<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, 2002

                                       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, 2002 Registrant had outstanding 13,089,572 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,
                                                                                        2002            2001
                                                                                    -------------  --------------
<S>                                                                                  <C>             <C>
                                              ASSETS
CURRENT ASSETS:
     Cash and cash equivalents....................................................   $   53,691      $  56,794
     Accounts receivable, net.....................................................       59,637         63,291
     Restricted assets............................................................       11,088         12,376
     Deferred tax asset...........................................................          493            493
     Prepaids and other...........................................................        6,968          5,679
                                                                                     ----------      ---------
         Total current assets.....................................................      131,877        138,633
PROPERTY AND EQUIPMENT, net.......................................................      253,158        253,243
OTHER ASSETS:
     Debt service reserve fund....................................................       23,800         23,800
     Intangible assets, net.......................................................       13,631         15,456
     Deferred costs and other.....................................................       13,370         13,675
                                                                                     ----------      ---------
         Total assets.............................................................   $  435,836      $ 444,807
                                                                                     ==========      =========

                               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable and accrued liabilities.....................................   $   25,114      $  33,934
     Current portion of long-term debt............................................        6,848          6,885
                                                                                     ----------      ---------
         Total current liabilities................................................       31,962         40,819
LONG-TERM DEBT....................................................................      239,310        238,768
DEFERRED TAX LIABILITIES..........................................................        3,947          4,106
OTHER LONG-TERM LIABILITIES.......................................................        7,593          7,970
MINORITY INTEREST IN CONSOLIDATED
     SPECIAL PURPOSE ENTITIES.....................................................           --             40

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $.001 par value, 10,000,000 shares authorized,
       none issued................................................................           --             --
     Common stock, $.001 par value, 30,000,000 shares authorized, 14,120,972
       and 14,005,482 shares issued and outstanding, respectively.................           14             14
     Additional paid-in capital...................................................      139,208        138,978
     Notes from shareholders......................................................         (661)          (651)
     Retained earnings............................................................       23,556         23,886
     Treasury stock (1,123,966 and 1,109,816 shares at cost, respectively)........       (8,340)        (8,090)
     Deferred compensation........................................................         (753)        (1,033)
                                                                                     ----------      ---------
         Total stockholders' equity...............................................      153,024        153,104
                                                                                     ----------      ---------
         Total liabilities and stockholders' equity...............................   $  435,836      $ 444,807
                                                                                     ==========      =========
</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,
                                                                                          -----------------------
                                                                                            2002          2001
                                                                                          ---------     ---------
                                                                                                       (restated)
<S>                                                                                       <C>           <C>
REVENUES................................................................................  $  68,475     $  60,628
OPERATING EXPENSES......................................................................     53,808        46,826
PRE-OPENING AND START-UP EXPENSES.......................................................         --         3,578
DEPRECIATION AND AMORTIZATION...........................................................      2,206         2,172
GENERAL AND ADMINISTRATIVE EXPENSES.....................................................      6,086         3,482
                                                                                          ---------     ---------

INCOME FROM OPERATIONS..................................................................      6,375         4,570
INTEREST EXPENSE........................................................................      5,795         4,672
INTEREST INCOME.........................................................................       (528)          (19)
MINORITY INTEREST IN LOSSES OF CONSOLIDATED
   SPECIAL PURPOSE ENTITIES.............................................................        (40)         (175)
                                                                                          ---------     ---------

INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE
   EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE............................................      1,148            92
PROVISION FOR INCOME TAXES..............................................................        513            38
                                                                                          ---------     ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
   PRINCIPLE............................................................................        635            54

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE,
   NET OF RELATED INCOME TAX PROVISION (BENEFIT)
   OF ($671) AND $535 IN 2002 AND 2001, RESPECTIVELY....................................       (965)          770
                                                                                          ---------     ---------

NET INCOME (LOSS).......................................................................  $    (330)    $     824
                                                                                          =========     =========

EARNINGS (LOSS) PER SHARE:
     BASIC
       Income before cumulative effect of changes in accounting principle...............  $     .05     $     .01
       Cumulative effect of changes in accounting principle.............................       (.08)          .08
                                                                                          ---------     ---------
       Net income (loss)................................................................  $    (.03)    $     .09
                                                                                          =========     =========

     DILUTED
       Income before cumulative effect of changes in accounting principle...............  $     .05     $     .01
       Cumulative effect of changes in accounting principle.............................       (.08)          .08
                                                                                          ---------     ---------
       Net income (loss)................................................................  $    (.03)    $     .09
                                                                                          =========     =========

NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
     BASIC..............................................................................     12,952         9,227
     DILUTED............................................................................     12,952         9,428
</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,
                                                                                          -----------------------
                                                                                             2002         2001
                                                                                          ---------    ----------
                                                                                                       (RESTATED)
<S>                                                                                       <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)....................................................................  $    (330)    $     824
   Adjustments to reconcile net income (loss) to net cash used in
     operating activities --
     Cumulative effect of changes in accounting principle...............................        965          (770)
     Depreciation.......................................................................      1,486         1,333
     Amortization.......................................................................        720           839
     Amortization of deferred compensation..............................................         44            --
     Non-cash interest expense..........................................................         95           345
     Provision for bad debts............................................................        480           241
     Deferred income taxes..............................................................       (159)           --
     Loss on sale of property and equipment.............................................         --            47
     Change in assets and liabilities
         Accounts receivable............................................................      3,174        (1,328)
         Restricted assets..............................................................      1,288           (40)
         Other assets...................................................................        633           256
         Accounts payable and accrued liabilities.......................................     (8,078)       (4,845)
         Deferred revenues and other liabilities........................................       (377)         (658)
                                                                                          ---------     ---------
     Net cash used in operating activities..............................................        (59)       (3,756)
                                                                                          ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures.................................................................     (1,973)       (5,789)
   Purchases of marketable securities...................................................     (1,752)           --
   Minority interest in consolidated special purpose entities...........................        (40)         (132)
                                                                                          ---------     ---------
     Net cash used in investing activities..............................................     (3,765)       (5,921)
                                                                                          ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term debt.........................................................        542        34,402
   Payments on long-term debt...........................................................         --       (25,000)
   Payments on capital lease obligations................................................        (37)          (10)
   Payments for debt issuance and other financing costs.................................         --          (399)
   Purchases of treasury stock..........................................................       (250)           --
   Proceeds from issuance of common stock...............................................        466           214
                                                                                          ---------     ---------
     Net cash provided by financing activities..........................................        721         9,207
                                                                                          ---------     ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS...............................................     (3,103)         (470)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................     56,794           620
                                                                                          ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..............................................  $  53,691     $     150
                                                                                          =========     =========

SUPPLEMENTAL CASH FLOW DISCLOSURE:
   Interest paid, net of amounts capitalized............................................  $   8,453     $   4,861
                                                                                          =========     =========
   Income taxes paid....................................................................  $   1,814     $   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 2001 Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission.

2.   RESTATEMENT

     The Company's lease financing arrangement under its 2000 Credit Facility is
a "synthetic lease". A synthetic lease is a form of lease financing that
qualifies for operating lease accounting treatment and, when all criteria
pursuant to generally accepted accounting principles (GAAP) are met, is kept
"off-balance sheet". Under such a structure, the owner/lessor of the properties
("Synthetic Lease Investor") could be considered as a virtual special purpose
entity when it obtains debt and equity capital to finance the acquisition or
construction of project(s) and leases the projects to a company. This financial
structure was used to finance the construction of the New Morgan Academy
completed in the first quarter of 2001, the acquisition of the Taylor Street
Center building in early 1999, and the construction-to-date of the Moshannon
Valley Correctional Center. The synthetic lease used to finance the above
projects was executed in December 1998 and was amended in July 2000 whereby the
available financing was increased from $40 million to $100 million and the lease
term extended to July 2005.

     Under current accounting rules, a Synthetic Lease Investor in a synthetic
lease treated as a special purpose entity must maintain at least a 3% equity
ownership interest in the property throughout the life of the lease. The
Company's synthetic lease documents, as amended in July 2000, provide for the
equity investor to fund 3.5% of project costs. There are provisions in the lease
and related credit documents for the lenders and Synthetic Lease Investor to
fund and be paid interest, yield and fees. Under current GAAP rules, the payment
of any yield and fees to the investors is required to be treated as a return of
capital rather than a return on capital.

     The Synthetic Lease Investor for the above projects received certain
customary payments to assist as co-arranger in the structure of the initial $40
million synthetic lease facility in 1998 and in July 2000 when the synthetic
lease facility was increased to $100 million. Although the Company does not
believe the lessor is a special purpose entity, the lessor is considered as a
"virtual" special purpose entity under certain accounting interpretations.
Therefore, these payments could be interpreted to reduce the Synthetic Lease
Investor's equity ownership in the leased projects below the required 3% level
as of the second quarter of 2000. Pursuant to this interpretation, these
synthetic leases no longer qualified for off-balance sheet treatment beginning
in the second quarter of 2000. Accordingly, the assets and liabilities and
results of operations of the synthetic lease owned by the Synthetic Lease
Investor are consolidated in the Company's financial statements.

     As a result of consolidating the synthetic lease assets and liabilities,
the Company's accompanying consolidated financial statements reflect, among
other things, the depreciation expense on the associated properties and interest
expense related to the Synthetic Lease Investor's debt, instead of rent expense.

                                      -5-
<Page>

     On August 14, 2001, the Company completed an arms' length sale and
leaseback transaction involving 11 of its real estate facilities (the "2001 Sale
and Leaseback Transaction"). The Company sold the facilities to an unaffiliated
company, 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. 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.

     MCF is an unaffiliated special purpose entity ("SPE"). Under current
accounting rules, a SPE must maintain at least a 3% equity ownership interest
throughout the life of the lease. In September 2001, the Company entered into a
separate retainer agreement, as amended, with affiliates of the equity investor
in MCF ("MCF Equity Investor"), and in November 2001, paid the related retainer
fee of $3.65 million for financial advisory services related to specific
separate potential future financing projects and the strategic development of
the Company's business. The retainer will be applied on a mutually agreed upon
basis toward future contingent fees associated with investment banking services
that are expected to be provided to the Company. Under certain accounting
interpretations, this retainer has been deemed to reduce the equity investment
in MCF to below the required 3% level. The Company has consolidated the assets,
liabilities, and results of operations of MCF in the Company's accompanying
consolidated financial statements beginning August 14, 2001. As a result of
consolidating the assets and liabilities of MCF, the Company's consolidated
financial statements reflect, among other things, the depreciation expense on
the associated properties and interest expense on the bond debt of MCF used to
finance MCF's acquisition of the 11 facilities in the 2001 Sale and Leaseback
Transaction. For income tax purposes, the Company recognizes rent expense
pursuant to the terms of its lease with MCF and does not consolidate the assets,
liabilities or results of operations of MCF.

     All applicable amounts relating to the aforementioned restatements have
been reflected in the consolidated financial statements and notes thereto.

3.   CHANGES IN ACCOUNTING PRINCIPLES

     CHANGE EFFECTIVE JANUARY 1, 2002

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. The new rules
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and also specifies the criteria for
the recognition of intangible assets separately from goodwill. Under the new
rules, goodwill will no longer be amortized but will be subject to an impairment
test at least annually. During the years ended December 31, 2001 and 2000,
goodwill amortization was $646,000 and $650,000, respectively. Other intangible
assets that meet the new criteria will continue to be amortized over their
useful lives.

     The Company adopted SFAS No. 141 and 142 and recorded a cumulative effect
of change in accounting principle charge of $965,000 (unaudited), net of tax, on
January 1, 2002. Other than the cumulative effect of change in accounting
principle and goodwill no longer being amortized, the adoption of SFAS No. 141
and 142 will have no impact on the Company.

     The following table reflects, on an unaudited pro-forma basis the results
of operations as though FAS No. 142 had been adopted and goodwill no longer
amortized as of January 1, 2001.

                                      -6-
<Page>

<Table>
<Caption>
                                                                                    THREE MONTHS ENDED
                                                                                      MARCH 31, 2001
                                                                                    ------------------
                                                                                        (RESTATED)
               <S>                                                                      <C>
               Reported net income....................................................  $     824
               Goodwill amortization..................................................        130
                                                                                        ---------
               Adjusted net income....................................................  $     954
                                                                                        =========
               Basic earnings per share:
                 Reported net income..................................................  $     .09
                 Goodwill amortization................................................        .01
                                                                                        ---------
                 Adjusted net income..................................................  $     .10
                                                                                        =========
               Diluted earnings per share:
                 Reported net income..................................................  $     .09
                 Goodwill amortization................................................        .01
                                                                                        ---------
                 Adjusted net income..................................................  $     .10
                                                                                        =========
</Table>

     CHANGE EFFECTIVE JANUARY 1, 2001

     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.

4.   CREDIT FACILITIES

     The Company's long-term debt consisted of the following (in thousands):

<Table>
<Caption>
                                                                              MARCH 31,     DECEMBER 31,
                                                                                2002            2001
                                                                            ------------    ------------
             <S>                                                             <C>             <C>
             DEBT OF CORNELL COMPANIES, INC.:
               Revolving Line of Credit due July 2005 with
                 an interest rate of prime plus 2.0%, or
                 LIBOR plus 3.0%..........................................   $      --       $       --
               Capital lease obligations..................................          48               85
                                                                             ---------       ----------
               Subtotal...................................................          48               85
                                                                             ---------       ----------

             DEBT OF SPECIAL PURPOSE ENTITIES:
               Synthetic Lease Investor Note A due July 2005
                 with an interest rate of LIBOR plus 3.25%................      40,657           40,197
               Synthetic Lease Investor Note B due July 2005
                 with an interest rate of LIBOR plus 3.50%................       8,053            7,971
               8.47% Bonds due 2016.......................................     197,400          197,400
                                                                             ---------       ----------
             Subtotal.....................................................     246,110          245,568
                                                                             ---------       ----------

             Consolidated total debt......................................     246,158          245,653

             Less: current maturities.....................................      (6,848)          (6,885)
                                                                             ---------       ----------

             Consolidated long-term debt..................................   $ 239,310       $  238,768
                                                                             =========       ==========
</Table>

                                      -7-
<Page>

     The Company's 2000 Credit Facility, as amended, 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. Due to the consolidation for financial reporting purposes of
MCF as of August 14, 2001, the Company was not in compliance with certain
leverage ratio covenants. On April 5, 2002, the 2000 Credit Facility was amended
to waive such non-compliance and to revise the covenants to levels that
accommodate the Company's consolidation of special purpose entities in its
consolidated balance sheet and statement of operations. As a result of this
waiver and amendment, the Company recognized a pre-tax charge to interest
expense of approximately $825,000 during the first quarter of 2002 for lender
fees and other professional fees. On April 11, 2002, the Company obtained a
waiver from the lenders under the 2000 Credit Facility regarding the pending
contractual default for the Moshannon Valley Correctional Center's construction
delay.

     Additionally, the amended 2000 Credit Facility provides the Company with
the ability to enter into synthetic lease agreements for the acquisition or
development of operating facilities. This synthetic lease financing arrangement
provides for funding to the lessor under the operating leases of up to $100.0
million, of which approximately $49.9 million had been utilized as of March 31,
2002. The Company expects to utilize the remaining capacity under this synthetic
lease financing arrangement to complete construction of the Moshannon Valley
Correctional Center. The Synthetic Lease Investor's Note A and Note B have total
credit commitments of $81.4 million and $15.1 million, respectively. The Company
pays commitment fees at a rate of 0.5% annually for the unused portion of the
synthetic lease financing capacity. The Synthetic Lease Investor's Notes A and B
are cross collateralized with the Company's revolving line of credit and contain
cross default provisions.

     On August 14, 2001, MCF issued $197.4 million of 8.47% taxable revenue
bonds due August 1, 2016. Interest on the bonds is payable by MCF semiannually
on February 1 and August 1, commencing February 1, 2002, and principal is
payable by MCF in annual installments commencing August 1, 2002.

     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.

     On November 30, 2001 the Company completed an offering of its common stock.
Net proceeds to the Company from the sale of 3,450,000 newly issued shares was
approximately $43.8 million. The Company used a portion of the proceeds to repay
outstanding borrowings of $39.4 million and retired the notes under the
Company's Note and Equity Purchase Agreements (the "Subordinated Notes") entered
into in July 2000.

     As a result of the early retirement of the Subordinated Notes, the Company
recognized extraordinary charges of $2.9 million, net of income tax of $2.0
million due to the write-off of related unamortized deferred debt issuance costs
and debt discount and assessed contractual prepayment fees.

5.   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.

                                      -8-
<Page>

     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 (the
"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 and the Stop-Work Order was lifted by the FBOP on August 9,
2001.

     In September 1999, the Company received correspondence from the Office of
the Attorney General of the Commonwealth of Pennsylvania indicating its belief
that the operation of a private prison in Pennsylvania is unlawful. The Company
and the FBOP have had, and continue to have, discussions with the Attorney
General's staff regarding these and related issues. Management anticipates that
these discussions will be resolved in the near-term. As of December 31, 2001,
the Company had incurred approximately $14.9 million for construction and land
development costs and capitalized interest for the Moshannon Valley Correctional
Center. According to the FBOP contract, as amended, the Company must complete
the construction of the project by April 15, 2002. The Company will not be able
to complete construction within that time frame. While the FBOP has not asserted
any default or made any claim, if the Company is not able to negotiate a
contract amendment with the FBOP, then the FBOP may have the right to assert
that the Company has not completed construction of the project within the time
frames provided in the FBOP contract, as amended. In the event that the FBOP
desires to continue with the Moshannon Valley Correctional Center, management
expects that the contract will be amended to address cost and construction
timing matters resulting from the extended delay. In the event that the FBOP
decides not to continue with the Moshannon project and terminates the contract,
management believes that the Company has the right to recover its invested
costs. In the event any portion of these costs are determined not to be
reimbursed upon contract termination, such costs would be expensed.

     At March 31, 2002, accounts receivable include costs totaling $1.4 million
for direct costs incurred by the Company since the issuance of the Stop-Work
Order in June 1999 for payroll and other operating costs related to the
Moshannon Valley Correctional Center. These costs were incurred 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 if they are determined not to be
reimbursable.

6.   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 common stock equivalents such
as stock options and warrants. Due to the loss incurred for the quarter ended
March 31, 2002, diluted EPS excludes the impact from common stock equivalents
because they were antidilutive.

7.   DERIVATIVE FINANCIAL INSTRUMENTS

     In August 2001, MCF completed a bond offering to finance the 2001 Sale and
Leaseback Transaction. In connection with the bond offering, two reserve fund
accounts were established by MCF pursuant to the terms of the indenture. MCF's
Debt Service Reserve Fund, aggregating $23.8 million, was established to make
payments on MCF's outstanding bonds in the event the Company (as lessee) fails
to make scheduled rental payments to MCF. MCF's Debt Service Fund, which
aggregated $9.5 million at December 31, 2001, is used to accumulate monthly
lease payments MCF receives from the Company until such funds are used to pay
MCF's semi-annual bond payments. Both reserve fund accounts are subject to
agreements with the MCF Equity Investor whereby guaranteed rates of return of 3%
and 5.08%, respectively, are provided for

                                      -9-
<Page>

the balance in the Debt Service Reserve Fund and the Debt Service Fund. The
guaranteed rates of return are characterized as non-hedge derivative
instruments. The derivatives have an aggregate fair value of $4.0 million, which
has been recorded as a decrease to the equity investment in MCF made by the MCF
Equity Investor (MCF Minority Interest) and as deferred income (a liability
account) in the accompanying consolidated balance sheet. Changes in the
derivative instruments will be recorded as an adjustment to deferred income.

     Also in connection with MCF's bond offering, the MCF Equity Investor
provided a guarantee of the Debt Service Reserve Fund if a bankruptcy of the
Company were to occur and a trustee for the estate of the Company were to obtain
jurisdiction of the Debt Service Reserve Fund for the Company's estate. This
guarantee is characterized as a non-hedge derivative instrument. The derivative
has an estimated fair value $2.5 million, which has been recorded as an increase
to MCF Minority Interest and as a deferred asset. Changes in the derivative
instrument will be recorded as an adjustment to the deferred asset.

8.  DEFERRED BONUS PLAN

     At March 31, 2002, cash and cash equivalents and other current assets
included $1.6 million and $1.8 million, respectively, representing amounts
deposited on behalf of individual participants into a rabbi trust account under
the Company's deferred bonus plan. At December 31, 2001, cash and cash
equivalents included $3.6 million of such deposits. The investments of the rabbi
trust represent assets of the Company and are included in the accompanying
balance sheet based on the nature of the assets held. Assets placed into the
rabbi trust are irrevocable, therefore they are restricted as to the Company's
use under the terms of the trust and the deferred bonus plan.

9.  RELATED PARTY TRANSACTIONS

     One of the Directors of the Company is a partner in the law firm that
provides legal services to the Company. The Company pays customary legal fees
for such services.

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 2001 Annual Report on Form 10-K,
as amended. 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, incentive bonuses, amortization of intangibles,
interest and income taxes. Corporate and other assets are comprised primarily of
cash, investments, accounts receivable, deposits, deferred costs, property and
equipment and deferred taxes.

                                      -10-
<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,
                                                                                       ------------------------
                                                                                          2002          2001
                                                                                       ----------    ----------
                                                                                                     (restated)
<S>                                                                                    <C>           <C>
Revenues
     Adult secure institutional.....................................................   $   24,007    $   23,840
     Juvenile.......................................................................       31,808        24,495
     Pre-release....................................................................       12,660        12,293
                                                                                       ----------    ----------
Total revenues......................................................................   $   68,475    $   60,628
                                                                                       ==========    ==========

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

Income from operations
     Adult secure institutional.....................................................   $    5,787    $    4,931
     Juvenile.......................................................................        4,145         2,320
     Pre-release....................................................................        3,183         2,595
     General and administrative expense.............................................       (6,086)       (3,482)
     Retention and incentive bonuses................................................         (197)       (1,188)
     Amortization of intangibles....................................................         (220)         (381)
     Corporate and other............................................................         (237)         (225)
                                                                                       ----------    ----------
Total income from operations........................................................   $    6,375    $    4,570
                                                                                       ==========    ==========
</Table>

<Table>
<Caption>
                                                                                       MARCH 31,     DECEMBER 31,
                                                                                         2002           2001
                                                                                       ----------    ----------
<S>                                                                                    <C>           <C>
Assets
     Adult secure institutional.....................................................   $  154,537    $ 155,085
     Juvenile.......................................................................       97,405      102,766
     Pre-release....................................................................       59,777       57,962
     Intangible assets, net.........................................................       13,361       15,456
     Corporate and other............................................................      110,756      113,538
                                                                                       ----------    ---------
Total assets........................................................................   $  435,836    $ 444,807
                                                                                       ==========    =========
</Table>

                                      -11-
<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 its three operating divisions: (1) adult secure institutional
services, (2) juvenile treatment, educational and detention services and (3)
pre-release correctional and treatment services. As of March 31, 2002, the
Company had contracts to operate 69 facilities with a total service capacity of
15,444. The Company's facilities are located in 13 states and the District of
Columbia.

     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 the average occupancy percentages.

<Table>
<Caption>
                                                                                   MARCH 31,        MARCH 31,
                                                                                      2002            2001
                                                                                  ------------    ------------

           <S>                                                                       <C>             <C>
           Total service capacity (1):
                Residential.....................................................     11,267          11,446
                Non-residential community-based.................................      4,177           3,046
                                                                                  ---------      ----------
                  Total.........................................................     15,444          14,492
           Service capacity in operation (end of period)........................     14,349          13,173
           Contracted beds in operation (end of period) (2).....................      9,503           9,991
           Average occupancy based on contracted beds in operation (2) (3)......       97.9%           95.2%
           Average occupancy excluding start-up operations (2)..................       97.9%           96.3%
</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 guaranteed take-or-pay basis
or on a cost-plus reimbursement basis.

     Factors which the Company considers in determining the per diem rate to
charge includes (1) the programs specified by the contract and the related
staffing levels, (2) wage levels customary in the respective geographic areas,
(3) whether the proposed facility is to be leased or purchased and (4) 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 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 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 that are
incurred prior to

                                      -12-
<Page>

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 (11 facilities in operation at March 31,
2002).

     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.

     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 at least 95% of the
contractual monthly revenue once the facility opens regardless of actual
occupancy.

     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.

     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 six-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.

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

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

                                      -13-
<Page>

RESULTS OF OPERATIONS

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

<Table>
<Caption>
                                                                                          THREE MONTHS
                                                                                         ENDED MARCH 31,
                                                                                  --------------------------
                                                                                      2002            2001
                                                                                  ----------     -----------
                                                                                                   (restated)
           <S>                                                                         <C>             <C>
           Total revenues.......................................................       100.0%          100.0%
           Operating expenses...................................................        78.6            77.3
           Pre-opening and start-up expenses....................................        --               5.9
           Depreciation and amortization........................................         3.2             3.6
           General and administrative expenses..................................         8.9             5.7
                                                                                  ----------     -----------
           Income from operations...............................................         9.3             7.5
           Interest expense, net................................................         7.7             7.7
           Minority interest in losses of consolidated special purpose entities.         (.1)            (.3)
                                                                                  ----------     -----------
           Income before provision for income taxes and
              cumulative effect of changes in accounting principle..............         1.7              .1
           Provision for income taxes...........................................          .8              --
                                                                                  ----------     -----------
           Income before cumulative effect of changes
              in accounting principle...........................................          .9%             .1%
                                                                                  ==========     ===========
</Table>

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
(RESTATED)

     REVENUES. Revenues increased 12.9% to $68.5 million for the three months
ended March 31, 2002 from $60.6 million for the three months ended March 31,
2001.

     Adult secure institutional division revenues increased to $24.0 million for
the three months ended March 31, 2002 from $23.8 million for the three months
ended March 31, 2001 due principally to per diem rate increases realized in 2001
offset by a reduction in revenue as a result of the Company's termination of the
Santa Fe County Detention Center contract effective September 30, 2001. There
were no revenues attributable to start-up operations for the three months ended
March 31, 2002 and 2001. Average occupancy was 97.3% for the three months ended
March 31, 2002 compared to 97.5% for the three months ended March 30, 2001.

     Juvenile division revenues increased to $31.8 million for the three months
ended March 31, 2002 from $24.5 million for the three months ended March 31,
2001 due primarily to (1) the New Morgan Academy which began operations in the
fourth quarter of 2000, (2) the commencement of a management contract at the
Alexander Youth Center in the third quarter of 2001, (3) the opening of the
William Penn Harrisburg Alternative School in the third quarter of 2001, (4)
increased occupancy at various facilities including the Griffin Juvenile
Facility and (5) increased occupancy at the Cornell Abraxas Center for
Adolescent Females, or ACAF, due to a facility expansion completed early in
2001. There were no revenues attributable to start-up operations for the three
months ended March 31, 2002. Revenues from start-up operations were
approximately $2.7 million for the three months ended March 31, 2001 and were
principally attributable to the New Morgan Academy. Average occupancy, excluding
start-up operations in 2001, was 89.8% for the three months ended March 31, 2002
compared to 90.1% for the three months ended March 31, 2001.

    Pre-release division revenues increased to $12.7 million for the three
months ended March 31, 2002 from $12.3 million for the three months ended March
31, 2001 due to fluctuations in occupancy at various facilities offset by a
decrease in revenue as a result of the terminations of the San Diego Treatment
Center

                                      -14-
<Page>

and the Durham Treatment Center contracts in 2001. Average occupancy for the
three months ended March 31, 2002 was 107.3% compared to 94.5% for the three
months ended March 31, 2001.

     OPERATING EXPENSES. Operating expenses increased 14.9% to $53.8 million for
the three months ended March 31, 2002 from $46.8 million for the three months
ended March 31, 2001.

     Adult secure institutional division operating expenses decreased 6.1% to
$17.4 million for the three months ended March 31, 2002 from $18.6 million for
the three months ended March 31, 2001 due principally to the Company's
termination of the Santa Fe County Detention Center contract effective September
30, 2001 offset, in part, by an increase in operating expenses at the Big Spring
Complex due to increased occupancy as a result of a facility expansion in the
first quarter of 2001. As a percentage of revenues, adult secure institutional
division operating expenses were 72.6% for the three months ended March 31, 2002
compared to 77.9% for the three months ended March 31, 2001. The comparable
operating margin was impacted favorably due to the termination of the Santa Fe
County Detention Center contract, the expansion of the Big Spring Complex,
certain per diem increases, and unusually high utilities and inmate medical
expenses during the first quarter of 2001.

     Juvenile division operating expenses increased 45.8% to $27.2 million for
the three months ended March 31, 2002 from $18.6 million for the three months
ended March 31, 2001 due principally to (1) increased occupancy at the New
Morgan Academy, (2) the commencement of a management contract at the Alexander
Youth Center in the third quarter of 2001, (3) the opening of the William Penn
Harrisburg Alternative School in the third quarter of 2001 and (4) the expansion
of ACAF completed in early 2001. As a percentage of revenues, excluding the
start-up operations of the New Morgan Academy in 2001, operating expenses were
85.4% for the three months ended March 31, 2002 compared to 85.5% for the three
months ended March 31, 2001.

     Pre-release division operating expenses decreased 4.5% to $9.2 million for
the three months ended March 31, 2002 from $9.6 million for the three months
ended March 31, 2001 as a result of the terminations of the Durham Treatment
Center and San Diego Treatment Center contracts in 2001. As a percentage of
revenues, operating expenses were 72.6% for the three months ended March 31,
2002 compared to 78.2% for the three months ended March 31, 2001. The 2002
operating margin was impacted favorably as a result of higher occupancy levels
at various facilities and due to the terminations of the Durham Treatment Center
and San Diego Treatment Center contracts.

     PRE-OPENING AND START-UP EXPENSES. There were no pre-opening and start-up
expenses for the three months ended March 31, 2002. Pre-opening and start-up
expenses of $3.6 million for the three months ended March 31, 2001 were
attributable to the start-up activities of the New Morgan Academy and to an
expansion of ACAF.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization was
approximately $2.2 million for the three months ended March 31, 2002 and 2001.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $6.1 million for the three months ended March 31, 2002 from $3.5
million for the three months ended March 31, 2001. General and administrative
expenses for the three months ended March 31, 2002 included approximately $1.7
million of legal and professional fees related to the special committee review
and the restatement of the Company's financial statements. Excluding these
charges, general and administrative expenses increased 27.1% from the same
period of prior year due principally to increased compensation costs, business
development costs and certain public affairs costs.

                                      -15-
<Page>

     INTEREST. Interest expense, net of interest income, increased to $5.3
million for the three months ended March 31, 2002 from $4.7 million for the
three months ended March 31, 2001. For the three months ended March 31, 2002
interest expense includes approximately $825,000 for lenders' fees and related
professional fees incurred to obtain certain waivers and amendments to the
Company's credit agreement obtained in conjunction with the restatement of the
Company's financial statements.

     Capitalized interest for the three months ended March 31, 2002 and 2001 was
$197,000 and $544,000, respectively. Capitalized interest for the three months
ended March 31, 2002 related to the construction of the Moshannon Valley
Correctional Center. Capitalized interest for the three months ended March 31,
2001 related to construction of the Moshannon Valley Correctional Center, the
New Morgan Academy and to an expansion at the Big Spring Complex.

     MINORITY INTEREST IN LOSSES OF CONSOLIDATED SPECIAL PURPOSE ENTITIES.
Minority interest in consolidated special purpose entities represents third
party equity contributed to the special purpose entities consolidated by the
Company for financial reporting purposes. Minority interest is adjusted for
income and losses of the special purpose entities. The cumulative losses of MCF
exceeded the recorded minority interest of MCF during the first quarter of 2002.
The cumulative losses of the Synthetic Lease Investor exceeded the recorded
minority interest of the Synthetic Lease Investor during the third quarter of
2001. Since the cumulative losses of MCF and the Synthetic Lease Investor exceed
the equity which is recorded as minority interest by the Company, the excess
losses are being recorded in the Company's Consolidated Statement of Operations.

     INCOME TAXES. For the three months ended March 31, 2002 and 2001, the
Company recognized a provision for income taxes at an estimated effective rate
of 44.7% and 41.3%, respectively. The Company's effective rate increased because
the income tax benefits on the losses of the consolidated special purpose
entities has been recognized at the rate of 35%.

LIQUIDITY AND CAPITAL RESOURCES

     GENERAL. The Company's primary capital requirements are for (1)
construction of new facilities, (2) expansions of existing facilities, (3)
working capital, (4) pre-opening and start-up costs related to new operating
contracts, (5) acquisitions, (6) information systems hardware and software, and
(7) furniture, fixtures and equipment. Working capital requirements generally
increase immediately prior to the Company commencing management of a new
facility as the Company incurs start-up costs and purchases necessary equipment
and supplies before facility management revenue is realized.

     2001 COMMON STOCK OFFERING. On November 30, 2001 the Company completed an
offering of its common stock. Net proceeds to the Company from the sale of the
3,450,000 newly issued shares were approximately $43.8 million. The Company used
a portion of the proceeds to repay outstanding borrowings of $39.4 million and
retired the notes under its Note and Equity Purchase Agreement (the
"Subordinated Notes") entered into in July 2000.

     2001 SALE AND LEASEBACK TRANSACTION. On August 14, 2001, the Company
completed an arms' length sale and leaseback transaction involving 11 of its
real estate facilities (the "2001 Sale and Leaseback Transaction"). The Company
sold the facilities to an unaffiliated company, 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 an unaffiliated special purpose entity ("SPE"). Under current
accounting rules, an SPE must maintain at least a 3% ownership interest
throughout the life of the lease. In September 2001, the Company entered into a
separate retainer agreement, thereafter amended, with affiliates of the equity
investor in MCF

                                      -16-
<Page>

("MCF Equity Investor"), and in November 2001, paid the retainer fee of $3.65
million for financial advisory services for separate potential future financing
projects and the strategic development of the Company's business. The retainer
will be applied on a mutually agreed upon basis toward future contingent fees
associated with investment banking services that are expected to be provided to
the Company. Under certain accounting interpretations, this retainer has been
deemed to reduce the equity investment in MCF to below the required 3% level.
Therefore, for financial reporting purposes only, the Company has consolidated
the assets, liabilities, and results of operations of MCF in the Company's
accompanying consolidated financial statements beginning August 14, 2001. As a
result of consolidating the assets and liabilities of MCF, the Company's
consolidated financial statements reflect the depreciation expense on the
associated properties and interest expense on the bond debt of MCF used to
finance MCF's acquisition of the 11 facilities in the 2001 Sale and Leaseback
Transaction.

     MCF issued $197.4 million of 8.47% bonds due August 2016. The Company used
$120.0 million of the $173 million of proceeds received by the Company from the
sale of such facilities to repay the Company's long-term senior debt and
invested the remaining proceeds of approximately $53.0 million in short-term
securities.

     The Company's consolidated financial statements include the financial
statements of MCF as of August 14, 2001 and thereafter.

     LONG-TERM CREDIT FACILITIES. The Company's amended 2000 Credit Facility
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 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. Due in part to the consolidation of MCF as
of August 14, 2001, the Company was not in compliance with certain covenants
required by the 2000 Credit Facility. On April 5, 2002, the 2000 Credit Facility
was amended to waive such non-compliance and to revise the covenants to levels
that accommodate the Company's consolidation of special purpose entities in its
Consolidated Balance Sheet and Statements of Operations. As a result of this
waiver and amendment, the Company paid fees and recognized a pre-tax charge to
interest expense of approximately $825,000 in the first quarter of 2002. On
April 11, 2002, the Company obtained a waiver from the lenders under the 2000
Credit Facility regarding the pending contractual default for the Moshannon
Valley Correctional Center's construction delay.

     Additionally, the amended 2000 Credit Facility provides the Company with
the ability to enter into lease financing arrangements for the acquisition or
development of operating facilities. This lease financing arrangement provides
for funding to the lessor under the leases of up to $100.0 million, of which
approximately $49.9 million had been utilized as of March 31, 2002. The Company
expects to utilize the remaining capacity under this lease financing arrangement
to complete construction of the Moshannon Valley Correctional Center. The
Company pays commitment fees at a rate of 0.5% annually for the unused portion
of the lease financing capacity.

     The Company's lease financing arrangement under its 2000 Credit Facility is
a "synthetic lease". A synthetic lease is a form of lease financing that
qualifies for operating lease accounting treatment and, when all criteria
pursuant to generally accepted accounting principles (GAAP) are met, is kept
"off-balance sheet". Under such a structure, the owner/lessor of the properties
("Synthetic Lease Investor") could be considered a virtual SPE when it obtains
debt and equity capital to finance the project(s) and leases the projects to a
company. This financial structure was used to finance the construction of the
New Morgan Academy

                                      -17-
<Page>

completed in the first quarter of 2001, the acquisition of the Taylor Street
Center building in early 1999, and the construction-to-date of the Moshannon
Valley Correctional Center which is still in process. The synthetic lease used
to finance the above projects was originally entered into in December 1998 and
was amended in July 2000 whereby the available financing was increased from $40
million to $100 million and the lease term extended to July 2005.

     Under current accounting rules, the Synthetic Lease Investor in a virtual
SPE must maintain at least a 3% equity ownership interest in the property
throughout the life of the lease. The Company's synthetic lease documents, as
amended in July 2000, provide for the equity investor to fund 3.5% of project
costs. There are provisions in the lease and related credit documents for the
lenders and Synthetic Lease Investor to fund and be paid interest, yield and
fees. Under current GAAP rules, the payment of any yield and fees to the
investors is required to be treated as a return of capital rather than a return
on capital.

     The Synthetic Lease Investor for the above projects received certain
customary payments to assist as co- arranger in the structure of the initial $40
million synthetic lease facility in 1998 and in July 2000 when the synthetic
lease facility was increased to $100 million. Although the Company does not
believe the lessor is a special purpose entity, the lessor could be considered
as a "virtual" special purpose entity under certain accounting interpretations.
Therefore, these payments could be interpreted to reduce the Synthetic Lease
Investor's equity ownership in the leased projects below the required 3% level
as of the second quarter of 2000. Pursuant to this interpretation, these
synthetic leases would no longer qualify for off-balance sheet treatment
beginning in the second quarter of 2000. Accordingly, the assets and liabilities
and results of operations of the synthetic lease owned by the Synthetic Lease
Investor are consolidated in the Company's financial statements beginning in the
second quarter of 2000.

     As a result of consolidating the synthetic lease assets and liabilities,
the Company's accompanying consolidated financial statements reflect the
depreciation expense on the associated properties and interest expense related
to the Synthetic Lease Investor's debt, instead of rent expense.

     The Synthetic Lease Investor's Note A and Note B have total credit
commitments of $81.4 million and $15.1 million, respectively. The Synthetic
Lease Investor's Notes A and B are cross collateralized with the Company's
revolving line of credit and contain cross default provisions.

     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.

     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 the FBOP in Moshannon Valley, Pennsylvania (the
"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 and the Stop-Work Order was lifted by the FBOP on August 9,
2001.

     In September 1999, the Company received correspondence from the Office of
the Attorney General of the Commonwealth of Pennsylvania indicating its belief
that the operation of a private prison in Pennsylvania is unlawful. The Company
and the FBOP have had, and continue to have, discussions with the Attorney
General's staff regarding these and related issues. Management anticipates that
these discussions will be resolved in the near-term. As of March 31, 2002, the
Company had incurred approximately $15.4 million

                                      -18-
<Page>

for construction and land development costs and capitalized interest for the
Moshannon Valley Correctional Center. According to the FBOP contract, as
amended, the Company was required to complete the construction of the project by
April 15, 2002. The Company was unable to complete construction within that time
frame. While the FBOP has not asserted any default or made any claim, if the
Company is not able to negotiate a contract amendment with the FBOP, then the
FBOP may have the right to assert that the Company has not completed
construction of the project within the time frames provided in the FBOP
contract, as amended. In the event that the FBOP desires to continue with the
Moshannon Valley Correctional Center, management expects that the contract will
be amended to address cost and construction timing matters resulting from the
extended delay. In the event that the FBOP decides not to continue with the
Moshannon project and terminates the contract, management believes that the
Company has the right to recover its invested costs. In the event any portion of
these costs are determined not to be reimbursed upon contract termination, such
costs would be expensed.

     At March 31, 2002, accounts receivable include costs totaling $1.4 million
for direct costs incurred by the Company since the issuance of the Stop-Work
Order in June 1999 for payroll and other operating costs related to the
Moshannon Valley Correctional Center. These costs were incurred 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 if they are determined not to be
reimbursable.

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

     CAPITAL EXPENDITURES. Capital expenditures for the three months ended March
31, 2002 were $2.0 million and related principally to various facility
improvements, information technology and software development, and capitalized
interest on the Moshannon Valley Correctional Center construction costs.

     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 Company's 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
2001, management believes that inflation has not had a material effect on the
Company's 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 term 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.

                                      -19-
<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 debt on the
Company's consolidated financial statements with fixed interest rates consists
of the 8.47% Bonds issued by MCF in August 2001 in connection with the 2001 Sale
and Leaseback Transaction. At March 31, 2002, approximately 20% ($48.7 million
of debt outstanding to the Synthetic Lease Investor) of the Company's
consolidated 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
$66,000 for the three months ended March 31, 2002. At March 31, 2002, the fair
value of the Company's consolidated 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 contains 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, (1) the impact of the restatement of our
financial statements on current, anticipated or future Company awards,
agreements, projects and financing arrangements, (2) the outcomes of pending
putative class action shareholder and derivative lawsuits, (3) the arrangements
between the Company and its investment bank with respect to the financial
advisory services provided by such investment bank, (4) risks associated with
acquisitions and the integration thereof (including the ability to achieve
administrative and operating cost savings and anticipated synergies), (5) the
timing and costs of expansions of existing facilities, (6) changes in
governmental policy to eliminate or discourage the privatization of
correctional, detention and pre-release services in the United States, (7)
availability of debt and equity financing on terms that are favorable to the
Company, (8) 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 (9) 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.

                                      -20-
<Page>

PART II  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     In March and April 2002, the Company and certain of its directors, Steven
W. Logan and John L. Hendrix, were named as defendants in four lawsuits styled
as follows: (1) GRAYDON WILLIAMS, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY
SITUATED V. CORNELL COMPANIES, INC, ET AL., No. H-02-0866, in the United States
District Court for the Southern District of Texas, Houston Division; (2) RICHARD
PICARD, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED V. CORNELL
COMPANIES, INC., ET AL., No. H-02-1075, in the United States District Court for
the Southern District of Texas, Houston Division; (3) LOUIS A. DALY, ON BEHALF
OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED V. CORNELL COMPANIES, INC., ET AL.,
No. H-02-1522, in the United States District Court for the Southern District of
Texas, Houston Division, and (4) ANTHONY J. SCALERO, ON BEHALF OF HIMSELF AND
ALL OTHERS SIMILARLY SITUATED V. CORNELL COMPANIES, INC., ET AL., No. H-02-1567,
in the United States District Court for the Southern District of Texas, Houston
Division. The aforementioned lawsuits are putative class action lawsuits brought
on behalf of all purchasers of the Company's common stock between March 6, 2001
and March 5, 2002. The lawsuits involve disclosures made concerning two prior
transactions executed by the Company: the August 2001 sale leaseback transaction
and the 2000 synthetic lease transaction. The plaintiffs allege that the
defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), Rule 10b-5 promulgated under Section 10(b) of the Exchange Act,
and/or Section 20(a) of the Exchange Act. The Company believes that it has good
defenses to each of the plaintiffs' claims and intends to vigorously defend
against each of the claims.

     Also in March 2002, the Company, its directors, and its independent auditor
Arthur Andersen LLP, were sued in a derivative action styled as WILLIAM WILLIAMS
DERIVATIVELY AND ON BEHALF OF NOMINAL DEFENDANT CORNELL COMPANIES, INC. V.
ANTHONY R. CHASE, ET AL., No. 2002-15614, in the 127th Judicial District Court
of Harris County, Texas. The lawsuit alleges breaches of fiduciary duty by all
of the individual defendants and asserts breach of contract and professional
negligence claims only against Arthur Andersen LLP. The Company believes that it
has good defenses to each of the plaintiff's claims and intends to vigorously
defend against each of the claims.

     While the plaintiffs in these cases have not quantified their claim of
damages and the outcome of the matters discussed above cannot be predicted with
certainty, based on information known to date, management believes that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position, operating results or cash flow.

     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, offender
privileges and employment matters.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a.   Exhibits

              11.1 Statement Re: Computation of Per Share Earnings

         b.   Reports on Form 8-K

              None.

                                      -21-
<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, 2002              By:  /s/ Harry J. Phillips, Jr.
                                       -----------------------------------------
                                       HARRY J. PHILLIPS, JR.
                                       Executive Chairman, Chairman of the
                                       Board and Director
                                       (Principal Executive Officer)


Date:   May 15, 2002              By:  /s/ John L. Hendrix
                                       -----------------------------------------
                                       JOHN L. HENDRIX
                                       Senior Vice President and
                                       Chief Financial Officer
                                       (Principal Financial Officer)

                                      -22-