UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, 20549

                                   FORM 10-K


[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934
     For the Fiscal Year Ended December 31, 1999

OR

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

                         Commission File No.:  0-23038


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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:
Title of each class                   Name of each exchange on which registered
-------------------                   -----------------------------------------
Common Stock, par value $.01 per share                   Nasdaq National Market

Indicate  by  check  mark  whether  the  Registrant  (1)  has filed all reports
required to be filed by Section 13 or 15(d) of the Securities  Exchange  Act of
1934  during the past 12 months (or for such shorter period that the Registrant
was required  to  file  such  reports), and (2) has been subject to such filing
requirements for the past 90 days.                        Yes  [X]     No  [  ]

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

The  aggregate  market  value  of  the voting stock (Common Stock) held by non-
affiliates of the Registrant as of the  close of business on March 30, 2000 was
approximately  $55,443,687  based  on  the  closing  sale  price of  the common
stock on the Nasdaq National Market consolidated tape on that date.

Number  of  shares  outstanding of each of the Registrant's classes  of  Common
Stock, as of the close of business on March 29, 2000:

     Common Stock, $.01 par value                             11,373,064 Shares


                     DOCUMENTS INCORPORATED BY REFERENCE

      Part III of this  report  incorporates by reference information from the
definitive Proxy Statement for the  Annual Meeting of Shareholders to be  held
in May 2000 which will  be filed  with  the  with  the Securities and Exchange
Commission within 120 days after December 31, 1999.

<PAGE>

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

                                                           PAGE
                                   PART I

Item 1   Business                                             4

Item 2   Properties                                          14

Item 3   Legal Proceedings                                   14

Item 4   Submission of Matters to a Vote of Security Holders 15

         Executive Officers of the Company                   15


                                   PART II

Item 5   Market  for  Registrant's  Common  Equity
         and  Related  Stockholder Matters                   16


Item 6   Selected Financial Data                             16


Item 7   Management's Discussion and Analysis of
         Financial Condition and Results of Operations       17

Item 7A  Quantitative and Qualitative Disclosures
         About Market Risk                                   28

Item 8   Financial Statements and Supplementary Data         29

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


                                   PART III

Item 10  Directors and Executive Officers of the Registrant  29

Item 11  Executive Compensation                              29

Item 12  Security Ownership of Certain Beneficial
         Owners and Management                               29

Item 13  Certain Relationships and Related Transactions      29


                                   PART IV

Item 14   Exhibits, Financial Statement Schedules,
          and Reports on Form 8-K                            29


                                       2

<PAGE>

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

     This document contains forward looking statements  within  the meaning of
Section  27A  of  the  Securities  Act  of  1933  and  21E  of  the Securities
Exchange  Act  of  1934  which  are not historical facts and involve risks and
uncertainties.   These   include   statements   regarding   the  expectations,
beliefs,  intentions  or  strategies regarding the future. The Company intends
that  all  forward-looking   statements   be   subject   to   the  safe-harbor
provisions  of  the  Private  Securities  Litigation Reform Act of 1995. These
forward-looking  statements  reflect  the  Company's views as of the date they
are  made  with  respect  to  future events and financial performance, but are
subject  to  many  uncertainties  and  risks  which  could  cause  the  actual
results   of  the  Company to   differ  materially  from  any  future  results
expressed or implied  by such  forward-looking  statements.  Examples  of such
uncertainties and risks  include,  but  are not limited to: the integration of
Youth Services International; occupancy  levels;  the  renewal  of  contracts,
the ability to  secure  new  contracts;  availability and cost of financing to
redeem YSI's debentures  and  to  expand  our  business; and public resistance
to privatization.  Additional  risk  factors  include  those  discussed in the
Company's joint  proxy  statement/prospectus, dated March 4, 1999. The Company
does  not  undertake any  obligation to update any forward-looking statements.

                                       3

<PAGE>

                                    PART I

Item 1.   Business.
          --------

General

     Correctional   Services   Corporation   ("CSC"  or  the  "Company")   was
incorporated in Delaware on October 28, 1993 to acquire all of the outstanding
capital stock of a number of affiliated corporations engaged in the  operation
of correctional  and detention facilities.

     On March 31, 1999, CSC  acquired Youth Services International  ("YSI"), a
leading   national  provider   of  private   educational,  developmental   and
rehabilitative programs to  adjudicated  juveniles, through a merger accounted
for as  a pooling of interests.  In the merger, CSC issued 3,114,614 shares of
CSC common stock in exchange for all of the outstanding common stock of YSI.

     The Company is one of  the  largest  and  most comprehensive providers of
juvenile rehabilitative services with 35 facilities  and  approximately  3,800
juveniles  in  its  care.  In addition, the Company is a leading developer and
operator of adult correctional facilities operating 18 facilities representing
approximately 7,100 beds. On  a  combined  basis, as of December 31, 1999, the
Company  provided  services  in  20  states  and  Puerto   Rico,  representing
approximately 10,900 beds excluding aftercare services.

     Revenues  for the year ended December 31, 1999 increased  24%  to  $239.9
million from $188.5  million in 1998.  Net income for 1999 was $6.8 million or
$.61 per diluted share  (excluding merger related charges of $10.3 million net
of tax, or $0.92 per diluted  share)  versus  a loss of $11.0 million or $1.01
per diluted share (excluding direct merger related charges net of tax, and the
cumulative  effect of change in accounting principle,  or  $0.52  per  diluted
share) in fiscal year 1998.

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

     - substance abuse offenders;
     - parole violators;
     - pre-trial detainees;
     - females;
     - sex offenders; and
     - community corrections.

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

     - intensive   treatment   programs   including  educational  and
          vocational services;
     - treatment for habitual offenders;
     - specialized female services;
     - detention services;
     - sex offender treatment programs;
     - academy training programs; and
     - high impact programs.


     In addition to providing fundamental residential  services  for adult and
juvenile  offenders,  CSC has developed a broad range of programs intended  to
reduce recidivism, including  basic  and  special  education,  substance abuse
treatment   and   counseling,   vocational  training,  life  skills  training,
behavioral modification counseling and comprehensive aftercare programs, based
upon the YSI philosophy, for juveniles  who  have successfully completed their

                                          4
<PAGE>

residential placements. In all of its facilities,  CSC  strives to provide the
highest  quality  services  designed  to  reduce  recidivism. CSC  continually
evaluates its programs and believes the reputation  of  its programs will lead
to continued business opportunities.

     CSC  is also a leading provider of design and construction  services  for
juvenile and  adult correctional facilities, including project consulting, the
design,  development  and  construction  of  new  correctional  and  detention
facilities  and  the  redesign  and  renovation  of existing facilities. These
services usually are provided in conjunction with  an  agreement  for  CSC  to
operate  the  facility  upon completion of the construction or renovation. CSC
believes its proven ability  to  manage  the  full  spectrum  of  correctional
facilities  and  its  wide  variety of programs and services will continue  to
increase its marketing opportunities.


Operational Divisions

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

     Adult/Community  Corrections.  The  Adult/Community  Corrections Division
operates 18 facilities, eight in Texas, four in New York, two  in  Arizona and
one  each  in Colorado, Mississippi, Oklahoma, Georgia and Washington,  for  a
total of 7,106 beds.  In its 13 secure adult facilities CSC, not only provides
adult inmates  with  housing  but  also  with  other basic services, including
health  care,  transportation  and  food service.  In  addition,  CSC  remains
committed to providing a variety of rehabilitative  and  educational services,
including community service and recreational programs for adult inmates  where
appropriate.

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

     Juvenile. The  Juvenile  Division operates 35 facilities in 14 states and
Puerto Rico. The addition of the  YSI  facilities  to the combined Company has
allowed  CSC  to  expand its juvenile operations into 10  new  states  and  to
increase its presence  in  Florida  and  Texas.   Contracts  with  the Florida
Department   of   Juvenile   Justice  comprised  over  10%  of  the  Company's
consolidated revenue in 1999 as  did contracts with the Maryland Department of
Juvenile Justice. The Company's facilities  house  youths  aged  10  to 20 and
represent  a  total  of approximately 3,816 beds. CSC manages secure and  non-
secure juvenile offender  facilities  for low, medium, and high risk youths in
highly structured programs, including military-style  boot  camps,  wilderness
programs,  secure  education and training centers; including academy programs,
high impact programs  servicing  lower  level  or  first  time  offenders  and
detention  facilities.  In addition, the Company also provides non-residential
aftercare programs for juveniles who have completed residential programs.

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

                                         5
<PAGE>


Marketing and Business Development

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

     CSC's  business  development department is responsible for marketing  the
full range of services  to  clients. CSC's business development department has
specialists in both the juvenile and adult markets. Marketing responsibilities
include identifying new clients, preparing and delivering formal presentations
and identifying strategic partners.

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


Contract Award Process

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

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

     - the current  size  and  growth  projections  of  the  available
       correctional and detention population;

     - whether or not a minimum capacity level is guaranteed;

     - the  willingness  of  the  contracting authority to allow CSC to
       house  populations  of  similar  classification  within  the  proposed
       facility for other governmental agencies; and

     - the willingness of the contracting  authority  to  allow  CSC to
       make   adjustments   in  operating  activities,  such  as  work  force
       reductions  in the event  the  actual  population  is  less  than  the
       contracted capacity.

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

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


Market

     Throughout   the   United   States,  there  is  a  growing  trend  toward
privatization of correctional and  detention  functions  as federal, state and
local governments have faced continuing pressure to control  costs and improve
the  quality of services. Further, 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.

                                         6
<PAGE>

     An estimated 1.8 million  inmates  are  held  in the nation's prisons and
local jails and recent legislation,  including  new  sentencing guidelines and
the increased popularity of "3 strikes" laws, has contributed  to  the growing
demand  for  prison facilities.   In 1998, state prisons were 13% above  their
highest design  capacity  and  federal prisons were 27% above design capacity.
According to the Department of Justice,  the  adult prison population rose and
estimated 1,627 new inmates per week from 1990  through  1998,  while  18%  of
released  prisoners  serviced their entire sentence in 1998 as compared to 13%
in 1990.  During that  same  period,  growth  in  female representation in the
adult inmate population has exceed the growth of male  representation  in  the
adult inmate population at a rate of 8.5% to 6.6%.

     In  addition  to  the current growth in the adult corrections population,
over the next 10 years,  the  number of juveniles approaching crime-committing
age  is  expected to increase significantly.   The  Company  expects  that  as
juvenile crime  continues to receive increasing levels of visibility, the need
for services for troubled youth will increase.

     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

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


Facilities

     CSC  operates  adult  and  juvenile  pre-disposition and post-disposition
secure  and non-secure correctional and detention  facilities  and  non-secure
community  correctional  facilities  for federal, state and local correctional
agencies.   Pre-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. CSC operates six types  of  post-disposition  facilities:  1)  secure
prisons  (adult);  2)  intermediate  sanction facilities (adult); 3) military-
style boot camps (juvenile); 4) academies (juvenile); 5)  high impact programs
(juvenile);   and  6)  secure treatment and  training  facilities  (adult  and
juvenile).

     Secure  prisons  and  intermediate  sanction  facilities  provide  secure
correctional services for  individuals  who  have  been found guilty of one or
more  offenses.  Offenders  placed  in  intermediate sanction  facilities  are
typically persons who have committed a technical  violation  of  their  parole
conditions,  but  whose  offense  history  or current offense does not warrant
incarceration in a prison. Both types of facilities offer vocational training,
substance abuse treatment and offense specific  treatment.  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.  Academies are secure facilities that range from hardware
secure to staff  secure.  These facilities typically service juveniles who are
repeat offenders and/or  violent  crime  offenders.   The  academies emphasize
rehabilitative  programming, including  education,  recreation and  vocational
training. High impact programs provide residential placement for juveniles who
are either first time offenders or who were unable to meet the terms of a non-
residential  placement.  High impact programs are generally  short  term  with
stays of 30 to  90  days, but involve all of the rehabilitative elements of an
academy  program.    Secure   treatment  and  training  facilities,  including
specialized  sex offender programs,  provide  numerous  services  designed  to
reduce recidivism including: educational and vocational training, life skills,
anger control  management,  and  substance  abuse  counseling  and  treatment.
Juvenile  sex  offender  programs  are  generally locked secure and involve  a
length of stay from 12 to 24 months.

     CSC also operates non-secure residential  and  non-residential  community
corrections  programs.  Non-secure  residential  facilities,  known as halfway
houses,  provide residential correctional services for offenders  in  need  of

                                        7
<PAGE>

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  nine  months  of their sentence.  Non-residential  programs  permit  the
offender to reside at home or in some other approved setting under supervision
and monitoring by CSC.  Supervision  may take the form of either requiring the
offender to report to a correctional facility a specified number of times each
week and/or having CSC employees monitor  the  offender  on  a case management
basis  at  his/her  work  site and home.  In the juvenile division,  the  non-
residential programs take the  form  of  aftercare programs.  Unlike the adult
division where a non-residential supervision program may replace the last part
of an adult's residential supervision, in the juvenile  division  counterpart,
the  aftercare  program is strictly post release.  The goal of these programs,
like  adult  community  corrections, is to assist the juvenile in effecting  a
positive return to their families and communities.  Aftercare programs provide
the contact, supervision and support that is  needed to  further  instill  the
principles learned by the juvenile during the longer residential program.


Adult Division

     The following information is provided with respect to the facilities for
which CSC had management contracts as of March 24, 2000:

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

South Texas Intermediate              450       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)

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

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

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

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

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

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

Central Oklahoma                      850               Prison            Multi-State       Managed
Correctional Facility
  McLoud, Oklahoma (1998)


                                        8
<PAGE>

South Fulton Municipal                288           Jail/Long Term        County/Federal    Managed
Regional Jail                                          Detention
  Union City, Georgia (1999)

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

Crowley County Correctional          1200                Prison           Multi-State       Managed
Facility
  Crowley, Colorado (1998)

Brooklyn Community                    500             Residential        Federal Bureau     Leased
Correctional Center                              Correctional Facility      of Prisons
  Brooklyn, New York (1989)

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

Bronx Community                        60             Residential        Federal Bureau     Leased
Corrections Center                               Correctional Facility      of Prisons
  Bronx, New York (1996)

New York State Community               70             Residential               State       Leased
Corrections Center                               Correctional Facility
  Manhattan, NY (1998)

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

</TABLE>
--------------

(1) Design  capacity is based on the physical  space  available  presently, or
    with minimal additional expenditure, for  offender or residential  beds in
    compliance with relevant regulations and contract requirements. In certain
    cases,  the management contract for a facility provides for a lower number
    of beds.
(2) A managed  facility  is  a  facility  for  which  CSC  provides management
    services   pursuant   to   a   management  contract  with  the  applicable
    governmental agency but, unlike  a  leased  or  owned facility, CSC has no
    property interest in the facility.
(3) This  facility  is  listed both as part of CSC's Adult  Division  and  its
    Juvenile  Division  as   the  facility  houses  both  adult  and  juvenile
    offenders.


Juvenile Division

<TABLE>
<CAPTION>
                                     Design                            Contracting           Owned,
   Facility Name, Location and      Capacity                           Governmental        Leased, or
   Year Operations Commenced         Beds(1)    Type of Facility          Agency           Managed(2)
   ---------------------------      --------    ----------------       ------------         ----------
<S>                                   <C>       <C>                       <C>               <C>
Tarrant County Community              120       Secure Boot Camp          County            Managed
Correctional Center(3)                              Facility
  Mansfield, Texas (1992)

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


                                         9
<PAGE>

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

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

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

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

Bayamon Treatment Center              141       Secure Treatment       Commonwealth         Managed
  Bayamon, Puerto Rico (1998)(4)                    Facility          of Puerto Rico

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

Clark County, Nevada Facility          96       Secure Treatment          State             Managed
  (May 2000-Not Yet Operational)                    Facility

Colorado County Boot Camp             100       Secure Detention       Multi-County         Managed
  Eagle Lake, Texas (1998)                          Facility

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

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

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

Victor Cullen Academy                 225        Secure Academy           State             Managed
  Sabillasville, Maryland (1992)                    Facility

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

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

Forest Ridge Youth Services           140       Non Secure Female      Multi-State          Leased
  Wallingford, Iowa (1993)                       Academy Facility

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


                                       10
<PAGE>

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

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

Woodward Academy                      96          Secure Academy       Multi-State          Leased
  Estherville, Iowa (1995)(5)                Sexual Offender Facility

Camp Washington                       45         Secure Boot Camp          City             Managed/
  Carrsville, Virginia (1996)                                                               Leased

Everglades Academy                   102          Secure Academy          State             Managed
  Florida City, Florida (1996)(6)                    Facility

Keweenaw Academy                     150        Non Secure Academy        State             Leased
  Mohawk, Michigan (1997)                            Facility

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

Genesis Treatment Agency              36     Secure Sexual Offender        City/            Leased
  Richmond, Virginia (1997)                    Treatment Facility      Multi-County

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

Pompano Academy                       52          Secure Academy          State             Managed
  Pompano Beach, Florida (1997)                      Facility

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

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

Chanute Transition Center             56       Non Secure Transition      State             Leased
  Rantoul, IL (1998)                                 Facility

Cotulla Boot Camp                     64          Secure Boot Camp     Multi-County         Leased
  Cotulla, Texas (1998)

Hondo Detention Center                15          Secure Detenion         County            Leased
  Hondo, Texas (1998)                                Facility

Lockhart Boot Camp                    38          Secure Boot Camp     Multi-County         Leased
  Lockhart, Texas (1998)                         Detention Facility

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

                                     11
<PAGE>

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

Salinas Treatment Center             100          Secure Treatment     Commonwealth         Leased
  Salinas, Puerto Rico (2000)(4)                                      of Puerto Rico

</TABLE>
___________________

(1) Design capacity  is based  on  the  physical space available presently, or
    with minimal additional expenditure,  for  offender or residential beds in
    compliance with relevant regulations and contract requirements. In certain
    cases, the management contract for a facility  provides for a lower number
    of beds.
(2) A  managed  facility  is a  facility for  which  CSC  provides  management
    services  pursuant  to  a  management   contract   with   the   applicable
    governmental  agency  but,  unlike a leased or owned facility, CSC has  no
    property interest in the facility.
(3)  This facility is listed both  as  part  of  CSC's  Adult Division and its
    Juvenile  Division  as  the  facility  houses  both  adult  and   juvenile
    offenders.
(4) The  Company  is  in  the  process of renegotiating its Agreement with the
    Commonwealth of Puerto Rico.  The timing and outcome of these negotiations
    are uncertain and may potentially  result in an increased per diem rate or
    the termination of the Company's operation of the facility.
(5) Operations   will  discontinue  effective   December   22,   2000.    (See
    "Management's  Discussion  and Analysis of Financial Condition and Results
    of Operations.")
(6) Operations will discontinue  effective  May  31,  2000. (See "Management's
    Discussion   and   Analysis   of  Financial  Condition  and   Results   of
    Operations.")


Facility Management Contracts

     CSC is primarily compensated on  the  basis  of the population in each of
its  facilities on a fixed rate per inmate per day;  however,  some  contracts
have a  minimum  revenue  guarantee.  Invoices are generally sent on a monthly
basis  detailing  the population for the  prior  month.  Occupancy  rates  for
facilities tend to  be  low  when  first  opened  or when expansions are first
available. However, after a facility passes the start-up  period,  typically 3
months, the occupancy rate tends to stabilize.

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

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

Operating Procedures

     CSC is responsible for the overall operation of each facility  under  its
management,   including  staff  recruitment,  general  administration  of  the
facility, security  of inmates and employees, supervision of the offenders and
facility maintenance.  CSC,  either  directly  or through subcontractors, also
provides health care, including medical, dental  and  psychiatric services and
food  service.  Certain  facilities  also  offer  special  rehabilitative  and
educational programs, such as academic or vocational education,  job  and life
skills   training,   counseling,   substance  abuse  programs,  and  work  and
recreational programs.

     CSC's  contracts  generally require  CSC  to  operate  each  facility  in
accordance with all applicable  local,  state  and  federal  laws,  rules  and
regulations  and  the standards.   In addition, adult facilities are generally
required to adhere to the 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. CSC
believes  the  benefits  of  operating its facilities in accordance  with  ACA

                                        12
<PAGE>

standards include improved management,  better  defense  against  lawsuits  by
offenders  alleging  violations of civil rights, a more humane environment for
personnel  and offenders  and  measurable  criteria  for  upgrading  programs,
personnel and  the  physical  plant  on  a  continuous  basis.  Several of our
facilities  are  fully  accredited  by  the  ACA  and certain other facilities
currently are being reviewed for accreditation. It  is  the  Company's goal to
obtain and maintain ACA accreditation for all of its adult facilities, and for
its juvenile facilities when applicable.  James Irving, President  YSI,  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, CSC also consults with
various  governmental entities to design and construct  new  correctional  and
detention  facilities  and  renovate  older  facilities  to  provide  enhanced
services  to the population. CSC manages all of the facilities it has designed
and constructed or redesigned and renovated.

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


Facilities Under Construction

     Construction is  near completion on the 132 bed juvenile detention center
in Salinas, Puerto Rico.  The  facility  will  house  minimum  to  medium risk
juveniles, aged 12 to 17, and is expected to be completed in May 2000.

     Construction is substantially complete on the 96 bed Clark County, Nevada
facility.  The maximum security juvenile facility is expected to be  completed
by late April 2000.


Employees

     At  March 24, 2000, CSC had approximately 5,100 employees, consisting  of
clerical  and  administrative  personnel,  security  personnel,  food  service
personnel and  facility administrators. CSC believes its relationship with its
employees is good.

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


Employee Training

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

                                         13
<PAGE>

Insurance

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

     CSC 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, covering itself  and  each  of its subsidiaries. There can be no
assurance that the aggregate amount and kinds  of CSC's insurance are adequate
to cover all risks it may incur or that insurance  will  be  available  in the
future.

     In  addition,  CSC 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.


Regulation

     The industry in which CSC 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 educational, 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.


Item 2.   Properties.
          ----------

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

     The Company  also  leases  the  space  for  the  following  facilities it
manages:  Hemphill  County  Juvenile  Detention  Center, Reflections Treatment
Agency, Forest Ridge Youth Services, Tarkio Academy,  Woodward  Academy,  Camp
Washington  Aftercare  Program,  Keweenaw  Academy,  Genesis Treatment Agency,
Snowden Cottage Academy, Chanute Transition Center, Cotulla  Boot  Camp, Hondo
Detention  Center, Lockhart Boot Camp, Texarkana Boot Camp, Frio County  Jail,
Brooklyn Community  Correctional  Center, Bronx Community Correctional Center,
Manhattan  Community  Correctional Center,  New  York  Community  Correctional
Center,  Fort  Worth  Community  Corrections  Center,  Frio  County  Detention
Center(partial), Salinas  Treatment  Center  and  Dickens  County Correctional
Center.

     The  Company  owns its facilities located in Florence, Arizona;  Phoenix,
Arizona;  Chamberlain,  South  Dakota;  Springfield,   South  Dakota;  Elmore,
Minnesota; and portions of the Frio County, Texas facility.


Item 3.   Legal Proceedings.
          -----------------

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

     In March 1996, former inmates at  one  of  CSC'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 CSC
and  claiming  $500,000,000  for each compensatory and punitive damages, which
suit was transferred to the United States District Court, Southern District of

                                          14
<PAGE>

New  York, in April 1996. In July  1996,  seven  detainees  at  one  of  CSC'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 CSC's Elizabeth, New Jersey Facility  filed  suit  in
the  United  States  District  Court  for the District of New Jersey. The suit
claims  violations  of  civil  rights, personal  injury  and  property  damage
allegedly caused by the negligent  and  intentional  acts of CSC.  No monetary
damages have been stated.  Through stipulation, 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.

     CSC believes the claims  made  in  each  of  the  foregoing actions to be
without  merit and will vigorously defend such actions. CSC  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 CSC could be rendered.


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

     No matters were submitted to security holders for a vote during the last
quarter of 1999.


                      EXECUTIVE OFFICERS OF THE COMPANY
                      ---------------------------------

     The  following  table  sets forth the executive officers of the  Company,
together with their respective ages and positions:

<TABLE>
<CAPTION>

Name                     Age                   Position with CSC
----                     ---                   -----------------
<S>                      <C>    <C>
James F. Slattery        50    President, Chief Executive Officer and
                               Chairman of the Board
Michael C. Garretson     52    Executive Vice President, Chief Operating
                               Officer
Ira M. Cotler            36    Executive Vice President, Chief Financial Officer
Aaron Speisman           51    Executive Vice President and Director
Speisman

</TABLE>

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

     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 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.

     Ira M. Cotler was elected Chief Financial Officer in January 1998. He had
served as the Company's Executive  Vice President-Finance since joining CSC 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.

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

                                     15

<PAGE>

                                   PART II


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

     The common  stock  of  CSC  is  traded on the Nasdaq National Market. The
following table sets forth, for the calendar  quarters indicated, the high and
low sale prices per share on the Nasdaq National  Market,  based  on published
financial sources.

<TABLE>
<CAPTION>
                                                  CSC Common
                                                    Stock
                                                  Sale Price
                                               High        Low
                                              ------      ------
<S>                                          <C>        <C>
1998
  First Quarter                               15 3/4     10 3/16
  Second Quarter                              16 7/8     12 1/2
  Third Quarter                               15 1/2      8 7/8
  Fourth Quarter                              14 1/4      6 3/4

1999
  First Quarter                               11         10 5/8
  Second Quarter                               8 1/2      8 3/16
  Third Quarter                                7 11/16    7 3/8
  Fourth Quarter                               4 15/16    4 5/8

</TABLE>

     On   the   record   date  there    were   199   holders   of  record  and
approximately  4,275  beneficial   shareholders   registered  in  nominee  and
street name.


Item 6.   Selected Financial Data.
          -----------------------

     The information  below  is  only  a  summary  and  should  be  read in
conjunction with Correctional Services Corporation's  historical  financial
statements and related notes.

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                           1999        1998        1997        1996      1995
                                         --------    --------    --------   --------   --------
<S>                                      <C>         <C>         <C>        <C>        <C>
Revenues                                 $233,918    $188,454    $175,933   $ 99,349   $ 83,960
Operating expenses                        205,662     166,443     149,389     75,710     62,400
Startup costs (1)                           1,177       8,171         211          -          -
General and administrative                 12,835      21,119      18,167     16,519     15,313
Merger costs and related
  restructuring charges                    13,813       1,109           -          -          -
Loss on sale of behavioral health               -           -      20,898          -          -
Other operating expenses                    1,622       2,327           -      3,329      3,910
Operating income (loss)                    (1,191)    (10,715)    (12,732)     3,791      2,337
Interest income (expense), net             (3,069)     (2,611)     (2,381)    (3,317)    (1,743)
Income (loss) before income taxes,
  extraordinary gain on
  extinguishment of debt and
  cumulative of change in accounting       (4,260)    (13,326)    (15,113)       474        594

                                     16
<PAGE>

Income tax (provision) benefit               (253)      1,593       1,062       (323)      (400)
Income (loss) before extraordinary
  gain on extinguishment of debt and
  cumulative effect of change in
  accounting principle                     (4,513)    (11,733)    (14,051)       151        194
Extraordinary gain on extinguishment
  of debt, net of tax of $643                 985           -           -          -          -
Cumulative effect of change in
  accounting, net of tax of $3,180,000          -      (4,863)          -          -          0
Net earnings (loss)                      $ (3,528)  $ (16,596)  $ (14,051)  $    151   $    194
Net earnings (loss) per share:
    Basic                                $  (0.31)  $   (1.53)  $   (1.32)  $   0.02   $   0.02
    Diluted                              $  (0.31)  $   (1.53)  $   (1.32)  $   0.01   $   0.02
Balance sheet data:
    Working capital                      $ 22,381   $  23,167   $  29,663   $ 36,355   $ 13,864
    Total assets                          111,198     125,314     120,750    143,393     52,390
    Long-term debt, net of current
      portion                              33,497      44,288      33,379     38,633     16,317
    Shareholders' equity                   50,738      51,006      65,503     71,818     26,890
</TABLE>
------------

(1)  The 1998 amounts include the effect of the adoption of the AICPA
     Statement of Position 98-5, Accounting for Startup Costs.  (See
     "Management's Discussion and Analysis of Financial Condition and Results
     of Operations.")


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

General

     The  Company  is  one of the largest and most comprehensive providers  of
juvenile rehabilitative  services  with  35 facilities and approximately 3,800
juveniles in its care. In addition, the Company  is  a  leading  developer and
operator of adult correctional facilities operating 18 facilities representing
approximately  7,100 beds. On a combined basis, as of December 31,  1999,  the
Company  provided   services  in  20  states  and  Puerto  Rico,  representing
approximately 10,900 beds excluding aftercare services.

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

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

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

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

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


Recent Developments

     On   December  15,  1999  the  Company  announced  that  it  had  engaged
Wasserstein  Parella & Co. to assist the Company in exploring a broad range of
business alternatives and financial strategies to enhance shareholder value.

Results of Operations

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

<TABLE>
<CAPTION>
                                               Percentage of Total Revenues
                                                        Years Ended
                                                        December 31,
                                               ----------------------------
                                                1999       1998       1997
                                                ----       ----       ----

<S>                                             <C>        <C>        <C>
Revenues                                        100.0%     100.0%     100.0%
                                                -----      -----      -----
Facility expenses:
     Operating                                   87.9       88.3       84.9
     Startup costs                                0.5        4.3        0.1
                                                -----      -----      -----
Contribution from operations                     11.6        7.3       15.0
Other operating expenses:
     General and administrative                   5.5       11.2       10.3
     College Station closure costs                  -        1.2          -
     Merger costs and related restructuring
       Charges                                    5.9        0.6          -
     Loss on sale of behavioral health
       Business                                     -          -       11.9
     Write-off of deferred financing costs        0.7          -          -
                                                -----      -----      -----
Operating loss                                   (0.5)      (5.7)      (7.2)
Interest and other expense, net                  (1.3)      (1.4)      (1.4)
                                                -----      -----      -----
Loss before income taxes, extraordinary
  gain on extinguishment of debt and
  cumulative effect of change in
  accounting principle                           (1.8)      (7.1)      (8.6)
Income tax (provision) benefit                   (0.1)       0.9        0.6
                                                -----      -----      -----
Loss before extraordinary gain on
  extinguishment of debt and cumulative
  effect of change in accounting principle       (1.9)      (6.2)      (8.0)
                                                -----      -----      -----
Extraordinary gain on extinguishment
  of debt, net of tax                             0.4          -          -
Cumulative effect of change in
  accounting principle                              -       (2.6)         -
                                                -----      -----      -----
Net loss                                         (1.5)%     (8.8)%     (8.0)%
                                                -----      -----      -----
                                                -----      -----      -----
</TABLE>

Year ended December 31, 1999 Compared to Year ended December 31, 1998

     Revenue  increased  by $45.5 million or 24.1% for the year ended December
31, 1999 to $233.9 million  compared  to  the  same  period  in  1998.   These
increases were primarily due to:

     -  An  increase  of $51.1 million generated from the opening of 11
        juvenile facilities (1,546 beds) and 7 adult facilities (4,283 beds).

     -  A net increase of  $4.7 million generated from per diem rate and
        occupancy level increases in existing facilities.

-  A  decrease of $10.3  million  from  the  discontinuance  of  7
        programs (956 beds.)

                                        18
<PAGE>

     Operating expenses  increased  $39.2  million or 23.6% for the year ended
December  31, 1999 to $205.7 million compared  to  the  same  period  in  1998
primarily due to the opening of the 18 facilities mentioned above.

     As a percentage  of  revenues,  operating expenses decreased to 87.9% for
the twelve months ended December 31, 1999  from  88.3%  for  the twelve months
ended December 31, 1998. Operating costs for the twelve months  ended December
31, 1998 were higher as a percentage of revenue than the comparable  period in
1999  primarily  due to the recording of approximately $6.6 million in charges
consisting  of adjustments  to  accruals  and  reserves  associated  with  the
collectibility  of  accounts  receivable,  recoverability  of  certain program
expenses  and  self-insurance  of  employee  medical  costs.  The decrease  in
operating expenses as a percentage of revenue from 1999  to 1998 was partially
offset by an increase in operating expenses from a number  of  facilities that
were in their early stages of operations during the fourth quarter of 1998 and
the first quarter of 1999 and were experiencing less than optimal  utilization
rates.  Depending  on  their  cost structure, facilities that are experiencing
less than 85% utilization rates generally incur significantly higher operating
expenses as a percentage of revenue  compared to those at or near capacity.  A
portion of the decrease was also attributable  to lower costs for resident and
operating expenses as a result of the Company's  ability  to  negotiate better
rates  due  to  its  increased size after the merger.  In addition,  operating
costs as a percentage  of  revenue  were  reduced due to the implementation of
enhanced financial controls and oversight of  the  facilities  acquired in the
merger.

     Startup costs were $1.2 million for the twelve months ended  December 31,
1999 compared to $8.3 million for the twelve months ended December  31,  1998.
Startup  for the twelve months ended December 31, 1999, related to the startup
of the South  Fulton,  Georgia  facility  (288 beds), 300-bed expansion of the
Crowley, Colorado facility and the 45 bed expansion  of  the  Bayamon,  Puerto
Rico  treatment  facility.   During the twelve months ended December 31, 1998,
there were fourteen facilities (5,596 beds) generating start up costs.

     General and administrative  expenses decreased from $21.1 million for the
twelve months ended December 31, 1998  to  $12.8 million for the twelve months
ended  December  31,  1999.  The  decrease  of $8.2  million  in  general  and
administrative expenses was primarily attributable to:

     -  A $4.9 million reduction of deferred development costs.

     -  A $1.1 million write-off on the  fourth  quarter of 1998 related
        to the buyout of a YSI training contract.

     -  The reduction of the administrative staff of the YSI subsidiary.

     -  The  synergies  realized  from the merger including  costs  for
        insurance, office expenses and travel.

     As  a  percentage  of  revenues,  general   and  administrative  expenses
decreased to 5.5% for the twelve months ended December 31, 1999 from 11.2% for
the  twelve  months  ended  December 31, 1998.  The decrease  in  general  and
administrative expenses as a  percentage  of  revenue is a result of the items
noted above and leveraging of the remaining costs over a larger revenue base.

     The Company recorded a charge of $2.3 million  in the twelve months ended
December  31,  1998  relating  to  anticipated losses in connection  with  the
College Station program that the Company closed on September 15, 1998.

     During the first quarter of 1999,  the  Company recorded merger costs and
related restructuring charges of approximately $13.8 million  ($10.3  million,
after  taxes  or $0.92 per share) for direct costs related to the merger  with
YSI and certain  other  costs  resulting  from  the restructuring of the newly
combined  operations.   Direct merger costs consisted  primarily  of  fees  to
investment bankers, attorneys,  accountants,  financial  advisors and printing
and other direct costs.  Restructuring charges included severance  and  change
in  control payments made to certain former officers and employees of YSI  and
costs  associated  with  the consolidation of administrative functions and the
expected closure of certain  facilities.  Exit costs include charges resulting
from the cancellation of lease agreements and other long-term commitments, the
write-down  of  underutilized  assets   or   assets  to  be  disposed  of  and
miscellaneous other costs.

     The Company incurred $1.1 million in merger  related  charges  during the
twelve  months  ended  December  31,  1998 in connection with the CSC and  YSI
merger.  In addition, a small portion of  the  merger charges related to costs
associated with the pooling transaction with CCI which was consummated on June
30, 1998.

                                         19
<PAGE>


     In  September  1999, the Company wrote off $1.6  million  of  unamortized
deferred financing costs  associated with the Company's previously established
credit facility, which was repaid in full on September 1, 1999.

     Interest expense, net of interest income, was $3.1 million for the twelve
months ended December 31, 1999  compared to $2.6 million for the twelve months
ended December 31, 1998, a net increase  in  interest  expense of $.5 million.
This  increase resulted from borrowings on the Company's  credit  facility  to
finance the growth of the Company.

     For  the  twelve months ended December 31, 1999 the Company recognized an
income tax provision  of  $253,000  and  an  income  tax provision of $643,000
related to the extraordinary gain on extinguishment of  debt  associated  with
the  YSI  7%  Convertible Debt.  For the twelve months ended December 31, 1998
the Company recognized  a benefit for income taxes of $1,593,000 and an income
tax benefit of $3,180,000  related  to  the  cumulative  effect  of  change in
accounting  principle  representing  an  effective tax benefit of 32.4%.   The
reduction in the effective tax rate was a  result  of expensing certain merger
costs that are non-deductible for tax purposes.

     In  September  1999, the Company recorded an extraordinary  gain  on  the
early extinguishment  of  debt  of  $985,000  (net  of  tax  of $643,000).  In
anticipation  of  entering  into  the  new financing arrangement, the  Company
agreed with certain holders of the 7% Convertible Subordinated Debentures (who
had previously agreed to postpone the redemption  of  their  Debentures  until
March  31, 2000) to redeem their Debentures upon the closing of the new credit
facilities.   The  agreed  redemption  price  was equal to 90% of the original
principal amount plus accrued but unpaid interest.   In  September  1999,  the
Company  used  approximately  $14.8  million of its available credit to redeem
$16.3 million face value of Debentures leaving a balance of $14.2 million.

     Due to the early adoption of SOP  98-5,  for  the year ended December 31,
1998  the  Company  expensed startup and deferred development  costs  totaling
$11,630,000.  In addition,  the  Company  was  required to record a cumulative
effect  of  change  in  accounting  principle of $4,863,000  (net  of  tax  of
$3,180,000) retroactively to January  1,  1998 (See Note A of the notes to the
consolidated financial statements).

     As  a  result  of the foregoing factors,  for  the  twelve  months  ended
December 31, 1999 the  Company  had  a net income of $6.8 million or $0.61 per
diluted share (excluding direct merger related charges of $10.3 net of tax, or
$0.92 per diluted share).   For the twelve  months ended December 31, 1998 the
Company  had  a  net  loss of ($11.0 million) or  ($1.01)  per  diluted  share
(excluding direct merger related charges net of tax, and the cumulative effect
of change in accounting principle, or $0.52 per diluted share).


Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

     Revenue increased  by  $12.5  million or 7.1% for the year ended December
31,  1998 to $188.5 million compared  to  the  same  period  in  1997.   These
increases were primarily due to:

     -  An  increase  of $38.1 million generated from the opening of 15
        juvenile facilities (1,867 beds) and 8 adult facilities (4,162 beds).

     -  A net increase of  $5.7million  generated from per diem rate and
        occupancy level increases in existing facilities.

     -  A decrease of $31.3 million resulting primarily from the sale of
        seven behavioral health programs in October  1997  and  the closure of
        the College Station program in September 1998.

     Operating  expenses increased $17.1 million or 11.4% for the  year  ended
December 31, 1998  to  $166.4  million  compared  to  the  same period in 1997
primarily due to the opening of the new facilities mentioned above.

     As a percentage of revenues, operating expenses increased  to  88.3%  for
the  year  ended  December  31,  1998  from 84.9% for the same period in 1997.
During the twelve months ended December  31, 1998 YSI recorded $6.6 million of
adjustments to accruals and reserves associated  with  the  collectibility  of
accounts receivable, recoverability of certain program expenses, medical costs
incurred in connection with the self-insurance of employee health benefits and
the  estimated  losses  to  be  incurred  under  the  remaining  term of YSI's
contracts to operate the Hillsborough and timberline facilities in Florida.

                                     20
<PAGE>

     Startup costs were $8.2 million for the twelve months ended December  31,
1998  compared  to  $211,000  for  the  twelve months ended December 31, 1997.
During  the  twelve  months  ended  December 31,  1998,  there  were  fourteen
facilities (5,596 beds) generating start up costs.

     General and administrative expenses  increased  $3.0 million or 16.2% for
the year ended December 31, 1998 to $21.1 million compared  to the same period
in 1997.  In addition, during the twelve months ended December  31,  1998  the
Company  incurred  $5.6  million  in  development  costs.   This  increase was
partially  offset  by a decrease primarily due to the savings attributable  to
the  sale  of  the  seven   behavioral   health  programs  as  well  as  other
administrative staff reductions.

     As  a  percentage  of  revenues,  general   and  administrative  expenses
decreased to 9.1% before the effect of adopting SOP 98-5 in 1998 from 10.3% in
1997.  The decrease in general and administrative  expenses as a percentage of
revenue is a result of leveraging these additional costs over a larger revenue
base.  General and administrative expense as a percentage of revenue was 11.2%
in  1998  after the effect of adopting SOP 98-5. The reduction  from  9.1%  is
directly attributable  to  reversing  amortization expense related to start-up
and deferred development in 1998 of $2.1million required by SOP 98-5.

     Due to the early adoption of SOP 98-5,  for  the  year ended December 31,
1998  the  Company  expensed startup and deferred development  costs  totaling
$11.6 million.  In addition,  the  Company was required to record a cumulative
effect of change in accounting principle  of  $4.9 million (net of tax of $3.2
million) retroactively to January 1, 1998 (See  Note  A  of  the  notes to the
consolidated financial statements).

     The Company recorded a charge of $2.3 million in the twelve months  ended
December  31,  1998  relating  to  anticipated  losses  in connection with the
College Station program that the Company closed on September 15, 1998.

     During the fourth quarter of 1997 the Company consummated the sale of the
behavioral health business, excluding the two behavioral  health  programs  in
Texas, for $20.4 million resulting in a loss on sale of $20.9 million.

     The  Company  incurred  $1.1 million in merger related charges during the
twelve months ended December 31,  1998  in  connection  with  the  CSC and YSI
merger.  In addition, a small portion of the merger charges related  to  costs
associated with the pooling transaction with CCI.

     Interest  expense,  net of interest income, was $2.6 million for the year
ended December 31, 1998 compared  to  $2.5 million for the year ended December
31,  1997.  Interest  expense  incurred  by  the  YSI  subsidiaries  decreased
approximately $1,200,000 in 1998 primarily  attributable  to  the repayment of
the  12% subordinated debentures in early January 1998 and the disposition  of
the behavioral  health  business,  whose  liabilities  included  a significant
amount of capital lease obligations.  This decrease in interest was offset by:

     -  A   $584,000  decrease  in  interest  income  related  to  the
        utilization of the proceeds from the September 1996 public offering to
        finance the Company's growth and expansion during 1998.  A substantial
        portion of the  proceeds  had been invested in cash equivalents during
        1997.

     -  A $254,000 net increase in interest expense from the utilization
        of the Company's credit facility  to  finance the Company's growth and
        expansion during 1998.

     -  A reduction of capitalized interest in 1998 by $300,000 compared
        to 1997.  In 1997, $371,500 was capitalized related to construction of
        the  Company's  Florence,  Arizona facility.   In  1998,  $72,000  was
        capitalized related to construction  and  capital  improvements to the
        Company's  Gallup,  New  Mexico,  Frio,  Texas  and  Canadian,   Texas
        facilities.

     For the year ended December 31, 1998 the Company recognized an income tax
benefit  of  $1.6  million on income before the cumulative effect of change in
accounting principle  and an income tax benefit of $3.2 million related to the
cumulative effect of change  in  accounting  principle.   For  the  year ended
December  31,  1997 the Company recognized a benefit for income taxes of  $1.1
million.  The effective  tax  rate  was  12%  in  1998  and  7%  in 1997.  The
effective  tax benefit rates are due primarily to the non-recognition  in  the
1998 period  of the tax benefit on certain current period expense items due to

                                          21
<PAGE>

uncertainties  of  realizability  and  to  the  non-deductibility  of  a large
component  of  goodwill  in  the  1997 period related to the behavioral health
programs which was included in the  loss  on  sale  of  the  behavioral health
business.   The fluctuations in the effective tax rates are also  due  to  the
effect of not  recording  a  tax provision on the earnings of CCI due to their
Subchapter S status during those periods.

     As a result of the foregoing  factors,  the  Company  had  a  net loss of
($11.0  million) or ($1.01) per diluted share before the cumulative effect  of
change in accounting principle and excluding any direct merger related charges
net of tax  for  year ended December 31, 1998.  During the year ended December
31, 1997 the Company  had  net  income $6.2 million or $0.58 per diluted share
excluding the loss on sale of the behavioral health business, net of tax.


Liquidity and Capital Resources

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

     The Company had working capital  at  December  31,  1999  of  $22,281,000
compared  to  $23,167,000  at December 31, 1998.  The Company's current  ratio
remained relatively consistent at 1.83 to 1 and 1.77 to 1 at December 31, 1999
and 1998 respectively.

     Net cash of $5.9 million  was  provided  by  operating activities for the
year ended December 31, 1999 as compared to $6.4 million  used  in  operations
for  the  year ended December 31, 1998.  The $12 million change was attributed
primarily to:

     -  Improved contribution margin in 1999 resulting from lower costs
        and enhanced financial controls.

     -  A  reduction  in general and administrative costs in 1999 due to
        less development costs,  reduction  in administrative staff and merger
        synergies.

     -  A decrease in net income of $10.6  million (net of taxes) during
        1998 resulting from the adoption of SOP 98-5.

     -  The payment of cash expenses related  to  the  merger  of  $7.7
        million and $1.1million in 1999 and 1998 respectively.

     -  A  decrease  in  prepaid  expenses  and  accounts  receivable of
        approximately $3.8 during 1999, partially due to increased  collection
        efforts by the Company.

     -  A  decrease  in  accrued  expenses  and  accounts  payable  of
        approximately $6.2 million during 1999.

     Net cash of  $3  million was used in investing activities during the year
ended December 31, 1999 as compared to $9,179,000 being used in the year ended
December 31, 1998.  In the 1999 period, such cash was used principally for:

     -  Capital expenditures related to the opening of new facilities.

     -  Leasehold improvements on existing facilities.

     -  Merger related computer technology and upgrades.

     -  Land improvement for future development.

     In the comparable  period for 1998, the principal investing activities of
the Company consisted of:

-  Capital expenditures related to the opening of new facilities;

     -  Offset by the  receipt  of  $4,500,000  from  the  sale  of  the
        Behavioral Health business owned by YSI.

                                         22
<PAGE>

     Net cash of $3,393,000 was used in financing activities in the year ended
December  31,  1999 as compared to $9,985,000 provided by financing activities
in the year ended  December  31,  1998.   During  1999  the  Company's primary
funding activities consisted of:

     -  Net proceeds of $11,938,000 from the Company's revolving  credit
        facilities  used to redeem a portion of the subordinated debt as noted
        below.

     -  Proceeds of  $920,000 (net of imputed interest) from the sale of
        equipment and leasehold improvements.

     -  Proceeds  of  $3,260,000 from the exercise of stock warrants and
        options.

     -  Redemption of subordinated debt totaling $17,483,000.

     -  Payment of debt issuance costs of $2,363,000.

     During 1998 the Company's primary funding activities consisted of:

     -  Net proceeds of  $11,500,000 from the Company's revolving credit
        facilities used for capital expenditures.

     -  Proceeds of  $1,265,000  (net of imputed interest) from the sale
        of equipment and leasehold improvements.

     -  Proceeds of $1,700,000 from  the  exercise of stock warrants and
        options.

     -  Redemption of subordinated debt totaling $3,886,000.

     -  Payment of short-term and long-term borrowings of $479,000.

     -  Payment of debt issuance costs of $431,000.

     In April 1998 the Company finalized a new five-year  credit facility with
a syndicate of banks led by NationsBank N.A.  The syndicated facility provided
for  up  to  $30  million in borrowings for working capital, construction  and
acquisition of correctional  facilities,  and  general  corporate purposes all
collateralized by the Company's accounts receivable.  The  line  was comprised
of  two  components, a $10 million revolving credit and $20 million  operating
lease facility for the construction, ownership and acquisition of correctional
facilities.  Borrowings  under  the  line  were  subject  to  compliance  with
financial  covenants  and  borrowing  base criteria. The Company incurred rent
expense under the $20 million operating  lease  facility  at an adjusted LIBOR
base lease rate as defined in the agreement.  The credit facility  was secured
by all of the assets of the Company.

     In  August  of  1998  the  Company  initiated an amendment to its current
credit agreement with a syndicate of banks  led by NationsBank N.A.  Under the
amendment, which was finalized on October 16,  1998,  the  Company received an
additional  $17,500,000  temporary  increase  in  its  credit  facility.   The
amendment  represents interim financing which terminated on June 15, 1999.  As
of December  31,  1998  the  total  amount  outstanding  on  the  revolver was
$11,500,000  and the total amount outstanding on the operating lease  facility
was $16,652,000  .   This  credit  facility  was repaid in August of 1999 with
proceeds from a new credit facility with Summit Bank as described below.

     On August 31, 1999, the Company finalized  a  new  $95  million financing
arrangement  with  Summit  Bank,  N.A.,  a  New  Jersey  based national  bank.
Borrowings  under the line are subject to compliance with financial  covenants
and borrowing  base  criteria.   The  new  financing arrangement is secured by
substantially all of the assets of the Company  and  consists of the following
components:

     -  $30  million  revolving  line  of  credit  to  be  used by the Company
        and  its  subsidiaries  for  working  capital  and  general  corporate

                                      23
<PAGE>

        purposes and to finance the acquisition of facilities,  properties and
        other businesses.

     -  $20  million  credit  facility  (the  "Delayed Drawdown  Line")  which
        provides  the  Company  with  additional  financing to be used by  the
        Company  to  fund  the  redemption of the outstanding  7%  Convertible
        Subordinated Debentures Due  March  31,  2000  that were issued by the
        Youth Services International, Inc., a subsidiary  of  the Company (the
        "Debentures").

     -  $45  million  in  financing  that  may  be  used  by  the  Company  to
        purchase land and property  and  to  finance  the  construction of new
        facilities through an operating lease arrangement.

     The  $30  million revolving line of credit and the $45,000,000  operating
lease financing facility mature on August 31, 2002.  They bear a variable rate
of interest on a  margin  over  the  base  rate  or LIBOR rate.  The margin is
determined by the ratio of funded debt to adjusted  EBITDA and ranges from .5%
to 1.5% for base rate and from 2.0% to 3.0% for LIBOR rate loans.  The Company
has the discretionary ability to elect either base rate or LIBOR rate loans.

     The  $20  million  Delayed Drawdown line matures three  years  after  the
earlier of August 31, 2000 or the date in which the credit facility equals the
$20 million commitment balance.   This  credit  facility  bears interest at 1%
over the base rate through December 2000, 3% over the base  rate  from January
1,  2001 to March 31, 2001 and 4% over the base rate thereafter.  The  Company
is required to pay the outstanding principal balance in twelve equal quarterly
installments  beginning  three  months after the earlier of August 31, 2000 or
the  date  in which the credit facility  equals  the  $20  million  commitment
balance.

     Simultaneously  with  the  closing  of  these  new credit facilities, the
Company  used  approximately  $13,080,000 of the available  credit  under  the
revolving line of credit facility  to discharge all of its outstanding line of
credit  banking  indebtedness  to  NationsBank,  N.A.,  fees  related  to  the
financing and repayment of other indebtedness.  Subsequent to the closing, the
Company paid this revolving credit line  down to $9,000,000.  Due to borrowing
base limitations, the available balance at December 31, 1999 was approximately
$17,133,000.

     Additionally, in  connection   with  the   closing   of the   new  credit
facilities, the Company used approximately $18,984,000 of its available credit
under the lease  credit facility to discharge its obligations  to  NationsBank
under a similar financing   vehicle   previously  provided  by  NationsBank to
the  Company.  Subsequent to the closing, the  company  incurred an additional
$1,519,000 in  construction  costs  and capitalized interest.   As  a  result,
$24,497,000  is  available  at  December  31,  1999  for  additional  property
acquisition and construction under this operating lease financing facility. At
December  31, 1999 the Company has construction commitments of  $3,704,000.


7% Convertible Subordinated Debentures

     On  March  31,  1999,  in connection with the merger, the Company assumed
$32,200,000 of 7% Convertible  Subordinated  Debentures  Due  February 1, 2006
originally issued during the year ended June 30, 1996 by YSI.   Due to certain
provisions in the indenture, the change of control as a result of  the  merger
enabled  the holder to demand immediate redemption by the Company.  Agreements
were reached  with  certain holders representing $30,470,000 of the total debt
to defer payment until  March  31, 2000.   A total of $1,730,000, representing
the balance was repaid from working capital during the second quarter of 1999.

     In anticipation of entering  into  the  new credit facilities with Summit
Bank,  the Company agreed with certain holders  of  the  Debentures  (who  had
previously  agreed  to postpone the redemption of their Debentures until March
31, 2000) to redeem their  Debentures  upon  the  closing  of  the  new credit
facilities at a redemption price equal to 90% of the original principal amount
thereof,  plus  accrued  but  unpaid interest.  The Company used approximately
$14,750,000 of its available credit  under  the  Delayed  Drawdown facility to
redeem $16,280,000 face value of these Debentures.  An additional $312,000 was
paid  on  the  delayed  draw  down facility in December leaving  an  available
balance of $5,562,000 at December  31,  1999  to  be used to redeem additional
Debentures on or before March 31, 2000.

As a result of the above note redemptions, $14,190,000  in principal amount of
these Debentures remain outstanding at December 31, 1999.   Absent a different
agreement,  the Company will be required to redeem these remaining  Debentures

                                     24
<PAGE>

on March 31,  2000  at  100%  of  the  original principal amount thereof, plus
accrued but unpaid interest.  The Company  expects  to redeem these Debentures
on March 31, 2000 using the long term financing facilities.    That portion to
be refinanced through the delayed drawdown instrument that is expected  to  be
paid  during  the  year 2000, in accordance with the loan provisions, has been
classified as current.

     Youth  Services   International,  Inc. incurred  approximately $2,500,000
of  direct  costs  in  connection  with  the issuance  of  the  7% Convertible
Subordinated Debentures. These costs were included within  deferred debt issue
costs for  1998 and amortized over the life  of the debentures.  The remaining
balance  at  December 31, 1998  was  expensed  as part  of the merger related
charges in 1999.


10% Subordinated Promissory Notes

     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.   On  July  1, 1998 the Company's subordinated promissory  notes  of
$3,935,760 became payable.   Management  granted  note  holders  the option to
extend their notes through June 30, 1999.  In July 1998, the Company  redeemed
a  total  of  $2,834,382  for  those  notes not extended.  The remaining notes
totaling $1,101,378 was paid in full between July and October 1999.


12% Subordinated Debentures

     During the year ended June 30, 1993,  the  YSI  issued  12%  Subordinated
Debentures in the principal amount of  $1,000,000.  The debentures were issued
with an original issue discount of $50,000, which was being amortized over the
life  of  the  debentures  using  the  effective  interest  method.   The  12%
Subordinated Debentures were redeemed by  the Company on January 1, 1998 and a
loss of $53,000 was incurred by the Company  in  connection  with  this  early
extinguishment.

     In  connection  with the issuance of the debentures, warrants to purchase
231,900 shares of common  stock  at  an exercise price of $3.23 per share were
issued. These warrants were exercisable beginning in April 1993 and expired at
various dates through November 1999. The  warrants  were  assigned  a value of
$50,000.

     The  Company  continues  to make cash investments in the acquisition  and
construction of new facilities  and  the  expansion of existing facilities. In
addition, the Company expects to continue to  have cash needs as it relates to
financing start-up costs in connection with new  contracts.   In  addition the
Company   is   continuing  to  evaluate  opportunities,  which  could  require
significant outlays  of  cash. If such opportunities were pursued, the Company
would  require  additional  financing  resources.  Management  believes  these
additional resources may be available through alternative financing methods.

RISK FACTORS

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

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

                                     25
<PAGE>

     During  1998,  YSI  experienced a significant decline in the occupancy
levels of certain of its facilities,  which  has  caused  its contributions
from operations to decline. Occupancy levels may decline at  YSI's or CSC's
facilities  in  the  future  and  new  facilities might not reach occupancy
levels required to produce profitability.

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

     As is typical  in  our industry, our facility management contracts are
short-term, generally ranging  from  one  to  three  years, with renewal or
extension options in favor of the contracting governmental agency. Many YSI
contracts  renew  annually. Our facility management contracts  may  not  be
renewed or our customers  may  terminate  such contracts in accordance with
their  right  to  do so. The non-renewal or termination  of  any  of  these
contracts  could  materially  adversely  affect  our  financial  condition,
results of operations  and  liquidity,  including our ability to secure new
facility management contracts from others.  Of the YSI multi-year contracts
in place as of December 31, 1998, four contracts representing approximately
590 beds are up for renewal in 1999. The contracts  up  for renewal in 1999
include the five year contract for the operation of the Charles  H. Hickey,
Jr.  School  in  Maryland  for  330  beds  for  which  YSI was selected the
successful  bidder  in  February 1999. Of the CSC multi-year  contracts  in
place as of December 31,  1998,  CSC  has fourteen contracts for a total of
2,137 beds subject to renewal in 1999.

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

WE  FACE  FINANCIAL RISKS RELATING TO SPECULATIVE PROJECTS,  INCLUDING  THE
LOSS OF INITIAL OUTLAYS ON CONTRACTS NOT AWARDED TO US.

     In some cases, we may decide to construct and own a facility without a
contract award  when  we  believe  there  is  a need for the facility and a
strong likelihood we will be awarded a contract.  However, we take the risk
that a contract may not be awarded. If contracts do  not  materialize,  the
initial outlays may be lost.

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

     Our growth is generally dependent  upon  our  ability  to  obtain  new
contracts  to develop and manage new correctional and detention facilities.
This depends  on  a  number  of  factors we cannot control, including crime
rates and sentencing patterns in various  jurisdictions  and  acceptance of
privatization.  Certain  jurisdictions  recently  have  required successful
bidders  to  make a significant capital investment in connection  with  the
financing of a  particular project, a trend which will require the combined
company to have sufficient capital resources to compete effectively. We may
not be able to obtain these capital resources when needed.

WE FACE RISKS AND  UNCERTAINTIES IN EXPANDING OUR OPERATIONS OUTSIDE OF THE
UNITED STATES AND ITS  TERRITORIES, INCLUDING NEW AND UNFAMILIAR REGULATORY
REQUIREMENTS, CURRENCY EXCHANGE  ISSUES, POLITICAL AND ECONOMIC ISSUES, AND
STAFFING AND MANAGING THESE OPERATIONS.

     Our business plan includes the  possible  expansion  of our operations
into markets outside of the United States and its territories.  We  may not
succeed in entering any of these markets, and if we are successful, we will
be  subject  to  the risks of international operations. These risks include
various new and unfamiliar  regulatory  requirements,  issues  relating  to
currency  exchange, political and economic changes and disruptions, tariffs
or other barriers,  and  difficulties  in  staffing  and  managing  foreign
operations.

                                     26
<PAGE>

WE MAY NOT BE ABLE TO ACHIEVE THE GROWTH WE ANTICIPATE, OR IF ACHIEVED,  WE
MAY NOT BE ABLE TO EFFECTIVELY MANAGE IT.

     CSC  has  experienced significant growth and expects that the combined
company will also  continue  to  grow.  Successful  growth  depends  on our
ability  to  obtain  and train qualified personnel to handle the increasing
number of juveniles and  adults  in  our  care,  to develop and operate the
information technology systems and financial controls  necessary  to manage
expanded operations, to manage our resources over a larger base of programs
and  activities,  and to integrate efficiently and effectively the business
and financial functions of any newly developed programs. We may not be able
to achieve the growth  anticipated  or,  if achieved, we may not be able to
effectively manage it.

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

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

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

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

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

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


THE LOSS OF ANY CSC EXECUTIVE OFFICERS COULD HAVE A MATERIAL ADVERSE EFFECT
ON THE COMBINED COMPANY.

     The  success of our operations will depend upon the continued services
of CSC's executive management, including James F. Slattery, Chairman, Chief
Executive  Officer   and   President,  Michael  Garretson,  Executive  Vice

                                    27
<PAGE>

President, and Ira Cotler, Executive  Vice  President  and  Chief Financial
Officer. The loss of any of these executive officers could have  a material
adverse effect on the combined company.

WE MAY ENCOUNTER MATERIAL COSTS RELATING TO YEAR 2000 COMPLIANCE.

     Many  existing computer programs were designed to use only two  digits
to identify  a year in the date field without considering the impact of the
upcoming  change   in   the   century.  If  not  corrected,  many  computer
applications could fail or create erroneous results by or at the year 2000.
CSC management has completed a  corporate  program,  which  we  believe has
prepared all CSC's computer systems and applications for the year 2000. CSC
expects  no material incremental infrastructure costs to be incurred  as  a
result of  these  enhancements.  YSI  expects  to implement the systems and
programming changes necessary to address year 2000  issues  with respect to
its internal systems without significant expense. In the event  the  merger
is  completed, management anticipates that CSC's computer systems would  be
utilized  for  both  companies.  Although YSI believes it will be year 2000
compliant and that the cost will not  have  a  material adverse effect, YSI
may not in fact be year 2000 compliant by year 2000,  whether  or  not  the
merger  is  completed,  and  the  cost  of year 2000 remediation may have a
material adverse effect on YSI's business,  financial condition and results
of operations. We also rely, directly and indirectly,  on  external systems
of  business  enterprises such as strategic partners, suppliers,  financial
organizations, research facilities and governmental entities, both domestic
and international,  for  accurate  exchange  of  data. Even if our internal
systems are not materially affected by the year 2000  computer  programming
issue,  we  could  be  affected  by  disruptions  in  the  operation of the
enterprises with which we interact.

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

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

INSURANCE  COVERAGE  MAY  BE  INADEQUATE OR UNAVAILABLE TO COVER  POTENTIAL
LIABILITY RELATED TO MANAGEMENT OF CORRECTIONAL AND DETENTION FACILITIES.

     Our management of correctional  and detention facilities exposes us to
potential third-party claims or litigation  by  prisoners  or other persons
for  personal  injury  or  other damages, including damages resulting  from
contact with our facilities,  programs,  personnel  or  students (including
students  who  leave  our  facilities without our authorization  and  cause
bodily injury or property damage).  Currently,  we  are  subject to actions
initiated  by  former  employees,  inmates and detainees alleging  assault,
sexual harassment, personal injury, property damage, and other injuries. In
addition, our management contracts generally  require  us  to indemnify the
governmental  agency  against any damages to which the governmental  agency
may be subject in connection  with  such  claims or litigation. We maintain
insurance programs that provide coverage for  certain liability risks faced
by us, including personal injury, bodily injury,  death  or property damage
to a third party where we are found to be negligent. There is no assurance,
however, that our insurance will be adequate to cover potential third-party
claims.  In  addition,  we are unable to secure insurance for  some  unique
business risks including riot and civil commotion or the acts of an escaped
offender.

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


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

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

                                   28
<PAGE>

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

<TABLE>
<CAPTION>
                                                              Expected Maturity Dates
                                                              -----------------------
                                       2000      2001      2002      2003    2004  Thereafter    Total    Fair Value
                                       ----      ----      ----      ----    ----  ----------    -----    ----------
<S>                                 <C>        <C>       <C>       <C>       <C>    <C>        <C>        <C>
Fixed rate debt                     17,801,632 4,815,005 4,815,252 1,206,073 3,222  305,950    1,422,786  1,422,786
                                    ---------- --------- --------- --------- -----  -------    ---------  ---------
                                    ---------- --------- --------- --------- -----  -------    ---------  ---------

   Weighted average interest   8.16%
    rate at December 31, 1999  -----
                               -----

Variable rate LIBOR debt                     -         - 9,000,000         -     -        -    9,000,000  9,000,000
                                    ---------- --------- --------- --------- -----  -------    ---------  ---------
                                    ---------- --------- --------- --------- -----  -------    ---------  ---------

   Weighted average interest   8.28%
    rate at December 31, 1999  -----
                               -----
</TABLE>


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The information required by this item is contained on Pages F-1 through
F-29 hereof.


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

     None.


                                   PART III

     Items 10, 11, 12 and 13 of  Part  III  have been omitted from this report
because the Company will file a definitive Proxy Statement with the Commission
no later than 120 days after the close of its  fiscal  year.   The information
required by Part III which will appear in the Proxy Statement is  incorporated
by reference into Part III of this report.


                                   PART IV

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

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

          (1)  Financial Statements:

               The  consolidated  statements  of  the Company are included  on
               pages F-1 through F-29 of this Form 10-K.

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

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

     (b)  The Company did not file any Current Reports on Form 8-K during  the
          quarter ended December 31, 1999.

                                       29
<PAGE>

     (c)  Exhibits:

  2.1     Agreement  and Plan of Merger, dated as of September 23, 1998, among
          YSI, CSC and Palm Merger Corp.(28)
  2.2     First  Amendment, dated as of January 12, 1999, to the Agreement and
          Plan of  Merger,  dated as of September 23, 1998, among YSI, CSC and
          Palm Merger Corp.(29)
  2.3     Second  Amendment,  dated  as of March 2, 1999, to the Agreement and
          Plan of Merger, dated as of  September  23, 1998, among YSI, CSC and
          Palm Merger Corp.(35)
  3.1     Certificate of Incorporation of CSC dated October 28, 1993.(1){
  3.1.1   Copy  of Certificate of Amendment of Certificate of Incorporation of
          CSC dated July 29, 1996.(4)
  3.1.2   Copy   of   Certificate   of  Correction  to  CSC's  Certificate  of
          Incorporation.(1)
  3.1.3   Copy   of  Certification  of  Correction  to  CSC's  Certificate  of
          Amendment to CSC's Certificate of
          Incorporation. (1)
  3.2     CSC's By-Laws.(33)

  4.1     Form of YSI's 7% Convertible Subordinated Debentures Due February 1,
          2006.(14)
  4.2.1   Amendment  to  Fiscal  and  Paying Agency Agreement, dated March 31,
          1999, by and among YSI, The Chase  Manhattan  Bank,  N.A., New York,
          The  Chase  Manhattan  Bank,  N.A., London and Chase Manhattan  Bank
          Luxembourg S.A.(15)
  4.3 a.  Form of CSC Series A Warrant.(2)
  4.3     Indenture,  dated October 15, 1996, by and between YSI and The Chase
          Manhattan Bank, N.A., as Trustee.
  4.3.1   Amendment to Indenture, dated March 31, 1999, by and between YSI and
          The Chase Manhattan Bank, as Trustee.(15)
  4.4 a.  Form of CSC 10% Subordinated Promissory Note.(37)
  4.4     Form  of  Letter  Agreement  executed  by  certain Debenture holders
          agreeing to receive proceeds from redemption of their Debentures one
          year following the effective date of the Merger  together  with Form
          of Guaranty from CSC.(14)
  4.4.2   Fiscal  and  Paying Agency Agreement, dated January 29, 1996, by and
          among YSI, The  Chase  Manhattan  Bank,  N.A.,  New  York, The Chase
          Manhattan  Bank,  N.A.,  London and Chase Manhattan Bank  Luxembourg
          S.A.(14)
  4.5     Form  of Placement Agent's Warrant between CSC and Janney Montgomery
          Scott Inc.(1)
* 10.1    CSC's 1993 Stock Option Plan, as amended.(33)
* 10.5.1  Employment  Agreement  between  CSC  and  James  F.  Slattery  dated
          February 17, 1998.(9)
* 10.6    Employment Agreement between CSC and Aaron Speisman.(1)
* 10.6.1  Modification  to  the  Employment  Agreement  between  CSC and Aaron
          Speisman, dated June 13, 1996.(4)
  10.15   Agreement between CSC and William Banks, dated October 31, 1989.(1)
  10.15.1 Letter dated December 9, 1993 from William Banks to CSC.(1)
  10.16   Form    of   Sub-Lease   between   CSC   and   LeMarquis   Operating
          Corporation.(1)
  10.17   Form of Lease between CSC and Myrtle Avenue Family Center, Inc.(1)
  10.24.1 Renewal  of  the  Revolving  Line  of  Credit Note dated January 15,
          1998.(7)
* 10.25   1994 Non-Employee Director Stock Option Plan.(3)
  10.26   Loan  and Security Agreement with NationsBank, N.A. (South) dated as
          of December 31, 1995.(3)
  10.26.2 Deed of Trust Modification Agreement dated January 14, 1998.(7)
  10.26.3 Third Amendment to Loan Agreement dated January 5, 1998.(7)
  10.26.4 Fourth Amendment to Loan Agreement dated January 14, 1998.(7)
  10.44   Lease  Agreement  between  CSC  and Creston Realty Associates, L.P.,
          dated October 1, 1996.(4)
  10.45   Lease between CSC and Elberon Development Company.(1)
  10.45.1 Assignment of Lease between CSC and Elberon Development Company.(4)
* 10.47.1 Amended  Employment  Agreement  between  CSC and Ira M. Cotler dated
          July 9, 1997.(5)
* 10.47.2 Amendment  No.  1  dated May 3, 1999 to Employment Agreement between
          CSC and Ira M. Cotler of July 9, 1997.(11)
* 10.47.3 Change in Control Agreement between CSC and Ira M. Cotler, dated May
          3, 1999.(11)
* 10.48   Employment  Agreement  between  CSC  and Michael C. Garretson, dated
          January 21, 1996.(4)
* 10.48.1 Employment  Agreement  between  CSC  and Michael C. Garretson, dated
          December 5, 1998.(17)

                                   30
<PAGE>

  10.51.1 First  Amendment  to  Asset  Purchase Agreement between CSC and Dove
          Development  Corporation, Consolidated  Financial  Resources/Crystal
          City, Inc., dated August 27, 1997.(6)
  10.60   Credit  facility with NationsBank and a syndicate of banks for up to
          $30 million dated April, 1998.(8)
  10.60.1 Amendment  No. 1 to credit facility with NationsBank and a syndicate
          of banks, dated October 16, 1998.(10)
  10.60.2 Amendment  No. 2 to credit facility with NationsBank and a syndicate
          of banks, dated March 31, 1999.(11)
  10.61   Sublease  for  Sarasota,  Florida  office  space dated April 9, 1998
          between Lucent Technologies, Inc. and CSC and  Landlord  Consent  to
          Sublease.(8)
  10.67   Asset  Purchase  Agreement  between  CSC  and the County of Dickens,
          Texas dated July 14, 1998 for the purchase  of  the  Dickens  County
          Correctional Facility.(9)
  10.70.1 Subcontract, Facility Use Agreement, and Asset Purchase by and among
          CSC,  Trans-American  Development  Associates,  Inc. and FBA, L.L.C.
          dated December 14, 1998.(36)
  10.72   Credit  Agreement,  dated  August  31,  1999, between CSC and Summit
          Bank, N.A.(16)
  10.73   Master  Agreement,  dated  August 31, 1999, between CSC and Atlantic
          Financial Group, Ltd., Summit Bank, N.A. and SunTrust Bank.(16)
* 10.74   Employment  Agreement dated September 29, 1999 between CSC and James
          F. Slattery.(13)
* 10.75   Change in Control Agreement dated September 29, 1999 between CSC and
          James F. Slattery.(13)
  10.114  Construction/Installment  Purchase  and Management Services Contract
          by  and  among  CSC,  the  State  of  Nevada,  Department  of  Human
          Resources, Nevada Real Property Corporation  and  Clark  &  Sullivan
          Constructors-Rite of Passage, Inc. dated February 2, 1999.(36)
  21      List of Subsidiaries
  23.1    Consent   of   Grant   Thornton  L.L.P.,  CSC's  independent  public
          accountants.
  27.     Financial Data Schedule
------------

(1)  Incorporated  by  reference  to  exhibit  of same number filed with CSC's
     Registration Statement on Form SB-2 (Registration No. 33-71314-NY).
(2)  Incorporated by reference to exhibit 4.3 filed  with  CSC's  Registration
     Statement on Form SB-2 (Registration No. 33-71314-NY).
(3)  Incorporated  by  reference  to  exhibit  of  same number filed with  the
     initial filing of CSC's Annual Report on Form 10-KSB  for the  year ended
     December 31, 1995.
(4)  Incorporated  by  reference  to  exhibit  of same number filed with CSC's
     Annual Report on Form-10-KSB for the year ended December 31, 1996.
(5)  Incorporated by reference to exhibit of same number filed with CSC's Form
     10-Q for the six months ended June 30, 1997.
(6)  Incorporated by reference to exhibit of same number filed with CSC's Form
     10-Q for the nine months ended September 30, 1997.
(7)  Incorporated  by reference to exhibit of same  number  filed  with  CSC's
     Annual Report on Form-10-K for the year ended December 31, 1997.
(8)  Incorporated by reference to exhibit of same number filed with CSC's Form
     10-Q for the three months ended March 31, 1998.
(9)  Incorporated by reference to exhibit of same number filed with CSC's Form
     10-Q for the six months ended June 30, 1998.
(10) Incorporated by reference to exhibit of same number filed with CSC's Form
     10-Q for the nine months ended September 30, 1998.
(11) Incorporated by reference to exhibit of same number filed with CSC's Form
     10-Q for the three months ended March 31, 1999.
(13) Incorporated by reference to exhibit of same number filed with CSC's Form
     10-Q for the nine months ended September 30, 1999.
(14) Incorporated by reference  to  exhibit  of  same  number filed with CSC's
     Current Report on Form 8-K filed with the SEC on April 15, 1999.
(15) Incorporated  by reference to  exhibit of same number  filed  with  CSC's
     Current Report  on Form 8-K filed with the SEC on April 22, 1999.
(16) Incorporated by  reference  to  exhibit  of  same number filed with CSC's
     Current Report on Form 8-K filed with the SEC on September 29, 1999.

                                   31
<PAGE>

(17) Incorporated by reference to exhibit of same number filed with CSC's Form
     10-K filed with the SEC on March 31, 1999.
(28) Incorporated by reference to CSC's Current Report on Form 8-K, filed with
     the SEC on September 25, 1998.
(29) Incorporated by reference to CSC's Current Report on Form 8-K, filed with
     the SEC on January 21, 1999
(33) Incorporated  by reference  to exhibit of same number  filed  with  CSC's
     Registration Statement on Form S-1 (Registration Number 333-6457).
(35) Incorporated by  reference  to  exhibit  of same number filed with CSC's,
     Current Report on Form 8-K, filed with the SEC on March 3, 1999.
(36) Incorporated by  reference to exhibit of same  number  filed  with  CSC's
     Registration Statement on Form S-4 (Registration Number 333-72003).
(37) Incorporated  by  reference  to Exhibit 4.4 filed with CSC's Registration
     Statement on Form SB-2 (Registration No. 33-71314-NY).

*    Management Contract or Compensatory Plan or arrangement.

                                   32
<PAGE>

                                  SIGNATURES

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

                                   CORRECTIONAL SERVICES CORPORATION
                                   Registrant


                                   By: /s/  James F. Slattery
                                        James F. Slattery, President

Dated: March 30, 2000


     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, Chief Executive Officer    March 30, 2000
James F. Slattery         and Chairman of the Board


/s/  Ira M. Cotler        Executive Vice President,
Ira M. Cotler             Chief Financial Officer               March 30, 2000


/s/ Aaron Speisman        Executive Vice President
Aaron Speisman            and Director                          March 30, 2000


/s/Richard Staley         Senior Vice President and Director    March 30, 2000
Richard Staley


/s/ Stuart Gerson         Director                              March 30, 2000
Stuart Gerson


/s/Shimmie Horn           Director                              March 30, 2000
Shimmie Horn


/s/ Bobbie L. Huskey      Director                              March 30, 2000
Bobbie L. Huskey


/s/ Melvin T. Stith       Director                              March 30, 2000
Melvin T. Stith

                                      33
<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, 1999 and 1998         F-2

  Consolidated Statements of Operations for the years ended
     December 31, 1999, 1998 and 1997                                  F-3

  Consolidated Statement of Stockholders' Equity for the years ended
     December 31, 1999, 1998 and 1997                                  F-4

  Consolidated Statements of Cash Flows for the years ended
     December 31, 1999, 1998 and 1997                                  F-5

  Notes to Consolidated Financial Statements                        F-6-29


                                   34
<PAGE>


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS




Board of Directors
Correctional Services Corporation


We have audited the accompanying consolidated  balance  sheet  of Correctional
Services Corporation and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended.  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 audit.

We conducted  our  audit  in  accordance  with  auditing  standards  generally
accepted  in  the  United  States.   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 audit provides
a reasonable basis for our opinion.

In  our  opinion,  the  consolidated  financial statements referred  to  above
present fairly, in all material respects,  the consolidated financial position
of Correctional Services Corporation and Subsidiaries as of December 31, 1999,
and the consolidated results of their operations  and  their consolidated cash
flows  for  the  year ended December 31, 1999, in conformity  with  accounting
principles generally accepted in the United States.

We previously audited  and  reported  on  the  consolidated  balance  sheet of
Correctional  Services  Corporation  and Subsidiaries as of December 31, 1998,
and the related consolidated statements  of  operations,  stockholders' equity
and cash flows for the years ended December 31, 1998 and 1997,  prior to their
restatement   for  the  1999  pooling  of  interests.   The  contribution   of
Correctional Services  Corporation  and  Subsidiaries  to  total  assets as of
December  31,  1998,  represented  53.2 percent and to revenues for the  years
ended December 31, 1998 and 1997, represented 52.0 percent and 34.1 percent of
the respective restated totals.  Separate  financial  statements  of the other
company included in the 1998 restated consolidated balance sheet and  the 1998
and  1997  restated  statements  of  operations, stockholders' equity and cash
flows were audited and reported on separately  by  another  auditor.   We also
audited  the combination of the accompanying consolidated balance sheet as  of
December  31,   1998,   and   the   consolidated   statements  of  operations,
stockholders' equity and cash flows for the years ended  December 31, 1998 and
1997,  after restatement for the 1999 pooling of interests;  in  our  opinion,
such  consolidated  statements  have  been  properly  combined  on  the  basis
described in Note A of the notes to the consolidated financial statements.





                              /s/  GRANT THORNTON LLP

Tampa, Florida
March 17, 2000

                                    F-1
                                    35

<PAGE>

             CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share data)


<TABLE>
<CAPTION>
                                                              December 31,
                                                           ------------------
                                                             1999      1998
                                                           --------  --------
<S>                                                        <C>       <C>
ASSETS
------
CURRENT ASSETS
  Cash and cash equivalents                                $  7,070  $  7,639
  Restricted cash                                               192       157
  Accounts receivable, net of allowance for doubtful
    accounts of $1,380 and $1,251 for
    December 31, 1999 and 1998, respectively                 35,768    37,924
  Deferred tax asset                                          3,227     2,071
  Prepaid expenses and other current assets                   2,987     5,396
                                                           --------  --------
    Total current assets                                     49,244    53,187

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET          47,972    53,119

OTHER ASSETS
  Deferred tax asset                                          7,060     9,161
  Goodwill, net                                               1,428     1,790
  Other                                                       5,494     8,057
                                                           --------  --------
                                                           $111,198  $125,314
                                                           --------  --------
                                                           --------  --------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES
  Accounts payable                                         $  3,124  $  5,297
  Accrued liabilities                                        18,836    23,599
  Current portion of subordinated debt                        3,797     1,101
  Current portion of senior debt                              1,206        23
                                                           --------  --------
    Total current liabilities                                26,963    30,020

COMMITMENTS AND CONTINGENCIES                                     -         -

LONG-TERM SENIOR DEBT                                        22,551    11,864
SUBORDINATED DEBENTURES                                      10,393    32,200
LONG-TERM PORTION OF FACILITY LOSS RESERVES                     553       224

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, 11,373,064 and 10,906,768 shares
    issued and outstanding, respectively                        114       109
  Additional paid-in capital                                 82,807    79,552
  Accumulated deficit                                       (32,183)  (28,655)
                                                           --------  --------
                                                             50,738    51,006
                                                           --------  --------
                                                           $111,198  $125,314
                                                           --------  --------
                                                           --------  --------
</TABLE>

       The accompanying notes are an integral part of these statements.

                                     F-2
                                     36

<PAGE>

             CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                               ------------------------------
                                                 1999       1998       1997
                                               --------   --------   --------
<S>                                            <C>        <C>        <C>
Revenues                                       $233,918   $188,454   $175,933
Facility expenses:
     Operating                                  205,662    166,443    149,389
     Startup costs                                1,177      8,171        211
                                               --------   --------   --------
                                                206,839    174,614    149,600
                                               --------   --------   --------
Contribution from operations                     27,079     13,840     26,333
Other operating expenses:
     General and administrative                  12,835     21,119     18,167
     College Station closure costs                    -      2,327          -
     Merger costs and related restructuring      13,813      1,109          -
       charges
     Loss on sale of behavioral health business       -          -     20,898
     Write-off of deferred financing costs        1,622          -          -
                                               --------   --------   --------
Operating loss                                   (1,191)   (10,715)   (12,732)

Interest and other expense, net                  (3,069)    (2,611)    (2,381)
Loss before income taxes, extraordinary gain
     on extinguishment of debt and cumulative
     effect of change in accounting principle    (4,260)   (13,326)   (15,113)
Income tax (provision) benefit                     (253)     1,593      1,062
                                               --------   --------   --------
Loss before extraordinary gain on
     extinguishment of debt and cumulative
     effect of change in accounting principle    (4,513)   (11,733)   (14,051)
Extraordinary gain on extinguishment of debt,
     net of tax of $643                             985          -          -
Cumulative effect of change in accounting
     principle, net of tax of $3,180                  -     (4,863)         -
                                               --------   --------   --------
Net loss                                       $ (3,528)  $(16,596)  $(14,051)
                                               --------   --------   --------
                                               --------   --------   --------

Basic and diluted loss per share:
     Loss before extraordinary gain on
     extinguishment of debt and cumulative
     effect of change in accounting principle    $(0.40)    $(1.08)    $(1.32)
     Extraordinary gain on extinguishment of
       debt                                        0.09          -          -
     Cumulative effect of change in
       accounting principle                           -      (0.45)         -
                                               --------   --------   --------
          Net loss per share                     $(0.31)    $(1.53)    $(1.32)
                                               --------   --------   --------
                                               --------   --------   --------

Number of shares used to compute EPS:
       Basic                                     11,219     10,860     10,676
       Diluted                                   11,219     10,860     10,676
</TABLE>


       The accompanying notes are an integral part of these statements.

                                     F-3
                                     37

<PAGE>

              CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                (in thousands)


<TABLE>
<CAPTION>
                                                    Additional   Accumulated    Unrealized Loss
                                            Common    Paid-in      Earnings     on Investments
                                            Stock     Capital     (Deficit)   Available-for-Sale      Total
                                            ------  ----------   -----------  ------------------      -----
<S>                                         <C>      <C>         <C>                  <C>           <C>

Balance at January 1, 1997                  $ 105    $ 69,591    $  2,180             $(58)         $ 71,818

Stock issuance cost                             -         (11)          -                -               (11)
Exercise of stock options                       2       3,286           -                -             3,288
Exercise of warrants                            -         178           -                -               178
Tax benefit realized due to exercise of
     non-qualified stock options                -       2,805           -                -             2,805
Unrealized gain on investment                   -           -           -               58                58
Issuance of common stock as
     compensation                               -       1,547           -                -             1,547
Dividend distribution                           -           -        (129)               -              (129)
Net loss                                        -           -     (14,051)               -           (14,051)
                                            -----    --------    --------             ----          --------

Balance at December 31, 1997                  107      77,396     (12,000)               -            65,503

Stock issuance cost                             -          (4)          -                -                (4)
Exercise of stock options                       1       1,069           -                -             1,070
Exercise of warrants                            1         630           -                -               631
Tax benefit realized due to exercise of
     non-qualified stock options                -         352           -                -               352
Issuance of common stock as
     compensation                               -         109           -                -               109
Dividend distribution                           -           -         (59)               -               (59)
Net loss                                        -           -     (16,596)               -           (16,596)
                                            -----    --------    --------             ----          --------

Balance at December 31, 1998                  109      79,552     (28,655)               -            51,006

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

Balance at December 31, 1999                $ 114    $ 82,807    $(32,183)               -          $ 50,738
                                            -----    --------    --------             ----          --------
                                            -----    --------    --------             ----          --------
</TABLE>


        The accompanying notes are an integral part of this statement.


                                     F-4
                                     38

<PAGE>

            CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>
                                                        Years ended December 31,
                                                      1999       1998        1997
                                                   --------    --------    --------
<S>                                                <C>         <C>         <C>
Cash flows from operating activities:
  Net loss                                         $ (3,528)   $(16,596)   $(14,051)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
      Depreciation and amortization                   5,643       5,667       7,703
      Stock granted as compensation                       -         109       1,547
      Merger related asset writedown                  6,147           -           -
      Cumulative effect of a change in accounting
        principle, net of tax                             -       4,863           -
      Deferred income tax expense (benefit)             945        (897)     (5,001)
      Loss on disposal of fixed assets, net             316          17          23
      Loss on sale of behavioral health                   -           -      20,898
      Loss on sale of investments                         -           -         203
      Write off of other assets                           -         321           -
      Tax benefit realized due to exercise of
        nonqualified stock options                        -         352       2,805
      Gain on extinguishment of debt                 (1,628)          -           -
      Deferred financing costs                        1,622           -           -
      Changes in operating assets and liabilities:
        Restricted cash                                 (35)        167          46
        Accounts receivable                           2,230     (10,088)     (7,514)
        Prepaid expenses and other current assets     1,410      (1,727)      2,364
        Accounts payable and accrued                 (6,609)     11,414        (789)
                                                   --------    --------    --------
             Net cash provided by (used in)
               operating activities:                  6,513      (6,398)      8,234
                                                   --------    --------    --------
Cash flows from investing activities:
    Capital expenditures                            (4,137)     (12,942)    (24,740)
    Proceeds from the sale of property, equipment
      and improvements                                 312           27         984
    Proceeds from the sale of behavioral health
      business                                           -        4,500      14,154
    Development and startup costs                        -            -      (3,410)
    Collection of notes receivable                       -           38       3,184
    Cash paid for acquired businesses, net of
      cash received                                      -           -         (628)
    Proceeds from the sale of investments                -           -        5,100
    Other assets                                       136        (802)        (684)
                                                  --------    --------     --------
             Net cash used in investing
              activities:                           (3,689)     (9,179)      (6,040)
                                                  --------    --------     --------
Cash flows from financing activities:
    Payment (proceeds) on short-term, long-term
      Borrowings capital lease obligations          11,874      11,021      (13,103)
    Payment of subordinated debt                   (17,483)     (3,886)           -
    Proceeds from sale of equipment of leasehold
      improvements                                     920       1,265        1,249
    Proceeds from exercise of stock options and
      warrants                                       3,260       1,700        3,403
    Debt issuance costs                             (2,363)       (431)        (100)
    Long-term portion of prepaid lease                 399         375       (4,335)
Dividend distribution                                    -         (59)        (129)
                                                  --------    --------     --------
             Net cash provided by (used in)
               financing activities:                (3,393)      9,985      (13,015)
                                                  --------    --------     --------
Net decrease in cash and cash equivalents             (569)     (5,592)     (10,821)
Cash and cash equivalents at beginning of period     7,639      13,231       24,052
                                                  --------    --------     --------

Cash and cash equivalents at end of period        $  7,070    $  7,639     $ 13,231
                                                  --------    --------     --------
                                                  --------    --------     --------

Supplemental disclosures of cash flows
  information:
    Cash paid (refunded) during the period for:
      Interest                                    $  3,712    $  2,631     $  3,522
                                                  --------    --------     --------
                                                  --------    --------     --------
      Income taxes                                $      8    $    703     $     67
                                                  --------    --------     --------
                                                  --------    --------     --------
</TABLE>

       The accompanying notes are an integral part of these statements.

                                     F-5
                                     39

<PAGE>

              CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

1.   Principles Of Consolidation

     The consolidated financial statements as of December 31, 1999 include the
     accounts  of  Correctional  Services  Corporation  and  its  wholly owned
     subsidiaries:

     -  Esmor, Inc.
     -  Esmor New Jersey, Inc.
     -  CSC Management de Puerto Rico, Inc.
     -  Youth Services International, Inc.
     -  Youth Services International of Iowa, Inc.
     -  Youth Services International of Tennessee, Inc.
     -  Youth Services International of Baltimore, Inc.
     -  Youth Services International of Maryland, Inc.
     -  Youth Services International of Northern Iowa, Inc.
     -  Youth Services International of South Dakota, Inc.
     -  Youth Services International of Missouri, Inc.
     -  Youth Services International of Central Iowa, Inc.
     -  Youth Services International of Texas, Inc.
     -  Youth Services International of Virginia, Inc.
     -  Youth Services International of Delaware, Inc.
     -  Youth Services International Southeastern Programs, Inc.
     -  Youth Services International of Minnesota, Inc.
     -  Youth Services International of Illinois, Inc.
     -  Youth Services International of Michigan, Inc

     All   significant   intercompany  balances  and  transactions  have  been
     eliminated.

     The Company manages and  operates  certain  of  its  programs pursuant to
     subcontracts or similar relationships with not-for-profit entities. These
     not-for-profit  entities  hold  contracts directly with state  and  local
     governments to provide rehabilitative  services  to  troubled  youth  and
     subcontract  management  responsibility  to  the  Company. These not-for-
     profit entities are each controlled by independent  Boards  of Directors,
     which  have the right to terminate their contract with the Company  under
     certain  circumstances.  The  accompanying  consolidated  balance  sheets
     include net accounts receivable pursuant to these contracts of $3,816,000
     and $4,277,000 as of December 31, 1999 and 1998, respectively.

2.   Pooling-Of-Interests Business Combinations

     Youth Services International, Inc.

     On  March  31,  1999,  the  Company  exchanged  3,114,614  shares  of the
     Company's  common  stock  for  all  of the common stock of Youth Services
     International, Inc. (YSI)  The merger was accounted for as a


                                     F-6
                                     40

<PAGE>

              CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

     pooling-of-interests,  and  accordingly,   the   accompanying   financial
     statements  have  been  retroactively  adjusted  to include the financial
     position and results of operations of YSI for all periods presented.

     The following balances of the separate companies for the period preceding
     the YSI merger were as follows (in thousands):

<TABLE>
<CAPTION>
                                              For the twelve months ended
                                                      December 31,
                                                     1998      1997
                                                   --------   --------
<S>                                                <C>        <C>
Revenues
CSC                                                $ 97,928   $ 59,936
YSI                                                  90,526    115,997
                                                   --------   --------
Combined                                           $188,454   $175,933
                                                   --------   --------
                                                   --------   --------
Net income (loss)
CSC                                                $ (6,022)  $  3,026
YSI                                                 (10,574)   (17,077)
                                                   --------   --------
Combined                                           $(16,596)  $(14,051)
                                                   --------   --------
                                                   --------   --------


                                                     As of December 31,
                                                      1998       1997
                                                   --------   --------
Stockholders' equity
CSC                                                $ 37,923   $ 43,188
YSI                                                  14,103     23,335
                                                   --------   --------
Combined                                             52,026     66,523
Adjustments to stockholders' equity for
    adoption of accounting policy                    (1,020)    (1,020)
                                                   --------   --------
Adjusted stockholders' equity                      $ 51,006   $ 65,503
                                                   --------   --------
                                                   --------   --------
</TABLE>

In  connection  with the merger, a conforming accounting  adjustment  was
recorded to conform  the  accounting  policy relating to YSI's accounting
for supplies inventory.  Previously YSI  capitalized  supplies  inventory
while CSC expensed them as incurred.  The above adjustment to equity  was
made to effect the accounting adjustment as of January 1, 1997.

During  the  first  quarter  of  1999,  the  Company recorded a charge to
operating expenses of approximately  $13,813,000 for direct costs related
to the merger and certain other costs resulting from the restructuring of
the newly combined operations.  Direct  merger  costs consisted primarily
of fees to investment bankers, attorneys, accountants, financial advisors
and  printing  and  other direct costs.  Restructuring  charges  included
severance and change  in control payments made to certain former officers
and employees of YSI and  costs  associated  with  the  consolidation  of
administrative  functions and the expected closure of certain facilities.
Exit costs include  charges  resulting  from  the  cancellation  of lease
agreements   and   other   long-term   commitments,   the  write-down  of
underutilized assets or assets to be disposed of and miscellaneous  other
costs.


                                     F-7
                                     41

<PAGE>

              CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

          Direct merger costs                                    $ 6,111
          Restructuring charges:
             Employee severance and change in control payments     2,339
             Exit costs                                            4,410
             Other                                                   953
          Total                                                  $13,813

     In  addition,  in   connection  with  the  merger,  the  Company  assumed
     $32,200,000 of 7% Convertible Subordinated Debentures  originally  issued
     by YSI during the  year  ended  June  30,  1996.   Under the terms of the
     indenture pursuant to which YSI issued the Debentures, the acquisition of
     YSI by the Company constituted a "change of control" thereby enabling the
     holders of  the  Debentures  to  demand   redemption by the Company.  The
     applicable portion of the unamortized costs related  to  the  issuance of
     these debentures have been appropriately  written  off  and  are included
     in the direct merger  costs.  Agreements  were  subsequently reached with
     certain  holders  representing  $30,500,000  of  the  debentures to defer
     payment  until March 31, 2000  leaving a  balance of $1,730,000 which was
     repaid in June 1999.

     As of December 31, 1999, all  merger  and  restructuring  costs have been
     paid except for approximately $720,000 which relates to lease obligations
     and asset writeoffs for  closed facilities  which are expected to be paid
     in 2000.

     Community Corrections, Inc.

     On June 30, 1998, the  Company exchanged 238,362 shares  of the Company's
     common  stock for all of the common stock  of Community Corrections, Inc.
     (CCI).  The merger  was  accounted  for  as  a  pooling-of-interests and,
     accordingly,  the  accompanying  consolidated  financial  statements  for
     the  periods  presented have been  retroactively adjusted to include  the
     financial position and results  of  operations for all periods presented.
     CCI operates residential boot camp and detention facilities with  a total
     capacity  of  353  beds  in  Texas  and  provided  aftercare  services to
     adjudicated  youth  in  Georgia.  CCI was  a Subchapter S corporation for
     federal income tax purposes whereby the earnings  of the corporation pass
     through to the respective owners.  It was the policy of CCI to distribute
     necessary amounts to the owners  on  a  periodic basis in order to  allow
     them  to  their personal tax  liabilities attributable to the earnings of
     CCI.  During  the  years  ended  December  31, 1998 and 1997, income  tax
     dividends were distributed to the  owners  totaling approximately $59,000
     and $129,000.  The operations of CCI during 1997 were not material to the
     consolidated results of operations. Accordingly, the pro forma effects on
     revenue and net loss are not presented.

3.   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.


                                     F-8
                                     42

<PAGE>

              CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

4.   Revenue Recognition and Contract Provisions

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

     One  of  the  Company's  significant  programs  operates under a contract
     whereby  revenues  are  recognized  as  reimbursable costs  are  incurred
     through  a  gross  maximum  price  cost reimbursement  arrangement.  This
     contract  has  costs, including indirect  costs,  subject  to  audit  and
     adjustment  by negotiations  with  government  representatives.  Contract
     revenues subject  to  audit  relating  to  this contract of approximately
     $13,800,000,  $13,458,000, and $13,519,000 have  been  recorded  for  the
     years ended December  31,  1999,  1998 and 1997, respectively, at amounts
     which  are  expected  to  be realized.  Subsequent  adjustments  if  any,
     resulting from the audit process are recorded when known.

     Contract  terms with government  and  not-for-profit  entities  generally
     range from  one  to  five  years  in duration and expire at various dates
     through June 2002. Most of these contracts are subject to termination for
     convenience by the governmental entity.  Management of the Company is not
     aware of any circumstances that would cause  any  governmental  entity to
     terminate any existing agreement.

5.   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.

     Included  in the restricted cash of $192,000 and $157,000 at December 31,
     1999 and 1998  is a major maintenance and repair reserve fund established
     by the Company as required by certain contracts.

6.   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).
     For tax purposes accelerated methods of depreciation are utilized.

7.   Capitalized Interest

     The  Company  capitalizes  interest  on  facilities during  construction.
     During  1998  the  Company capitalized interest  of  $72,000  related  to
     construction at the  Gallup,  New Mexico, Frio, Texas and Canadian, Texas
     facilities.  During 1997 interest of $371,500 was capitalized relating to
     the construction of the Florence, Arizona facility.


                                     F-9
                                     43

<PAGE>

              CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

8.   Deferred Development and Start-Up Costs

     For the year ended December 31, 1997 deferred development costs consisted
     of costs that could be directly  associated  with  a specific anticipated
     contract and, if the recoverability from that contract was probable, they
     were  deferred  until  the  anticipated  contract  was awarded.   At  the
     commencement  of  operations  of  the facility, the deferred  development
     costs were 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 were charged to expense when their
     recovery was not considered probable.   Facility  start-up  costs,  which
     included  costs  of  initial  employee  training, travel and other direct
     expenses were incurred (after a contract  is  awarded) in connection with
     the  opening  of  new  facilities.   These  costs  were  capitalized  and
     amortized  on  a  straight-line  basis  over  the term (including  option
     periods) of the contracts not to exceed five years.

     In  the fourth quarter of 1998 the Company elected  to  early  adopt  the
     AICPA's  Statement  of  Position 98-5 (SOP 98-5), ACCOUNTING FOR START-UP
     COSTS.  The new accounting  change required the Company to expense start-
     up and deferred development costs  as  incurred, rather than capitalizing
     and subsequently amortizing such costs.  SOP 98-5 required the Company to
     record a cumulative effect of change in accounting  of $4,863,000 (net of
     tax benefit of $3,180,000) retroactively to January 1, 1998 and a current
     year  effect  of  expensing  startup  and deferred development  costs  as
     incurred  throughout  the  remainder of the  year  totaling  $11,630,000.
     These costs are included in  startup costs and general and administrative
     expenses amounting to $7,677,000  and  $3,953,000,  respectively in 1998.
     The  pro forma effect of the change in accounting principle  for  startup
     and deferred  development costs would have been to decrease net income by
     $1,333,000 ($0.12 per share) for the year ended December 31, 1997.

9.   Goodwill

     Goodwill representing  the  excess  of  the  cost  over the net assets of
     acquired  businesses  is stated at cost and is amortized  over  10  years
     using the straight-line method.  Amortization expense for the years ended
     December 31, 1999, 1998  and  1997  was  $362,000, $375,000 and $894,000,
     respectively.  Accumulated amortization at December 31, 1999 and 1998 was
     $2,393,000 and $2,031,000, respectively.   (See  Note O for discussion of
     the  loss  reserve  related to the disposition of the  behavioral  health
     business recognized during the year ended December 31, 1997.)

10.  Accounting for the Impairment of Long-Lived Assets and Goodwill

     The  Company  reviews  long-lived   assets   and   certain   identifiable
     intangibles including goodwill to be held and used or disposed  of by for
     impairment whenever events or changes in circumstances indicate that  the
     carrying  amount  of an asset may not be recoverable. The Company uses an
     estimate of the undiscounted  cash  flows  over the remaining life of its
     long-lived assets and goodwill in measuring whether the assets to be held
     and used will be realizable.


                                     F-10
                                     44

<PAGE>

              CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

11.  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.

12.  Earnings Per Share

     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, when the effect is not anti-dilutive, 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.

13.  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 accordingly, will continue following APB
     No. 25's accounting provisions.

14.  Comprehensive Income

     The Company's comprehensive income (loss) is substantially equivalent  to
     net income (loss) for the years ended December 31, 1999, 1998 and 1997.

15.  Reclassifications

     Certain reclassifications have been made to the 1998 and 1997 balances to
     conform to the 1999 presentation.

16.  Deferred Revenue

     Deferred revenue consist  of  advance  payments  for  services which will
     be recognized as revenue as the related services are performed.


                                     F-11
                                     45

<PAGE>

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


NOTE B - CONTRACTUAL AGREEMENTS WITH GOVERNMENT AGENCIES

The  Company currently operates thirty-four secure and non-secure  corrections
or detention programs as well as educational, developmental and rehabilitative
programs in the states of Arizona, Colorado, Delaware, Florida, Georgia, Iowa,
Illinois,  Maryland,  Minnesota,  Mississippi,  Missouri,  New York, Oklahoma,
South  Dakota,  Tennessee,  Texas,  Virginia, Washington and Puerto  Rico  for
federal, state and local government agencies.  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  educational,  developmental  and  rehabilitative  programs
include  an  academy  style residential  treatment  program  for  high  impact
juvenile offenders and  non-residential highly structured supportive aftercare
programs for juveniles.

The Company is compensated  on  the  basis  of the number of residents 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.  One of  the  Company's programs operates under a contract whereby
revenues which are recognized  as  reimbursable  costs  are incurred through a
gross maximum price cost reimbursement arrangement.

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.


NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS

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


1.   Cash and Cash Equivalents

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

2.   Accounts Receivable, Accounts Payable and Accrued Expenses

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

3.   Subordinated Promissory Notes and Long-Term Debt

     The fair value of  the  Company's subordinated promissory notes and long-
     term debt is estimated based  upon  the quoted market prices for the same
     or similar issues or on the current rates offered to the Company for debt
     of the same remaining maturities.  As  of  December 31, 1999 and 1998 the
     estimated fair values of the subordinated promissory  notes and long-term
     debt approximated their carrying values.


                                     F-12
                                     46


<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  (in
thousands):

<TABLE>
<CAPTION>
                                                       December 31,
                                                     1999       1998
                                                    -------    -------
<S>                                                 <C>        <C>
 Receivable from sale of equipment and leasehold
      improvements                                  $     -    $   944
 Prepaid insurance                                      269        189
 Prepaid real estate taxes                              217        185
 Prepaid and refundable income taxes                    225        116
 Prepaid rent - current portion                         473        399
 Prepaid expenses                                     1,233      2,707
 Other                                                  570        856
                                                    -------    -------
                                                    $ 2,987    $ 5,396
                                                    -------    -------
                                                    -------    -------

NOTE E - BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements, at cost, consist of the
following (in thousands):

                                                       December 31,
                                                     1999       1998
                                                    -------    -------
<S>                                                 <C>        <C>
 Buildings and land                                 $37,008    $36,151
 Equipment                                           13,531     15,092
 Leasehold improvements                              11,536     14,243
                                                    -------    -------
                                                     62,075     65,486
 Less accumulated depreciation                      (14,103)   (12,367)
                                                    -------    -------
                                                    $47,972    $53,119
                                                    -------    -------
                                                    -------    -------

Depreciation expense for the years ended December 31, 1999,  1998 and 1997
was approximately $4,912,000, $5,131,000 and $5,277,000 respectively.


NOTE F - OTHER ASSETS

Other assets consist of the following (in thousands):

                                                       December 31,
                                                     1999       1998
                                                    -------    -------
<S>                                                 <C>        <C>
Deferred refinancing costs, net                     $1,229     $2,093
 Deposits                                              482        504
 Prepaid rent - net of current portion               3,561      3,960
 Other                                                 222      1,500
                                                    ------     ------
                                                    $5,494     $8,057
                                                    ------     ------
                                                    ------     ------
</TABLE>

                                     F-13
                                     47

<PAGE>

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


NOTE G - ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                 December 31,
                                               1999       1998
                                              -------    -------
<S>                                          <C>        <C>
 Aaccrued expenses                           $ 6,727    $ 5,172
 Accrued interest                                533        942
 Accrued medical claims                        1,886      1,300
 Accrued worker's compensation claims            978        867
 Payroll and related taxes                     3,965      4,335
 Construction costs (including retainage)        728      2,371
 Accrual for disallowed costs                      -      2,002
 Accrued contract buy-out costs                    -      1,150
 Unearned revenue                              1,509          -
 Facility loss reserves                          808        595
 Other                                         1,702      4,865
                                             $18,836    $23,599


NOTE H - DEBT

SENIOR DEBT:

Senior debt consists of the following (in thousands):
                                                              December 31,
                                                            1999       1998
                                                           -------    -------
<S>                                                        <C>        <C>
Revolving line of credit expiring August 2002.
Interest payable monthly at LIBOR plus 2.5%.
Interest rate at December 31, 1999 as 9%.                  $ 9,000    $     -

Delayed drawdown term note, principal payments due
quarterly beginning three months after the earlier of
August 31, 2000 or the date in which the credit
facility equals the $20 million commitment balance.
Interest payable monthly at prime plus 1%, 3%, and 4%
through December 31, 2000, March 31, 2001, and
thereafter, respectively.  Interest rate at
December 31, 1999 was 9.5%.                                 14,438          -

Mortgage payable due in semi-annual installments of
$17,083 which includes principal plus interest at 10%
per annum, due in full October 2006 collateralized
by land with a book value of $434,000.                         319        322

Revolving line of credit expiring April 2003
($1.5 million expired June 1999).  Interest payable
quarterly at LIBOR plus 2.5%.  Replaced in August 1999.          -     11,500

Other                                                            -         65
                                                           -------    -------
                                                            23,757     11,887
Less current portion                                         1,206         23
                                                           -------    -------
                                                           $22,551    $11,864
                                                           -------    -------
                                                           -------    -------
</TABLE>


                                     F-14
                                     48

<PAGE>

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


NOTE H - DEBT - (Continued)

SENIOR DEBT:

NationsBank N.A.

In  April  1998  the Company entered into a five-year credit facility  with  a
syndicate of banks  led  by NationsBank N.A.  The syndicated facility provided
for up to $30 million in borrowings  for  working  capital,  construction  and
acquisition  of  correctional  facilities,  and general corporate purposes all
collateralized by the Company's accounts receivable.   The  line was comprised
of  two  components, a $10 million revolving credit and $20 million  operating
lease facility for the construction, ownership and acquisition of correctional
facilities.   Borrowings  under  the  line  were  subject  to  compliance with
financial  covenants  and borrowing base criteria.  The Company incurred  rent
expense under the $20 million  operating  lease  facility at an adjusted LIBOR
base lease rate as defined in the agreement.  The  credit facility was secured
by all of the assets of the Company.

In August of 1998 the Company initiated an amendment  to  the credit agreement
with a syndicate of banks led by NationsBank N.A. under the  amendment,  which
was  finalized  on  October  16,  1998,  the  Company  received  an additional
$17,500,000   temporary  increase  in  its  credit  facility.   The  amendment
represented interim  financing  until the earlier of the date that the Company
received proceeds from junior capital  or  June  15, 1999.  as of December 31,
1998  the total amount outstanding on the revolver  was  $11,500,000  and  the
total amount  outstanding  on  the  operating  lease facility was $16,652,000.
This credit facility was repaid in August of 1999  with  proceeds  from  a new
credit facility with Summit Bank as described below.

Summit Bank N.A.

On  August  31,  1999,  the  Company  finalized  a  new  $95 million financing
arrangement with Summit Bank, N.A. Borrowings under the line  are  subject  to
compliance  with various financial covenants and borrowing base criteria.  The
Company is currently  in  compliance  with all debt covenants.  This financing
arrangement is secured by all of the assets of the Company and consists of the
following components:

-  $30  million  revolving  line  of  credit  to  be  used  by the Company and
   its subsidiaries for working capital and general corporate  purposes and to
   finance  the  acquisition  of  facilities, properties and other businesses.
   At  December  31, 1999 the Company  has  an  available  borrowing  base  of
   $17,000,000 and  had  $9,000,000  outstanding  under  the revolving line of
   credit.

-  $20  million  delayed  drawdown credit facility which  provides  the
   Company with additional  financing to be used to fund the redemption of the
   outstanding 7% Convertible  Subordinated Debentures due March 31, 2000 that
   were issued by Youth Services  International,  Inc.,  a  subsidiary  of the
   Company   (the  "Debentures").   At  December  31,  1999  the  Company  has
   $5,562,000 available under the delayed drawdown facility.

-  $45 million  in  financing  which  may be used to purchase land and property
   and to finance the  construction  of  new  facilities  through an operating
   lease  arrangement.   The  Company currently has approximately  $24,496,000
   million  available for additional  property  acquisition  and  construction
   under this operating lease financing facility.

Simultaneously with the closing of the new credit facilities, the Company used
approximately  $13,080,000 of the available credit under the revolving line of
credit facility  to  discharge  all  of its outstanding line of credit banking
indebtedness  to  NationsBank,  N.A.,  fees  related  to  the  financing,  and
repayment   of   other   indebtedness.   Additionally,    the   Company   used
approximately $18,984,000  of  its  available  credit  under  the lease credit
facility  to  discharge  its  obligations  under  a similar financing  vehicle
previously provided by NationsBank to the Company.


                                     F-15
                                     49

<PAGE>

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


NOTE H - DEBT - (Continued)

SUBORDINATED DEBENTURES:

Subordinated debentures consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                             1999       1998
                                                            -------    -------
<S>                                                         <C>        <C>
7% Convertible Subordinated Debentures due March 31,
2000 which includes interest payable semi-annually in
arrears.                                                    $14,190    $32,200

10% Subordinated Debentures due July 1, 1998 and extended
through June 30, 1999.  Interest payable quarterly.               -      1,101
                                                            -------    -------
                                                             14,190     33,301
Less current portion                                          3,797      1,101
                                                            -------    -------

                                                            $10,393    $32,200
                                                            -------    -------
                                                            -------    -------
</TABLE>


7% Convertible Subordinated Debentures

During  the year ended June 30, 1996, YSI issued 7%  Convertible  Subordinated
Debentures  due  February 1, 2006, in the principal amount of $37,950,000. The
debentures are convertible  into  common stock at the rate of one share of YSI
common stock for each $12.47 of principal.   At  December 31, 1998 $32,200,000
were outstanding.

On  March 31, 1999, in connection with the merger,  the  Company  assumed  the
$32,200,000  Debentures.   Due  to  certain  provisions  in the indenture, the
change  of  control  as  a result of the merger enabled the holder  to  demand
immediate redemption by the  Company.   Agreements  were  subsequently reached
with  certain  holders  representing $30,470,000 of the total  debt  to  defer
payment until March 31, 2000.  The balance of $1,730,000 was repaid during the
second quarter of 1999.

In anticipation of entering  into  the new credit facilities with Summit Bank,
the Company agreed with certain holders  of the Debentures (who had previously
agreed to postpone the redemption of their Debentures until March 31, 2000) to
redeem their Debentures upon the closing of  the  new  credit  facilities at a
redemption  price equal to 90% of the original principal amount thereof,  plus
accrued but unpaid  interest.   The  Company used approximately $14,750,000 of
its  available  credit  under  the  delayed   draw  down  facility  to  redeem
$16,280,000  face  value  of  these  Debentures.   An  extraordinary  gain  of
$985,000 (net of tax of $643,000) was  recognized by the Company in connection
with this early extinguishment  (see Note I).

As a result of the above note redemptions,  $14,190,000 in principal amount of
these  Debentures remains outstanding at December  31,  1999.   Absent  a  new
agreement,  the  Company will be required to redeem these remaining Debentures
on March 31, 2000  at  100%  of  the  original  principal amount thereof, plus
accrued but unpaid interest.  The Company intends  to  redeem  these  notes on
March 31, 2000 using its available financing facilities.  That portion  to  be
refinanced  by  the  delayed drawdown instrument which is expected to be paid
during 2000 is classified as current.


                                     F-16
                                     50


<PAGE>

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


NOTE H - DEBENTURES - (Continued)

SUBORDINATED DEBENTURES:

YSI incurred approximately  $2,500,000  of direct costs in connection with the
issuance  of  the 7% Convertible Subordinated  Debentures.  These  costs  were
included within  deferred  debt issuance costs for 1998 and amortized over the
life of the debentures.  The  remaining  balance  was  expensed as part of the
merger related charges in 1999.


10% Subordinated Debentures

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.  On July 1, 1998
the Company's subordinated  promissory  notes  of  $3,935,760  became payable.
Management granted note holders the option to extend their notes  through June
30,  1999.   In July 1998, the Company repaid a total of $2,834,382 for  those
options not exercised.   The  remaining balance of $1,101,378 was paid in full
in October 1999.

At December 31, 1999, aggregate  maturities  of  senior  debt and subordinated
debentures were as follows (in thousands):

       YEAR ENDING DECEMBER 31,
       -----------------------
                2000                             $ 5,003
                2001                               6,666
                2002                              24,299
                2003                               1,671
                2004                                   3
                Thereafter                           305
                                                 -------
            TOTAL                                $37,947
                                                 -------
                                                 -------


NOTE I - EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT

In  anticipation of entering into the new financing arrangement,  the  Company
agreed with certain holders of the 7% Convertible Subordinated Debentures (who
had previously  agreed  to  postpone  the redemption of their Debentures until
March 31, 2000) to redeem their Debentures  upon the closing of the new credit
facilities.  The agreed redemption price was  equal  to  90%  of  the original
principal  amount  plus  accrued but unpaid interest.  In September 1999,  the
Company used approximately  $14,750,000  of  its  available  credit  to redeem
$16,280,000  face value of Debentures leaving a balance of $14,190,000.   This
transaction resulted  in  a  gain of $985,000 (net of tax of $643,000) or $.09
per share.


                                     F-17
                                     51

<PAGE>

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


NOTE J - RENTAL AGREEMENTS

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

Future  minimum  rental  commitments  under both cancelable and non-cancelable
leases as of December 31, 1999 are as follows (in thousands):

                                                   Related
                                     Total        Companies
                                   -------        ---------
     Year Ending December 31,
     -----------------------
                2000               $ 6,388          $   884
                2001                 5,101              629
                2002                 3,068              480
                2003                 2,211              480
                2004                 1,461                -
                Thereafter           3,661                -
                                   -------          -------
                                   $21,890          $ 2,473
                                   -------          -------
                                   -------          -------

The  Company  leases  one  facility from a  related  party  under  a  sublease
arrangement, which expires April  30,  2000.   The  Company  has two five-year
options  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,  1999  and expires December 31, 2003.  Thereafter,  the
Company has two successive five-year  options  to  renew.   In addition to the
base rent, the Company pays taxes, insurance, repairs and maintenance  on this
facility.

The Company leases a third facility from a related party.  The lease commenced
October  1,  1996  and   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, 1999, 1998 and 1997 aggregated
$6,767,000,   $6,192,000   and  $5,649,000,  respectively.   Rent  to  related
companies aggregated $1,295,000,  $1,260,000,  and  $1,260,000  for  the years
ended December 31, 1999, 1998 and 1997, respectively.


                                     F-18
                                     52

<PAGE>

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


NOTE K - INCOME TAXES

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

<TABLE>
<CAPTION>
                                      Years Ended December 31,
                                       -----------------------
                                     1999       1998       1997
                                    -------    -------    -------
<S>                                 <C>        <C>        <C>
 Current:
   Federal                          $  (335)   $(1,159)   $ 1,157
   State and local                      286       (107)       (23)

 Deferred:
   Federal, state and local             945     (3,507)    (2,196)
                                    -------    -------    -------
                                    $   896    $(4,773)   $(1,062)
                                    -------    -------    -------
                                    -------    -------    -------

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,
                                               -----------------------
                                                1999     1998     1997
                                               ------   ------   ------
<S>                                            <C>      <C>      <C>
 Statutory federal rate                        (34.0)%  (34.0)%  (34.0)%
 State taxes, net of federal tax benefit        (5.1)    (5.0)    (5.0)
 Non-deductible items                           37.3      2.1     28.4
 Valuation Allowance                            35.0     15.6        -
 Other                                           0.8     (1.0)     3.5
                                               -----    -----    -----
                                                34.0%   (22.3)%  ( 7.1)%
                                               -----    -----    -----
                                               -----    -----    -----
</TABLE>

At  December  31, 1999, The Company had net operating  loss  carryforwards  of
approximately $11,500,000  and  $17,000,000  for  federal and state income tax
purposes, respectively, that expire through 2019.   At  December 31, 1999, the
Company  also  had  an Alternative Minimum Tax (AMT) credit  of  approximately
374,000, which does not expire.

The  net  operating  loss   carryforwards  are  subject  to  IRS  Section  382
limitations and other limitations,  which limit the utilization of the federal
and state net operating loss carryforwards  in  any  given  year.  The tax net
operating  loss  carryforwards  begin to expire in 2006.  Realization  of  the
portion of the deferred tax asset  resulting  from the Company's net operating
loss  carryforward  in Puerto Rico is not considered  more  likely  than  not.
Accordingly, a valuation allowance has been established for the full amount of
that deferred tax asset.   The  Company,  after  considering  its  pattern  of
profitability  and  its anticipated future taxable income, believes it is more
likely than not that the remaining deferred tax assets will be realized.


                                     F-19
                                     53


<PAGE>

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


NOTE K - INCOME TAXES - (Continued)

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

<TABLE>
<CAPTION>
                                                 December 31,
                                                1999      1998
                                              -------   -------
<S>                                           <C>       <C>
 Facility closure costs                       $   648   $   320
 Vacation accrual                                 289       180
 Startup and development costs                  2,148     3,355
 Accrued expenses                               1,874     3,894
 Depreciation                                     249       639
 Net operating loss carryforwards               4,880     4,165
 Alternative minimum tax credit                   374       375
 Other                                          1,310    (1,133)
                                              -------   -------
                                               11,772    11,795
 Valuation allowance                           (1,485)     (563)
                                              -------   -------
                                              $10,287   $11,232
                                              -------   -------
                                              -------   -------


NOTE L - COMMON STOCK WARRANTS

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

                                     Public     Underwriter     Total
                                     -------    -----------    -------
<S>                                  <C>          <C>          <C>
Balance at January 1, 1998           650,545      115,556      766,101

Warrants exercised                        35       82,007       82,042
                                     -------      -------      -------
Balance at December 31, 1998         650,510       33,549      684,059
                                     -------      -------      -------
Warrants exercised                   350,589        5,906      356,495

Warrants expired                     299,921            -      299,921
                                     -------      -------      -------
Balance at December 31, 1999               -       27,643       27,643
                                     -------      -------      -------
                                     -------      -------      -------
</TABLE>


                                     F-20
                                     54

<PAGE>

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

NOTE M - COMMITMENTS AND CONTINGENCIES

1(a). Fort Worth and New York Closures

     During  1996,  the  Company  committed  to plans to close its Fort Worth,
     Brooklyn and Manhattan facilities and accordingly  incurred certain costs
     in 1996 associated with the closure of these facilities.   The facilities
     continued  to  be  operated  throughout  1999 and, with the exception  of
     Brooklyn,  will  be  closed  in 2000.  The plan  to  close  the  Brooklyn
     facility  was  terminated  based   on   its   increased   operations  and
     profitability.  Additionally, during 1999, the Company closed three other
     facilities and planned to close two additional facilities in 2000.  There
     are no incremental costs associated with the closures of these additional
     five facilities.

     Facility loss reserves, excluding those for the College Station facility
     discussed in Note O, are as follows (in thousands):

                                                          December 31,
                                                        1999        1998
                                                        ----        ----
          Facility loss reserves                        $224        $819
          Less current portion                           224         595
                                                        ----        ----
          Long-term portion of facility loss reserves   $  -        $224
                                                        ----        ----
                                                        ----        ----

     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.

     Revenues and operating income (loss) for the aforementioned programs  for
     the years  ended  December  31,  1999,  1998  and  1997  are  as  follows
     (in thousands):

                                                 December 31,
                                                 -----------
                                          1999       1998       1997
                                        -------    -------    -------
          Revenues                      $15,163    $21,985    $15,847
          Operating income (loss)       $(1,144)   $(5,759)   $(1,140)

     Operating  income  (loss) for the year ended December 31, 1999, 1998  and
     1997 is net of amortization  of  contract  loss  reserves  costs totaling
     approximately $595,000, $919,000 and $829,000, respectively.

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.   The   Company  has  no
     continuing obligation with respect to the Elizabeth, New Jersey facility.
     According  to  the  terms  of  the asset purchase agreement, the  monthly
     payments beginning September 1999  are contingent upon the renewal of the
     contract by the INS and the Buyer.   The INS did re-award the contract to
     the Buyer in 1999.  Therefore, the Company will continue to receive up to
     approximately  8  monthly  non-interest  bearing  payments  of  $123,000,
     beginning September 1999, and will recognize  income  ratably  over  this
     period.


                                     F-21
                                     55

<PAGE>

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


NOTE M - COMMITMENTS AND CONTINGENCIES - (Continued)

     The  receivable  from  sale  of  the equipment and leasehold improvements
     reflected in the balance sheet at  December  31,  1998,  representing the
     present value of the consideration to be received through August 1999, is
     $994,082.

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 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 June 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
     June  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.

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.

4.   Disputed Receivable

     In April 1999, immediately following the merger  with  YSI,  a non-profit
     entity  chose to exercise their right under the change in control  clause
     of their  contract  with  YSI  and  elected to discontinue all contracted
     services. Upon this determination, the  non-profit entity claimed that it
     had been billed incorrectly for years prior  to  1997.   The  Company  is
     currently  investigating  this  claim  and  based  on currently available
     information has reserved approximately $700,000 at December 31, 1999.


                                     F-22
                                     56

<PAGE>

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


NOTE M - COMMITMENTS AND CONTINGENCIES - (Continued)

5.   Officers' Compensation

     The Company has entered into an employment agreement  with  its President
     which   expires  February  17,  2001  and  provides  for  minimum  annual
     compensation of $270,000, cost of living increases, use of an automobile,
     reimbursement  of  business  expenses, health insurance, related benefits
     and a bonus equal to 5% of pre-tax  profits in excess of $1,000,000, such
     bonus not to exceed $200,000.

     The  Company  has entered into an employment  agreement  with  its  Chief
     Operating Officer  (COO)  which  expired on January 20, 1999 and provided
     for minimum annual 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 a
     grant  of  options  to  purchase  100,000  shares of the Company's common
     stock.  The company is currently finalizing  a  new  employment agreement
     with the COO.

     The  Company's  current  employment  agreement  with its Chief  Financial
     Officer (CFO) was extended in July 1997 and has a  term  of  three  years
     with  automatic  annual  renewal  provisions.   The  CFO receives minimum
     annual  compensation  of  $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.  The agreement provides for
     the negotiation of  the  CFO's  annual  compensation for the period after
     February 24, 1999 at an amount not less than  $149,000.  In January 1999,
     as part of the renegotiations of compensation for  the  period commencing
     February  26, 1999, the Company increased the CFO's base compensation  to
     $200,000 with  an  annual  bonus not to exceed $100,000.  In addition the
     CFO  was granted five-year options  to  purchase  25,000  shares  of  the
     Company's  common  stock  at  $11.125  per  share.   The  options  become
     exercisable at the annual rate of 8,333 shares, commencing on the date of
     grant.

6.   Concentrations of Credit Risk

     The  Company's  contracts in 1999, 1998 and 1997 with government agencies
     where revenues exceeded  10% of the Company's total consolidated revenues
     were as follows:

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                   -----------------------
                                                      1999   1998   1997
                                                      ----   ----   ----
<S>                                                    <C>    <C>    <C>
 Florida Department of Juvenile Justice                13%    15%    13%
 Texas Department of Criminal Justice                  10%    -       -
 Various Agencies in the State of Texas                11%    10%     -
 State of Maryland Department of Juvenile Justice      10%    13%    15%

</TABLE>


7.   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.


                                     F-23
                                     57

<PAGE>

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


NOTE M - COMMITMENTS AND CONTINGENCIES - (Continued)

8.   Construction Commitments

     The  Company  has  various  construction  contracts  related  to  ongoing
     projects totaling approximately $3,704,000 as of December 31, 1999.

9.   Letter of Credit

     In  connection  with  the  Company's   workmen's  compensation  insurance
     coverage  requirements, the Company has obtained  a  $269,000  Letter  of
     Credit from its bank in favor of the insurance carrier.


NOTE N - CONTRACT WITH THE STATE OF LOUISIANA

In December 1998  the  Company  entered  into  a  contract  with  the State of
Louisiana (`the State") to operate the Tallulah Correctional Center for Youth.
This  contract  obligated  the  State  to  maintain  the  facility  at  a full
population  of 686.  Conditioned upon the State maintaining the 686 population
level for the  remaining  term  of  the  contract,  the Company entered into a
verbal understanding with the State indicating it would only invoice the State
for  the  actual  monthly  population  for  a  period of six-months  from  the
commencement  of  operations  by the Company.  At the  end  of  the  six-month
period, the State was to increase  the  population to the full capacity or pay
for its full utilization.  In July 1999,  the  Company began billing the State
at the 686 population level of the original contract.  Revenues, however, were
only  recognized  for  a  population level of 620 (the  population  level  the
facility was approved to house  by  the  local  judicial  authority  prior  to
commencement  of  operations  by  the  Company).  In September 1999, the State
unexpectedly indicated it could not commit  to  achieve  the population levels
required by the contract for its remaining term and subsequently,  the Company
discontinued operations of the facility on September 24, 1999.  The Company is
currently pursuing payment of all funds that would be owed under the  original
contract  from  the commencement of operation.  The Company did not incur  any
material losses in conjunction with this closure.


                                     F-24
                                     58

<PAGE>

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


NOTE O - DISPOSITION OF BEHAVIORAL HEALTH BUSINESS

During the period  January  1,  1994  through  January  1,  1997,  the Company
acquired the operating assets or stock of the following companies:

  - Western Youth Inc.
  - Parc Place, Limited Partnership
  - Promise House, Inc.
  - Developmental Behavioral Consultants, Inc.
  - Desert Hills Center for Youth and Families of New Mexico, Inc.
  - Desert Hills of Texas, Inc. ("College Station")
  - Tampa Bay Academy, Ltd.
  - Youth Quest Inc.
  - Introspect Healthcare, Corporation
  - Texas Children's Health Services Inc. ("Los Hermanos")

Following  their  respective  acquisitions,  the Company operated each of  the
companies listed above as distinct businesses.  Due  to  their related nature,
however, these businesses comprised the Company's behavioral  health business.
The total acquisition price for these companies, including assumed liabilities
and  acquisition  costs,  was  approximately  $41.1 million with approximately
$19.8  million  of the total purchase price being  allocated  to  goodwill  in
connection with purchase accounting.

In March 1997, the  Board of Directors of the Company approved, and management
committed to, a plan  to  sell  the  programs  that  comprised  the  Company's
behavioral health business.  On October 31, 1997, the Company consummated  the
sale  of  the behavioral health business, other than the two behavioral health
programs in  Texas,  for  $20.4  million  resulting in a loss on sale of $20.9
million.  In September 1998, the Company closed  the  College Station program.
In December of 1999 the Company closed the Los Hermanos program.

Unaudited revenues and contribution from operations for  the behavioral health
businesses including the Texas Programs for the years ended  December 31, 1998
and 1997 are as follows (in thousands):

                                          Year Ended     Year Ended
                                          December 31,   December 31,
                                             1998             1997
                                           -------         --------
        Revenues                           $  1,566        $ 34,733
        Contribution from Operations           (787)             95


As  of  December  31,  1998 the Company recorded a liability of $2,327,000  to
provide for the anticipated  future  losses  related  to  the  College Station
facility.  The major components of the charge are as follows:

     Future lease payments                                         $1,250,000
     Continuing maintenance and occupancy costs                       858,000
     Write-down of leasehold improvements and other fixed assets      219,000
                                                                   ----------
                                                                   $2,327,000
                                                                   ----------
                                                                   ----------

The  charge was recorded as College Station closure costs in the  accompanying
consolidated statements of operations for the year ended December 31, 1998.


                                     F-25
                                     59

<PAGE>

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


NOTE P - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                                    1999      1998      1997
                                                  -------  --------  --------
<S>                                               <C>      <C>       <C>
Numerator:
   Net loss                                       $(3,528) $(16,596) $(14,051)
                                                  -------  --------  --------
                                                  -------  --------  --------
Denominator:
   Basic earnings per share:
   Weighted average shares outstanding             11,219    10,860    10,676

   Effect of dilutive securities - stock options
      and warrants                                      -         -         -
                                                  -------  --------  --------

   Denominator for diluted earnings per share      11,219    10,860    10,676
                                                  -------  --------  --------
                                                  -------  --------  --------

   Net loss per common share - basic              $ (0.31) $  (1.53) $  (1.32)
                                                  -------  --------  --------
                                                  -------  --------  --------
   Net loss per common share - diluted              (0.31)    (1.53)    (1.32)
                                                  -------  --------  --------
                                                  -------  --------  --------
</TABLE>

The effect of dilutive  securities  was  not  included  in  the calculation of
diluted net loss per common share as the effect would have been  anti-dilutive
in all years presented.


NOTE Q - STOCK OPTIONS

In  October  1993, the Company adopted a stock option plan (the "Stock  Option
Plan").  This  plan  as  amended,  provides  for  the  granting  of both:  (i)
incentive stock options to employees and/or officers of the Company  and  (ii)
non-qualified  options to consultants, directors, employees or officers of the
Company.  The total  number  of  shares  that  may be sold pursuant to options
granted under the stock option plan is 1,500,000.   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  150,000  shares  of the
Company's  Common  Stock.   In  May  1999,  the  Company adopted the 1999 Non-
Employee Director Stock Option Plan, which provides  for  the  grant  of  non-
qualified  options  to  purchase  up to 300,000 shares of the Company's Common
Stock.

Options granted under all plans may  not  be  granted at a price less than the
fair market value of the Common Stock on the date  of  grant  (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company).  Options granted under the all plans will expire  not  more than
ten 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 loss per share would be adjusted to the pro forma  amounts
indicated below:


                                     F-26
                                     60

<PAGE>

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


NOTE Q - STOCK OPTIONS - (Continued)

<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                                  -----------------------
                                                    1999     1998     1997
                                                  -------  --------  --------
<S>                                               <C>      <C>       <C>
Net loss
  As reported                                     $(3,528) $(16,596) $(14,051)
  Pro forma (unaudited)                            (4,454)  (22,102)  (16,681)

Loss per common share - basic
  As reported                                     $ (0.31) $  (1.53) $  (1.32)
  Pro forma (unaudited)                             (0.40)    (2.04)    (1.56)

Loss per common share - diluted
   As reported                                    $ (0.31) $  (1.53) $  (1.32)
   Pro forma (unaudited)                            (0.40)    (2.04)    (1.56)

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, 1999, 1998 and
1997.

                                                  Years Ended December 31,

                                           1999        1998        1997
<S>                                        <C>         <C>         <C>
 Volatility                                62%         77%         72%
 Risk free rate                            5.00%       5.75%       6.00%
 Expected life                             3 years     3 years     3 years

</TABLE>

The  weighted average fair value of options granted during 1999, 1998 and 1997
for which  the  exercise  price  equals the market price on the grant date was
$3.51, $18.19 and $11.85, respectively.

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


                                     F-27
                                     61

<PAGE>




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


NOTE Q - STOCK OPTIONS - (Continued)

Stock option activity during 1999, 1998 and 1997 is summarized below:

<TABLE>
<CAPTION>
                                                   Weighted-Average
                                   Options          Exercise Price
                                  ----------        ----------------
<S>                               <C>                  <C>

 Balance, January 1, 1997           939,273            $19.66
    Granted                         254,676             21.15
    Exercised                      (230,190)            17.17
    Canceled                        (67,052)            44.40
                                  ---------            ------
 Balance, December 31, 1997         896,707             15.49
    Granted                         351,544             26.12
    Exercised                       (44,061)            20.67
    Canceled                       (113,012)            31.96
                                  ---------            ------
 Balance, December 31, 1998       1,091,178             16.58
    Granted                         319,001              7.72
    Exercised                      (108,501)             4.67
    Canceled                       (369,553)            28.24
                                  ---------            ------
 Balance, December 31, 1999         932,125            $10.34
                                  ---------            ------
                                  ---------            ------
</TABLE>


                                     F-28
                                     62

<PAGE>

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


NOTE Q - STOCK OPTIONS - (Continued)

The  following  table  summarizes information concerning currently outstanding
and exercisable stock options at December 31, 1999:

                                         Weighted-Average
                                            Remaining
    Range of             Number          Contractual Life     Weighted-Average
 Exercise Prices      Outstanding             (Years)          Exercise Price
 ---------------      -----------        ----------------     ----------------
 $ 2.06 -  4.12          3,000                 5.0                $ 3.75
   4.12 -  6.18          4,000                 4.9                  4.45
   6.18 -  8.25        270,000                 4.5                  7.49
   8.25 - 10.31        245,000                 1.4                  8.96
  10.31 - 12.37        153,875                 2.6                 11.41
  12.37 - 14.44        190,250                 3.2                 12.97
  14.44 - 16.50         21,000                 1.5                 15.25
  16.50 - 18.56         20,000                 1.4                 17.81
  18.56 - 20.63         25,000                 0.5                 19.50
                       -------                 ---                ------
                       932,125                 2.9                $10.34
                       -------                 ---                ------
                       -------                 ---                ------

    Range of             Number           Weighted-Average
 Exercise Prices        Exercise         Exercisable Price
 ---------------        --------         -----------------
 $ 8.25 - 10.31          227,667              $ 8.91
  10.31 - 12.37           81,459               11.42
  12.37 - 14.44           63,751               12.97
  14.44 - 16.50           21,000               15.25
  16.50 - 18.56           20,000               17.81
  18.56 - 20.63           25,000               19.50
                         -------              ------
                         438,877              $11.28
                         -------              ------
                         -------              ------


NOTE R - 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 $10,000 in 1999 and
1998 and $9,500 in 1997. The Company's  contribution under the plan amounts to
20% of the employees' contribution.  In 1999 and 1998, the Company contributed
$322,000 and $127,000, respectively, to the plan.


NOTE S - SELF INSURANCE

The  Company  is  self-insured for workers'  compensation.   The  Company  has
obtained an aggregate  excess policy, which limits the Company's exposure to a
maximum  of  $1,150,000 and  $750,000  as  of  December  31,  1999  and  1998,
respectively.    The  estimated  insurance  liability  totaling  $909,000  and
$744,000 on December  31,  1999 and 1998, respectively is based upon review by
the Company of claims filed and claims incurred but not reported.

The Company maintains a group  health plan subject to a self-insured retention
and subject to a loss limit of $100,000  per  individual. At December 31, 1999
the plan had 3,374 participants and medical insurance liability of $1,885,000.
This  liability  represents the maximum claim exposure  under  the  plan  less
actual payments made  during  1999.   In addition, the Company is subject to a
maximum terminal liability of $353,000.  Since termination is not anticipated,
no terminal accruals were made at December 31, 1999.


                                     F-29
                                     63
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