995,  and is currently in its first renewal term expiring  April 30, 2000.  The
sublease contains two additional  successive five-year renewal options beginning
May 1, 2000.  The  monthly  rent  above the rent paid by LMOC to the  building's
owner  will  increase  to $22,000  per month  during  the  second  renewal  term
beginning  May 1, 2000 and to $26,000 per month  during the third  renewal  term
beginning May 1, 2005. The Company paid $40,000 to LMOC for the renewal options.

<PAGE>

These renewal options were separately  negotiated between the Board of Directors
of the Company and LMOC. Mr. Slattery  participated in such  negotiations.  Mrs.
Horn and Mr. Slattery will receive their proportionate  shares of rents received
by LMOC under the terms of this sublease.

     Previously, residential and commercial tenants of this building  paid  rent
to LeMarquis Enterprise Corp. ("Enterprises"), a company owned 30% by Mrs. Horn,
28% by Mr. Slattery and 25% by Mr. Speisman, and Enterprises  paid all  expenses
of  operating  the  residential and commercial portions of the building  as well
as a portion of the  overall  expenses of the  building.  As  of  February 1994,
however, all of the building's revenues, including rent from the residential and
commercial tenants are now  received and  expenses  paid  by  the  Company.  The
revenue from this portion of the building was approximately $193,000 in 1996 and
$184,000 in 1997.  The Company  anticipates that  operating  the  portion of the
building  occupied  by  residential  and commercial tenants will result in a net
expense to the Company of approximately $6,500  per month.  Due to New York rent
stabilization  laws,  the  Company  is  unable  to increase the rent paid by the
residential  tenants in  this building in response to increased rent or expenses
incurred by the Company.

     The  Company  leases the  entire  building  located  at 988 Myrtle  Avenue,
Brooklyn, New York from Myrtle Avenue Family Center, Inc. ("MAFC") pursuant to a
lease which commenced  January 1, 1994 and expires  December 31, 1998. The lease
establishes a monthly  rental of $40,000 and contains  three  five-year  renewal
options. The monthly rental for the first option period, which runs from January
1, 1999 through December 31, 2003, is $40,000. The monthly rental for the second
option  period,  which runs from January 1, 2004 through  December 31, 2008,  is
$45,000,  and the monthly  rental for the third option  period,  which runs from
January 1, 2009 through December 31, 2013, is $50,000. In addition,  the Company
pays taxes,  insurance,  repairs and  maintenance  on this  building.  MAFC is a
corporation  owned by Mrs.  Horn (27.5%) and Messrs.  Slattery (8%) and Speisman
(27.5%). The terms of the lease were not negotiated at arm's length due to their
relationship  with  MAFC  and  the  Company.   Messrs.   Slattery  and  Speisman
participated in such negotiations.

     The Company leases a building  located at 2534 Creston Avenue,  Bronx,  New
York from Creston Realty Associates,  L.P. ("CRA"), the corporation owned 10% by
Ester Horn. The lease term is two years commencing October 1, 1996 and has three
additional  one year  option  periods.  The  Company  also  pays a base  rent of
$180,000  per year which will  escalate  five  percent  per year for each of the
three year options if they are  exercised.  The Company  pays taxes,  insurance,
repairs and maintenance on this building which will be used to house a community
correctional  center. The terms of this lease were not negotiated at arms length
due to the relationship between the Company, Ms. Horn and CRA.

     Pursuant  to the  terms  of a Board  of  Directors  resolution  adopted  in
connection with the Company's initial public offering,  all transactions between
the  Company  and any of its  officers,  directors  or  affiliates  (except  for
wholly-owned  subsidiaries)  must be approved by a majority of the  unaffiliated
members  of the  Board of  Directors  and be on terms no less  favorable  to the
Company  than  could be  obtained  from  unaffiliated  third  parties  and be in
connection  with bona fide  business  purposes of the Company.  In the event the
Company makes a loan to an individual affiliate (other than a short-term advance
for  travel,   business  expense,   relocation  or  similar  ordinary  operating
expenditure),  such loan must be  approved  by a  majority  of the  unaffiliated
directors

<PAGE>

ITEM 13. EXHIBITS AND REPORTS

     (a) Exhibits

     *2.1      Stock Transfer  Agreements  between  the  Company  and the stock-
holders  of  each  of  Esmor  Management,  Inc.,  Esmor (Brooklyn),  Inc., Esmor
Manhattan, Inc., Esmor  (Seattle), Inc.,  Esmor New Jersey,  Inc.,  Esmor Texas,
Inc. and Esmor Houston, Inc.

     *3.1      Certificate of Incorporation dated October 28, 1993

    ##3.1.1    Copy of Certificate of Amendment of Certificate of  Incorporation
of Esmor Correctional Services, Inc. dated July 29, 1996

     *3.2      By-Laws

     *4.2      Form  of  Underwriter's  Warrant between the Company  and  Janney
Montgomery Scott Inc.

    *10.1      Stock Option Plan

    *10.5      Employment Agreement between the Company and James F. Slattery

    *10.6      Employment Agreement between the Company and Aaron Speisman

   ##10.6.1    Modification  to the  Employment  Agreement  between  the Company
and Aaron Speisman, dated June 13, 1996

    #10.8.3    Exercise  of  third  option  of  the  contract for operation of a
facility in New York, New York for women through June 30, 1995

    *10.9      Contract between the Company and the U.S.  Department of Justice,
Federal Bureau of Prisons  for  operation  of  a facility in Brooklyn, New York,
dated November 13, 1990

    *10.9.1    Letter  dated  September 23, 1993  from  the  U.S.  Department of
Justice, Federal  Bureau expressing its intent to exercise the third option year
of the contract

    *10.9.2    Exercise of third option year of the contract for  operation of a
facility in Brooklyn, New York

    #10.9.3    Extension of contract  for operation  of a facility  in Brooklyn,
New York through March 31, 1995

    *10.10     Bridge Contract  between the Company  and the U.S.  Department of
Justice,  Immigration  and  Naturalization  Service for operation of the Seattle
Processing Center, dated September 28, 1993

   ##10.10.1   Contract Amendment between the Company  and the  U.S. Immigration
and Naturalization service for operation of the Seattle Processing Center, dated
October 1, 1996

    *10.11     Contract between the Company and the Judicial District  Community
Supervision  and Corrections  Department of Tarrant  County,  dated September 1,
1993

    #10.11.1   Renewal and  Amendment of  Agreement  between the Company and the
Judicial District  Community  Supervision and Corrections  Department of Tarrant
County, dated October 5, 1994

   **10.11.2   Contract between  the Company and the Judicial District Community
Supervision  and Corrections  Department of Tarrant County,  dated September 26,
1995 for the operation of the Tarrant County Community Corrections Facility

<PAGE>

    *10.12     Contract between the Company and the New York State Department of
Corrections, dated July 17, 1992

   **10.12.1   Extension of Contract between  the Company and the New York State
Department of Corrections

    *10.13     Contract  between  the  Company  and  the   Texas  Department  of
Criminal Justice, Pardons and Paroles Division

    #10.13.1   Extension  to the  contract  between  the  Company  and the Texas
Department of Criminal  Justice,  Pardons and Paroles  Division for operation of
the South Texas Intermediate Sanction Facility

   **10.13.2   Contract between the Company and the Texas Department of Criminal
Justice for operation of the South Texas Intermediate Sanction Facility

    *10.14     Contract  between  the  Company  and  the  U.S.  Immigration  and
Naturalization  Service for operation of the New Jersey Processing Center, dated
August 13, 1993

   **10.14.1   Contract  between   the  Company  and  the  U.S.  Immigration and
Naturalization Service extending  the  period which the INS has to exercise  its
renewal option under its contract for the operation of the New Jersey Processing
Center

    *10.15     Agreement between the Company and William Banks, dated
October 31, 1989

    *10.15.1   Letter dated December 9, 1993 from William Banks to the Company

    *10.16     Form of  Sub-Lease  between  the  Company and LeMarquis Operating
Corporation

    *10.17     Form  of  Lease  between  the  Company  and  Myrtle Avenue Family
Center, Inc.

    *10.18     Lease between the Company and T. NY (USA)

    #10.19     Contract  by and  between  Esmor  Canadian, Inc. and the Board of
Trustees for the Hemphill County Juvenile  Detention Center for operation of the
Hemphill County Juvenile Detention Center

<PAGE>
    #10.20     Contract between Esmor Fort Worth,  Inc. and the Texas Department
of Criminal Justice, Pardons  and  Paroles Division for the Fort Worth Community

     10.20.1   Addendum One to the  Contract between Esmor Fort Worth,  Inc. and
the Texas  Department of  Criminal Justice, Pardons and Paroles Division for the
Fort Worth Community

     10.20.2   Amendment Two to the  Contract between Esmor Fort Worth, Inc. and
the Texas  Department of  Criminal Justice, Pardons and Paroles Division for the
Fort Worth Community dated April 1, 1997

     10.20.3   Amendment Three  to the  Contract  between Esmor Fort Worth, Inc.
and the Texas  Department of  Criminal Justice, Pardons and Paroles Division for
the Fort Worth Community dated September 1, 1997

    #10.21     Contract dated September 1, 1994 by the Community Supervision and
Corrections  Department of Travis County,  Texas for the Travis County Substance
Abuse Treatment Facility

   **10.21.1   Contract dated October 1, 1995 by the Community  Supervision  and
Corrections  Department of Travis County,  Texas for the Travis County Substance
Abuse Treatment Facility

<PAGE>
   ++10.21.2   Amendment to the  Contract  and the Company for the Operation and
Management of the Travis County Substance Abuse Treatment facility

    #10.22     Contract  between the Company and the U.S. Department of Justice,
Immigration and  Naturalization  Service for operation of the Seattle Processing
Center, effective August 1, 1994

   **10.22.1   Exercise of second  option  of the contract for  operation of the
Seattle Processing Center #10.23 Lease between Esmor Fort Worth, Inc. and Region
Enterprises, Inc.

    #10.23     Lease between Esmor Fort Worth, Inc. and Region Enterprises, Inc.

    #10.24     Revolving Credit and Term Loan Agreement with Marine Midland Bank
dated as of July 28, 1994

     10.24.1   Renewal  of  the  Revolving Line of Credit Note dated January 15,
1998

   **10.25     1994 Non-Employee Director Stock Option Plan

   **10.26     Loan and  Security Agreement with NationsBank, N.A. (South) dated
as of December 31, 1995

     10.26.1   Intentionally blank

     10.26.2   Deed of Trust Modification Agreement dated January 14, 1998

     10.26.3   Third Amendment to Loan Agreement dated January 5, 1998

     10.26.4   Fourth Amendment to Loan Agreement dated January 14, 1998

   **10.27     Lease between  the  Company  and  Zell/Merrill  Lynch Real Estate
Opportunity Partners Limited Partnership dated as of June 30, 1995

   ##10.27.1   Amendment  to the Lease Agreement  between  the  Company and Zell
Merrill Lynch Real Estate Opportunity Partners Limited Partnership dated
November 15, 1996

   **10.28     Lease between the Company and Gayton Crossing dated as of May 26,
1995

   **10.29     Contract   between   the   Company  and  the  State  of  Florida,
Correctional Privatization Commission dated October 6, 1995 for operation of the
Pahokee Youth Facility

   **10.30     Contract   between   the   Company  and  the  State  of  Florida,
Correctional Privatization Commission dated October 6, 1995 for operation of the
Polk City Youth Facility

   **10.31     Contract between the Company and the State of Arizona, Department
of  Corrections for  operation  of the  Arizona DWI Facility in Phoenix, Arizona
dated July 1995

     10.31.1   Amendment Number One to the  contract between the Company and the
State of Arizona, Department of Corrections for the operation of the Arizona DWI
Facility in Phoenix, Arizona dated April 1997

     10.31.2   Amendment Number Two to the  contract between the Company and the
State of Arizona, Department of Corrections for the operation of the Arizona DWI
Facility in Phoenix, Arizona dated December 1997

   **10.32     Contract between the Company and the State of Florida, Department
of Juvenile Justice for operation of the Bartow Youth Facility

<PAGE>

   **10.33     Contract, effective as of December 22, 1995, between the  Company
and Johnson County, Texas for the Johnson County Juvenile Detention Center

   **10.34     Asset  Purchase  Agreement  dated as of December 15, 1995 between
the Company and Corrections Corporation of America

   **10.35     Construction Contract  dated as of December  28, 1995 between the
Company and Bison  Industries,  Inc. for  construction of the Pahokee  (Florida)
Youth Facility

   **10.36     Design and  Construction Contract dated as of December 1, 1995 by
and between the Company,  the Florida  Correctional  Finance Corporation and the
State of  Florida,  Correctional  Privatization  Commission  for the  design and
construction of the Polk City (Florida) Youth Facility

   **10.37     Contract dated July 1, 1995,  between  the  Company  and the U.S.
Department of Justice,  Federal Bureau of Prisons for operation of a facility in
New York, New York

   **10.38     Contract between the Company and the U.S.  Department of Justice,
Federal Bureau of Prisons for operation of a facility in Brooklyn, New York

     10.39     (Intentionally blank)

   ##10.40     Contract between the Company  and the U.S.  Bureau of Prisons for
operation of the Bronx Community Corrections Center, dated October, 1, 1996

   ##10.41     Contract  between  the  Company  and  the  State  of  Arizona for
operation of the DWI Secure Prison in Phoenix, Arizona dated January 1997

   ##10.42     Contract between the Company and  McKinley  County New Mexico for
operation of the McKinley  County,  New Mexico Adult Detention  Facility,  dated
October 3, 1996

   ##10.43     Contract between the Company and Colorado  County,  Texas for the
operation of the Colorado County, Texas Juvenile Residential Facility

   ##10.44     Lease   Agreement   between   the   Company  and  Creston  Realty
Associates, L.P., dated October 1, 1996

    *10.45     Lease between the Company and Elberon Development Company

   ##10.45.1   Assignment of Lease  between the Company and Elberon  Development
Company

   ##10.46     Contract between the Company and Bell County Texas for  operation
of the Bell County Juvenile Residential Facility

   ##10.47     Employment  Agreement  between  the  Company  and  Ira M. Cotler,
dated January 21, 1996

    +10.47.1   Amended  Employment  Agreement  between  the  Company  and Ira M.
Cotler dated July 9, 1997

   ##10.48     Employment Agreement between the Company and Michael C.
Garretson, dated January 21, 1996

    +10.49     Contract between the Company and Okaloosa County, Florida for the
Design, Build and Operation of a Moderate Risk  Residential  Program  and a High
Risk Residential Program dated June 13, 1997

<PAGE>
    +10.49.1   Amendment  to  Contract  between the Company and Okaloosa County,
Florida for the Design, Build and  Operation  of  a  Moderate  Risk  Residential
Program and a High Risk Residential Program dated June 16, 1997

   ++10.50     Contract between the Company and Grenada County, Mississippi  for
the Operation and Management of a 200 bed jail dated September 1, 1997

   ++10.50.1   Lease Agreement between the  Company  and  Grenada  County  dated
September 1, 1997

   ++10.51     Asset Purchase Agreement between the Company and Dove Development
Corporation,   Consolidate   Financial   Resources/Crystal  City,  Inc.,   dated
August 27, 1997

   ++10.51.1   First  Amendment to  Asset Purchase Agreement between the Company
and Dove Development Corporation,  Consolidate Financial Resources/Crystal City,
Inc., dated August 27, 1997

   ++10.52     Contract between  the Company and McKinley County, New Mexico for
the Operation and Management of the  McKinley County Adult Detention Facility in
Gallup, New Mexico, executed August 21, 1997

   ++10.53     Contract  between  the  Company  and  the  Martin  Hall  Juvenile
Facility Board dated October 15, 1997 for the  Operation and Management  of  the
Martin Hall Juvenile Detention Center in Medical Lake, Washington

     10.54     Lease  Agreement  between  the  Company  and  Frio  County  dated
November 26, 1997

     10.55     Contract between  CSC Management  de Puerto Rico and the Juvenile
Institutions Administration of the Commonwealth of Puerto Rico dated
December 22, 1997 for the operation and management of a secure  residential
treatment program for youths at the Salinas facility in Puerto Rico

     10.56     Contract  between  the  Company  and  the  Juvenile  Institutions
Administration dated February 6, 1998 for operation of the Metropolitan Juvenile
Detention Center in Puerto Rico

     10.57     Contract  between  the  Company  and  the  Juvenile  Institutions
Administration dated February 6, 1998 for operation of the Metropolitan Juvenile
Treatment Center in Puerto Rico

     10.58     Contract between the Company and the New York State Department of
Corrections for Community Reintegration Services dated March 1, 1998

     10.59     Resolution from the City Council of the City of Eagle Lake, Texas
to the Company to  construct  and  operate  a 1,000 bed prison facility in Eagle
Lake, Colorado County, Texas dated July 22, 1997

   **21.1      List of Significant Subsidiaries

     21.2      Amended List of Subsidiaries

     27.       Financial Data Schedule

------------------------

    *  Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 33-71314-NY).

    #  Incorporated by  reference to the  Company's Annual Report on Form-10-KSB
for the year ended December 31, 1994.

<PAGE>
   **  Incorporated  by reference to the initial  filing of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995.

   ##  Incorporated by  reference to the  Company's Annual Report on Form-10-KSB
for the year ended December 31, 1996.

    +  Incorporated  by  reference  to  the  Company's  filings on Form 10-Q for
June 30, 1997.

   ++  Incorporated  by  reference  to  the  Company's  filings on Form 10-Q for
September 30, 1997.


     (b) Reports on Form 8-K

         The Company did not file any reports on Form 8-K in fiscal 1997.

<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, President
                                    ---------------------------------
                                    James F. Slattery, President


Dated: March 30, 1998

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


Signature                Title                                    Date


/s/James F. Slattery     President (Principal Executive Officer)  March 30, 1998
--------------------         and Director
James. F. Slattery


/s/Aaron Speisman        Vice President, Secretary and Director   March 30, 1998
--------------------
Aaron Speisman


/s/Ira C. Cotler         Chief Financial Officer (Principal       March 30, 1998
--------------------          Financial Officer)
Ira C. Cotler


/s/Raymond S. Evans      Director                                 March 30, 1998
--------------------
Raymond S. Evans


/s/Stuart Gerson         Director                                 March 30, 1998
--------------------
Stuart Gerson


/s/Melvin Stith          Director                                 March 30, 1998
--------------------
Melvin Stith


/s/Shimmie Horn         Director                                  March 30, 1998
--------------------
Shimmie Horn


/s/Richard Staley       Vice President and Director               March 30, 1998
--------------------
Richard Staley

<PAGE>








CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES

December 31, 1997, 1996 and 1995


<PAGE>

                             C O N T E N T S


                                                                       Page


Report of Independent Certified Public Accountants                      F-1

   Consolidated Balance Sheets as of December 31, 1997 and 1996         F-2

   Consolidated Statements of Operations for the years ended
      December 31, 1997, 1996 and 1995                                  F-3

   Consolidated Statement of Stockholders' Equity for the years
     ended December 31, 1997, 1996 and 1995                             F-4

   Consolidated Statements of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995                                 F-5-6

   Notes to Consolidated Financial Statements                        F-7-30


<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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.  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 generally accepted auditing
standards. 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 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.



                                             GRANT THORNTON LLP

Tampa, Florida
March 11, 1998

<PAGE>
<TABLE>

               CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                         December 31,
                                                   ------------------------
                         ASSETS                       1997          1996
                                                   ----------   -----------
<S>                                               <C>           <C>
CURRENT ASSETS
  Cash and cash equivalents                       $ 5,216,106   $20,932,309
  Restricted cash                                      60,626             -
  Accounts receivable, net                         10,672,018     4,023,620
  Receivable from sale of equipment and
    leasehold improvements                          1,380,000     1,476,000
  Prepaid expenses and other                          964,576     2,001,973
                                                   ----------    ----------
     Total current assets                          18,293,326    28,433,902

BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -
  AT COST, NET                                     23,717,172    12,040,149

LONG-TERM RECEIVABLE FROM SALE OF EQUIPMENT AND
  LEASEHOLD IMPROVEMENTS                              879,082     2,031,882

OTHER ASSETS
  Deferred development and start-up costs, net      8,043,380     5,817,959
  Deferred income taxes                                     -     1,495,000
  Other                                             4,933,327       485,157
                                                   ----------    ----------

                                                  $55,866,287   $50,304,049
                                                   ----------    ----------
                                                   ----------    ----------
      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable and accrued liabilities        $ 7,539,062   $ 4,873,542
  Subordinated promissory notes                     3,935,760             -
  Deferred tax liability                              125,000             -
  Current portion of long-term debt                     1,800             -
                                                   ----------    ----------
     Total current liabilities                     11,601,622     4,873,542

LONG-TERM DEBT                                        321,491             -
LONG-TERM PORTION OF ACCRUED CLOSURE EXPENSES         755,000     1,606,000
SUBORDINATED PROMISSORY NOTES                               -     3,899,841

COMMITMENTS AND CONTINGENCIES                               -             -

STOCKHOLDERS' EQUITY
  Preferred stock, $.01 par value,
    1,000,000 shares authorized,
    none issued and outstanding                             -             -
  Common stock, $.01 par value,
    30,000,000 shares authorized,
    7,693,854 and 7,660,779 shares
    issued and outstanding
    as of 1997 and 1996, respectively                  76,938        76,608
  Additional paid-in capital                       42,260,247    42,022,593
  Accumulated earnings (deficit)                      850,989    (2,174,535)
                                                   ----------    ----------
                                                   43,188,174    39,924,666
                                                   ----------    ----------

                                                  $55,866,287   $50,304,049
                                                   ----------    ----------
                                                   ----------    ----------

        The accompanying notes are an integral part of these statements.

                                    F-2
</TABLE>

<PAGE>

<TABLE>

            CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
                                              Years Ended December 31,
                                              -----------------------
                                          1997         1996         1995
                                       ----------   ----------   ----------
<S>                                   <C>          <C>          <C>
Revenues
  Resident fees                       $58,593,217  $30,866,162  $30,482,683
Other income                            1,342,884      635,496    1,007,343
                                       ----------   ----------   ----------

                                       59,936,101   31,501,658   31,490,026
                                       ----------   ----------   ----------

Expenses
  Operating                            43,472,402   21,928,329   19,731,797
  General and administrative           11,859,399    8,655,628    9,938,344
Fort Worth and New York Community
    Corrections closure costs                   -    3,329,000            -
New Jersey facility closure cost                -            -    3,909,700
                                       ----------   ----------   ----------

                                       55,331,801   33,912,957   33,579,841
                                       ----------   ----------   ----------

Operating income (loss)                 4,604,300   (2,411,299)  (2,089,815)

Interest income (expense)                 444,077     (481,728)    (699,576)
                                       ----------   ----------   ----------

Income (loss) before income taxes       5,048,377   (2,893,027)  (2,789,391)
Income tax expense (benefit)            2,022,853   (1,025,000)  (1,050,000)
                                       ----------   ----------   ----------

       NET INCOME (LOSS)              $ 3,025,524  $(1,868,027) $(1,739,391)
                                       ----------   ----------   ----------
                                       ----------   ----------   ----------


Net earnings (loss) per common
  share:
       Basic                                $0.39       $(0.32)      $(0.38)
       Diluted                              $0.37       $(0.32)      $(0.38)

Number of shares used in per common
  share computation:
       Basic                            7,675,220    5,781,853    4,552,707
       Diluted                          8,117,922    5,781,853    4,552,707


        The accompanying notes are an integral part of these statements.

                                    F-3

</TABLE>

<PAGE>

<TABLE>
            CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
              CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
               Years ended December 31, 1997, 1996 and 1995

<CAPTION>
                                        Additional   Retained
                              Common     Paid-in     Earnings
                               Stock     Capital    (Deficit)      Total
                            --------  -----------  -----------  -----------

<S>                         <C>       <C>          <C>          <C>
Balance at January 1, 1995  $ 44,079  $ 5,616,456  $ 1,432,883  $ 7,093,418

Exercise of stock options         70       33,250            -       33,320
Common stock issuance          4,968    3,464,730            -    3,469,698
Issuance of warrants with
  subordinated promissory
  notes                            -      365,000            -      365,000
Net loss                                            (1,739,391)  (1,739,391)
                              ------   ----------   ----------   ----------


Balance at December 31, 1995  49,117    9,479,436     (306,508)   9,222,045


Common stock issuance
  through public offering     24,375   30,483,681            -   30,508,056
Exercise of stock options        649      411,338            -      411,987
Exercise of warrants           2,467    1,648,138            -    1,650,605
Net loss                                            (1,868,027)  (1,868,027)
                              ------   ----------   ----------   ----------


Balance at December 31, 1996  76,608   42,022,593   (2,174,535)  39,924,666


Reduction in stock
  issuance cost                    -       46,902            -       46,902
Exercise of stock options         26       12,443            -       12,469
Exercise of warrants             304      178,309            -      178,613
Net income                         -            -    3,025,524    3,025,524
                              ------   ----------   ----------   ----------


Balance at December 31, 1997 $76,938  $42,260,247  $   850,989  $43,188,174
                              ------   ----------   ----------   ----------
                              ------   ----------   ----------   ----------


         The accompanying notes are an integral part of this statement.

                                    F-4
</TABLE>

<PAGE>

<TABLE>
            CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                              Years Ended December 31,
                                              -----------------------
                                          1997         1996         1995
                                      ----------   ----------    ----------
<S>                                  <C>          <C>           <C>

Cash flows from operating
activities:
  Net income (loss)                  $ 3,025,524  $(1,868,027)  $(1,739,391)
  Adjustments to reconcile net
    income (loss) to net cash
    provided by operating
    activities:
      Depreciation and amortization    2,164,110      778,462     1,168,850
      Amortization of subordinated
        note discount                     88,515      173,247        50,695
      Amortization of deferred loan
        costs                            250,836      243,258       127,568
      Deferred income tax expense
        (benefit)                      1,620,000     (375,000)   (1,120,000)
      Ft. Worth deferred development
        cost writedown                         -       98,446             -
      Ft. Worth and NYCC facilities
        asset impairment                       -      564,050             -
      New Jersey facility asset
        impairment                             -            -     2,771,424
      New Jersey deferred development
        costs writedown                        -            -       416,201
      Changes in operating assets and
        liabilities:
          Accounts receivable         (6,648,398)    (649,391)    1,429,785
          Refundable income taxes        562,499     (650,000)            -
          Prepaid expenses and other
            current assets               474,900       63,333      (774,644)
          Accounts payable and
             accrued liabilities       2,643,283      377,877       895,650
          Reserve for Ft. Worth and
            NYCC facilities closure
              costs                     (828,763)   2,566,504             -
          Reserve for New Jersey
            facility closure costs             -     (300,000)            -
                                      ----------   ----------    ----------

              Net cash provided by
                operating activities   3,352,506    1,022,759     3,226,138
                                      ----------   ----------    ----------

Cash flows from investing
activities:
  Capital expenditures               (12,648,961)  (6,018,195)   (6,110,693)
  Development and start-up costs      (3,409,590)  (4,317,276)   (1,824,268)
  (Increase) decrease in restricted
    cash - unexpended construction
    and maintenance funds                (60,626)     750,000      (750,000)
                                      ----------   ----------    ----------

              Net cash used in
              investing activities   (16,119,177)  (9,585,471)   (8,684,961)
                                      ----------   ----------    ----------

Cash flows from financing
activities:
  Proceeds from issuance of common
    stock                                      -   30,508,056     3,469,698
  Proceeds from long-term borrowing      325,000            -     1,500,000
  Payments on long-term borrowings        (1,709)  (4,000,000)   (1,282,715)
  Proceeds (payments) on short-term
    debt, net                                  -   (1,221,022)      218,333
  Issuance of subordinated notes
    and warrants                               -            -     5,676,600
  Proceeds from sale of equipment
    and leasehold improvements         1,248,800            -             -
  Debt issuance costs                   (100,000)           -      (652,101)
  Net proceeds from exercise of
    stock options and warrants           185,388      426,890        33,320
  Long-term portion of prepaid
    lease                             (4,335,482)           -             -
  Other assets                          (271,529)      24,349       (56,010)
                                      ----------   ----------    ----------

              Net cash provided by
              (used in) financing
              activities              (2,949,532)  25,738,273     8,907,125
                                      ----------   ----------    ----------


       The accompanying notes are an integral part of these statements.

                                   F-5
<PAGE>

            CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


<CAPTION>
                                              Years Ended December 31,
                                              -----------------------
                                          1997         1996         1995
                                      ----------    ----------   ----------
<S>                                  <C>           <C>          <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS                     $(15,716,203) $17,175,561  $ 3,448,302

Cash and cash equivalents at
  beginning of period                  20,932,309    3,756,748      308,446
                                       ----------   ----------   ----------

Cash and cash equivalents at
  end of period                      $  5,216,106  $20,932,309  $ 3,756,748
                                      -----------   ----------   ----------
                                      -----------   ----------   ----------

Supplemental disclosures of cash
flows information:
  Cash paid (refunded) during the
    period for:
      Interest                       $    436,178  $   883,900  $   602,700
                                      -----------   ----------   ----------
                                      -----------   ----------   ----------
    Income taxes, net                $   (211,609) $    (2,200) $   789,500
                                      -----------   ----------   ----------
                                      -----------   ----------   ----------
       The accompanying notes are an integral part of these statements.

                                   F-6
</TABLE>

<PAGE>

              CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Correctional Services Corporation and Subsidiaries operate and manage
detention and correctional facilities for federal, state and local
government agencies.  On August 1, 1996, the Company's Certificate of
Incorporation was amended which changed the name of the Company to
Correctional Services Corporation and increased the number of authorized
shares of Common Stock from 10,000,000 to 30,000,000 shares.

1.  Principles of Consolidation

    The consolidated financial statements as of December 31, 1996 include
the accounts of Correctional Services Corporation and its wholly-owned
subsidiaries, Esmor, Inc., Correctional Services Management, Inc., Esmor
Brooklyn, Inc., Esmor Seattle, Inc., Esmor Manhattan, Inc., Esmor
Mansfield, Inc., Esmor Houston, Inc., Esmor New Jersey, Inc., Esmor Ft.
Worth, Inc., Esmor Canadian, Inc. and Esmor Travis, Inc. (collectively the
"Company" or the " companies").  As of December 31, 1996 all of the
aforementioned subsidiaries (except Esmor, Inc. and Esmor New Jersey, Inc.)
were merged into the parent company. An additional corporation, CSC
Management de Puerto Rico, Inc., was added to the Company's consolidated
group as of July 1, 1997.  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
generally accepted accounting principles, 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.  For discussion of the realization of
Receivable from Sale of Equipment and Leasehold Improvements and costs
pertaining to New York and Fort Worth closures, see Note L.

3.  Revenue Recognition

    Revenue is recognized at the time the service is provided.  Revenues
are principally derived from contracts with federal, state and local
government agencies.

4.  Cash and Cash Equivalents

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

	Restricted cash of $60,626 at December 31, 1997 represents a major
maintenance and repair reserve fund established by the Company as required
by contracts in Polk and Pahokee, Florida.

                                    F-7
<PAGE>

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


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

5.  Building, Equipment and Leasehold Improvements

    Building, 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).

6.  Capitalized Interest

    In accordance with Statement of Financial Accounting Standards No. 34
Capitalization of Interest Costs the Company capitalizes interest on
facilities during construction.  During 1997 the Company capitalized
interest of $371,500 related to the construction of the Florence, Arizona
facility. During 1996 interest of $103,576 was capitalized relating to the
construction of the Phoenix, Arizona facility.

7.  Deferred Development and Start-up Costs

    Deferred development costs consist of costs that can be directly
associated with a specific anticipated contract and, if the recoverability
from that contract is probable, they are deferred until the anticipated
contract has been awarded.  At the commencement of operations of the
facility, the deferred development costs are amortized over the life of
the contract (including option periods) as development expense but not to
exceed five years.  Costs of unsuccessful or abandoned contracts are
charged to expense when their recovery is not considered probable.
Facility start-up costs, which include costs of initial employee training,
travel and other direct expenses are incurred (after a contract is awarded)
in connection with the opening of new facilities.  These costs are
capitalized and amortized on a straight-line basis over the term (including
option periods) of the contracts not to exceed five years.

In April 1997, the American Institute of Certified Public Accountants
issued a proposed accounting standard on "Accounting for the Costs of
Start-up Activities." If adopted in 1998, the standard would require the
Company to expense start-up and deferred development costs as incurred. In
addition, the standard may require that all previously capitalized start-up
costs be expensed and reported as a cumulative effect of a change in
accounting principle at the time of the adoption.  As of December 31, 1997,
unamortized startup costs and deferred development were $8,043,380.

8.  Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of

    On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long- Lived
Assets and  for Long- Lived Assets to

                                    F-8
<PAGE>

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


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

be Disposed Of ("SFAS No. 121").  The standards for SFAS No. 121 require
that the Company recognize and measure impairment losses of long-lived
assets and certain identifiable intangibles and to value long-lived assets
to be disposed of.  The primary objectives under SFAS No. 121 are to (a)
recognize an impairment loss of an asset whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable or
(b) if planning to dispose of long-lived assets or certain identifiable
intangibles, such assets have been reflected in the Company's consolidated
financial statements at the net asset value less cost to sell.  The effect,
adoption and application of SFAS No. 121 was not considered material to the
consolidated financial statements in 1997 and 1996.

9.  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.

10.  Earnings Per Share

     In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS No. 128"). The standard
requires the disclosure of basic and diluted earnings per share for periods
ending after December 15, 1997 and restatement of prior periods to conform
with the new disclosure format. The computation under SFAS No. 128 differs
from the primary and fully diluted earnings per share computed under APB
Opinion No. 15 primarily in the manner in which potential common stock is
treated. Basic earnings per share is computed by dividing net income 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 for the effect of all potential common stock and
the average share price for the period is used in all cases when applying
the treasury stock method to potentially dilutive outstanding options.  The
1996 and 1995 earnings per share amounts presented herein have been
restated to reflect the adoption of SFAS No. 128.

11.  Stock Based Compensation

     In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123").  With
respect to stock options granted to employees, SFAS No. 123 permits
companies to continue using the accounting method promulgated by the
Accounting Principles Board Opinion No. 25 ("APB No. 25"), Accounting for
Stock Issued to Employees, to measure compensation or to adopt the fair
value based method prescribed by SFAS No. 123.  Management has not adopted
SFAS No. 123's accounting recognition provisions related to stock options
granted to employees and

                                     F-9

<PAGE>

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


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

accordingly, will continue following APB No. 25's accounting provisions.
All other requirements of SFAS No. 123 were implemented on January 1, 1996.

12.  New Accounting Pronouncements

     SFAS No. 130 Reporting Comprehensive Income is effective for fiscal
years beginning after December 15, 1997.  This statement establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.  The
requirements of this statement include:  (a) classifying items of other
comprehensive income by their nature in a financial statement and (b)
displaying the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of the balance sheet.  The Company plans to adopt SFAS No. 130 for the year
ending December 31, 1998 and expects no material impact to the Company's
financial statement presentation.

     SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information is effective for fiscal years beginning after December 15,
1997.  This statement supercedes SFAS No. 14 Financing Reporting for
Segments of a Business Enterprise and amends SFAS No. 94 Consolidation of
All Majority-Owned Subsidiaries.  This statement requires annual financial
statements to disclose information about products and services, geographic
areas and major customers based on a management approach, along with
interim reports.  The management approach requires disclosing financial and
descriptive information about an enterprise's reportable operating segments
based on reporting information the way management organizes the segments
for making decisions and assessing performance.  It also eliminates the
requirement to disclose additional information about subsidiaries that were
not consolidated.  The Company plans to adopt SFAS No. 131 for the year
ending December 31, 1998 impacting only the Company's disclosure
information and not its results of operations.

13.  Reclassifications

     Certain reclassifications have been made to the 1996 and 1995 balances
to conform to the 1997 presentation.

                                  F-10
<PAGE>

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


NOTE B - CONTRACTUAL AGREEMENTS WITH GOVERNMENT AGENCIES

The Company currently operates nineteen secure and non-secure corrections
or detention programs in the states of Arizona, Florida, New Mexico,
Mississippi, New York, Texas and Washington for Federal, state and local
government agencies exclusive of two programs which are expected to wind
down in 1998 and for which a write-down has been provided for the year
ended December 31, 1996 (see Note L).  The Company's secure facilities
include a detention and processing center for illegal aliens, intermediate
sanction facilities for parole violators and a shock incarceration
facility, which is a military style "boot camp" for youthful offenders.
Non-secure facilities include residential programs such as community
correction facilities for federal and state offenders serving the last six
months of their sentences and non-residential programs such as home
confinement supervision.

The Company is compensated on the basis of the number of offenders held in
each of its facilities.  The Company's contracts may provide for fixed per
diem rates or monthly fixed rates.  Some contracts also provide for minimum
guarantees.

The terms of each contract vary and can be from one to five years.
Contracts for more than one year have renewal options which either are
exercisable on mutual agreement between the Company and the government
agency or are exercisable by the government agency alone.

                                F-11
<PAGE>

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


NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, financial instruments consist principally of cash and cash
equivalents, subordinated promissory notes and long-term debt.

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


1.  Cash and Cash Equivalents

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


2.  Subordinated Promissory Notes and Long-Term Debt

    The fair value of the Company's subordinated promissory notes and
long-term debt is estimated based upon the quoted market prices for the
same or similar issues or on the current rates offered to the Company for
debt of the same remaining maturities.  As of December 31, 1997 and 1996
the estimated fair values of the subordinated promissory notes and
long-term debt approximated their carrying values.


3.  Receivable from Sale of Equipment and Leasehold Improvements

    The carrying value of the receivable from sale of equipment and
leasehold improvements at December 31, 1997 and 1996 is $2,259,082 and
$3,507,882, respectively.  The Company believes the fair value of the
receivable from sale of equipment and leasehold improvements is not
practicable to estimate (See Note L-1(b)).


                                 F-12
<PAGE>

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


NOTE D - PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

                                                   December 31,
                                               1997            1996
                                            ----------     ----------

     Prepaid insurance                      $  153,875     $  214,231
     Prepaid real estate taxes                 133,110        165,061
     Prepaid and refundable income taxes        87,501        819,199
     Prepaid rent - current portion            383,333              -
     Other                                     206,757        803,482
                                             ---------      ---------

                                            $  964,576     $2,001,973
                                             ---------      ---------
                                             ---------      ---------


NOTE E - BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Building, equipment and leasehold improvements, at cost, consist of the
following:

                                                   December 31,
                                               1997            1996
                                            ----------     ----------

     Buildings and land                    $21,125,911    $10,072,687
     Equipment                               3,464,003      2,221,427
     Leasehold improvements                    998,502        645,341
                                            ----------     ----------
                                            25,588,416     12,939,455

     Less accumulated depreciation          (1,871,244)      (899,306)
                                            ----------     ----------
                                           $23,717,172    $12,040,149
                                            ----------     ----------
                                            ----------     ----------


Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was approximately $972,000, $640,000 and $1,040,000, respectively.


                                 F-13
<PAGE>

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


NOTE F - OTHER ASSETS

Deferred development and start-up costs are comprised of the following:

                                                   December 31,
                                               1997            1996
                                            ----------     ----------

     Development costs                      $4,343,247     $3,158,242
     Start-up costs                          5,301,229      3,079,272
                                             ---------      ---------

                                             9,644,476      6,237,514

     Less accumulated amortization          (1,601,096)      (419,555)
                                             ---------      ---------

                                            $8,043,380     $5,817,959
                                             ---------      ---------
                                             ---------      ---------


The December 31, 1997 and 1996 balance of $8,043,380 and $5,817,959
includes development costs of approximately $1,005,500 and $306,300,
respectively, related to unawarded contracts.  Deferred development at
December 31, 1997 and 1996, includes $637,500 paid to Colorado County,
Texas for the Company's contractual commitment to finance 25% of the
facility's construction cost. Colorado County, Texas is obligated to fund
the balance.

Other assets consist of the following:


                                                   December 31,
                                               1997            1996
                                            ----------     ----------

     Deferred refinancing costs, net        $  193,330     $  344,167
     Deposits                                  355,160        106,820
     Deferred lease option costs                18,656         26,660
     Prepaid rent - net of current portion   4,335,482              -
     Other                                      30,699          7,510
                                             ---------      ---------

                                            $4,933,327     $  485,157
                                             ---------      ---------
                                             ---------      ---------

During the year, the Company entered into a prepaid lease agreement with
a facility located in Frio, Texas.  The term of the lease is for twelve
years and began in December 1997.  The current portion of the lease
payments are included in prepaid expenses (Note D) and the long-term
portion is included above in other assets.


                                 F-14
<PAGE>

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


NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:


                                                   December 31,
                                               1997            1996
                                            ----------     ----------

     Accounts payable                       $1,906,454     $1,900,867
     Accrued expenses                        2,610,299      1,193,348
     Payroll and related taxes               1,523,475        691,540
     Construction costs (including
        retainage)                             499,250         10,950
     Income taxes                                    -        116,333
     Other                                      16,843              -
     Accrued closure costs of Fort Worth
       and New York Community Corrections      982,741        960,504
                                             ---------      ---------

                                            $7,539,062     $4,873,542
                                             ---------      ---------
                                             ---------      ---------


NOTE H - DEBT

Long-term debt consists of the following:


                                                   December 31,
                                               1997            1996
                                            ----------     ----------

     Mortgage payable due in semi-annual
       installments of $17,083 which
       includes principal plus interest at
       10% per annum due in full
       October 2006                           $323,291       $      -
     Less current portion                       (1,800)             -
                                               -------        -------

                                              $321,491       $      -
                                               -------        -------

Effective December 31, 1995, the Company and NationsBank, N.A. entered into
a loan and security agreement totaling $11.0 million.  The agreement
consists of $5 million term loan at a fixed rate of 8.92%, which refinanced
previous debt with another bank, and a $6 million revolving line of credit
for working capital purposes.  On September 17, 1996, the outstanding
balances of both the term loan ($4,333,360) and the revolving line
($2,865,108) were repaid in full with interest from the net proceeds raised
from the public offering (see Note K).  Borrowings under the revolver are
based, at the Company's option, on .75% over the bank's prime rate or the
London International Bank Rate (LIBOR) plus 3.35%.  After September 30,
1996 the interest rate charged under either method is based on the
Company's financial performance as specified in the agreement.  Further,
the Company is required to pay an annual commitment fee of .25% of the
average unused portion of the facility.  The Company may prepay any
borrowings without interest or penalty.  The Company's subsidiaries have
guaranteed  the Company's obligation  under  the  agreement.  The  Company
has  granted  the

                                F-15
<PAGE>

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


NOTE H - DEBT - (Continued)

bank a first priority security interest in all of its assets. The lending
agreement contains certain financial covenants including debt service
coverage ratio and senior liabilities to tangible net worth and
subordinated debt ratio.  The agreement precludes the payment of dividends
and stock repurchase or redemptions prior to December 31, 1996. Thereafter,
such dividends, purchase or redemptions is limited to 10% of the Company's
net earnings after taxes provided that the Company is in compliance with
the above-noted financial covenants.  The Company was in compliance with
all financial covenants as of December 31, 1997.  There were no bank
borrowings at December 31, 1997 and 1996.

On January 14, 1998 the Company extended the term of the revolving credit
portion of its loan agreement until April 3, 1998.  The Company is
currently in negotiations with NationsBank for a new and expanded credit
and lease agreement.

Through a series of transactions that closed in July, August and September
1995, the Company issued 5,676.6 units at $1,000 per unit, in a private
placement of its securities ("1995 Private Placement").  Each unit consists
of (i) a 10% subordinated promissory note due July 1, 1998 in the principal
amount of $1,000, interest payable quarterly and (ii) a four year warrant
to purchase 154 shares of Common Stock at $7.75 per share.  The Company
received proceeds of $5,676,600 in connection with the 1995 Private
Placement and recorded the market value of the warrants, $365,000, as
promissory note discount amortized over three years.  The net proceeds from
such issuance were used to purchase and renovate the Phoenix, Arizona
facility.

At December 31, 1997, aggregate maturities of long-term debt were as
follows:

          Year ending December 31,
          -----------------------
               1998                         $  1,800
               1999                            2,000
               2000                            2,300
               2001                            2,500
               2002                            2,800
               Thereafter                    311,891
                                             -------
             TOTAL                          $323,291
                                             -------
                                             -------


                                   F-16
<PAGE>

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


NOTE I - RENTAL AGREEMENTS

The Company has operating leases for certain of its facilities and certain
machinery and equipment which expire at various dates through 2002.
Substantially all the facility leases provide for payment by the Company of
all property taxes and insurance.

Future minimum rental commitments under non-cancelable leases as of
December 31, 1997, are as follows:

                                                      Related
                                         Total       Companies
                                      ----------     ----------

          Year ending December 31,

               1998                   $2,500,000     $1,232,000
               1999                    1,818,000        642,000
               2000                    1,158,000        222,000
               2001                      756,000              -
               2002                      543,000              -
               Thereafter              2,739,000              -
                                       ---------      ---------

                                      $9,514,000     $2,096,000
                                       ---------      ---------
                                       ---------      ---------


The Company leases one facility from a related party under a sublease
arrangement, which expires April 30, 2000.  The Company has a five-year
option to renew this sublease arrangement.  Residential and commercial
tenants occupy a portion of this building and annex.

The Company leases a second facility from a related party.  The lease
commenced January 1, 1994 and expires December 31, 1998.  Thereafter, the
Company has three 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 leases a third facility from a related party.  The lease
commenced October 1, 1996 and expires September 30, 1998.  Thereafter, the
Company has three successive one-year options to renew.  In addition to the
base rent, the Company pays taxes, insurance, repairs and maintenance on
this facility.

Rental expense for the years ended December 31, 1997, 1996 and 1995
aggregated $1,439,000,  $1,549,000 and $1,632,000, respectively, and is
included in general and administrative expenses.  Rent expenses for the
year ended December 31, 1997 is net of $539,000 related to rental costs
incurred at the Company's Fort Worth and New York facilities that was
written off against accrued closure costs.  (See Note L)  Rent to related
companies aggregated $1,260,000, $1,090,000 and $1,038,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.


                                     F-17
<PAGE>

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


NOTE J - INCOME TAXES

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

                                           Years Ended December 31,
                                           -----------------------
                                       1997         1996         1995
                                   ----------    ----------   ----------

     Current:
       Federal                     $  242,853   $  (695,000)  $  (42,000)
       State and local                160,000        45,000      112,000

     Deferred:
       Federal, state and local     1,620,000      (375,000)  (1,120,000)
                                    ---------     ---------    ---------

                                   $2,022,853   $(1,025,000) $(1,050,000)
                                    ---------     ---------    ---------
                                    ---------     ---------    ---------


The following is a reconciliation of the federal income tax rate and the
effective tax rate as a percentage of pre-tax income:

                                           Years Ended December 31,
                                           -----------------------
                                       1997         1996         1995
                                   ----------    ----------   ----------

     Statutory federal rate            34.0%       (34.0)%      (34.0)%
     State taxes, net of federal
       tax benefit                      5.0          1.4          5.0
     Non-deductible items               0.9          1.5          1.2
     Other                              0.2         (4.3)        (9.8)
                                       ----         ----         ----

                                       40.1%       (35.4)%      (37.6)%
                                       ----         ----         ----
                                       ----         ----         ----


                                 F-18
<PAGE>

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


NOTE J - INCOME TAXES - (Continued)

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


                                                   December 31,
                                               1997            1996
                                            ----------     ----------

     Facility closure costs                 $  678,000     $  969,000
     Vacation accrual                          129,000         70,000
     Development costs                      (1,021,000)       111,000
     Accrued expenses                          392,000         33,000
     Depreciation                           (  373,000)             -
     Net operating loss carryforward                 -        242,000
     Alternative minimum tax credit             70,000         70,000
                                             ---------      ---------
                                            (  125,000)     1,495,000
     Valuation allowance                             -              -
                                             ---------      ---------

                                           $(  125,000)    $1,495,000
                                             ---------      ---------
                                             ---------      ---------

The Company, after considering its pattern of profitability, excluding the
New Jersey, Ft. Worth, and NYCC facility closure charges, and its
anticipated future taxable income, believes it is more likely than not that
the deferred tax assets will be realized.


NOTE K - STOCKHOLDERS' EQUITY

On March 8, 1995, the Company's Board of Directors authorized a
five-for-four stock split in the form of a 25% stock dividend payable on
April 5, 1995 to stockholders of record on March 23, 1995.  All references
in the financial statements to average number of shares outstanding, per
share amounts and stock option data for prior periods presented have been
restated to reflect the five-for-four stock split.

During September 1995, the Company completed the private placement of
496,807 shares of Common Stock at $7.75 per share.  The Company received
gross proceeds of $3,850,254 and incurred issuance costs of $380,556.  The
net proceeds were used for its Phoenix, Arizona facility.

In connection with the 1995 Private Placement, warrants issued with units
totaled 874,198, which are exercisable at $7.75 per share.  During the
years ended December 31, 1997 and 1996, 10,800 and 216,703 of such warrants
were exercised simultaneously with the tendering of subordinated notes.  At
December 31, 1997 and 1996, warrants outstanding totaled 646,695 and
657,495, respectively.  (See Note H).


                                 F-19
<PAGE>

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


NOTE K - STOCKHOLDERS' EQUITY - (Continued)

On February 2, 1994, the Company completed a public offering of 833,333
shares of Common Stock.  The net proceeds received by the Company after
deducting applicable issuance costs and expenses aggregated $4,105,020. In
connection with the public offering, the Company sold to the representative
of the underwriters, for a nominal sum, warrants to purchase from the
Company 109,375 shares of Common Stock. The warrants are exercisable for a
period of four years commencing February 2, 1995 at an exercise price of
107% of the initial public offering price ($4.76), increasing to 114% of
the initial public offering price on February 2, 1996, 121% of the initial
public offering price on February 2, 1997 and 128% of the initial public
offering price on February 2, 1998.  During the year ended December 31,
1997, 7,100 and 16,500 of such warrants were exercised at an exercise price
of $5.43 and $5.77 per share, respectively.  During the year ended
December 31, 1996, 30,000 of such warrants were exercised at an exercise
price of $5.43 per share.

On September 12, 1996, the Company completed a public offering of 2,070,000
shares of Common Stock at $13.625 per share.  The net proceeds of the public
offering after deducting applicable issuance costs and expenses
aggregated approximately $25,790,000.  In October, 1996, pursuant to the
underwriters' over-allotment option, the Company sold an additional 367,500
shares of Common Stock at $13.625 per share.  The net proceeds received
from the exercise of the over-allotment option aggregated approximately
$4,716,000. The net proceeds of the public offering and the over-allotment
option were used to repay bank loans of $7,198,468 (See Note H) and are
being used for construction, start-up and related costs of the Florence,
Arizona and Eagle Lake, Texas facilities and for start-up costs of the Polk
and Pahokee, Florida facilities and for general corporate purposes.


                               F-20

<PAGE>

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


NOTE L - COMMITMENTS AND CONTINGENCIES

1(a).  Fort Worth and New York Closures

       During the fourth quarter of 1996, due to substantially reduced occupancy
levels and operating losses being sustained at two of the Company's
community-based halfway houses, the Company decided to discontinue the
operations of two programs (one in Fort Worth, Texas and the other in New York,
New York). As a result, the Company accrued certain expenses at December 31,
1996, and has written down certain assets related to each program.

In Fort Worth, the Company notified the contracting agency (Texas
Department of Criminal Justice) that the entire facility will be closed.
In addition, all incremental closure related costs, from April 1, 1997
until the expiration of the facility's operating lease in May, 1999, have
been charged to operations at December 31, 1996.  Such expenses include the
write-off of fixed assets, deferred development and start-up costs, and a
provision for rent expense, real estate taxes, insurance and closure costs.
The Company began winding down the operations of the Program in the first
quarter of 1997.  Subsequently, the Company was asked by the Texas
Department of Criminal Justice (TDCJ) to leave a portion of the facility
open until an alternative site could be located.

In August of 1997, the Company signed an amendment to its contract with
TDCJ which significantly lowered the expected population of the Facility in
addition to increasing the per diem rate to $ 33.00 from $29.95.  The
Company has continued to run the Program at the reduced levels pending the
locating of an alternate site.  The Company operated this facility at a
loss in 1997 and estimates that it will continue to incur a loss in the
future based on the terms of the amended contract with TDCJ.  The Company
believes that the remaining balance of the accrued closure costs reserved
at December 31, 1997 is adequate to offset the estimated losses associated
with this contract.  The Company's decision to continue to operate the
Facility is based on its desire to offset the fixed obligations of the
Company pertaining to the building.  These obligations will continue
regardless of whether or not the Company actually operates the Program.

At the Company's Brooklyn and Manhattan, New York facilities, the Company
has written-off a portion of fixed assets and expenses during the year
ended December 31, 1996 related to the program it manages for the New York
State Department of Corrections.  Such expenses include rents and related
costs of operating each facility, real estate taxes, insurance and closure
costs from April 1, 1997 through the expiration of the facilities'
operating leases on December 31, 1998 and April 30, 2000, respectively.
Costs and expenses associated with the Company's ongoing programs in New
York with the Federal Bureau of Prisons have not been written down except
for certain costs anticipated at the Manhattan facility resulting from the
closure of the New York program.  In the second quarter of 1997, the
Company closed its Manhattan location and placed all of its remaining
residents in its Brooklyn location.  Throughout the year, the Company
continued  its efforts  to ascertain the likelihood


                                F-21
<PAGE>

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


NOTE L - COMMITMENTS AND CONTINGENCIES - (Continued)

1(a).	Fort Worth and New York Closures

of increased population and a long-term contract.  In the third quarter of
1997, the Company understood the State would be issuing a formal Request
for Proposal (RFP) relating to its Community Corrections Programs.  In
addition, the State indicated to the Company that the population rates
would improve.  At that time the Company decided to re-open its Manhattan
location and to prepare to bid on the pending RFP.  In February of 1998,
the Company was awarded contracts to operate two Community Corrections
Programs in its Manhattan location for a total capacity of 130.

Although the Company has recently signed contracts to operate these two
programs, the State has given no minimum occupancy guarantee and did not
increase the per diem rate.  It is the Company's belief that the
populations in New York will continue to fluctuate and the New York
operations will not produce income for the Company.  The Company believes
that the remaining balance of the accrued closure costs related to these
operations at December 31, 1997 is adequate to offset the estimated losses
associated with these programs.  The Company's decision to operate these
programs is based on its desire to offset the fixed obligations of the
Company pertaining to the lease of the buildings.  These obligations will
continue regardless of whether or not the Company actually operates a
program.

The December 31, 1996 write-down of $3,329,000 represents actual charges to
operations incurred for each program at December 31, 1996 and the present
value of those expenses subsequent to April 1, 1997, attributable to the
closure of each program which total $3,600,000 discounted using an interest
rate of 9% per annum.

The composition of the writedown at December 31, 1996 is as follows:

     Fixed assets, net                               $  564,050
     Deferred development and start-up costs, net        98,446
     Accrued closure costs                            2,566,504
     Closure related costs incurred in 1996             100,000
                                                      ---------
                                                     $3,329,000
                                                      ---------
                                                      ---------

Accrued closure costs are as follows:

                                                   December 31,
                                               1997            1996
                                            ----------     ----------

     Accrued closure costs                  $1,737,741     $2,566,504
     Less current portion                      982,741        960,504
                                             ---------      ---------
     Long-term portion of accrued
       closure costs                        $  755,000     $1,606,000
                                             ---------      ---------
                                             ---------      ---------


                               F-22
<PAGE>

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


NOTE L - COMMITMENTS AND CONTINGENCIES - (Continued)

1(a).  Fort Worth and New York Closures

       For each of the aforementioned programs, the operating losses
incurred until the facilities are closed will be reflected in the financial
statements applicable to those periods.

1(b).  New Jersey Facility Closure

       Due to a disturbance at the Company's Elizabeth, New Jersey facility
on June 18, 1995, the facility was closed and the INS moved all detainees
located therein to other facilities.  On December 15, 1995, the Company and
a publicly-traded company (the "Buyer"), which also operates and manages
detention and correctional facilities, entered into an asset purchase
agreement pursuant to which the Buyer purchased the equipment, inventory
and supplies, contract rights and records, leasehold and land improvements
of the Company's New Jersey facility for $6,223,000.  The purchase price is
payable in non-interest bearing monthly installments of $123,000 (through
August 1999) effective January 1997, the month the Buyer commenced
operations of the facility.  If the INS re-awards the contract to the
Buyer, the unpaid balance is payable in monthly non-interest bearing
installments of $123,000 beginning in the first month of the re-award term
and the Company will record as income the unpaid balance.  On June 13, 1996
the Company, the Buyer and the INS executed a novation agreement whereby
the Buyer became the successor-in-interest to the contract with the INS.
In addition, the Company's lease for the New Jersey facility was assigned
to the Buyer.  The Company has no continuing obligation with respect to the
Elizabeth, New Jersey facility.

      The receivable from sale of the equipment and leasehold improvements
reflected in the balance sheet at December 31, 1997 and December 31, 1996,
represents the present value of the consideration to be received through
August 1999 of $2,259,082 and $3,507,882, respectively, ($4,428,000
discounted using an interest rate of 11.5% per annum) reduced by the
estimated closing costs (legal and consulting) and the facility's estimated
carrying costs through December 31, 1996.  The statement of operations for
1995 reflects a provision, "New Jersey facility closure costs," of
$3,909,700 which represents $416,201 from the write-off of deferred
development costs related to the facility and $3,493,499 resulting from the
adjustment of the carrying value of the related assets discussed above.
During the year ended December 31, 1996 the entire reserve established at
December 31, 1995 for carrying and closing costs was reduced by
approximately $300,000 of payments for rent and other carrying and closing
costs.


                                   F-23
<PAGE>

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


NOTE L - COMMITMENTS AND CONTINGENCIES - Continued

2.  Legal Matters

    In May 1993, a former employee of the Company filed suit in the United
States District Court, Southern District of New York, claiming he was
intentionally assaulted by employees of the Company and claiming $5,000,000
in damages on each of six causes of action.  In January 1996, a lawsuit was
filed with the Supreme Court of New York, County of Kings, by a former
employee alleging sexual harassment and discrimination, physical assault,
rape and negligent screening of employees and claiming damages of
$4,000,000 plus attorney fees.  The Company is awaiting court rulings in
both of these cases which are expected to result in dismissals of these
actions during 1998.

In March 1996, former inmates at one of the Company's facilities 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 negligence and intentional acts of
the Company and claiming $500,000,000 each for compensatory and punitive
damages, which suit was transferred to the United States District Court,
Southern District of New York, in April 1996. In July 1996, seven detainees
at one of the Company's facilities (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, which suit was transferred to the United States District Court,
District of New Jersey, in August 1996.  In July 1997, former detainees of
the Company's Elizabeth, New Jersey facility filed suit in the United
States District Court for the District of New Jersey.  The suit claims
violation of civil rights, personal injury and property damage allegedly
caused by the negligent and intentional acts of the Company.  No monetary
damages have been stated.  Through stipulation, all these actions will now
be heard in the United States District Court for the District of New
Jersey.  This will streamline the discovery process, minimize costs and
avoid inconsistent rulings.

The Company believes the claims made in each of the foregoing actions to be
without merit and will vigorously defend such actions.  The Company further
believes the outcome of these actions and all other current legal
proceedings to which it is a party will not have a material adverse effect
upon its results of operations, financial condition or liquidity.

3.  Contracts

    Renewal of government contracts (Note B) 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.


                                  F-24
<PAGE>

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


NOTE L - COMMITMENTS AND CONTINGENCIES - (Continued)

4.  Officers' Compensation

    Effective February 9, 1994, the President entered into a five-year
employment agreement with the Company that provides annual compensation of
$189,000, annual cost of living increases and an annual bonus of five
percent of pre-tax earnings greater than $1,000,000, not to exceed
$200,000.

    In January 1996, the Company entered into three-year employment
agreements with its Chief Operating Officer and Executive Vice President-
Finance, which provide annual compensation of $115,000 and $129,000,
respectively, and a bonus equal to 3% of pre-tax profits in excess of
$1,000,000 not to exceed $75,000 and $75,000, respectively.  Pursuant to
the terms of the employment agreement, each executive was granted an option
to purchase 100,000 shares of Common Stock.  The option was granted at the
fair market value of the stock on the date of grant, which was $8.875 per
share.  The options are exercisable as follows:  one-third on the date of
grant, one-third one year from the date of grant and the remaining
one-third two years from the date of grant.

5.  Concentrations of Credit Risk

    Approximately 97.8%, 98.0% and 96.6% of the Company's revenues for the
years ended December 31, 1997, 1996 and 1995, respectively, relate to
amounts earned from Federal, state and local contracts.  The Company's
contracts in 1997, 1996 and 1995 with government agencies where revenues
exceeded 10% of the Company's total consolidated revenues were with the U.
S. Bureau of Prisons, the INS, the New York State Department of
Corrections, the Texas Department of Criminal Justice, and the Arizona
Department of Corrections (1997 and 1996 only).

6.  Fiduciary Funds

    The Company has acted as a fiduciary disbursing agent on behalf of a
governmental entity whereby certain governmental entity funds are
maintained in a separate bank account.  These funds have been paid to the
general contractor, which constructed the government owned facilities.  The
Company is responsible for managing the construction process. The Company
has no legal rights to the funds nor the constructed facility, and
accordingly, such funds do not appear in the accompanying financial
statements.

7.  Construction Commitments

    The Company has various construction contracts related to ongoing
projects totaling approximately $1,439,000 as of December 31, 1997.


                                   F-25
<PAGE>

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


NOTE L - COMMITMENTS AND CONTINGENCIES - (Continued)

8.  Letter of Credit

    In connection with the Company's workmen's compensation insurance
coverage requirements, the Company has obtained a $258,000 Letter of Credit
from its bank in favor of the insurance carrier.

NOTE M - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share in accordance with SFAS No. 128:

                                             Years Ended December 31,
                                             -----------------------
                                         1997         1996        1995
                                     ----------   ----------   ----------

   Numerator:
     Net income (loss)               $3,025,524  $(1,868,027) $(1,739,391)
                                      ---------    ---------    ---------
                                      ---------    ---------    ---------

   Denominator:
     Basic earnings per share:
     Weighted average shares
        outstanding                   7,675,220    5,781,853    4,552,707

     Effect of dilutive securities
       - stock options and warrants     442,702            -            -
                                      ---------    ---------    ---------

     Denominator for diluted
       earnings per share             8,117,922    5,781,853    4,552,707
                                      ---------    ---------    ---------
                                      ---------    ---------    ---------

     Net income (loss) per common
       share - basic                      $0.39       $(0.32)      $(0.38)
                                           ----         ----         ----
                                           ----         ----         ----

     Net income (loss) per common
       share - diluted                    $0.37       $(0.32)      $(0.38)
                                           ----         ----         ----
                                           ----         ----         ----

The effect of dilutive securities for 1996 and 1995 were not included in
the calculation of diluted net loss per common share as the effect would
have been anti-dilutive.


NOTE N - STOCK OPTIONS

In October 1993, the Company adopted a stock option plan (the "Stock Option
Plan").  This plan 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 500,000.  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 196,875 shares of the Company's
Common Stock.


                                     F-26

<PAGE>

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


NOTE N - STOCK OPTIONS - (Continued)

Options granted under both 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 the Stock Option Plan will
expire not more than five years from the date of grant.

In 1996, the Company granted 215,000 options to two key employees and a
director of the Company.  The exercise price of the options is equal to the
fair market value of the Common Stock at the date of the grant.  These
options vest over a two-year period and expire five years from the date of
grant.

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


                                             Years Ended December 31,
                                             -----------------------
                                         1997         1996          1995
                                      ---------    ---------     ---------
   Net income (loss)
       As reported                   $3,025,524  $(1,868,027)  $(1,739,391)
       Pro forma (unaudited)          2,215,352  $(2,716,910)  $(1,972,438)

   Income (loss) per common share -
     basic
       As reported                   $     0.39  $     (0.32)  $     (0.38)
       Pro forma                     $     0.29  $     (0.47)  $     (0.43)

   Income (loss) per common share -
     diluted
       As reported                   $     0.37  $     (0.32)  $     (0.38)
       Pro forma (unaudited)         $     0.27  $     (0.47)  $     (0.43)


These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before 1995.  The fair value of these options was estimated
at the date of grant using Black-Scholes option-pricing model with the
following weighted-average assumptions for the years ended December 31,
1997, 1996 and 1995.


                                             Years Ended December 31,
                                             -----------------------
                                         1997         1996          1995
                                      ---------    ---------     ---------

    Volatility                              70%          72%           72%
    Risk free rate                        6.00%        5.64%         6.38%
    Expected life                       3 years   3.32 years       4 years


                                  F-27
<PAGE>

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


NOTE N - STOCK OPTIONS - (Continued)

The weighted average fair value of options granted during 1997, 1996 and
1995 for which the exercise price equals the market price on the grant date
was $5.65, $5.71 and $8.81, respectively, and  the  weighted  average
exercise  prices  were  $11.32, $10.56 and $15.04,  respectively.   The
weighted average fair value and weighted average exercise price of options
granted in 1995 for which the exercise price exceeded the market price on
the grant date were $10.50 and 20.63, 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.

Stock option activity during 1997, 1996 and 1995 is summarized below:

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

     Balance, January 1, 1995         290,313            $ 6.19
        Granted                        81,875             15.73
        Exercised                      (7,000)             4.76
        Canceled                            -                 -
                                      -------             -----
     Balance, December 31, 1995       365,188              8.35
        Granted                       293,700             10.56
        Exercised                     (64,888)             6.37
        Canceled                      (43,750)            12.67
                                      -------             -----
     Balance, December 31, 1996       550,250              9.40
        Granted                       170,750             11.32
        Exercised                      (2,625)             4.76
        Canceled                      (21,950)            16.01
                                      -------             -----
     Balance, December 31, 1997       696,425              9.75
                                      -------             -----
                                      -------             -----


                                F-28
<PAGE>

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


NOTE N - STOCK OPTIONS - (Continued)

The following table summarizes information concerning currently outstanding
and exercisable stock options at December 31, 1997:

                                       Weighted-Average
                                          Remaining
         Range of         Number       Contractual Life    Weighted-Average
     Exercise Prices   Outstanding          (Years)         Exercise Price
     ---------------   -----------     ----------------    ----------------
        $ 4 -  8         202,050              1.35               $6.06
          8 - 12         312,625              3.35                9.31
         12 - 18         146,750              4.17               13.75
         18 - 21          35,000              2.46               19.29
                         -------
                         696,425
                         -------
                         -------


         Range of         Number       Weighted-Average
    Exercise Prices    Exercisable      Exercise Price
    ---------------    -----------     ----------------
        $ 4 -  8         202,050            $ 6.06
          8 - 12         240,375              9.08
         12 - 18          51,750             16.50
         18 - 21          35,000             19.29


NOTE O - 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 $9,500 in
1997 and 1996. The Company's contribution under the plan amounts to 20% of
the employees' contribution.  In 1997 and 1996, the Company contributed
$62,000 and $15,886, respectively, to the plan.


NOTE P - SELF INSURANCE

During 1996, the Company decided to self-insure for workers' compensation
insurance.  The Company has obtained an aggregate excess policy, which
limits the Company's exposure to a maximum of $600,000 and $400,000 as of
December 31, 1997 and 1996, respectively.  The estimated insurance
liability totaling $451,000 and $120,000 on December 31, 1997 and 1996,
respectively is based upon review by the Company and an independent
insurance broker of claims filed and claims incurred but not reported.

On October 1, 1997 the Company entered into a group health plan subject to
a self-insured retention.  The Company's  maximum  annual  self-insured
retention  per  employee  is $1,687, which includes


                                 F-29
<PAGE>

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


NOTE P - SELF INSURANCE - (Continued)

fixed costs of $418 and claims costs $1,269.  The fixed costs include the
loss limit charges.  The fixed costs are reduced by 5% upon reaching a
threshold of 750 participating employees and by another 5% upon a reaching
a threshold of 1,000 participating employees.  At December 31, 1997 the
plan had 878 participants and medical insurance liability of $179,000.
This liability represents the maximum claim exposure under the plan less
actual payments made during 1997.  In addition, the Company is subject to a
maximum terminal liability of $168 per participating employee and an
administrative charge of $27 per participating employee in the event of
termination.  Since termination is not anticipated, no terminal accruals
were made at December 31, 1997.


NOTE Q - SUBSEQUENT EVENTS

In February, 1998 the Company formed Correctional Services Corporation (UK)
Ltd., a British company, to pursue correctional projects in the United
Kingdom.  The Company intends to build relationships with international
joint venture partners to maximize its capabilities abroad.

In February, 1998 the Company signed contracts with the Juvenile
Institutions Administration of the Commonwealth of Puerto Rico to operate
two Juvenile Treatment Centers and one Juvenile Detention Center.  The
Salinas Treatment Center has a 100 bed capacity and will be designed,
built, owned and operated by CSC.  It is estimated that the costs of
construction will be $11,000,000.  It is expected to become fully
operational in the first quarter of 1999.  The Bayamon Treatment Center has
a 141 bed capacity and is currently undergoing renovation.  Until the
renovations are complete, which is anticipated to be the first quarter
of 1999, the facility will operate at a reduced capacity.  The Company will
assume operation of the facility in the second quarter of 1998.  The
Bayamon Detention Center has a 120 bed capacity and will begin accepting
residents in the second quarter of 1998.  Each of the three contracts has a
base period of 5 years with one 5 year renewal option.  Once completed and
fully operational these facilities are expected to contribute approximately
$15 million in revenue on an annualized basis.


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