<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 JUNE 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)

                     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 July 31, 2001 Registrant had outstanding 9,198,867 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>

                                                                                       JUNE 30,     DECEMBER 31,
                                                                                        2001           2000
                                                                                     -----------   ------------
<S>                                                                                  <C>           <C>
                                              ASSETS

CURRENT ASSETS:
     Cash and cash equivalents....................................................   $      176      $     620
     Accounts receivable, net.....................................................       61,569         55,262
     Deferred tax asset...........................................................          667            667
     Prepaids and other...........................................................        3,462          4,363
     Restricted assets............................................................        1,986          2,011
                                                                                     ----------      ---------
         Total current assets.....................................................       67,860         62,923
PROPERTY AND EQUIPMENT, net.......................................................      204,134        201,683
OTHER ASSETS:
     Intangible assets, net.......................................................       16,159         16,861
     Deferred costs and other.....................................................       10,440          9,972
                                                                                     ----------      ---------
         Total assets.............................................................   $  298,593      $ 291,439
                                                                                     ==========      =========


                               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable and accrued liabilities.....................................   $   26,523      $  33,179
     Current portion of long-term debt............................................           43             41
                                                                                     ----------      ---------
         Total current liabilities................................................       26,566         33,220
LONG-TERM DEBT, net of current portion............................................      159,488        146,926
DEFERRED TAX LIABILITIES..........................................................          643            643
OTHER LONG-TERM LIABILITIES.......................................................        5,125          6,330

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Preferred stock, $.001 par value, 10,000,000 shares authorized,
       none outstanding...........................................................           --             --
     Common stock, $.001 par value, 30,000,000 shares authorized, 10,230,267
       and 10,161,113 shares issued and outstanding, respectively.................           10             10
     Additional paid-in capital...................................................       91,965         91,625
     Stock option loans...........................................................         (629)          (609)
     Retained earnings............................................................       22,183         19,227
     Treasury stock (1,031,400 and 955,500 shares of common stock,
       respectively, at cost).....................................................       (6,758)        (5,933)
                                                                                     ----------      ---------
         Total stockholders' equity...............................................      106,771        104,320
                                                                                     ----------      ---------
         Total liabilities and stockholders' equity...............................   $  298,593      $ 291,439
                                                                                     ==========      =========


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

</Table>
                                         -2-

<Page>

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


<Table>
<Caption>

                                                                  THREE MONTHS ENDED          SIX MONTHS ENDED
                                                                       JUNE 30,                   JUNE 30,
                                                                ----------------------    -----------------------
                                                                   2001         2000         2001          2000
                                                                ---------    ---------    ---------     ---------
<S>                                                             <C>          <C>          <C>           <C>
REVENUES......................................................  $  65,745    $  55,408    $ 126,373     $ 108,875
OPERATING EXPENSES............................................     52,123       43,139       99,569        84,776
PRE-OPENING AND START-UP EXPENSES.............................        280          194        3,858           543
DEPRECIATION AND AMORTIZATION.................................      2,193        1,681        4,233         3,459
GENERAL AND ADMINISTRATIVE EXPENSES...........................      3,598        2,928        7,079         5,730
                                                                ---------    ---------    ---------     ---------

INCOME FROM OPERATIONS........................................      7,551        7,466       11,634        14,367
INTEREST EXPENSE..............................................      3,962        3,771        7,969         7,364
INTEREST INCOME...............................................        (19)         (27)         (38)          (54)
                                                                ---------    ---------    ---------     ---------

INCOME BEFORE PROVISION FOR INCOME TAXES
   AND CUMULATIVE EFFECT OF CHANGE IN
   ACCOUNTING PRINCIPLE.......................................      3,608        3,722        3,703         7,057
PROVISION FOR INCOME TAXES....................................      1,479        1,529        1,517         2,893
                                                                ---------    ---------    ---------     ---------
INCOME BEFORE CUMULATIVE EFFECT OF
   CHANGE IN ACCOUNTING PRINCIPLE.............................      2,129        2,193        2,186         4,164

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

NET INCOME....................................................  $   2,129    $   2,193    $   2,956     $   4,164
                                                                =========    =========    =========     =========

EARNINGS PER SHARE:
     BASIC
       Income before cumulative effect of change
          in accounting principle.............................  $     .23    $     .23    $     .24     $     .44
       Cumulative effect of change in accounting principle....         --           --          .08            --
                                                                ---------    ---------    ---------     ---------
       Net income.............................................  $     .23    $     .23    $     .32     $     .44
                                                                =========    =========    =========     =========

     DILUTED
       Income before cumulative effect of change
          in accounting principle.............................  $     .22    $     .23    $     .23     $     .43
       Cumulative effect of change in accounting principle....         --           --          .08            --
                                                                ---------    ---------    ---------     ---------
       Net income.............................................  $     .22    $     .23    $     .31     $     .43
                                                                =========    =========    =========     =========

NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
     BASIC....................................................      9,237        9,464        9,232         9,458
     DILUTED..................................................      9,675        9,585        9,552         9,593


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

</Table>
                                         -3-

<Page>

                                        CORNELL COMPANIES, INC.
                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (UNAUDITED)
                                            (IN THOUSANDS)
<Table>
<Caption>
                                                                                              SIX MONTHS ENDED
                                                                                                  JUNE 30,
                                                                                           ----------------------
                                                                                             2001          2000
                                                                                           --------     ---------
<S>                                                                                        <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income...........................................................................   $  2,956     $   4,164
   Adjustments to reconcile net income to net cash used in operating activities
     Cumulative effect of change in accounting principle................................       (770)           --
     Depreciation.......................................................................      2,444         1,977
     Amortization.......................................................................      1,789         1,482
     Non-cash interest expense..........................................................        649           568
     Provision for bad debts............................................................        979           346
     Loss on sale of property and equipment.............................................         47            27
     Change in assets and liabilities:
         Accounts receivable............................................................     (7,286)       (2,664)
         Restricted assets..............................................................         25            76
         Other assets...................................................................      1,046        (1,357)
         Accounts payable and accrued liabilities.......................................     (6,530)       (4,371)
         Deferred revenues and other liabilities........................................     (1,205)         (802)
                                                                                           --------     ---------
     Net cash used in operating activities..............................................     (5,856)         (554)
                                                                                           --------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures.................................................................     (5,969)       (4,592)
   Proceeds from sales of property and equipment........................................         --           719
                                                                                           --------     ---------
     Net cash used in investing activities..............................................     (5,969)       (3,873)
                                                                                           --------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term debt.........................................................     57,500        56,400
   Payments on long-term debt...........................................................    (45,000)      (52,900)
   Payments on capital lease obligations................................................        (24)           --
   Payments for debt issuance and other financing costs.................................       (484)         (546)
   Proceeds from issuance of common stock...............................................        214            97
   Proceeds from exercises of stock options.............................................         --            25
   Purchases of treasury stock..........................................................       (825)           --
                                                                                           --------     ---------
     Net cash provided by financing activities..........................................     11,381         3,076
                                                                                           --------     ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS...............................................       (444)       (1,351)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................        620         1,763
                                                                                           --------     ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..............................................   $    176     $     412
                                                                                           ========     =========

SUPPLEMENTAL CASH FLOW DISCLOSURE:
   Interest paid, net of amounts capitalized............................................   $  7,398     $   7,547
                                                                                           ========     =========
   Income taxes paid....................................................................   $    198     $   7,787
                                                                                           ========     =========

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

</Table>
                                         -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 generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments and disclosures necessary for a fair presentation of these
financial statements have been included. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's 2000 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.

2.   SUBSEQUENT EVENT

     On August 14, 2001, the Company entered into 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 will be deferred and
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>
              Four months ending December 31, 2001.....................  $   10,224
              Year Ending December 31:
              2002 ....................................................      24,862
              2003.....................................................      25,116
              2004.....................................................      25,138
              2005.....................................................      25,101
              Thereafter...............................................     249,725
                                                                         ----------
                  Total................................................  $  360,166
                                                                         ==========

</Table>

     The following unaudited pro forma balance sheet data as of June 30, 2001
and the unaudited pro forma statement of operations data for the year ended
December 31, 2000 and for the six months ended June 30, 2001 reflect the
financial position and results of operations, respectively, of the Company as
though the 2001 Sale and Leaseback Transaction had occurred, in the case of the
balance sheet, on June 30, 2001, and, in the case of the statement of
operations, 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>
Balance Sheet Data:
       Current assets.............................................................   $   67,860      $ 120,360
       Property and equipment, net................................................      204,134         38,390
       Total assets...............................................................      298,593        186,742
       Current liabilities........................................................       26,566         28,948
       Long-term debt, net of current portion.....................................      159,488         38,988
       Stockholders' equity.......................................................      106,771        105,838
       Total liabilities and stockholders' equity.................................      298,593        186,742

Statement of Operations Data:
     Six Months Ended June 30, 2001
       Revenues...................................................................   $  126,373      $ 126,373
       Income from operations.....................................................       11,634          4,786
       Net income.................................................................        2,956          1,793
       Net earnings per share (1)
       - Basic....................................................................          .32            .19
       - Diluted..................................................................          .31            .19

     Year Ended December 31, 2000
       Revenues...................................................................      226,050        226,050
       Income from operations.....................................................       29,061         14,718
       Net income.................................................................        7,969          5,000
       Net earnings per share (1)
       - Basic....................................................................          .85            .53
       - Diluted..................................................................          .84            .53

</Table>
     The pro form balance sheet data includes pro forma adjustments to record
     the sale of the 11 facilities and to record the use of sales proceeds to
     retire indebtedness. The pro forma statement of operations data includes
     pro forma adjustments to reflect the corresponding decrease in
     depreciation and interest expense, the increase in rent expense, and the
     related income taxes. The pro forma statement of operations data
     excludes a non-recurring charge of approximately $930,000, net of taxes,
     which will be recognized upon the closing of the 2001 Sale and Leaseback
     Transaction related to the write-off of certain deferred financing
     costs due to the extinguishment of debt.

     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. Assuming that the excess cash proceeds of approximately
     $50.0 million resulting from the 2001 Sale and Leaseback Transaction had
     only been invested in short-term securities such as commercial paper
     (using an average interest rate of 4.77% for 2001 and 6.27% for 2000),
     pro forma net earnings per share for the six months ended June 30, 2001
     and for the year ended December 31, 2000 would be increased by
     approximately $.07 and $.19, respectively, resulting in diluted earnings
     per share of approximately $.26 and $.72, respectively.

3.   CREDIT FACILITIES

     On August 14, 2001, the Company repaid $70 million outstanding under the
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.

     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 July 31, 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


                                     -6-

<Page>

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.

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

4.   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 consolidated statements of
operations. For the three and six months ended June 30, 2000, the pro forma
impact of this change in accounting would have been immaterial.

5.   DEFERRED COSTS AND OTHER

     At June 30, 2001, the Company had deferred professional fees and other
costs totaling $2.3 million related to its efforts to the 2001 Sale and
Leaseback Transaction. These and subsequent transaction costs were reimbursed to
the Company at the closing of the transaction on August 14, 2001.

     At June 30, 2001, the Company had deferred acquisition costs totaling
$628,000 related to the anticipated purchase of real property located near Fort
Greely, Alaska. Management anticipates that this property will be used in
conjunction with the operations of an adult secure institution for the State of
Alaska. If management determines that a contract to operate this facility near
Fort Greely, Alaska will not be awarded, the Company will likely not purchase
the real property and the deferred acquisition costs will be expensed.

     At June 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 reimbursed in the near
term. On August 9, 2001, the Stop-Work was lifted by the FBOB.

6.   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


                                     -7-

<Page>

periods beginning after June 15, 2002. The Company is currently evaluating the
potential impact of the adoption of these statements on its financial position,
results of operations and cash flows.

7.   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.

8.   RECLASSIFICATIONS

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


9.   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          SIX MONTHS ENDED
                                                                       JUNE 30,                    JUNE 30,
                                                              ------------------------    -----------------------
                                                                 2001          2000         2001           2000
                                                              ----------    ----------    ---------     ---------
<S>                                                           <C>           <C>           <C>           <C>
Revenues
   Adult secure institutional...............................  $   25,346    $   21,707    $  49,179     $  42,788
   Juvenile.................................................      27,864        21,461       52,537        41,959
   Pre-release..............................................      12,535        12,240       24,657        24,128
                                                              ----------    ----------    ---------     ---------
Total revenues..............................................  $   65,745    $   55,408    $ 126,373     $ 108,875
                                                              ==========    ==========    =========     =========

Pre-opening and start-up expenses
   Adult secure institutional...............................  $       --    $      148    $      --     $     497
   Juvenile.................................................         280            46        3,858            46
   Pre-release..............................................          --            --           --            --
                                                              ----------    ----------    ---------     ---------
Total pre-opening and start-up expenses.....................  $      280    $      194    $   3,858     $     543
                                                              ==========    ==========    =========     =========

Income from operations
   Adult secure institutional...............................  $    5,323    $    4,630    $  10,253     $   9,464
   Juvenile.................................................       3,597         3,188        5,490         5,589
   Pre-release..............................................       2,983         3,066        5,515         5,976
   General and administrative expense.......................      (3,598)       (2,928)      (7,079)       (5,730)
   Incentive bonuses........................................         (66)          (41)      (1,254)          (41)
   Amortization of intangibles..............................        (381)         (394)        (762)         (775)
   Corporate and other......................................        (307)          (55)        (529)         (116)
                                                              ----------    ----------    ---------     ---------
Total income from operations................................  $    7,551    $    7,466    $  11,634     $  14,367
                                                              ==========    ==========    =========     =========

</Table>


<Table>
<Caption>

                                                                JUNE 30,     DECEMBER 31,
                                                                  2001          2000
                                                              ----------     ----------
<S>                                                           <C>            <C>
Assets
   Adult secure institutional...............................  $  142,920     $ 143,743
   Juvenile.................................................      69,346        59,630
   Pre-release..............................................      54,919        51,802
   Intangible assets, net...................................      16,159        16,861
   Corporate and other......................................      15,249        19,403
                                                              ----------     ---------
Total assets................................................  $  298,593     $ 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 private provider of corrections, treatment and
education services to government agencies. As of June 30, 2001, the Company had
contracts to operate 70 facilities with a total service capacity of 15,850. The
Company's facilities are located in 13 states and the District of Columbia.

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

<Table>
<Caption>
                                                                                    JUNE 30,        JUNE 30,
                                                                                      2001            2000
                                                                                  ------------    ------------
           <S>                                                                    <C>             <C>
           Total service capacity(1):
                Residential.....................................................     11,838          12,137
                Non-residential community-based.................................      4,012           2,708
                  Total.........................................................     15,850          14,845
           Service capacity in operation (end of period)........................     13,695          13,046
           Contracted beds in operation (end of period).........................     10,071           9,835
           Average occupancy based on contracted beds in operation (2)(3).......       95.6%           93.8%
           Average occupancy excluding start-up operations(2)...................       96.4%           96.1%

</Table>

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

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

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

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

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

     Although the Company has experienced higher operating margins in its adult
secure institutional and pre-release divisions as compared to the juvenile
division, the Company's operating margins generally vary from facility to
facility based on the level of competition for the contract award, the proposed
length of the contract, the occupancy levels for a facility, the level of
capital commitment required with respect to a facility, the anticipated changes
in operating costs over the term of the contract, and the Company's ability to
increase contract revenues. The Company has and expects to experience interim
period operating margin differences due to the number of calendar days in the
period, higher payroll taxes in the first half of the year, and salary and wage
increases which are incurred prior to certain contract revenue increases.

                                    -10-
<Page>

     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 rental
expense to be incurred 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.

     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 June
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 and payroll to a certain extent
based on occupancy at a facility, but a minimum fixed number of employees is
required to operate and maintain any facility regardless of occupancy levels.
Personnel costs are subject to increase in tightening labor markets based on
local economic and other conditions.

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

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

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

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


                                    -11-

<Page>

RESULTS OF OPERATIONS

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


<Table>
<Caption>

                                                                   THREE MONTHS              SIX MONTHS
                                                                  ENDED JUNE 30,            ENDED JUNE 30,
                                                            ------------------------  -------------------------
                                                                2001        2000          2001          2000
                                                            -----------  -----------  -----------    ----------
           <S>                                              <C>          <C>          <C>            <C>
           Revenues.......................................        100.0%       100.0%       100.0%        100.0%
           Operating expenses.............................         79.3         77.9         78.8          77.9
           Pre-opening and start-up expenses..............          0.4          0.4          3.1           0.5
           Depreciation and amortization..................          3.3          3.0          3.3           3.2
           General and administrative expenses............          5.5          5.2          5.6           5.2
                                                            -----------  -----------  -----------    ----------
           Income from operations.........................         11.5         13.5          9.2          13.2
           Interest expense, net..........................          6.0          6.8          6.3           6.7
                                                            -----------  -----------  -----------    ----------
           Income before provision for income
              taxes and cumulative effect of change
              in accounting principle.....................          5.5          6.7          2.9           6.5
           Provision for income taxes.....................          2.3          2.7          1.2           2.7
                                                            -----------  -----------  -----------    ----------
           Income before cumulative effect of
              change in accounting principle..............          3.2%         4.0%         1.7%          3.8%
                                                            ===========  ===========  ===========    ==========

</Table>

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

     REVENUES. Revenues increased 18.7% to $65.7 million for the three months
ended June 30, 2001 from $55.4 million for the three months ended June 30, 2000.

    Adult secure institutional division revenues increased 16.8% to $25.3
million for the three months ended June 30, 2001 from $21.7 million for the
three months ended June 30, 2000 due principally to (a) per diem rate increases
realized in 2001, (b) 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 and (c) the commencement of a
management contract at the Valencia County Detention Center in the fourth
quarter of 2000. Average occupancy, excluding start-up operations in 2000, was
97.7% for the three months ended June 30, 2001 compared to 95.8% for the three
months ended June 30, 2000.

    Juvenile division revenues increased 29.8% to $27.9 million for the three
months ended June 30, 2001 from $21.5 million for the three months ended June
30, 2000 due principally to (a) the New Morgan Academy which began operations
late in the fourth quarter of 2000, (b) increased occupancy at various
facilities including the Griffin Juvenile Facility and (c) the commencement
of a management contract at the Shaffner Youth Center in the first quarter of
2001. Revenues attributable to start-up operations were $88,000 for the three
months ended June 30, 2001 and related to the expansion of the Cornell
Abraxas Center for Adolescent Females ("ACAF"). There were no revenues
attributable to start-up operations for the three months ended June 30, 2000.
Average occupancy, excluding start-up operations in 2001, was 93.5% for the
three months ended June 30, 2001 compared to 92.4% for the three months ended
June 30, 2000.

    Pre-release division revenues increased 2.4% to $12.5 million for the
three months ended June 30, 2001 from $12.2 million for the three months
ended June 30, 2000 due to increased average occupancy at various facilities.
Average occupancy was 99.5% for the three months ended June 30, 2001 compared
to 95.4% for the three months ended June 30, 2000.

    OPERATING EXPENSES. Operating expenses increased 20.8% to $52.1 million for
the three months ended June 30, 2001 from $43.1 million for the three months
ended June 30, 2000.





                                    -12-

<Page>

    Adult secure institutional division operating expenses increased 17.4% to
$19.1 million for the three months ended June 30, 2001 from $16.3 million for
the three months ended June 30, 2000 due principally to (a) increased personnel
costs due to contractual wage increases at the Big Spring Complex, (b) 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 and (c) the commencement of a management contract at the
Valencia County Detention Center in the fourth quarter of 2000. As a percentage
of revenue, excluding start-up operations in 2000, adult secure institutional
division operating expenses were 75.4% for the three months ended June 30, 2001
compared to 75.0% for the three months ended June 30, 2000.

    Juvenile division operating expenses increased 33.3% to $23.6 million for
the three months ended June 30, 2001 from $17.7 million for the three months
ended June 30, 2000 due to (a) the New Morgan Academy which began operations
late in the fourth quarter of 2000, (b) increased average occupancy at
various facilities including the Griffin Juvenile Facility and (c) the
commencement of a management contract at the Shaffner Youth Center in the
first quarter of 2001. As a percentage of revenues, excluding start-up
operations, juvenile division operating expenses were 85.1% for the three
months ended June 30, 2001 compared to 82.6% for the three months ended June
30, 2000. The decline in the 2001 operating margin was due principally to the
results of the New Morgan Academy as the facility had not reached its optimal
occupancy level.

    Pre-release division operating expenses increased 1.4% to $9.3 million
for the three months ended June 30, 2001 from $9.1 million for the three
months ended June 30, 2000 due to increased average occupancy at various
facilities. As a percentage of revenues, operating expenses were 74.0% for
the three months ended June 30, 2001 compared to 74.7% for the three months
ended June 30, 2000.

    PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$280,000 for the three months ended June 30, 2001 and were attributable to
the expansion of ACAF. Pre-opening and start-up expenses were $194,000 for
the three months ended June 30, 2000 and were attributable to the start-up
activities of the Moshannon Valley Detention Center and the New Morgan
Academy.

    DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
30.5% to $2.2 million for the three months ended June 30, 2001 from $1.7
million for the three months ended June 30, 2000 due 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)
depreciation of furniture and equipment purchased for the New Morgan Academy
and (d) various facility improvements and furniture and equipment purchases.

    GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 22.9% to $3.6 million for the three months ended June 30, 2001 from
$2.9 million for the three months ended June 30, 2000. The increase in
general and administrative expenses resulted primarily from retention and
incentive bonus costs, additional personnel providing public affairs and
business development services, certain consulting and legal costs and other
administrative infrastructure costs.

    INTEREST. Interest expense, net of interest income, increased to $3.9
million for the three months ended June 30, 2001 from $3.7 million for the
three months ended June 30, 2000 due principally to increased borrowings
under the Company's revolving line of credit used to finance capital
expenditures and for additional working capital for new and expanded
operations such as the New Morgan Academy. Capitalized interest for the three
months ended June 30, 2001 was approximately $25,000 and related to facility
expansions. There was no capitalized interest for the three months ended June
30, 2000.

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


                                    -13-

<Page>

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

     REVENUES. Revenues increased 16.1% to $126.4 million for the six months
ended June 30, 2001 from $108.9 million for the six months ended June 30, 2000.

    Adult secure institutional division revenues increased 14.3% to $49.2
million for the six months ended June 30, 2001 from $42.8 million for the six
months ended June 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 and (c) the commencement of a
management contract at the Valencia County Detention Center in the fourth
quarter of 2000. Revenues attributable to start-up operations for the six months
ended June 30, 2000 were $44,000 and related to the expansion of the D. Ray
James Prison. There were no revenues attributable to start-up operations for the
six months ended June 30, 2001. Average occupancy, excluding start-up operations
in 2000, was 97.2% for the six months ended June 30, 2001 compared to 97.5% for
the six months ended June 30, 2000.

    Juvenile division revenues increased 25.2% to $52.5 million for the six
months ended June 30, 2001 from $42.0 million for the six months ended June 30,
2000 due to (a) the New Morgan Academy which began operations late in the fourth
quarter of 2000, (b) increased occupancy at various facilities including the
Griffin Juvenile facility and (c) the commencement of a management contract at
the Shaffner Youth Center in the first quarter of 2001. Revenues attributable to
start-up operations were $2.8 million for the six months ended June 30, 2001 and
related to operations of the New Morgan Academy and the expansion of ACAF. There
were no revenues attributable to start-up operations for the six months ended
June 30, 2000. Average occupancy, excluding start-up operations in 2001, was
92.0% for the six months ended June 30, 2001 compared to 93.3% for the six
months ended June 30, 2000.

    Pre-release division revenues increased 2.2% to $24.7 million for the six
months ended June 30, 2001 from $24.1 million for the six months ended June 30,
2000 due to increased average occupancy at various facilities. Average occupancy
was 97.1% for the six months ended June 30, 2001 compared to 94.3% for the six
months ended June 30, 2000.

    OPERATING EXPENSES. Operating expenses increased 17.4% to $99.6 million for
the six months ended June 30, 2001 from $84.8 million for the six months ended
June 30, 2000.

    Adult secure institutional division operating expenses increased 19.5% to
$37.6 million for the six months ended June 30, 2001 from $31.4 million for the
six months ended June 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 and (c) the commencement of a management contract at
the Valencia County Detention Center in the fourth quarter of 2000. As a
percentage of revenues, excluding start-up operations in 2000, adult secure
institutional division operating expenses were 76.4% for the six months ended
June 30, 2001 compared to 73.6% for the six months ended June 30, 2000. The 2001
operating margin was impacted unfavorably due to increased personnel and
employee retention costs, inmate medical and utility costs.

    Juvenile division operating expenses increased 20.0% to $42.3 million for
the six months ended June 30, 2001 from $35.3 million for the primarily six
months ended June 30, 2000. The increase in operating expenses was primarily
due to (a) the New Morgan Academy which began operations late in the fourth
quarter of 2000, (b) increased average occupancy at various facilities
including the Griffin Juvenile Facility and (c) commencement of a management
contract at the Shaffner Youth Center. As a percentage of revenues, excluding
start-up operations, juvenile division operating expenses were 85.1% for the
six months ended June 30, 2001 compared to 84.1% for the six months ended
June 30, 2000. The 2001 operating margin was impacted unfavorably due to
increased personnel and employee retention costs and utility costs and due to
the results of the New Morgan Academy as the facility had not reached its
optimal occupancy level.

                                    -14-

<Page>

    Pre-release division operating expenses increased 8.3% to $19.5 million
for the six months ended June 30, 2001 from $18.0 million for the six months
ended June 30, 2000 due to increased average occupancy at various facilities.
As a percentage of revenue, pre-release division operating expenses were
79.2% for the six months ended June 30, 2001 compared to 74.7% for the six
months ended June 30, 2000. The 2001 operating margin was impacted
unfavorably due to increased personnel and employee retention costs and
utility costs. Additionally, the 2001 operating margin was impacted
unfavorably due to the expiration of the San Diego Center contract early in
2001.

    PRE-OPENING AND START-UP EXPENSES. Start-up expenses were $3.9 million
for the six months ended June 30, 2001 and were attributable to the start-up
activities of the New Morgan Academy and other facility expansions.
Pre-opening and start-up expenses were $543,000 for the six months ended June
30, 2000 and were attributable to the start-up activities of the final 550
bed expansion at the D. Ray James Prison, the Moshannon Valley Detention
Center and the New Morgan Academy.

    DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
22.4% to $4.2 million for the six months ended June 30, 2001 from $3.5
million for the six months ended June 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 and (d) various facility improvements and furniture and
equipment purchases.

    GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 23.5% to $7.1 million for the six months ended June 30, 2001 from $5.7
million for the six months ended June 30, 2000. The increase in general and
administrative expenses resulted primarily from retention and incentive bonus
costs, additional personnel providing public affairs and business development
services, certain consulting and legal costs and other administrative
infrastructure costs.

    INTEREST. Interest expense, net of interest income, increased to $7.9
million for the six months ended June 30, 2001 from $7.3 million for the six
months ended June 30, 2000 due primarily to increased borrowings under the
Company's revolving line of credit used to finance capital expenditures and
for additional working capital for new and expanded operations such as the
New Morgan Academy and ACAF. For the six months ended June 30, 2001, the
Company capitalized interest of approximately $66,000 related to facility
expansions. There was no interest capitalized for the six months ended June
30, 2000.

    INCOME TAXES. For the six months ended June 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) acquisitions, (c) expansions of existing facilities, (d)
working capital, (e) pre-opening and start-up costs related to new operating
contracts, (f) information systems hardware and software and (g) furniture,
fixtures and equipment. Working capital requirements generally increase
immediately prior to the Company commencing management of a new facility as the
Company incurs pre-opening and start-up costs and purchases necessary equipment
and supplies before facility management revenue is realized.

    2001 SALE AND LEASEBACK TRANSACTION. On August 14, 2001, the Company entered
into 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.


                                    -15-

<Page>

    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 will be deferred and
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>
              Four months ending December 31, 2001.....................  $   10,224
              Year Ending December 31:
              2002 ....................................................      24,862
              2003.....................................................      25,116
              2004.....................................................      25,138
              2005.....................................................      25,101
              Thereafter...............................................     249,725
                                                                         ----------
                  Total................................................  $  360,166
                                                                         ==========

</Table>

     See Note 2 to the unaudited consolidated financial statements for pro
forma financial data.

     LONG-TERM CREDIT FACILITIES. 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. 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.

     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 July
31, 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.

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


                                    -16-

<Page>

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

     In April 1999, the Company was awarded a contract to design, build and
operate a 1,095 bed prison for 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.

     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".

     DEFERRED COSTS AND OTHER. At June 30, 2001, the Company had deferred
professional fees and other costs totaling $2.3 million related to the Sale
and Leaseback Transaction. These and subsequent transaction costs were
reimbursed to the Company at the closing of the transaction on August 14,
2001.

     At June 30, 2001, the Company had deferred acquisition costs totaling
$628,000 related to the anticipated purchase of real property located near Fort
Greely, Alaska. Management anticipates that this property will be used in
conjunction with the operations of an adult secure institution for the State of
Alaska. If management determines that a contract to operate this facility near
Fort Greely, Alaska will not be awarded, the Company will likely not purchase
the real property and the deferred acquisition costs will be expensed.

     At June 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 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.

     CAPITAL EXPENDITURES. Capital expenditures for the six months ended June
30, 2001 were $6.0 million and related primarily to (a) a 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 resulting from the 2001
Sale and Leaseback Transaction, cash flows generated from operations, together
with the credit available under the 2000 Credit Facility and the operating lease
capacity thereunder, will provide sufficient liquidity to meet the Company's
committed capital and working capital requirements for currently awarded
contracts. It is not anticipated that the current financing arrangements will
provide sufficient financing to fund construction costs related to future adult
secure institutional contract awards or significant expansions. The Company
anticipates obtaining additional sources of financing to fund such activities.

INFLATION

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


                                    -17-

<Page>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

INTEREST RATE EXPOSURE

     The Company's exposure to changes in interest rates primarily results from
its long-term debt with both fixed and floating interest rates. The Company's
long-term debt with fixed interest rates consists of the Senior Notes and the
Subordinated Notes. The Company's only long-term debt with variable interest is
its revolving line of credit. At June 30, 2001, approximately 44.2% ($70.5
million outstanding under the Company's revolving line of credit) of the
Company's long-term debt was subject to variable interest rates. The detrimental
effect of a hypothetical 100 basis point increase in interest rates would be to
reduce income before provision for income taxes by approximately $283,000 for
the six months ended June 30, 2001. At June 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) changes in market conditions that may make
the sale/leaseback financing platform unavailable or less attractive, (b) the
ability to finance the construction and initial operations of facilities, (c)
risks associated with acquisitions and the integration thereof (including the
ability to achieve administrative and operating cost savings and anticipated
synergies), (d) the timing and costs of expansions of existing facilities, (e)
changes in governmental policy to eliminate or discourage the privatization of
correctional, detention and pre-release services in the United States, (f)
availability of debt and equity financing on terms that are favorable to the
Company, (g) 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 (h) significant charges to expense for deferred
costs associated with financing and other projects in development if management
determines that one or more of such projects is unlikely to be successfully
consummated.







                                    -18-

<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 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On June 14, 2001, the Company held its 2001 Annual Meeting of Stockholders.
The matters voted on at the meeting and the results thereof are as follows:

     Stockholders elected the persons listed below as directors whose terms
expire at the 2002 Annual Meeting of Stockholders. Results by nominee were:


<Table>
<Caption>

                                                                                 AUTHORITY
                                                              VOTED FOR          WITHHELD
                                                              ---------          --------
         <S>                                                  <C>                <C>
         David M. Cornell................................     7,045,724           96,164
         Steven W. Logan.................................     7,045,724           96,164
         Harry J. Phillips, Jr.  ........................     7,045,744           96,144
         Peter A. Leidel.................................     7,045,744           96,144
         Arlene R. Lissner...............................     7,045,675           96,213
         Tucker Taylor...................................     7,045,544           96,344
         James H.S. Cooper...............................     7,045,744           96,144
         Anthony R. Chase................................     7,045,744           96,144
         Marcus A. Watts.................................     7,045,744           96,144

</Table>

     Stockholders ratified the appointment of Arthur Andersen LLP as the
Company's independent public accountants for the fiscal year ending December 31,
2001, with 7,112,817 shares voted for, 27,121 shares voted against and 1,950
abstentions.

     Stockholders approved the Cornell Companies Director's Stock Plan. There
were 6,263,506 shares voted for, 51,927 shares voted against and 826,455
abstentions.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a.  Exhibits

             11.1 Computation of Per Share Earnings

         b.  Reports on Form 8-K

             None.









                                    -19-

<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:    August 14, 2001            By:    /s/ Steven W. Logan
                                           -------------------------------------
                                           STEVEN W. LOGAN
                                           Chief Executive Officer and President
                                           (Principal Executive Officer)



Date:    August 14, 2001            By:    /s/ John L. Hendrix
                                           -------------------------------------
                                           JOHN L. HENDRIX
                                           Senior Vice President and
                                           Chief Financial Officer
                                           (Principal Financial Officer)

















                                    -20-