<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       OR

( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD __________ TO _______________

                         COMMISSION FILE NUMBER 1-14472

                             CORNELL COMPANIES, INC.
              -----------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                                        76-0433642
 ---------------------------------                     ----------------------
   (STATE OR OTHER JURISDICTION                            (I.R.S. EMPLOYER
 OF INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)


1700 WEST LOOP SOUTH, SUITE 1500, HOUSTON, TEXAS                        77027
------------------------------------------------                   -------------
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                         (ZIP CODE)



REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:              (713) 623-0790



Indicate by a check mark whether Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.

                                                Yes  X   No
                                                    ---     -----

               At April 30, 2001 Registrant had outstanding 9,266,767 shares of
its Common Stock.

--------------------------------------------------------------------------------
<PAGE>

PART I   FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                            CORNELL COMPANIES, INC.
                          CONSOLIDATED BALANCE SHEETS
                                 (UNAUDITED)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                         MARCH 31,    DECEMBER 31,
                                                                                           2001              2000
                                                                                    ------------------------------------
<S>                                                                                 <C>               <C>
                                     ASSETS

CURRENT ASSETS:
     Cash and cash equivalents......................................................   $      150       $     620
     Accounts receivable, net.......................................................       56,349          55,262
     Deferred tax asset.............................................................          667             667
     Prepaids and other.............................................................        4,559           4,363
     Restricted assets..............................................................        2,051           2,011
                                                                                       ----------       ---------
         Total current assets.......................................................       63,776          62,923
PROPERTY AND EQUIPMENT, net.........................................................      203,312         201,683
OTHER ASSETS:
     Intangible assets, net.........................................................       16,510          16,861
     Deferred costs and other.......................................................       10,402           9,972
                                                                                       ----------       ---------
         Total assets...............................................................   $  294,000       $ 291,439
                                                                                       ==========       =========


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable and accrued liabilities.......................................   $   28,208       $  33,179
     Current portion of long-term debt..............................................           42              41
                                                                                       ----------       ---------
         Total current liabilities..................................................       28,250          33,220
LONG-TERM DEBT......................................................................      153,957         146,926
DEFERRED TAX LIABILITIES............................................................          643             643
OTHER LONG-TERM LIABILITIES.........................................................        5,672           6,330

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $.001 par value, 10,000,000 shares authorized,
       none outstanding.............................................................           --              --
     Common stock, $.001 par value, 30,000,000 shares authorized, 10,230,267
       and 10,161,113 shares issued and outstanding, respectively...................           10              10
     Additional paid-in capital.....................................................       91,965          91,625
     Notes from shareholders........................................................         (615)           (609)
     Retained earnings..............................................................       20,051          19,227
     Treasury stock (955,500 shares of common stock, at cost).......................       (5,933)         (5,933)
                                                                                       ----------       ---------
         Total stockholders' equity.................................................      105,478         104,320
                                                                                       ----------       ---------
         Total liabilities and stockholders' equity.................................   $  294,000       $ 291,439
                                                                                       ==========       =========
</TABLE>

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

                                     - 2 -
<PAGE>

                             CORNELL COMPANIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                               THREE MONTHS ENDED
                                                                                                    MARCH 31,
                                                                                            ------------------------
                                                                                               2001          2000
                                                                                            ----------    ----------
<S>                                                                                         <C>           <C>
REVENUES..................................................................................   $  60,628    $  53,468
OPERATING EXPENSES........................................................................      47,448       41,638
PRE-OPENING AND START-UP EXPENSES.........................................................       3,578          349
DEPRECIATION AND AMORTIZATION.............................................................       2,040        1,778
GENERAL AND ADMINISTRATIVE EXPENSES.......................................................       3,482        2,802
                                                                                             ---------    ---------

INCOME FROM OPERATIONS....................................................................       4,080        6,901
INTEREST EXPENSE..........................................................................       4,007        3,593
INTEREST INCOME...........................................................................         (19)         (27)
                                                                                             ---------    ---------

INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE
   EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE...............................................          92        3,335
PROVISION FOR INCOME TAXES................................................................          38        1,364
                                                                                             ---------    ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
   PRINCIPLE..............................................................................          54        1,971

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
   NET OF RELATED INCOME TAX PROVISION OF $535 IN 2001....................................         770           --
                                                                                             ---------    ---------

NET INCOME................................................................................   $     824    $   1,971
                                                                                             =========    =========

EARNINGS PER SHARE:
     BASIC
       Income before cumulative effect of change in accounting principle..................   $     .01    $     .21
       Cumulative effect of change in accounting principle................................         .08           --
                                                                                             ---------    ---------
       Net income.........................................................................   $     .09    $     .21
                                                                                             =========    =========

     DILUTED
       Income before cumulative effect of change in accounting principle..................   $     .01    $     .21
       Cumulative effect of change in accounting principle................................         .08           --
                                                                                             ---------    ---------
       Net income.........................................................................   $     .09    $     .21
                                                                                             =========    =========

NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
     BASIC................................................................................       9,227        9,452
     DILUTED..............................................................................       9,428        9,602
</TABLE>

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

                                     - 3 -
<PAGE>

                             CORNELL COMPANIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                               THREE MONTHS ENDED
                                                                                                    MARCH 31,
                                                                                            ------------------------
                                                                                               2001          2000
                                                                                            ----------    ----------
<S>                                                                                         <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income.............................................................................   $     824    $   1,971
   Adjustments to reconcile net income to net cash provided by (used in)
     operating activities --
     Cumulative effect of change in accounting principle..................................        (770)          --
     Depreciation.........................................................................       1,201        1,048
     Amortization.........................................................................         839          730
     Non-cash interest expense............................................................         294          282
     Provision for bad debts..............................................................         241          174
     Loss on sale of property and equipment...............................................          47           43
     Change in assets and liabilities
         Accounts receivable..............................................................      (1,328)      (1,177)
         Restricted assets................................................................         (40)         184
         Other assets.....................................................................         255         (582)
         Accounts payable and accrued liabilities.........................................      (4,845)      (1,381)
         Deferred revenues and other liabilities..........................................        (658)        (287)
                                                                                             ---------    ---------
     Net cash provided by (used in) operating activities..................................      (3,940)       1,005
                                                                                             ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures...................................................................      (3,335)      (2,341)
   Proceeds from sales of property and equipment..........................................          --           77
                                                                                             ---------    ---------
     Net cash used in investing activities................................................      (3,335)      (2,264)
                                                                                             ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term debt...........................................................      32,000       21,400
   Payments on long-term debt.............................................................     (25,000)     (21,650)
   Payments on capital lease obligations..................................................         (10)          --
   Payments for debt issuance and other financing costs...................................        (399)        (115)
   Proceeds from issuance of common stock.................................................         214           97
   Proceeds from exercises of stock options...............................................          --           25
                                                                                             ---------    ---------
     Net cash provided by (used in) financing activities..................................       6,805         (243)
                                                                                             ---------    ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................        (470)      (1,502)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..........................................         620        1,763
                                                                                             ---------    ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................   $     150    $     261
                                                                                             =========    =========

SUPPLEMENTAL CASH FLOW DISCLOSURE:
   Interest paid, net of amounts capitalized..............................................   $   4,247    $   4,270
                                                                                             =========    =========
   Income taxes paid......................................................................   $      29    $   3,915
                                                                                             =========    =========
</TABLE>

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

                                     - 4 -
<PAGE>

                             CORNELL COMPANIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been
prepared by Cornell Companies, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of management, all adjustments and disclosures necessary for a fair
presentation of these financial statements have been included. These
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's 2000 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.

2.   CREDIT FACILITIES

     As of March 31, 2001, the Company had borrowings outstanding under its
2000 Credit Facility of $65.0 million. Under the 2000 Credit Facility, the
Company has a $75.0 million revolving line of credit. At March 31, 2001, the
remaining borrowing capacity was $10.0 million. The revolving credit
commitment is reduced by $2.7 million quarterly beginning in January 2002.
The 2000 Credit Facility matures in 2005 and bears interest, at the election
of the Company, at either the prime rate plus a margin of 1.0% to 2.0% or a
rate which is 2.0% to 3.0% above the applicable LIBOR rate. At March 31,
2001, the margin was at 3.0% above the LIBOR rate. A commitment fee of 0.5%
is charged on the unused portion of the revolving credit commitment. The 2000
Credit Facility is secured by substantially all of the Company's assets,
including the stock of all the Company's subsidiaries; does not permit the
payment of cash dividends; and requires the Company to comply with certain
leverage, net worth and debt service coverage covenants. Additionally, the
2000 Credit Facility provides the Company with the ability to enter into
future operating lease agreements that provide for residual value guarantees.

     The Company has outstanding $50.0 million of Senior Secured Notes
("Senior Notes"). The Senior Notes, which bear interest at a fixed rate of
7.74%, mature on July 15, 2010. Under the Senior Notes purchase agreements,
the Company is required to make eight annual principal payments of $6.25
million beginning on July 15, 2003 and comply with certain financial
covenants. Earlier payments of principal are allowed subject to certain
prepayment provisions. Interest is payable semi-annually. The holders of the
Senior Notes and the lenders under the 2000 Credit Facility have a
collateral-sharing agreement whereby both sets of creditors have an equal
security interest in all the assets of the Company.

     The Company has outstanding $40.0 million under its Note and Equity
Purchase Agreement (the "Subordinated Notes") entered into in July 2000. The
Subordinated Notes have a seven-year term, are interest-only payable
quarterly at a fixed rate of 12.875%, and contain certain financial covenants.

3.   CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY

     On January 1, 2001, management changed its method of accounting for
supplies whereby the Company capitalizes durable operating supply purchases
such as uniforms, linens and books and amortizes these costs to operating
expense over the estimated period of benefit of 18 months. Effective January
1, 2001, the Company capitalized a portion of previously expensed supplies
and recognized a benefit in the consolidated statements of operations of
$770,000 (net of income taxes of $535,000) which has been reflected as a
cumulative effect of a change in accounting principle in the accompanying
consolidated statements of operations. For the three months ended March 31,
2000, the pro-forma impact of this change in accounting would have been
immaterial.

                                     - 5 -
<PAGE>

4.   DEFERRED COSTS AND OTHER

     At March 31, 2001, the Company had deferred professional fees and other
costs totaling $2.2 million related to its efforts to sell and leaseback
certain facilities owned by the Company. Upon consummation of this
transaction, the transaction costs will be included in the determination of
the gain from the sale which will be deferred over the initial lease term. If
management of the Company determines that it is doubtful that this
transaction will be consummated, these transaction costs will be expensed in
the period such determination is made.

     At March 31, 2001, the Company had deferred acquisition costs totaling
$652,000 related to the anticipated purchase of real property located near
Fort Greely, Alaska. Management anticipates that this property will be used
in conjunction with the operations of an adult secure institution for the
State of Alaska. If management determines that a contract to operate this
facility near Fort Greely, Alaska will not be awarded, the Company will
likely not purchase the real property and the deferred acquisition costs will
be expensed.

     At March 31, 2001, accounts receivable include costs totaling $1.3
million for direct costs incurred by the Company since June 1999 for payroll
and other operating costs related to the Moshannon Valley Correctional Center
since the issuance of the Stop-Work Order. These costs were incurred at the
direction of the Federal Bureau of Prisons ("FBOP") with the understanding
that such costs would be reimbursed. Although no formal written agreement
exists, management believes that these costs will be reimbursed by the FBOP.
In the event any portion of these costs are not reimbursed, such costs will
be expensed.

5.   EARNINGS PER SHARE

     Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities, such as stock options and warrants, into common
stock.

6.   SEGMENT DISCLOSURE

     The Company's three operating divisions are its reportable segments. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Notes to Consolidated
Financial Statements included in the Company's 2000 Annual Report on Form
10-K. Intangible assets are not included in each segment's reportable assets,
and the amortization of intangible assets is not included in the
determination of a segment's operating income or loss. The Company evaluates
performance based on income or loss from operations before general and
administrative expenses, retention and incentive bonuses, amortization of
intangibles, interest and income taxes. Corporate and other assets are
comprised primarily of cash, accounts receivable, deposits, deferred costs,
property and equipment and deferred taxes.

                                     - 6 -
<PAGE>

     The only significant non-cash item reported in the respective segments'
income or loss from operations is depreciation and amortization (excluding
intangibles):

<TABLE>
<CAPTION>
                                                                                               (IN THOUSANDS)
                                                                                             THREE MONTHS ENDED
                                                                                                 MARCH 31,
                                                                                          ------------------------
                                                                                             2001          2000
                                                                                          ----------    ----------
<S>                                                                                       <C>           <C>
Revenues
     Adult secure institutional.......................................................    $   23,840    $  21,081
     Juvenile.........................................................................        24,495       20,496
     Pre-release......................................................................        12,293       11,891
                                                                                          ----------    ---------
Total revenues........................................................................    $   60,628    $  53,468
                                                                                          ==========    =========

Pre-opening and start-up expenses
     Adult secure institutional.......................................................    $       --    $     349
     Juvenile.........................................................................         3,578           --
     Pre-release......................................................................            --           --
                                                                                          ----------    ---------
Total pre-opening and start-up expenses...............................................    $    3,578    $     349
                                                                                          ==========    =========

Income from operations
     Adult secure institutional.......................................................    $    4,931    $   4,836
     Juvenile.........................................................................         1,893        2,402
     Pre-release......................................................................         2,532        2,908
     General and administrative expense...............................................        (3,482)      (2,802)
     Retention and incentive bonuses..................................................        (1,188)          --
     Amortization of intangibles......................................................          (381)        (382)
     Corporate and other..............................................................          (225)         (61)
                                                                                          ----------    ---------
Total income from operations..........................................................    $    4,080    $   6,901
                                                                                          ==========    =========



                                                                                           MARCH 31,    DECEMBER 31,
                                                                                             2001           2000
                                                                                          ----------     ----------
Assets
     Adult secure institutional.......................................................    $  145,876   $  143,743
     Juvenile.........................................................................        60,963       59,630
     Pre-release......................................................................        51,845       51,802
     Intangible assets, net...........................................................        16,510       16,861
     Corporate and other..............................................................        18,806       19,403
                                                                                          ----------   ----------
Total assets..........................................................................    $  294,000   $  291,439
                                                                                          ==========   ==========
</TABLE>

                                     - 7 -
<PAGE>

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

GENERAL

     The Company is a leading private provider of corrections, treatment and
education services to government agencies. As of March 31, 2001, the Company
had contracts to operate 71 facilities with a total service capacity of
14,492. The Company's facilities are located in 13 states and the District of
Columbia.

     The Company provides integrated facility development, design,
construction and operational services to governmental agencies within three
operating divisions: (a) adult secure institutional, correctional and
detention services; (b) juvenile treatment, educational and detention
services and (c) pre-release correctional and treatment services. The
following table sets forth, for the periods indicated, total service
capacity, the service capacity and contracted beds in operation at the end of
the periods shown, billed mandays and the average occupancy percentages.

<TABLE>
<CAPTION>
                                                                                     MARCH 31,        MARCH 31,
                                                                                        2001            2000
                                                                                    ------------    ------------
<S>                                                                                 <C>             <C>
            Total service capacity (1):
                Residential......................................................       11,446         12,026
                Non-residential community-based..................................        3,046          2,819
                  Total..........................................................       14,492         14,845
            Service capacity in operation (end of period)........................       13,173         13,046
            Contracted beds in operation (end of period) (2).....................        9,991          9,835
            Average occupancy based on contracted beds in operation (2) (3)......         95.2%          95.1%
            Average occupancy excluding start-up operations (2)..................         96.3%          96.9%
</TABLE>

-----------
(1)  The Company's service capacity is comprised of the number of beds available
     for service upon completion of construction of residential facilities and
     the average program capacity of non-residential community-based programs.

(2)  Occupancy percentages are based on contracted service capacity of
     residential facilities in operation. Since certain facilities have service
     capacities that exceed contracted capacities, occupancy percentages can
     exceed 100% of contracted capacity.

(3)  Occupancy percentages reflect less than normalized occupancy during the
     start-up phase of any applicable facility, resulting in a lower average
     occupancy in periods when the Company has substantial start-up activities.

     The Company derives substantially all its revenues from providing
corrections, treatment and educational services to federal, state and local
government agencies in the United States. Revenues for the Company's services
are generally recognized on a per diem rate based upon the number of occupant
days or hours served for the period or cost-plus reimbursement.

     Factors which the Company considers in determining the per diem rate to
charge include: (a) the programs specified by the contract and the related
staffing levels; (b) wage levels customary in the respective geographic
areas; (c) whether the proposed facility is to be leased or purchased and (d)
the anticipated average occupancy levels which the Company believes could
reasonably be maintained.

     Although the Company has experienced higher operating margins in its
adult secure institutional and pre-release divisions as compared to the
juvenile division, the Company's operating margins generally vary from
facility to facility based on the level of competition for the contract
award, the proposed length of the

                                     - 8 -
<PAGE>

contract, the occupancy levels for a facility, the level of capital
commitment required with respect to a facility, the anticipated changes in
operating costs over the term of the contract, and the Company's ability to
increase contract revenues. The Company has and expects to experience interim
period operating margin differences due to the number of calendar days in the
period, higher payroll taxes in the first half of the year, and salary and
wage increases which are incurred prior to certain contract revenue increases.

     The Company is responsible for all facility operating expenses, except
for certain debt service and lease payments with respect to facilities for
which the Company has only a management contract (ten facilities in
operation at March 31, 2001).

     A majority of the Company's facility operating expenses consist of fixed
costs. These fixed costs include lease and rental expense, insurance,
utilities and depreciation. As a result, when the Company commences operation
of new or expanded facilities, fixed operating expenses increase. The amount
of the Company's variable operating expenses, including food, medical
services, supplies and clothing, depend on occupancy levels at the facilities
operated by the Company. The Company's largest single operating expense,
facility payroll expense and related employment taxes and costs, has both a
fixed and a variable component. The Company can adjust the staffing and
payroll to a certain extent based on occupancy at a facility, but a minimum
fixed number of employees is required to operate and maintain any facility
regardless of occupancy levels. Personnel costs are subject to increase in
tightening labor markets based on local economic and other conditions.

       Pre-opening and start-up expenses consist primarily of payroll,
benefits, training and other operating costs prior to opening a new or
expanded facility and during the period of operation while occupancy is
ramping up to break-even levels.

     General and administrative expenses consist primarily of salaries of the
Company's corporate and administrative personnel who provide senior
management, finance, accounting, human resources, payroll, information
systems and other services and costs of business development.

     Newly opened facilities are staffed according to contract requirements
when the Company begins receiving offenders or clients. Offenders or clients
are typically assigned to a newly opened facility on a phased-in basis over a
one-to three-month period, although certain programs require a longer time
period to reach break-even occupancy levels. The Company incurs pre-opening
and start-up operating losses at new facilities until break-even occupancy
levels are reached. Quarterly results can be substantially affected by the
timing of the commencement of operations as well as development and
construction of new facilities.

     Working capital requirements generally increase immediately prior to the
Company's commencing management of a new or expanded facility as the Company
incurs pre-opening and start-up costs and purchases necessary equipment and
supplies before facility management revenue is realized.

                                     - 9 -
<PAGE>

RESULTS OF OPERATIONS

       The following table sets forth for the periods indicated the
percentages of revenue represented by certain items in the Company's
historical consolidated statements of operations.

<TABLE>
<CAPTION>
                                                                                            THREE MONTHS
                                                                                           ENDED MARCH 31,
                                                                                    ----------------------------
                                                                                        2001            2000
                                                                                    ------------    ------------
<S>                                                                                 <C>             <C>
            Total revenues.......................................................       100.0%         100.0%
            Operating expenses...................................................        78.3           77.9
            Pre-opening and start-up expenses....................................         5.9            0.7
            Depreciation and amortization........................................         3.4            3.3
            General and administrative expenses..................................         5.6            5.2
                                                                                    ---------      ---------
            Income from operations...............................................         6.8           12.9
            Interest expense, net................................................         6.6            6.7
                                                                                    ---------      ---------
            Income before provision for income taxes and
               cumulative effect of change in accounting principle...............         0.2            6.2
            Provision for income taxes...........................................         0.1            2.6
                                                                                    ---------      ---------
            Income before cumulative effect of change
               in accounting principle...........................................         0.1%           3.6%
                                                                                    =========      =========
</TABLE>

THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000

    REVENUES. Revenues increased 13.4% to $60.6 million for the three months
ended March 31, 2001 from $53.5 million for the three months ended March 31,
2000.

    Adult secure institutional division revenues increased 13.1% to $23.8
million for the three months ended March 31, 2001 from $21.1 million for the
three months ended March 31, 2000 due principally to (a) the final 550 bed
expansion of the D. Ray James Prison which began housing inmates late in the
first quarter of 2000 and (b) the commencement of a management contract at
the Valencia County Detention Center in the fourth quarter of 2000. Revenues
attributable to start-up operations for the D. Ray James Prison were
approximately $44,000 for the three months ended March 31, 2000. There were
no revenues attributable to start-up operations for the three months ended
March 31, 2001. Average occupancy, excluding start-up operations in 2000, was
97.5% for the three months ended March 31, 2001 compared to 99.0% for the
three months ended March 30, 2000.

    Juvenile division revenues increased 19.5% to $24.5 million for the three
months ended March 31, 2001 from $20.5 million for the three months ended
March 31, 2000 due primarily to the New Morgan Academy which began operations
late in the fourth quarter of 2000. Revenues attributable to start-up
operations for the New Morgan Academy were approximately $2.7 million for the
three months ended March 31, 2001. There were no revenues attributable to
start-up operations for the three months ended March 31, 2000. Average
occupancy, excluding start-up operations in 2001, was 90.1% for the three
months ended March 31, 2001 compared to 94.0% for the three months ended
March 31, 2000.

    Pre-release division revenues increased 3.4% to $12.3 million for the
three months ended March 31, 2001 from $11.9 million for the three months
ended March 31, 2000 due to fluctuations in occupancy over the two periods.
Average occupancy for the three months ended March 31, 2001 was 94.5%
compared to 93.0% for the three months ended March 31, 2000.

                                     - 10 -
<PAGE>

    OPERATING EXPENSES. Operating expenses increased 14.0% to $47.4 million
for the three months ended March 31, 2001 from $41.6 million for the three
months ended March 31, 2000.

    Adult secure institutional division operating expenses increased 22.5% to
$18.6 million for the three months ended March 31, 2001 from $15.2 million
for the three months ended March 31, 2000 due principally to (a) the final
550 bed expansion of the D. Ray James Prison which began housing inmates late
in the first quarter of 2000, (b) an increase in personnel and employee
retention costs, unusually high utility costs during the winter months,
particularly natural gas, and the increased inmate medical costs at certain
secure institutions, and (c) the commencement of a management contract at the
Valencia County Detention Center in the fourth quarter of 2000. As a
percentage of revenues, excluding start-up operations in 2000, adult secure
institutional division operating expenses were 77.9% for the three months
ended March 31, 2001 compared to 72.0% for the three months ended March 31,
2000. The operating margin was impacted unfavorably due to increased
personnel, inmate medical and utilities expenses, and due to one less
calendar day in the 2001 period. Management anticipates that the adult secure
institutional division operating margin will improve during the remainder of
2001 due to certain negotiated and contracted revenue rate increases.

    Juvenile division operating expenses increased 7.6% to $19.2 million for
the three months ended March 31, 2001 from $17.6 million for the three months
ended March 31, 2000. As a percentage of revenues, excluding the start-up
operations of the New Morgan Academy in 2001, operating expenses were 88.0%
for the three months ended March 31, 2001 compared to 85.6% for the three
months ended March 31, 2000. The increase in operating expenses and the
decrease in operating margin was due principally to increased personnel and
employee retention costs and utility costs.

    Pre-release division operating expenses increased 11.9% to $9.7 million
for the three months ended March 31, 2001 from $8.9 million for the three
months ended March 31, 2000. As a percentage of revenues, operating expenses
were 78.9% for the three months ended March 31, 2001 compared to 74.8% for
the three months ended March 31, 2000. The increase in operating expenses and
the decrease in operating margin was due principally to increased personnel
and employee retention costs and utility costs. Additionally, the operating
margin for the three-months ended March 31, 2001 was impacted unfavorably due
to the expiration of the San Diego Center contract in early 2001.

    PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$3.6 million for the three months ended March 31, 2001 and were attributable
to the start-up activities of the New Morgan Academy and to an expansion of
the Cornell Abraxas Center for Adolescent Females ("ACAF "). Pre-opening and
start-up expenses for the three months ended March 31, 2000 were $349,000 and
were attributable to the start-up activities of the final 550 bed expansion
of the D. Ray James Prison.

    DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
14.7% to $2.0 million for the three months ended March 31, 2001 from $1.8
million for the three months ended March 31, 2000 due to (a) depreciation of
furniture and equipment purchased for the New Morgan Academy, (b)
depreciation associated with the expansion of the Big Spring Complex, and (c)
depreciation associated with various facility expansions and furniture and
equipment additions.

    GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 24.3% to $3.5 million for the three months ended March 31, 2001
from $2.8 million for the three months ended March 31, 2000. The increase in
general and administrative expenses resulted principally from additional
personnel providing public affairs and business development services, certain
consulting costs, and other administrative infrastructure.

    INTEREST. Interest expense, net of interest income, increased to $4.0
million for the three months ended March 31, 2001 from $3.6 million for the
three months ended March 31, 2000 due principally to (a) increased borrowings
to fund various facility expansions and the associated increases in working
capital and

                                     - 11 -
<PAGE>

(b) an increase in the Company's interest rate margin on its 2000 Credit
Facility. Capitalized interest for the three months ended March 31, 2001 was
approximately $40,000 and related to an expansion at the Big Spring Complex.
There was no capitalized interest for the three months ended March 31, 2000.

    INCOME TAXES. For the three months ended March 31, 2001 and 2000, the
Company recognized a provision for income taxes at an estimated effective
rate of 41%.

LIQUIDITY AND CAPITAL RESOURCES

    GENERAL. The Company's primary capital requirements are for (a)
construction of new facilities, (b) acquisitions, (c) expansions of existing
facilities, (d) working capital, (e) pre-opening and start-up costs related
to new operating contracts, (f) information systems hardware and software,
and (g) furniture, fixtures and equipment. Working capital requirements
generally increase immediately prior to the Company commencing management of
a new facility as the Company incurs pre-opening and start-up costs and
purchases necessary equipment and supplies before facility management revenue
is realized.

    NEW FACILITIES AND PROJECTS UNDER CONSTRUCTION. The New Morgan Academy
was completed and became operational in two phases during the fourth quarter
of 2000 and the first quarter of 2001.

    In April 1999, the Company was awarded a contract to design, build and
operate a 1,095 bed prison for the FBOP in Moshannon Valley, Pennsylvania
("Moshannon Valley Correctional Center"). Construction and activation
activities commenced immediately. In June 1999, the FBOP issued a Stop-Work
Order pending a re-evaluation of their environmental documentation supporting
the decision to award the contract. The environmental study was completed
with a finding of no significant impact. While the Stop-Work Order remains in
effect at March 31, 2001, management of the Company believes it will be
lifted and construction will be resumed in the near-term.

    Development and construction costs for the New Morgan Academy and the
Moshannon Valley Correctional Center have been financed with the Company's
lease financing arrangement discussed below under "Long-Term Credit
Facilities".

    LONG-TERM CREDIT FACILITIES. Effective July 21, 2000, the Company
formalized terms under the 2000 Credit Facility with a group of financial
institutions. The 2000 Credit Facility provides for borrowings of up to $75.0
million under a revolving line of credit. The revolving credit commitment is
reduced by $2.7 million quarterly beginning in January 2002. The 2000 Credit
Facility matures in July 2005 and bears interest, at the election of the
Company, at either the prime rate plus a margin of 1.0% to 2.0%, or a rate
which is 2.0% to 3.0% above the applicable LIBOR rate, depending on the level
of borrowings. At March 31, 2001, the margin was 3.0% above the LIBOR rate.
The 2000 Credit Facility is secured by substantially all of the Company's
assets, including the stock of all of the Company's subsidiaries; does not
permit the payment of cash dividends; and requires the Company to comply with
certain leverage, net worth and debt service coverage covenants. At April 30,
2001, the Company had $66.5 million outstanding under the revolving line of
credit, therefore the remaining borrowing capacity was $8.5 million.

    Additionally, the 2000 Credit Facility provides the Company with the
ability to enter into operating lease agreements for the acquisition or
development of operating facilities. This lease financing arrangement
provides for funding to the lessor under the operating leases of up to $100.0
million, of which approximately $48.9 million had been utilized as of April
30, 2001. The remaining capacity under this lease financing arrangement is
expected to be utilized to complete the construction of the Moshannon Valley
Correctional Center. The leases under this arrangement have a term of five
years, include purchase and renewal options, and provide for residual value
guarantees for each lease which average 81.4% of the total cost and would be
due by the Company upon termination of the leases. Upon termination of a
lease, the Company could either exercise a purchase option or the facilities
could be sold to a third party. The Company believes the fair value of the
leased facilities will equal or exceed the residual guaranteed amounts. Lease
payments under the lease financing arrangement are variable and are adjusted
for changes in interest rates.

                                     - 12 -
<PAGE>

    The Company has outstanding $50.0 million of Senior Secured Notes (the
"Senior Notes"). The Senior Notes bear interest at a fixed rate of 7.74% and
mature on July 15, 2010. Under the Senior Notes purchase agreements, the
Company is required to make eight annual principal payments of $6.25 million
beginning July 15, 2003 and comply with certain financial covenants. Earlier
payments of principal are allowed subject to prepayment provisions. Interest
is payable semi-annually. The holders of the Senior Notes and the lenders
under the 2000 Credit Facility have a collateral-sharing agreement whereby
both sets of creditors have an equal security interest in all of the assets
of the Company.

    The Company has outstanding $40.0 million under its Note and Equity
Purchase Agreement (the "Subordinated Notes") entered into in July 2000. The
Subordinated Notes have a seven-year term, are interest-only payable
quarterly at a fixed rate of 12.875%, and contain certain financial covenants.

    DEFERRED COSTS AND OTHER. At March 31, 2001, the Company had deferred
professional fees and other costs totaling $2.2 million related to its
efforts to sell and leaseback certain facilities owned by the Company. Upon
consummation of this transaction, the transaction costs will be included in
the determination of the gain from the sale which will be deferred over the
initial lease term. If management of the Company determines that it is
doubtful that this transaction will be consummated, these transaction costs
will be expensed in the period such determination is made.

    At March 31, 2001, the Company had deferred acquisition costs totaling
$652,000 related to the anticipated purchase of real property located near
Fort Greely, Alaska. Management anticipates that this property will be used
in conjunction with the operations of an adult secure institution for the
State of Alaska. If management determines that a contract to operate this
facility near Fort Greely, Alaska will not be awarded, the Company will
likely not purchase the real property and the deferred acquisition costs will
be expensed.

    At March 31, 2001, accounts receivable include costs totaling $1.3
million for direct costs incurred by the Company since June 1999 for payroll
and other operating costs related to the Moshannon Valley Correctional Center
since the issuance of the Stop-Work Order. These costs were incurred at the
direction of the FBOP with the understanding that such costs would be
reimbursed. Although no formal written agreement exists, management believes
that these costs will be reimbursed by the FBOP. In the event any portion of
these costs are not reimbursed, such costs will be expensed.

    CAPITAL EXPENDITURES. Capital expenditures for the three months ended
March 31, 2001 were $3.3 million and related principally to (a) an expansion
at the Big Spring Complex, (b) the renovation of a building in Pennsylvania
related to an expansion of ACAF, (c) purchases of furniture and equipment for
the New Morgan Academy, and (d) normal building and leasehold improvements
and replacements of equipment.

    Management believes that the cash flows generated from operations,
together with the credit available under the 2000 Credit Facility and the
operating lease capacity thereunder, will provide sufficient liquidity to
meet the Company's committed capital and working capital requirements for
currently awarded contracts. It is not anticipated that the current financing
arrangements will provide sufficient financing to fund construction costs
related to future adult secure institutional contract awards, or significant
expansions or acquisitions. The Company anticipates obtaining additional
sources of financing to fund such activities.

INFLATION

    Other than personnel and inmate medical costs at certain facilities
during 2000 and into 2001, management believes that inflation has not had a
material effect on its results of operations during the past three years.
Most of the Company's facility management contracts provide for payments to
the Company of either fixed per diem fees or per diem fees that increase by
only small amounts during the terms of the contracts. Inflation could
substantially increase the Company's personnel costs (the largest component
of operating expenses) or other operating expenses at rates faster than any
increases in contract revenues.

                                     - 13 -
<PAGE>

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this
risk. The Company is not exposed to any other significant market risks,
including commodity price risk, foreign currency exchange risk or interest
rate risks from the use of derivative financial instruments. Management does
not use derivative financial instruments for trading or to speculate on
changes in interest rates or commodity prices.

INTEREST RATE EXPOSURE

     The Company's exposure to changes in interest rates primarily results
from its long-term debt with both fixed and floating interest rates. The
Company's long-term debt with fixed interest rates consists of the Senior
Notes and the Subordinated Notes. The Company's only long-term debt with
variable interest is its revolving line of credit. At March 31, 2001,
approximately 42.2% ($65.0 million outstanding under the Company's revolving
line of credit) of the Company's long-term debt was subject to variable
interest rates. The detrimental effect of a hypothetical 100 basis point
increase in interest rates would be to reduce income before provision for
income taxes by approximately $147,000 for the three months ended March 31,
2001. At March 31, 2001, the fair value of the Company's fixed rate debt
approximated carrying value based upon discounted future cash flows using
current market prices.

FORWARD LOOKING STATEMENT DISCLAIMER

     This quarterly report on Form 10-Q may contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on current plans and actual future
activities and results of operations may be materially different from those
set forth in the forward-looking statements. Important factors that could
cause actual results to differ include, among others, (a) risks associated
with acquisitions and the integration thereof (including the ability to
achieve administrative and operating cost savings and anticipated synergies),
(b) the timing and costs of expansions of existing facilities, (c) changes
in governmental policy to eliminate or discourage the privatization of
correctional, detention and pre-release services in the United States, (d)
availability of debt and equity financing on terms that are favorable to the
Company, (e) fluctuations in operating results because of occupancy,
competition (including competition from two competitors that are
substantially larger than the Company), increases in cost of operations,
fluctuations in interest rates and risks of operations and (f) significant
charges to expense for deferred costs associated with financing and other
projects in development if management determines that one or more of such
projects is unlikely to be successfully consummated.

                                     - 14 -
<PAGE>

PART II      OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

     The Company currently and from time to time is subject to claims and
suits arising in the ordinary course of business, including claims for
damages for personal injuries or for wrongful restriction of, or interference
with, inmate privileges. In the opinion of management of the Company, the
outcome of the proceedings to which the Company is currently a party will not
have a material adverse effect upon the Company's operations or financial
condition.

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

             a.  Exhibits

                  3.1    Amended and Restated Bylaws of the Company

                 11.1    Statement Re: Computation of Per Share Earnings

                 18.1    Letter Re: Change in Accounting Principle

             b.  Reports on Form 8-K

                 None.


                                     - 15 -
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                          CORNELL COMPANIES, INC.


Date:    May 15, 2001               By:   /s/ STEVEN W. LOGAN
                                          --------------------------------------
                                          STEVEN W. LOGAN
                                          Chief Executive Officer and President
                                          (Principal Executive Officer)


Date:    May 15, 2001               By:   /s/ JOHN L. HENDRIX
                                          --------------------------------------
                                          JOHN L. HENDRIX
                                          Senior Vice President and
                                          Chief Financial Officer
                                          (Principal Financial Officer)


                                     - 16 -