<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 SEPTEMBER 30, 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)


<TABLE>

<S>                                                         <C>

                   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
</TABLE>


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 October 15, 2001 Registrant had outstanding
                     9,430,790 shares of its Common Stock.

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

<Page>

PART I        FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                                              CORNELL COMPANIES, INC.
                                            CONSOLIDATED BALANCE SHEETS
                                         (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>

                                                                                    SEPTEMBER 30,    DECEMBER 31,
                                                                                        2001            2000
                                                                                    -------------    ------------
                                                                                     (UNAUDITED)
<S>                                                                                 <C>              <C>
                                              ASSETS
CURRENT ASSETS:
     Cash and cash equivalents....................................................     $ 50,402       $    620
     Accounts receivable, net.....................................................       65,913         55,262
     Deferred tax asset...........................................................          667            667
     Prepaids and other...........................................................        3,528          4,363
     Restricted assets............................................................        1,984          2,011
                                                                                       --------       --------
         Total current assets.....................................................      122,494         62,923
PROPERTY AND EQUIPMENT, net.......................................................       39,251        201,683
OTHER ASSETS:
     Intangible assets, net.......................................................       15,808         16,861
     Deferred costs and other.....................................................        8,140          9,972
                                                                                       --------       --------
         Total assets.............................................................     $185,693       $291,439
                                                                                       ========       ========
                               LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable and accrued liabilities.....................................     $ 25,565       $ 33,179
     Current portion of long-term debt............................................           44             41
                                                                                       --------       --------
         Total current liabilities................................................       25,609         33,220
LONG-TERM DEBT, net of current portion............................................       38,424        146,926
OTHER LONG-TERM LIABILITIES.......................................................       12,439          6,973

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, 10,453,857
       and 10,161,113 shares issued, respectively.................................           10             10
     Additional paid-in capital...................................................       93,231         91,625
     Stock option loans...........................................................         (640)          (609)
     Retained earnings............................................................       23,622         19,227
     Treasury stock (1,046,400 and 955,500 shares of common stock,
       respectively, at cost).....................................................       (7,002)        (5,933)
                                                                                     ----------       --------
         Total stockholders' equity...............................................      109,221        104,320
                                                                                     ----------       --------
         Total liabilities and stockholders' equity...............................     $185,693       $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           NINE MONTHS ENDED
                                                                    SEPTEMBER 30,                SEPTEMBER 30,
                                                             ------------------------      ------------------------
                                                               2001           2000           2001           2000
                                                             ---------      ---------      ---------      ---------
<S>                                                          <C>            <C>            <C>            <C>
REVENUES....................................................  $ 68,733     $  56,747       $195,106       $165,622
OPERATING EXPENSES..........................................    56,480        43,809        156,052        128,585
PRE-OPENING AND START-UP EXPENSES...........................        --           295          3,858            838
DEPRECIATION AND AMORTIZATION...............................     1,515         1,853          5,748          5,312
GENERAL AND ADMINISTRATIVE EXPENSES.........................     4,312         3,274         11,390          9,004
                                                              --------     ---------      ---------       --------
INCOME FROM OPERATIONS......................................     6,426         7,516         18,058         21,883
INTEREST EXPENSE............................................     3,403         4,270         11,372         11,634
INTEREST INCOME.............................................      (233)          (27)          (270)           (81)
                                                              --------     ---------      ---------       --------
INCOME BEFORE PROVISION FOR INCOME
   TAXES, EXTRAORDINARY CHARGE AND
   CUMULATIVE EFFECT OF CHANGE IN
   ACCOUNTING PRINCIPLE.....................................     3,256         3,273          6,956         10,330
PROVISION FOR INCOME TAXES..................................     1,335         1,341          2,852          4,234
                                                              --------     ---------      ---------       --------
INCOME BEFORE EXTRAORDINARY CHARGE
   AND CUMULATIVE EFFECT OF CHANGE IN
   ACCOUNTING PRINCIPLE.....................................     1,921         1,932          4,104          6,096
EXTRAORDINARY CHARGE FOR EARLY
   RETIREMENT OF DEBT, NET OF RELATED INCOME
   TAX BENEFIT OF $333 IN 2001..............................      (479)           --           (479)            --
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
   PRINCIPLE, NET OF RELATED INCOME TAX
   PROVISION OF $535 IN 2001................................        --            --            770             --
                                                              --------     ---------      ---------       --------
NET INCOME..................................................  $  1,442     $   1,932      $   4,395       $  6,096
                                                              ========     =========      =========       ========
EARNINGS (LOSS) PER SHARE:
     BASIC
       Income before extraordinary charge and cumulative
          effect of change in accounting principle..........  $    .21     $     .21      $     .45       $    .65
       Extraordinary charge.................................      (.05)           --           (.05)            --
       Cumulative effect of change in accounting principle..        --            --            .08             --
                                                              --------     ---------      ---------       --------
       Net income...........................................  $    .16     $     .21      $     .48      $     .65
                                                              ========     =========      =========      =========
     DILUTED
       Income before extraordinary charge and cumulative
          effect of change in accounting principle..........  $    .20     $     .20      $     .42      $     .64
       Extraordinary charge.................................      (.05)           --           (.05)            --
       Cumulative effect of change in accounting principle..        --            --            .08             --
                                                              --------     ---------      ---------      ---------
       Net income...........................................  $    .15     $     .20      $     .45      $     .64
                                                              ========     =========      =========      =========
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
     BASIC..................................................     9,242         9,391          9,236          9,435
     DILUTED................................................     9,880         9,525          9,661          9,570
</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>

                                                                                             NINE MONTHS ENDED
                                                                                               SEPTEMBER 30,
                                                                                          ------------------------
                                                                                              2001         2000
                                                                                          ----------    ----------
<S>                                                                                       <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income...........................................................................  $   4,395     $   6,096
   Adjustments to reconcile net income to net cash provided by operating activities--
     Extraordinary charge, net of taxes.................................................        479            --
     Cumulative effect of change in accounting principle, net of taxes..................       (770)           --
     Depreciation.......................................................................      3,370         3,012
     Amortization.......................................................................      2,378         2,300
     Non-cash interest expense..........................................................      1,599           960
     Provision for bad debts............................................................      1,215           557
     Loss on sale of property and equipment.............................................         26            27
     Change in assets and liabilities:
         Accounts receivable............................................................    (11,866)       (4,248)
         Restricted assets..............................................................         27            79
         Other assets...................................................................      2,056        (4,721)
         Accounts payable and accrued liabilities.......................................     (7,489)       (3,773)
         Deferred revenues and other liabilities........................................     (2,025)       (1,334)
                                                                                          ---------     ---------
     Net cash used in operating activities..............................................     (6,605)       (1,045)
                                                                                          ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures.................................................................     (7,703)       (6,644)
   Proceeds from sales of property and equipment........................................    172,997           719
                                                                                          ---------     ---------
     Net cash provided by (used in) investing activities................................    165,294        (5,925)
                                                                                          ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term debt.........................................................     73,000       126,500
   Payments on long-term debt...........................................................   (181,000)      (76,000)
   Payments on capital lease obligations................................................        (34)           --
   Payments on note payable.............................................................         --       (40,000)
   Payments for debt issuance and other financing costs.................................       (679)       (3,675)
   Proceeds from exercises of stock options.............................................        875            37
   Purchases of treasury stock..........................................................     (1,069)       (1,426)
                                                                                          ---------     ---------
     Net cash provided by (used in) financing activities................................   (108,907)        5,436
                                                                                          ---------     ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................     49,782        (1,534)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................        620         1,763
                                                                                          ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..............................................  $  50,402     $     229
                                                                                          =========     =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
   Interest paid, net of amounts capitalized............................................  $  11,814     $  12,332
                                                                                          =========     =========
   Income taxes paid....................................................................  $     296     $   8,022
                                                                                          =========     =========
   Non-cash investing and financing activities:
     Debt canceled for stock warrants exercise..........................................  $     603     $      --
                                                                                          =========     =========
</TABLE>

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

                                      - 4 -

<Page>

                             CORNELL COMPANIES, INC.
              NOTES TO UNAUDITED 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 accounting principles generally accepted in the United States
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.   FACILITY SALE AND LEASEBACK TRANSACTION

     On August 14, 2001, the Company completed a sale and leaseback transaction
involving 11 of its real estate facilities (the "2001 Sale and Leaseback
Transaction"). The Company sold the facilities to Municipal Corrections Finance,
L.P. ("MCF"), and is leasing them back for an initial period of 20 years, with
renewal options for up to approximately 25 additional years. MCF is a
special-purpose entity.

     The Company received $173.0 million of proceeds from the sale of the
facilities. The proceeds were used to repay $120.0 million of the Company's
long-term debt and the remainder invested in short-term securities. The gain on
sale of the facilities of approximately $7.5 million was deferred and is being
amortized over the initial lease term as a reduction to rental expense.

     The Company's lease payment obligations are fixed for the initial 20-year
lease period. The cash rental payments due under the initial lease term are
largely due in the first 15 years of the lease term, therefore the Company will
be capitalizing a portion of the rental payments as prepaid rent during the
first 15 years of the lease term and amortizing the aggregate lease payments
over the 20-year lease term on a straight-line basis.

     The straight-line rental expense for the 2001 Sale and Leaseback
Transaction will be approximately $17.6 million annually. The future minimum
lease cash payments are as follows (in thousands):

<TABLE>

<S>                                                              <C>
    Three months ending December 31, 2001....................    $  6,134
    Year Ending December 31:
    2002 ....................................................      24,862
    2003.....................................................      25,116
    2004.....................................................      25,138
    2005.....................................................      25,101
    Thereafter (2006 to 2021)................................     249,725
                                                                 --------
        Total................................................    $356,076
                                                                 ========
</TABLE>

     The following unaudited pro forma statements of operations data for the
year ended December 31, 2000 and for the nine months ended September 30, 2001
reflect the results of operations of the Company as though the 2001 Sale and
Leaseback Transaction had occurred on January 1, 2000. This pro forma
financial data does not purport to be indicative of the Company's future
results. The pro forma financial data is based on certain assumptions and
estimates which are subject to change.

                                      - 5 -

<Page>


<TABLE>
<CAPTION>

                                                                                                     PRO FORMA AS
                                                                                                   ADJUSTED FOR THE
                                                                                                     2001 SALE AND
                                                                                                       LEASEBACK
                                                                                     HISTORICAL       TRANSACTION
                                                                                     ----------    ----------------
<S>                                                                                  <C>           <C>
Statements of Operations Data:
     Nine Months Ended September 30, 2001
       Revenue....................................................................    $195,106         $195,106
       Income from operations.....................................................      18,058            9,498
       Net income.................................................................       4,395            3,868
       Net earnings per share
       - Basic....................................................................         .48              .42
       - Diluted..................................................................         .45              .40

     Year Ended December 31, 2000
       Revenue....................................................................    $226,050         $226,050
       Income from operations.....................................................      29,061           14,718
       Net income.................................................................       7,969            5,000
       Net earnings per share
       - Basic....................................................................         .85              .53
       - Diluted..................................................................         .84              .53
</TABLE>

     The pro forma statements of operations data includes pro forma
adjustments to reflect a decrease in depreciation expense and an increase in
facility rent expense as a result of the transaction and a decrease in
interest expense as a result of the repayment of debt with the proceeds from
the sale, and related income taxes.

     The above pro forma net income and earnings per share amounts do not
reflect any interest income on the excess cash proceeds, nor do they reflect any
benefit from investing the excess cash proceeds in any future projects.

3.   EXTRAORDINARY CHARGE

     The Company used a portion of the net proceeds from the 2001 Sale and
Leaseback Transaction to retire $50.0 million of outstanding 7.74% Senior
Secured Notes which had a maturity date of July 15, 2010. As a result, the
Company recognized an extraordinary charge of $479,000 (net of income taxes of
$333,000) due to the write-off of unamortized deferred debt issuance costs
related to the Senior Secured Notes. See Note 4 for disclosure of an
additional charge related to the Company's repayment of its revolving line of
credit and the associated reduction in credit commitment.

4.   CREDIT FACILITIES

     On August 14, 2001, the Company repaid $70.0 million outstanding under its
revolving line of credit with a portion of the proceeds from the 2001 Sale and
Leaseback Transaction. Effective August 9, 2001, the Company amended its 2000
Credit Facility which, as amended, provides for borrowings of up to $45.0
million under a revolving line of credit (previously $75.0 million). The
revolving line of credit commitment is reduced by $1.6 million quarterly
beginning in July 2002. The amended 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 2.0%, or a rate which is 3.0% above the applicable LIBOR rate.
The amended 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.

                                      - 6 -

<Page>

     As a result of the reduction of the revolving line of credit commitment,
the Company recognized a charge of $818,000 to interest expense representing
a portion of its unamortized deferred debt issuance costs related to the 2000
Credit Facility.

     Additionally, the amended 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 $49.4 million had been utilized as of September 30, 2001.
The remaining capacity under this lease financing arrangement is expected to be
utilized to complete 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.

     On August 14, 2001, the Company repaid the $50.0 million of outstanding
7.74% Senior Secured Notes with a portion of the proceeds from the 2001 Sale and
Leaseback Transaction. See Note 3 to the Unaudited Consolidated Financial
Statements.

     As of September 30, 2001, the Company had outstanding $38.4 million, net
of discount, 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. In August 2001, $603,000 of the
Subordinated Notes were canceled and used as consideration for the exercise
of warrants to purchase 90,000 shares of the Company's common stock.

5.   CHANGE IN ACCOUNTING OF 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
unaudited consolidated statements of operations. For the three and nine
months ended September 30, 2000, the pro forma impact of this change in
accounting would have been immaterial.

6.   DEFERRED COSTS AND OTHER

     During the third quarter of 2001, the Company recognized a charge of
$660,000 to expense previously deferred acquisition costs related to the
anticipated purchase of real property located near Fort Greely, Alaska which
was expected to be used in conjunction with the operations of an adult secure
institution for the State of Alaska. Management's efforts to develop a prison
in Alaska have been moved to a potential site other than Fort Greeley. This
charge was reported as general and administrative expense.

                                      - 7 -

<Page>

     At September 30, 2001, accounts receivable include costs totaling $1.4
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 recovered in the near term. In the event any
portion of these costs are not reimbursed, such costs will be expensed. On
August 9, 2001, the Stop-Work Order was lifted by the FBOP.

7.   NEW ACCOUNTING STANDARDS

     In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," SFAS
No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 143 "Accounting for
Asset Retirement Obligations." SFAS No. 141 requires use of the purchase method
of accounting for all business combinations initiated after June 30, 2001 and
prohibits use of the pooling of interests method for those transactions. SFAS
No. 141 also specifies criteria intangible assets must meet to be recognized and
reported apart from goodwill. SFAS No. 142 changes the accounting method for
goodwill from an amortization to an impairment-only approach. SFAS No. 142 is
effective for acquisitions consummated after June 30, 2001, and will be
effective for all previously recorded goodwill beginning as of January 1, 2002.
As a result, the Company will continue to amortize its existing goodwill and
other intangible assets under the previous accounting pronouncements until
December 31, 2001. SFAS No. 143 requires measuring and recognizing legal
obligations to retire long-lived assets that are identifiable upon acquisition,
construction and during the operating life of the assets. SFAS No. 143 is
effective for periods beginning after June 15, 2002. The Company is currently
evaluating the potential impact of the adoption of these statements on its
consolidated financial position, results of operations and cash flows.

8.   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 year.
Diluted EPS reflects the potential dilution from the exercise or conversion of
securities, such as stock options and warrants, into common stock using the
treasury stock method.

9.   RECLASSIFICATIONS

     Current reclassifications have been made to the prior year consolidated
financial statements contained herein to conform to current year presentation.

10.  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
related 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.

                                      - 8 -

<Page>

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

<TABLE>
<CAPTION>

                                                                THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                   SEPTEMBER 30,              SEPTEMBER 30,
                                                              ----------------------       -------------------
                                                                  2001        2000           2001       2000
                                                              ---------     --------       --------   --------
<S>                                                           <C>            <C>           <C>        <C>

Revenues
   Adult secure institutional.............................    $  25,602     $ 23,160       $ 74,781   $ 65,946
   Juvenile...............................................       31,085       21,262         83,622     63,301
   Pre-release............................................       12,046       12,325         36,703     36,375
                                                              ---------     --------       --------   --------
Total revenues............................................    $  68,733     $ 56,747       $195,106   $165,622
                                                              =========     ========       ========   ========

Pre-opening and start-up expenses
   Adult secure institutional.............................    $      --     $     37       $     --   $    534
   Juvenile...............................................           --          258          3,858        304
   Pre-release............................................           --           --             --         --
                                                              ---------     --------       --------   --------
Total pre-opening and start-up expenses...................    $      --     $    295       $  3,858   $    838
                                                              ---------     --------       --------   --------

Income from operations
   Adult secure institutional.............................    $   4,935     $  5,663       $ 15,193   $ 15,127
   Juvenile...............................................        4,543        2,652         10,022      8,322
   Pre-release............................................        2,276        3,075          7,802      8,971
   General and administrative expenses....................       (4,312)      (3,274)       (11,390)    (9,004)
   Incentive bonuses......................................         (617)         (80)        (1,871)      (121)
   Amortization of intangibles............................         (381)        (371)        (1,144)    (1,147)
   Corporate and other....................................          (18)        (149)          (554)      (265)
                                                              ---------     --------       --------   --------

Total income from operations..............................    $   6,426      $ 7,516       $ 18,058   $ 21,883
                                                              =========     ========       ========   ========

</TABLE>

<TABLE>
<CAPTION>


                                                             SEPTEMBER 30,  DECEMBER 31,
                                                                2001          2000
                                                              ---------     --------
<S>                                                          <C>            <C>
Assets
   Adult secure institutional.............................    $  20,292     $143,743
   Juvenile...............................................       46,104       59,630
   Pre-release............................................       38,299       51,802
   Intangible assets, net.................................       15,808       16,861
   Corporate and other....................................       65,190       19,403
                                                              ---------     --------
Total assets..............................................    $ 185,693     $291,439
                                                              =========     ========
</TABLE>

                                      - 9 -

<Page>

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

GENERAL

     The Company is a leading provider of privatized correctional, treatment
and educational services outsourced by federal, state and local government
agencies. The Company provides a diversified portfolio of services for adults
and juveniles through three operating divisions: (a) adult secure
institutional services, (b) juvenile treatment, educational and detention
services and (c) pre-release correctional and treatment services. As of
September 30, 2001, the Company had contracts to operate 70 facilities with a
total service capacity of 15,909. The Company's facilities are located in 13
states and the District of Columbia.

     From 1994 to 1999 the Company completed eight acquisitions. The Company's
acquisitions have generally targeted companies that assist it in penetrating new
markets, diversifying its revenues and establishing a nationally recognized
presence. To fulfill this strategy, the Company has acquired companies that
have a reputation for high quality in the corrections and treatment industry.

     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 and average occupancy percentages.

<TABLE>
<CAPTION>

                                                                                       NINE MONTHS ENDED
                                                                                 ------------------------------
                                                                                 SEPTEMBER 30,    SEPTEMBER 30,
                                                                                      2001            2000
                                                                                 -------------    -------------
<S>                                                                              <C>              <C>
           Total service capacity (1):
                Residential.....................................................     11,897           11,659
                Non-residential community-based.................................      4,012            2,705
                                                                                     ------           ------
                  Total.........................................................     15,909           14,364
           Service capacity in operation (end of period)........................     14,814           12,929
           Contracted beds in operation (end of period).........................     10,130            9,721
           Average occupancy based on contracted beds in operation (2) (3)......       95.5%            94.0%
           Average occupancy excluding start-up operations (2)..................       96.1%            95.5%
</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 outsourced by 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, on a take-or-pay
basis or on a cost-plus reimbursement basis.

     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 whether the facility is owned or leased, the
level of competition for the contract award, the proposed length of the
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 ability to increase
contract revenues. The Company has and expects to

                                     - 10 -

<Page>

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 that 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 (12 facilities in operation at September
30, 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 levels
and the related payroll expense 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.

     As a result of the 2001 Sale and Leaseback Transaction on August 14,
2001, the Company's operating expenses will increase due to the associated
facility rental expense to be recognized of approximately $17.6 million
annually. This additional rental expense will be largely offset by a
reduction to interest expense due to the repayment of long term debt, and a
reduction to depreciation and amortization expense due to the sale of the 11
facilities.

     Following a contract award, the Company incurs pre-opening and start-up
expenses including 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. These costs vary by contract. Since
pre-opening and start-up costs are factored into the revenue per diem rate
that is charged to the contracting agency, the Company typically expects to
recover these upfront costs over the life of the contract. Because occupancy
rates during a facility's start-up phase typically result in capacity
under-utilization for at least 90 to 180 days, the Company may incur
additional post-opening start-up costs. The Company does not anticipate
post-opening start-up costs at facilities operating under any future
contracts with the FBOP, because these contracts are currently take-or-pay,
meaning that the FBOP will pay the Company for at least 95% of the
contractual monthly revenue regardless of actual occupancy.

     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 start-up
operating losses at new facilities until break-even occupancy levels are
reached. Although the Company typically recovers these upfront costs over the
life of the contract, quarterly results can be substantially affected by the
timing of the commencement of operations as well as development and
construction of new facilities.

     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.

                                     - 11 -

<Page>

     The Company continually reviews the performance of its portfolio of
contracts and, if it is determined a contract will not be able to meet the
required level of financial performance, the Company will seek to remove that
contract from its portfolio.

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 unaudited consolidated statements of operations:

<TABLE>
<CAPTION>

                                                                   THREE MONTHS               NINE MONTHS
                                                                ENDED SEPTEMBER 30,       ENDED SEPTEMBER 30,
                                                                -------------------       -------------------
                                                                2001          2000         2001         2000
                                                             ----------    ----------  ----------   ----------
<S>                                                          <C>           <C>         <C>          <C>
           Revenues.......................................      100.0%       100.0%       100.0%        100.0%
           Operating expenses.............................       82.2         77.2         80.0          77.6
           Pre-opening and start-up expenses..............         --          0.5          2.0           0.5
           Depreciation and amortization..................        2.2          3.3          2.9           3.2
           General and administrative expenses............        6.3          5.8          5.8           5.4
                                                            ---------    ---------    ---------      --------
           Income from operations.........................        9.3         13.2          9.3          13.3
           Interest expense, net..........................        4.6          7.5          5.7           7.0
                                                            ---------    ---------    ---------      --------
           Income before provision for income
              taxes, extraordinary charge and
              cumulative effect of change
              in accounting principle.....................        4.7          5.7          3.6           6.3
           Provision for income taxes.....................        1.9          2.4          1.5           2.6
                                                            ---------    ---------    ---------      --------
           Income before extraordinary charge and
              cumulative effect of change
              in accounting principle.....................        2.8%         3.3%         2.1%          3.7%
                                                            =========    =========    =========      ========
</TABLE>


THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000

       REVENUES. Revenues increased 21.1% to $68.7 million for the three months
ended September 30, 2001 from $56.7 million for the three months ended
September 30, 2000.

    Adult secure institutional division revenues increased 10.5% to
$25.6 million for the three months ended September 30, 2001 from $23.1 million
for the three months ended September 30, 2000 due principally to (a) per diem
rate increases realized in 2001, (b) the commencement of a management contract
at the Valencia County Detention Center in the fourth quarter of 2000 and (c) an
increase in occupancy at the Great Plains Correctional Facility as compared to
the three months ended September 30, 2000. The increase in revenue was offset,
in part, by a reduction in occupancy at the Santa Fe County Detention Center.
The Company's contract to manage the Santa Fe County Detention Center expired
effective September 30, 2001. Average occupancy, excluding start-up operations
in 2000, was 95.8% for the three months ended September 30, 2001 compared to
97.1% for the three months ended September 30, 2000.

Juvenile division revenues increased 46.2% to $31.1 million for the three
months ended September 30, 2001 from $21.3 million for the three months ended
September 30, 2000 due principally to (a) the opening of the New Morgan
Academy in the fourth quarter of 2000, (b) the commencement of a management
contract at the Alexander Youth Center in the third quarter of 2001, (c) the
opening of the William Penn Harrisburg Alternative School in the third
quarter of 2001, (d) increased occupancy at the Cornell Abraxas Center for
Adolescent Females ("ACAF") due to a facility expansion and (e) increased
occupancy at various facilities including the Griffin Juvenile Facility.
Average occupancy was 90.9% for the three months ended September 30, 2001
compared to 88.7% for the three months ended September 30, 2000.

                                     - 12 -

<Page>

    Pre-release division revenues decreased to $12.0 million for the three
months ended September 30, 2001 from $12.3 million for the three months ended
September 30, 2000 due to the Company's termination of the Durham Treatment
Center and San Diego Center contracts as of June 30, 2001 and January 31,
2001, respectively. The decrease in revenue due to the above contract
terminations was offset, in part, by increased average occupancy at various
facilities. Average occupancy was 99.1% for the three months ended September
30, 2001 compared to 93.0% for the three months ended September 30, 2000.

    OPERATING EXPENSES. Operating expenses increased 28.9% to $56.5 million for
the three months ended September 30, 2001 from $43.8 million for the three
months ended September 30, 2000.

    Adult secure institutional division operating expenses increased 22.4% to
$20.5 million for the three months ended September 30, 2001 from $16.7
million for the three months ended September 30, 2000 due principally to (a)
increased personnel costs due to contractual wage increases at the Big Spring
Complex, (b) the commencement of a management contract at the Valencia County
Detention Center in the fourth quarter of 2000, (c) increased operating
expenses at the Great Plains Correctional Facility as a result of increased
occupancy as compared to the three months ended September 30, 2000 and (d)
increased facility rent expense as a result of the 2001 Sale and Leaseback
Transaction. As a percentage of revenue, excluding start-up operations in
2000, adult secure institutional division operating expenses were 80.0% for
the three months ended September 30, 2001 compared to 72.3% for the three
months ended September 30, 2000. The decline in the 2001 operating margin was
due to increased facility rent expense as a result of the 2001 Sale and
Leaseback Transaction and the reduction in occupancy at the Santa Fe County
Detention Center.

    Juvenile division operating expenses increased 45.4% to $26.3 million for
the three months ended September 30, 2001 from opening of the $18.1 million
for the three months ended September 30, 2000 due to (a) the opening of the
New Morgan Academy in the fourth quarter of 2000, (b) the commencement of a
management contract at the Alexander Youth Center in the third quarter of
2001, (c) the opening of the William Penn Harrisburg Alternative School in
the third quarter of 2001, (d) increased facility rent expense as a result of
the 2001 Sale and Leaseback Transaction and (e) increased operating expenses
at ACAF due to increased occupancy as a result of a facility expansion. As a
percentage of revenues, excluding start-up operations, juvenile division
operating expenses were 84.7% for the three months ended September 30, 2001
compared to 85.2% for the three months ended September 30, 2000. The increase
in the 2001 operating margin was due principally to the results of the New
Morgan Academy, the Alexander Youth Center and the Harrisburg Youth Center
offset, in part, by increased facility rent expense as a result of the 2001
Sale and Leaseback Transaction.

    Pre-release division operating expenses increased 8.7% to $9.7 million
for the three months ended September 30, 2001 from $9.0 million for the three
months ended September 30, 2000 principally due to increased facility rent
expense as a result of the 2001 Sale and Leaseback Transaction offset, in
part, by a reduction to operating expenses due to the termination of the
Durham Treatment Center and San Diego Center contracts. As a percentage of
revenues, operating expenses were 80.8% for the three months ended September
30, 2001 compared to 72.7% for the three months ended September 30, 2000. The
decline in the 2001 operating margin was due to increased facility rent
expense as a result of the 2001 Sale and Leaseback Transaction.

  PRE-OPENING AND START-UP EXPENSES. There were no pre-opening and start-up
expenses for the three months ended September 30, 2001. Pre-opening and
start-up expenses were $295,000 for the three months ended September 30, 2000
and were attributable to the pre-opening and start-up activities of the New
Morgan Academy.

    DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased 21.0%
to $1.5 million for the three months ended September 30, 2001 from $1.9 million
for the three months ended September 30, 2000. Depreciation decreased as a
result of the sale of the 11 facilities involved in the 2001 Sale and Leaseback

                                     - 13 -

<Page>

Transaction. The decrease in expense was offset, in part, by depreciation
expense related to (a) the completion of a 150 bed expansion at the Big
Spring Complex in the first quarter of 2001, (b) the purchase and renovation
of a building for the expansion of ACAF, (c) furniture and equipment
purchased for the New Morgan Academy, (d) the write-off leasehold
improvements at the Durham Treatment Center due to its contract termination
and (e) various facility improvements and furniture and equipment purchases.

    GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $4.3 million for the three months ended September 30, 2001 from
$3.3 million for the three months ended September 30, 2000. Included in
general and administrative expenses for the three months ended September 30,
2001 was a charge of $660,000 related to the write-off of deferred
acquisition costs associated with the Fort Greeley, Alaska project. The
remaining increase in general and administrative expenses resulted primarily
from costs for additional personnel providing public affairs and business
development services, certain consulting and legal costs and other
administrative infrastructure costs. Excluding the $660,000 charge in the
2001 period, general and administrative expenses were 5.3% and 5.8% of
revenues for the three months ended September 30, 2001 and 2000, respectively.

    INTEREST. Interest expense, net of interest income, decreased to $3.2
million for the three months ended September 30, 2001 from $4.2 million for
the three months ended September 30, 2000 due primarily to the August 14,
2001 repayment of $120.0 million of long-term debt with a portion of the
proceeds from the 2001 Sale and Leaseback Transaction. For the three months
ended September 30, 2001, interest expense included a charge of $818,000 due
to the write-off of a portion of unamortized deferred debt issuance costs
related to the 2000 Credit Facility as a result of the repayment of all
outstanding borrowings and the associated reduction in the credit commitment.

    INCOME TAXES. For the three months ended September 30, 2001 and 2000, the
Company recognized a provision for income taxes at an estimated effective rate
of 41%.

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000

    REVENUES. Revenues increased 17.8% to $195.1 million for the nine months
ended September 30, 2001 from $165.6 million for the nine months ended September
30, 2000.

    Adult secure institutional division revenues increased 13.4% to $74.8
million for the nine months ended September 30, 2001 from $65.9 million for the
nine months ended September 30, 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 reached a full occupancy level late in the second
quarter of 2000, (b) per diem rate increases realized in 2001, (c) the
commencement of a management contract at the Valencia County Detention Center in
the fourth quarter of 2000 and (d) increased occupancy at the Great Plains
Correctional Facility as compared to the nine months ended September 30, 2000.
The increase in revenue was offset, in part, by a reduction in occupancy at the
Santa Fe County Detention Center. The Company's contract to manage the Santa Fe
County Detention Center expired effective September 30, 2001. There were no
revenues attributable to start-up operations for the nine months ended September
30, 2001. Revenues attributable to start-up operations for the nine months ended
September 30, 2000 were $44,000 and related to the expansion of the D. Ray James
Prison. Average occupancy, excluding start-up operations in 2000, was 96.7% for
the nine months ended September 30, 2001 compared to 97.3% for the nine months
ended September 30, 2000.

    Juvenile division revenues increased 32.1% to $83.6 million for the nine
months ended September 30, 2001 from $63.3 million for the nine months ended
September 30, 2000 principally due to (a) the opening of the New Morgan
Academy in the fourth quarter of 2000, (b) the commencement of a management
contract at the Alexander Youth Center in the third quarter of 2001, (c) the
opening of the William Penn Harrisburg Alternative School in the third
quarter of 2001, (d) increased occupancy at ACAF due to

                                     - 14 -

<Page>

a facility expansion and (e) increased occupancy at various facilities including
the Griffin Juvenile facility. Revenues attributable to start-up operations were
$2.8 million for the nine months ended September 30, 2001 and related to the
operations of the New Morgan Academy and the expansion of ACAF. There were no
revenues attributable to start-up operations for the nine months ended September
30, 2000. Average occupancy, excluding start-up operations in 2001, was 91.5%
for the nine months ended September 30, 2001 compared to 90.6% for the nine
months ended September 30, 2000.

    Pre-release division revenues increased 0.9% to $36.7 million for the nine
months ended September 30, 2001 from $36.4 million for the nine months ended
September 30, 2000 due to increased average occupancy at various facilities
offset by a reduction in revenue due to the terminations of the Durham Treatment
Center and San Diego Center contracts as of June 30, 2001 and January 31, 2001,
respectively. Average occupancy was 97.6% for the nine months ended September
30, 2001 compared to 93.8% for the nine months ended September 30, 2000.

    OPERATING EXPENSES. Operating expenses increased 21.4% to $156.1 million for
the nine months ended September 30, 2001 from $128.6 million for the nine months
ended September 30, 2000.

    Adult secure institutional division operating expenses increased 21.3% to
$58.0 million for the nine months ended September 30, 2001 from $47.9 million
for the nine months ended September 30, 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 reached a full occupancy level late in the second
quarter of 2000, (b) increased personnel costs due to contractual wage increases
at the Big Spring Complex associated with receiving an increase in our revenue
per diem, (c) the commencement of a management contract at the Valencia County
Detention Center in the fourth quarter of 2000, (d) increased operating expenses
at the Great Plains Correctional Facility due to increased occupancy as compared
to the nine months ended September 30, 2000 and (e) increased facility rent
expense as a result of the 2001 Sale and Leaseback Transaction. As a percentage
of revenues, excluding start-up operations in 2000, adult secure institutional
division operating expenses were 77.6% for the nine months ended September 30,
2001 compared to 72.6% for the nine months ended September 30, 2000. The decline
in the 2001 operating margin was due to (a) increased personnel and employee
retention costs, inmate medical and utility costs, (b) increased facility rent
expense as a result of the 2001 Sale and Leaseback Transaction and (c) the
reduction in occupancy at the Santa Fe County Detention Center.

    Juvenile division operating expenses increased 30.0% to $68.6 million for
the nine months ended September 30, 2001 from $53.7 million for the nine
months ended September 30, 2000. The increase in operating expenses was
principally due to (a) the opening of the New Morgan Academy in the fourth
quarter of 2000, (b) the commencement of a management contract at the
Alexander Youth Center in the third quarter of 2001, (c) the opening of the
William Penn Harrisburg Alternative School in the third quarter of 2001, (d)
increased facility rent expense as a result of the 2001 Sale and Leaseback
Transaction, (e) increased operating expenses at ACAF due to a facility
expansion and (f) increased average occupancy at various facilities including
the Griffin Juvenile Facility. As a percentage of revenues, excluding
start-up operations, juvenile division operating expenses were 81.4% for the
nine months ended September 30, 2001 compared to 85.0% for the nine months
ended September 30, 2000. The 2001 operating margin was impacted favorably
due to the results of the New Morgan Academy, the Alexander Youth Center and
the William Penn Harrisburg Alternative School, offset by increased personnel
and employee retention costs, utility costs and facility rent expense as a
result of the 2001 Sale and Leaseback Transaction.

    Pre-release division operating expenses increased 8.2% to $29.3 million for
the nine months ended September 30, 2001 from $27.0 million for the nine months
ended September 30, 2000 due to increased facility rent expense as a result of
the 2001 Sale and Leaseback Transaction offset, in part, by a reduction to
operating expenses due to the Company's terminations of the Durham Treatment
Center and San Diego Center contracts. As a percentage of revenue, pre-release
division operating expenses were 79.7% for the

                                     - 15 -

<Page>

nine months ended September 30, 2001 compared to 74.4% for the nine months
ended September 30, 2000. The decline in the 2001 operating margin was
principally due to increased personnel and employee retention costs, utility
costs and increased facility rent expense as a result of the 2001 Sale and
Leaseback Transaction and due to our termination of the San Diego Center
contract in January 2001.

    PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$3.9 million for the nine months ended September 30, 2001 and were attributable
to the start-up activities of the New Morgan Academy and the expansion of ACAF.
Pre-opening and start-up expenses were $838,000 for the nine months ended
September 30, 2000 and were attributable to the start-up activities of the final
550 bed expansion at the D. Ray James Prison in the first quarter of 2000, the
New Morgan Academy and the Moshannon Valley Detention Center.

    DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 8.2%
to $5.7 million for the nine months ended September 30, 2001 from $5.3 million
for the nine months ended September 30, 2000 due to (a) the completion of a 150
bed expansion at the Big Spring Complex completed in the first quarter of 2001,
(b) the purchase and renovation of a building for the expansion of ACAF, (c)
depreciation of furniture and equipment purchased for the New Morgan Academy,
(d) the write-off of leasehold improvements for the Durham Treatment
Center due to its contract termination and (e) various facility improvements and
furniture and equipment purchases. Depreciation expense was further reduced as a
result of the sale of the 11 facilities involved in the 2001 Sale and Leaseback
Transaction.

    GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $11.4 million for the nine months ended September 30, 2001 from
$9.0 million for the nine months ended September 30, 2000. Included in
general and administrative expense for the nine months ended September 30,
2001 was a non-recurring charge of $660,000 related to the write-off of
deferred acquisition costs associated with the Fort Greeley, Alaska project.
The remaining increase in general and administrative expenses resulted
primarily from retention and incentive bonus costs, costs for additional
personnel providing public affairs and business development services, certain
consulting and legal costs and other administrative infrastructure costs.
Excluding the $660,000 charge in the 2001 period, general and administrative
expenses were 5.5% and 5.4% of revenues for the nine months ended September
30, 2001 and 2000, respectively.

    INTEREST. Interest expense, net of interest income, decreased to $11.1
million for the nine months ended September 30, 2001 from $11.6 million for
the nine months ended September 30, 2000 due principally to the August 14,
2001 repayment of $120.0 million of senior debt with a portion of the
proceeds from the 2001 Sale and Leaseback Transaction. For the nine months
ended September 30, 2001, interest expense included a non-recurring charge
of $818,000 to write-off a portion of unamortized deferred debt issuance
costs related to the 2000 Credit Facility as a result of the repayment of all
outstanding borrowings and the associated reduction of the credit commitment.
For the nine months ended September 30, 2001, the Company capitalized
interest of approximately $69,000 related to facility expansions. There was
no interest capitalized for the nine months ended September 30, 2000.

    INCOME TAXES. For the nine months ended September 30, 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) expansions of existing facilities, (c)
working capital, (d) pre-opening and start-up costs related to new operating
contracts, (e) acquisitions, (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 contractual facility
management revenue is realized.

                                     - 16 -

<Page>

    2001 SALE AND LEASEBACK TRANSACTION. On August 14, 2001, the Company
completed a sale and leaseback transaction involving 11 of its real estate
facilities (the "2001 Sale and Leaseback Transaction"). The Company sold the
facilities to Municipal Corrections Finance L.P. ("MCF"), and is leasing them
back for an initial period of 20 years, with approximately 25 years of
additional renewal period options. MCF is a special-purpose entity.

    The Company received $173.0 million of proceeds from the sale of the
facilities. The Company used $120.0 million of the proceeds to repay the
Company's long-term senior debt and invested the remainder proceeds of $53.0
million in short-term securities. As a result, the Company now has an undrawn
$45.0 million revolving line of credit. The gain on sale of the facilities of
approximately $7.5 million was deferred and is being amortized over the
initial lease term as a reduction to facility rental expense.

    The Company's lease payment obligations are fixed for the initial 20-year
lease period. The cash rental payments due under the initial lease term are
largely due in the first 15 years of the lease term, therefore the Company will
be capitalizing a portion of the rental payments as prepaid rent during the
first 15 years of the lease term and amortizing the aggregate lease payments
over the 20-year lease term on a straight-line basis.

    The straight-line rental expense for the 2001 Sale and Leaseback Transaction
will be approximately $17.6 million annually. The future minimum lease cash
payments are as follows (in thousands):

<TABLE>

<S>                                                               <C>
     Three months ending December 31, 2001....................    $  6,134
     Year Ending December 31:
     2002 ....................................................      24,862
     2003.....................................................      25,116
     2004.....................................................      25,138
     2005.....................................................      25,101
     Thereafter (2006 to 2021)................................     249,725
                                                                  --------
        Total................................................     $356,076
                                                                  ========
</TABLE>

     See Note 2 to the Unaudited Consolidated Financial Statements for pro forma
financial data.

     LONG-TERM CREDIT FACILITIES. On August 14, 2001, the Company repaid
$70.0 million outstanding under the revolving line of credit with a portion
of the proceeds from the 2001 Sale and Leaseback Transaction. In connection
with the repayment, the Company amended its 2000 Credit Facility, which now
provides for borrowings of up to $45.0 million under a revolving line of
credit. The commitment amount is reduced by $1.6 million quarterly beginning
in July 2002. The amended 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 2.0%, or a rate which is 3.0% above the applicable LIBOR rate. The
amended 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.

         As a result of the reduction of the revolving line of credit
commitment, the Company recognized a charge of $818,000 to interest expense
representing a portion of the unamortized deferred debt issuance costs
related to the 2000 Credit Facility.

     Additionally, the amended 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 $49.4 million had been utilized as of
September 30, 2001. The Company expects to utilize the remaining capacity
under this lease financing arrangement to complete 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 upon termination of the leases. Upon termination of a
lease, the Company could either

                                     - 17 -

<Page>

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.

     On August 14, 2001, the Company repaid the $50.0 million of outstanding
7.74% senior Secured Notes with a portion of the proceeds from the 2001 Sale and
Leaseback Transaction. See Note 3 to the Unaudited Consolidated Financial
Statements.

     The Company has outstanding $38.4 million, net of discount, under its
Note and Equity Purchase Agreement (the "Subordinated Notes") entered into in
July 2000. The Subordinated Notes have a seven-year term maturing in July
2007, are interest-only payable quarterly at a fixed annual rate of 12.875%,
and contain certain financial covenants.

     NEW FACILITIES AND PROJECT UNDER DEVELOPMENT. 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 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. The Stop-Work Order was lifted by the FBOP on August 9,
2001. Management anticipates that construction will be resumed in the near-term
pending a re-negotiation of the originally awarded contract.

     At September 30, 2001, accounts receivable include costs totaling $1.4
million for direct costs incurred by us since June 1999 for payroll and other
operating costs related to 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 near term. In the event any portion of these costs
are not reimbursed such costs will be expensed.

     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 under "Long-Term Credit Facilities".

     CAPITAL EXPENDITURES. Capital expenditures for the nine months ended
September 30, 2001 were $7.7 million and related primarily to (a) the 150 bed
expansion at the Big Spring Complex, (b) the purchase and renovation of a
building and related furniture and equipment purchases for an expansion of ACAF,
(c) purchases of furniture and equipment for the New Morgan Academy and (d)
various facility improvements and furniture and equipment purchases.

     Management believes that the excess cash proceeds from the 2001 Sale and
Leaseback Transaction and 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 and
certain potential future contracts. To the extent our cash and current
financing arrangements do not provide sufficient financing to fund
construction costs related to future adult secure institutional contract
awards or significant expansions, the Company anticipates obtaining
additional sources of financing to fund such activities. However, the Company
cannot assure anyone that such financing will be available, or will be
available on terms favorable to us.

INFLATION

     Other than personnel and inmate medical costs at certain facilities during
2000 and early 2001, management believes that inflation has not had a material
effect on its results of operations during the past

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<Page>

three years. Most of the Company's facility management contracts provide for
payments to the Company of either fixed per diem rates or per diem rates 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.

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 results primarily from
its long-term debt with both fixed and floating interest rates. The Company's
long-term debt with fixed interest rates consists solely of the Subordinated
Notes. The Company's only long-term debt with variable interest is its revolving
line of credit. At September 30, 2001, the Company did not have an outstanding
balance on its revolving line of credit. At September 30, 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, (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
treatment services in the United States, (d) fluctuations in operating
results because of occupancy, competition, increases in cost of operations,
fluctuations in interest rates and risks of operations and (e) significant
charges to expense of 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 concluded.

                                     - 19 -

<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 2. CHANGES IN SECURITIES

     In August 2001, $603,000 of Subordinated Notes were canceled and used
as consideration for the exercise of warrants to purchase 90,000 shares of
the Company's common stock.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        a.  Exhibits

          10.1 *   Premises Transfer Agreement dated August 14, 2001 among
                   Cornell Companies, Inc., Cornell Corrections of Georgia,
                   L.P., Cornell Corrections of Oklahoma, Inc., Cornell
                   Corrections of Texas, Inc., WBP Leasing, Inc., and Municipal
                   Corrections Finance, L.P.

          10.2 *   Master Lease Agreement (with addenda) dated August 14, 2001
                   between Municipal Corrections Finance, L.P. and Cornell
                   Companies, Inc.

          10.3     Master Lease Agreement dated December 3, 1998 between
                   Atlantic Financial Group and WBP Leasing, Inc. and certain
                   other subsidiaries of Cornell Corrections, Inc.

          10.4     Amendment No. 1 to Credit Agreement dated January 31, 2001

          10.5     Amendment No. 2 to Credit Agreement and Amendment No. 1
                   to Master Agreement dated August 9, 2001.

          10.6     First Amendment to Note and Equity Purchase Agreement dated
                   August 9, 2001.

          11.1     Computation of Per Share Earnings

          23.1     Consent of Arthur Andersen LLP.

        b.  Reports on Form 8-K

          Form 8-K of the Company dated August 28, 2001 reporting the
          2001 Sale and Leaseback Transaction on August 14, 2001.

-------------------
*    Incorporated by reference to the Company's Current Report on Form 8-K filed
     with the Securities and Exchange Commission on August 28, 2001.

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<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.

<TABLE>

<S>                               <C>
                                  CORNELL COMPANIES, INC.

Date: October 30, 2001            By: /s/ Steven W. Logan
                                      --------------------------------------
                                      STEVEN W. LOGAN
                                      Chief Executive Officer and President
                                      (Principal Executive Officer)

Date: October 30, 2001            By: /s/ John L. Hendrix
                                      --------------------------------------
                                      JOHN L. HENDRIX
                                      Senior Vice President and
                                      Chief Financial Officer
                                      (Principal Financial Officer)

</TABLE>


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