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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2003

OR

For the transition period from             to             .

Commission File No.: 0-23038

CORRECTIONAL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(g) of the Act:

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

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

Indicate by check mark whether the registrant is an accelerated filer.

(as defined by Exchange Act Rule 12b-2).    Yes  ¨    No  x

At June 30, 2003, the aggregate market value of the 10,157,274 shares of Common Stock held by non-affiliates of the registrant was $29,964,000. At March 15, 2004, there were 10,159,107 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which Proxy Statement shall be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates, are incorporated by reference in Part III of this Report.

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

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts and involve risks and uncertainties. These include statements regarding the expectations, beliefs, intentions or strategies regarding the future. The Company intends that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company’s views as of the date they are made with respect to future events and financial performance, but are subject to many uncertainties and risks which could cause the actual results of the Company to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties and risks include, but are not limited to: fluctuations in occupancy levels and labor costs; the ability to secure both new contracts and the renewal of existing contracts; the ability to obtain financing when a contract requires that the Company construct a new facility in order to meet the needs of the contract; the ability to meet financial covenants; the ability to reduce various operating costs; and public resistance to privatization. Additional risk factors include those discussed in reports filed by the Company from time to time on Forms 10-K, 10-Q and 8-K. The Company does not undertake any obligation to update any forward-looking statements.

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PART I

Item 1. Business

General

Correctional Services Corporation (“the Company” or the “Company”) was incorporated in Delaware on October 28, 1993 to acquire all of the outstanding capital stock of a number of affiliated corporations engaged in the operation of correctional and detention facilities. In 1999, the Company acquired Youth Services International (“YSI”), a leading national provider of private educational, developmental and rehabilitative programs to adjudicated juveniles, through a merger accounted for as a pooling of interests.

The combined Company is one of the largest and most comprehensive providers of juvenile rehabilitative services with 19 facilities and approximately 2,500 beds. In addition, the Company is a leading developer and operator of adult correctional facilities, operating 13 facilities representing approximately 5,000 beds. On a combined basis, as of December 31, 2003, the Company provided services in 14 states, representing approximately 7,500 beds including aftercare services.

Revenues from continuing operations for the year ended December 31, 2003 were $135.8 million versus $154.6 million in 2002. Contribution from operations was $14.2 million for 2003 compared to $16.1 million in 2002. Income from continuing operations was $1.5 million compared to $4.8 million in 2002, with net income of $1.3 million or $0.13 per diluted share in 2003 compared to $2.4 million or $0.23 per diluted share for 2002. Diluted shares were 10.2 million in both 2003 and 2002.

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

In its ten secure adult facilities, the Company not only provides adult inmates with housing but also with other basic services, including health care, transportation and food service. In addition, the Company remains committed to providing a variety of rehabilitative and educational services, including community service and recreational programs for adult inmates where appropriate.

The Company’s three Community Corrections facilities are non-secure residential facilities for adult male and female offenders transitioning from institutional to independent living. Qualified offenders may spend the last three to six months of their sentence in a community corrections program. These programs assist the offender in the reunification process with family and the community. Independent research has indicated that successful reunification can play a key role in recidivism reduction, which is the primary goal of any corrections operation. To that end, the Company provides life skills training, case management, home confinement supervision and family reunification programs from these facilities. The Company believes that community correctional facilities help reduce recidivism, resulting in prison beds being available for more violent offenders and, in appropriate cases, represent cost-effective alternatives to prisons for many jurisdictions.

The Company’s juvenile facilities are secure and non-secure offender facilities for low, medium, and high risk youths in highly structured programs, including wilderness programs, secure education and training centers, academy programs, high impact programs servicing lower level or first time offenders, and detention facilities. In addition, the Company also provides non-residential aftercare programs. The Company provides aftercare services for approximately 600 juveniles in the State of Georgia as well as for juveniles who have completed residential programs throughout the Company’s system.

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The Company’s juvenile division operates largely under the YSI brand name. The YSI Care Continuum, designed for juvenile offenders, is a comprehensive, community-based approach that strives to be the difference between returning to old patterns and moving forward, once an offender re-enters the community. Specific YSI Care Continuum programs and services for juveniles include:

The Company’s innovative programs address the root causes and issues behind adult and juvenile anti-social behavior. The Company believes its programs, by instilling the qualities of self-respect, respect for others and their property, personal responsibility, and family values, can help reduce the recidivism rate of program participants and hopefully help to prevent adult incarceration. The Company’s juvenile programs are comprised of four major components: education; vocational training; socialization; and recreation. Behavioral management principles intended to dramatically change the thinking and behavior of program participants are consistently applied throughout each segment of programming to teach participants basic life skills, while reinforcing the principle that success begins with appropriate, acceptable behavior.

In addition to providing fundamental residential services for adult and juvenile offenders, the Company has developed a broad range of programs intended to reduce recidivism, including: basic, special, and vocational education; substance abuse treatment and counseling; life skills training; behavioral modification counseling; and comprehensive aftercare programs. In all of its facilities, the Company strives to provide the highest quality services designed to reduce recidivism and continually evaluates and audits its programs and believes the reputation of its programs will lead to continued business opportunities.

The Company is also a leading provider of design and construction services for juvenile and adult correctional facilities, including project consulting, the design, development and construction of new correctional and detention facilities and the redesign and renovation of existing facilities. These services usually are provided in conjunction with an agreement for the Company to operate the facility upon completion of the construction or renovation.

Operational Divisions

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

Adult/Community Corrections: At year-end 2003, the Adult/Community Corrections Division operated 13 facilities in five states, for a total of approximately 5,000 beds. During the year 2003, revenues from the Adult/Community Corrections programs comprised 46.5% of the Company’s consolidated revenue, and 90.9% of the consolidated contribution margin. During the year 2003, 22.7% and 18.7% of the Company’s consolidated revenues were earned from various US Government agencies and the State of Arizona, respectively.

Juvenile: At year-end 2003, the Juvenile Division operated 19 facilities in 10 states approximating 2,500 beds including aftercare. During the year 2003, revenues from the Juvenile Division comprised 53.5% of the Company’s consolidated revenues, and 7.4% of the consolidated contribution margin. During the year 2003, 7.0% and 11.1% of the Company’s consolidated revenues were earned from the Florida and Maryland Departments of Juvenile Justice, respectively.

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Marketing and Business Development

The Company engages in extensive marketing and business development on a national basis. Marketing efforts are spearheaded by the Company’s business development team in conjunction with the Company’s executive officers and outside consultants. Additional marketing efforts are conducted locally by the Facility Administrators to fill empty beds on an as-needed basis, and in anticipation of future vacancies.

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

Contract Award Process

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

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

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

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

Market

The Company believes there is a growing acceptance of privatization of governmental services. Correctional and detention functions traditionally performed by federal, state and local governments have faced continuing pressure to control costs and reduce the number of governmental employees. Since incarceration costs generally grow faster than many other parts of budget items, in an attempt to address these budgetary pressures, governmental agencies responsible for correctional and detention facilities are privatizing facilities. As of year-end 2002 (the most recent available data), privately operated adult prison facilities held 93,771 prisoners, up 3.1% from 2001. This accounted for 6.5% of all Federal and State adult inmates as of year-end 2002 and 2001.

An estimated 2.2 million adult inmates are held in Federal and State prisons, and local jails as of December 31, 2002. On December 31, 2002, State adult prisons were operating between full capacity and 17% above capacity, while Federal adult prisons were operating at 33% above capacity.

The services in which the juvenile justice system has seen the greatest growth are residential services for children committing crimes who have serious emotional and behavioral problems. The public and private sector have had to adjust to providing services for children who are dually diagnosed, have drug and alcohol addictions and/or sex

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offending and fire setting histories. The Company has developed treatment programs to address these growing needs, and has focused their efforts to capture a share of this growing market. The Company’s Florida facilities began receiving Medicaid funds in 2001 for reimbursement of behavioral health services, as the provision of these additional services qualified for reimbursement under Medicaid. The Company plans to seek this certification at other applicable juvenile facilities.

Competition

The Company competes on the basis of cost, quality and range of services offered, its experience in managing facilities, the reputation of its personnel and its ability to design, finance and construct new facilities. Some of the Company’s competitors have greater resources than the Company. The Company also competes in some markets with local companies that may have a better understanding of local conditions and a better ability to gain political and public acceptance. In addition, the Company’s Community Corrections and Juvenile operations compete with governmental and not-for-profit entities. The Company’s main competitors in the adult division include but are not limited to Corrections Corporation of America, the Geo Group (formerly Wackenhut Corrections Corporation), and Cornell Corrections. The Company’s primary competitors in the Juvenile Division are Psychotherapeutic Services, Inc., Securicor, and Sunshine Youth Services.

Facilities

The Company operates adult and juvenile pre-adjudication and post-adjudication secure and non-secure correctional and detention facilities, and non-secure adult community correctional facilities for federal and state correctional agencies. Pre-adjudication secure detention facilities provide secure residential detention for individuals awaiting trial and/or the outcome of judicial proceedings, and for aliens awaiting deportation or the disposition of deportation hearings. Post-adjudication secure facilities provide secure incarceration for individuals who have been found guilty of a crime by a court of law. The Company operates six types of post-adjudication facilities: 1) secure prisons (adult); 2) intermediate sanction facilities (adult); 3) high impact programs (juvenile); 4) academies (juvenile); 5) secure treatment and training facilities (adult and juvenile); and 6) sexually delinquent juvenile programs (juvenile).

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

The Company also operates non-secure residential and non-residential community corrections programs. Non-secure residential facilities, known as halfway houses, provide a residential correctional environment for offenders in need of less supervision and monitoring than are provided in a secure environment. Offenders in community corrections facilities are typically allowed to leave the facility to work in the immediate community and/or participate in community-based educational and vocational training programs during daytime hours. Generally, persons in community correctional facilities are serving the last three to six months of their sentence. Non-residential programs permit the offender to reside at home or in some other approved setting under supervision and monitoring by the Company. Supervision may take the form of either requiring the offender to report to a correctional facility a specified number of times each week and/or having the Company employees monitor the offender on a case management basis at his/her work site and home. In the juvenile division, the non-residential programs take the form of aftercare programs. Unlike the adult division where a non-residential supervision program may replace the last part of an adult’s residential supervision, the juvenile division counterpart, the aftercare program, is strictly post release. The goal of these programs, like adult community corrections, is to assist the juvenile in effecting a positive return to their families and communities. Aftercare programs provide the contact, supervision and support that is needed to further instill the principles learned by the juvenile during the longer residential program.

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Adult Division

The following information is provided with respect to the facilities for which the Company had management contracts as of March 15, 2004:

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Juvenile Division

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Facility Changes During the Year 2003

During 2003, contracts were terminated at the following juvenile facilities:

The Company’s operating agreements at the Bartow, Cypress Creek and Polk facilities expired during 2003 and were subsequently awarded to a different provider. The Company elected not to renew its contract at the Bell County Detention Center, and displaced a portion of its residents to other Company-operated facilities in the State of Texas. The government of Puerto Rico elected to terminate the Company’s contract at the Bayamon facility, due to its desire to eliminate private providers under the new government regime. The Company elected to terminate its contract at the Bill Clayton facility due to the State of Texas displacing all residents to State operated facilities. The Company has subsequently reached an agreement with the owner of the facility to operate a 214-bed adult program from the same location, with operations commencing during the first quarter of 2004. The Company terminated its various agency contracts at the Genesis and Keweenaw facilities due to lack of financial viability.

The Company’s management contract at the Charles H. Hickey, Jr. School expires March 31, 2004, and the Company has elected not to participate in the bid process to renew its contract with the State of Maryland.

During 2003, the Company commenced operations at the following juvenile facilities:

Additionally, the Company began operations during the first quarter of 2004, or expects to commence operations at the following facilities, as follows:

Facility Management Contracts

The Company is primarily compensated on the basis of the population in each of its facilities on a fixed rate per inmate per day; however, some contracts have a minimum revenue guarantee, or the Company may also be paid a lesser per diem paid for unoccupied beds. Additionally, some facilities are compensated on a per diem basis, in addition to the normal per diem, for treatment provided to residents with behavioral and/or mental health diagnoses, as well as residents requiring substance abuse counseling. Invoices are generally sent on a monthly basis detailing the population for the prior month. Occupancy rates for facilities tend to be low when first opened or when expansions are first available. However, after a facility passes the start-up period, typically three months, the occupancy rate tends to stabilize.

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

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

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Operating Procedures

The Company is responsible for the overall operation of each facility under its management, including staff recruitment, general administration of the facility, security of inmates and employees, supervision of the offenders, and facility maintenance. The Company, either directly or through subcontractors, also provides health care, including medical, dental and psychiatric services, and food service.

The Company’s contracts generally require the Company to operate each facility in accordance with all applicable local, state and federal laws, and rules and regulations. In addition, all facilities are generally required to adhere to the guidelines of the American Correctional Association (“ACA”). The ACA standards, designed to safeguard the life, health and safety of offenders and personnel, describe specific objectives with respect to administration, personnel and staff training, security, medical and health care, food service, inmate supervision and physical plant requirements. The Company believes the benefits of operating its facilities in accordance with ACA standards include improved management, better defense against lawsuits by offenders alleging violations of civil rights, a more humane environment for personnel and offenders and measurable criteria for upgrading programs, personnel and the physical plant on a continuous basis. Several of our facilities are fully accredited by the ACA and certain other facilities currently are being reviewed for accreditation. It is the Company’s goal to obtain and maintain ACA accreditation for all of its facilities, when applicable.

Facility Design and Construction

In addition to its facility management services, the Company also consults with various governmental entities to design and construct new correctional and detention facilities and renovate older facilities to provide enhanced services to the population. Pursuant to the Company’s design, construction and management contracts, it is responsible for overall project development and completion. Typically, the Company develops the conceptual design for a project, then hires architects, engineers and construction companies to complete the development. When designing a particular facility, the Company utilizes, with appropriate modifications, prototype designs the Company has used in developing other projects. Management of the Company believes that the use of such prototype designs allows it to reduce cost overruns and construction delays.

Employees

At January 31, 2004, the Company had approximately 2,800 employees, consisting of corporate and facility employees. Each of the Company’s facilities is led by an experienced facility administrator or warden. Other facility personnel include administrative, security, medical, food service, counseling, classification, and educational and vocational training personnel. The Company conducts background screening checks and drug testing on potential facility employees. Some of the services rendered at certain facilities, such as medical services, education or food service, are provided by third-party contractors.

Employee Training

All jurisdictions require corrections officers and youth workers to complete a specified amount of training. Generally, the Company employees are required to participate in at least 160 hours of paid training during their first year of service, with 120 hours coming prior to their direct contact with offenders or detainees, unless otherwise specified by contract. Training is requisite for all new hires, regardless of classification, is outcome based, and requires observable or measurable levels of performance competency. Training consists of approximately 40 hours relating to the Company policies, operational procedures, management philosophy, ethics and compliance training, and 120 hours relating to legal issues, rights of offenders and detainees, techniques of communication and supervision, improvement of interpersonal skills, life safety and emergency procedures, training to promote the security and health and welfare of the residents, and job training relating to the specific tasks to be held. All the Company training programs meet or exceed applicable American Correctional Association (ACA) licensing requirements.

In addition to comprehensive pre-service training, all Company personnel are required to complete 40 hours of in-service training annually, unless otherwise specified by contract. Mandatory annual training plans are interfaced between state and federal laws, policies, ACA Standards for Adult and Juvenile Facilities, and course lesson plans. Some of the topics include: use of force or behavioral management programs, security procedures, suicide precautions, interpersonal

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communications, cultural sensitivity, first aid and CPR, and safety procedures. The Company’s training matrix is designed to provide the flexibility needed to incorporate specialized training mandated by the contracting agency, such as an overview of the criminal justice or juvenile justice system.

In addition, the Company reimburses employees for specialized training programs to ensure retention of licensure or certification as required by the appropriate professional standards.

The Company places dignity, professionalism and respect for all, as its benchmark, and is committed to providing quality training programs for newly hired employees to prepare them for a challenging and rewarding career in the corrections field. The Company also provides scheduled annual refresher training to veteran employees to maintain their proficiencies and adherence to the Company’s commitment to provide quality service to its contracting agencies.

The Company is committed to providing quality training programs for newly hired employees to prepare them for a challenging and rewarding career in the Criminal Justice or Juvenile Justice field and to reinforce adherence to the Company’s commitment to provide quality service to its contracting agencies.

Insurance

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

The Company currently maintains primary general liability insurance in the amount of $3,000,000 and a primary excess liability policy in the amount of $2,000,000, and an excess umbrella policy in the amount of $25,000,000, covering itself and each of its subsidiaries, as well as automobile liability insurance, employment practices liability insurance, workers’ compensation insurance, and property and casualty insurance, in addition to other special forms of insurance. There can be no assurance that the aggregate amount and kinds of the Company’s insurance are adequate to cover all occurrences or that insurance will be available in the future. In addition, the Company is unable to secure insurance for some unique business risks, which may include, but not be limited to, some types of punitive damages in states where it is prohibited by law.

Regulation

Generally, providers of correctional services must comply with a variety of applicable federal, state and local regulations, including educational, health care and safety regulations administered by a variety of regulatory authorities. Management contracts frequently include extensive reporting requirements. In addition, many federal, state and local governments are required to follow competitive bidding procedures before awarding a contract. Certain jurisdictions may also require the successful bidder to award subcontracts on a competitive bid basis and to subcontract to varying degrees with businesses owned by women or minorities.

The failure to comply with any applicable laws, rules or regulations or the loss of any required license could have a material adverse effect on the Company’s business, financial condition and results of operations. Furthermore, the current and future operations of the Company may be subject to additional regulations as a result of, among other factors, new statutes and regulations and changes in the manner in which existing statutes and regulations are or may be interpreted or applied. Any such additional regulations could have a material adverse effect on the Company’s business, financial condition and results of operations.

Item 2. Properties

The Company leases office space for its corporate headquarters in Sarasota, Florida. Additionally, the Company leases office space for a regional office in New York, New York, which expires April 30, 2004. The Company will not renew this lease.

The Company also leases the space for the following facilities: Arizona State Prison-Florence West, Hemphill County Juvenile Detention Center, Reflections Treatment Agency, Tarkio Academy, Frio County Jail, Brooklyn Community Correctional Center, Bronx Community Correctional Center, Thompson Academy, and Fort Worth Community Corrections Center.

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The Company owns its facilities located in Chamberlain, South Dakota; Springfield, South Dakota; Elmore, Minnesota; portions of the Frio County, Texas facility; Forest Ridge, Iowa; and portions of the Eagle Lake, Texas expansion.

During 2002, the Company sold a property owned in Bryan, Texas, from which the Company formerly operated the Los Hermanos Ranch program (which it closed in November 1999).

Additionally, the Company was involved in a transaction during 2002 with an unrelated not-for-profit entity, whereby the ownership of the Phoenix, Arizona facility will eventually be passed to the State of Arizona over the passage of time, or the occurrence of certain events. In accordance with generally accepted accounting principles, the Company has not recorded the transaction as a sale, and the assets and associated liabilities remain on the financial statements of the Company; however, legal title to the property is held by the not-for profit entity.

The Florence, Arizona facility was sold to an unrelated not-for-profit entity in December 2002, and has been subsequently leased back by the Company for an initial lease term of ten years, renewable for an additional ten years at the option of the State.

The Company owns the following properties, which were acquired by the Company in anticipation of future development projects, but were never developed, and are now being marketed for sale. These properties are located in Belle Glade, Florida; Mangonia Park, Florida; and Eagle Lake, Texas, and are classified on the balance sheet under assets held for sale.

The Company also owns the property from which its Genesis Treatment Agency program was operated. This program terminated operations in October 2003. The property is currently being marketed for sale, and is classified on the balance sheet under assets held for sale.

Item 3. Legal Proceedings

The nature of the Company’s business results in claims and litigation against the Company for damages arising from the conduct of its employees and others. The Company believes that most of these types of claims and charges are without merit and/or that the Company has meritorious defense to the claims and charges, and vigorously defends against these types of actions. The Company also has procured liability insurance to protect the Company against these types of claims and charges. The Company believes that, except as described below, the insurance coverage available to the Company for these claims and charges should be adequate to protect the Company from any material exposure in any given matter, even if the outcome of the matter is unfavorable to the Company. However, if all, or a substantial number of these claims are resolved unfavorably to the Company, the insurance coverage available to the Company would not be sufficient to satisfy all of the claims currently pending against the Company, and such a result would have a material adverse effect on the Company’s results of operations, financial condition and liquidity.

The Company has determined that the following matters should be deemed material to the Company under applicable SEC regulations, because either: (a) the claims asserted against the Company in these matters involve amounts that exceed 10% of the Company’s current assets on a consolidated basis as of December 31, 2003; or (b) the claims asserted against the Company depart from those asserted in the normal course of the Company’s business:

As discussed below, the plaintiffs in the Brown Samson and DaSilva matters are now part of the Brown Samson class action.

The Brown Samson suit was filed in March 1996 in the Supreme Court of the State of New York, County of Bronx by several former detainees in the INS (Immigration and Naturalization Services) Detention Center that the Company formerly operated for the INS in Elizabeth, New Jersey, on behalf of themselves and others similarly situated, alleging personal injuries and property damage purportedly caused by the negligent and intentional acts of CSC, in which the plaintiffs in the suit claimed $500,000,000 in compensatory and $500,000,000 in punitive

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damages. This suit was removed to the United States District Court, Southern District of New York, in April 1996, and subsequently transferred to the United States District Court for the District of New Jersey. The plaintiffs in this case obtained certification from the Court to try their case as a class action.

The Company has filed summary judgment motions in this case, which are currently pending before the Court. In addition, the parties recently entered into a stipulated order of dismissal with respect to all corporate defendants other than CSC. Mr. Speisman and Mr. Slattery also have been dismissed from the action. Further, six (6) of the named plaintiffs, each of whom failed to appear for deposition and did not otherwise comply with discovery, have been dismissed as named plaintiffs and have become members of the putative class.

The DaSilva case was brought in July 1996 by nine individual plaintiffs, each whom alleged that they were former detainees at the Company’s INS detention facility in Elizabeth, NJ &/or spouses of detainees at that facility, in which the plaintiffs asserted various causes of action complaining of the conditions at the facility and “mistreatment” by CSC and local authorities after a June 1995 disturbance at the facility. The plaintiffs in this case sought $10,000,000 each in damages. The Court recently dismissed the DaSilva complaint in its entirety, because the plaintiffs’ did not properly opt-out of the Brown, Samson class action. Therefore, the plaintiffs’ who were identified in the DaSilva complaint will now become part of the Brown, Samson class action.

The Jama case was initiated in July 1997 by another group of former detainees in the INS Detention Center that the Company formerly operated in Elizabeth, New Jersey. The suit claims violations of civil rights, personal injury and property damage allegedly caused by the negligent and intentional acts of the Company. No monetary damages have been stated. The Company recently filed various dispositive motions in the case, which are currently pending. The Company also has filed interlocutory appeals from the District Court concerning jurisdictional issues, which are currently pending before the Third Circuit Court of Appeals. The Company is currently awaiting action by the Third Circuit Court of Appeals on these appeals.

Although the Company believes that it has meritorious defenses to the claims made in the Jama and Brown Samson actions, and is vigorously pursuing its defense of these claims, the aggregate amount of the damages claimed by the plaintiffs in these cases substantially exceeds the amount of insurance coverage available to the Company. Therefore, given the inherent uncertainties associated with litigation, no assurance can be given that the outcome of this litigation will not have a materially adverse effect on the Company.

In May, 2001, the plaintiffs in this case, the estate and parents of Bryan Alexander, a former inmate at the Tarrant County Correctional Facility in Mansfield, Texas (which formerly was operated by the Company), brought wrongful death and survival actions against the Company and the co-defendants named therein, in which it was alleged that the Company’s negligent and intentional acts, as well as the negligent and intentional acts of the other named defendants, proximately caused the death of Bryan Alexander on January 9, 2001.

On September 17, 2003, following the Company’s announcements that a Tarrant County, Texas jury had returned verdicts against the Company and its former employee, awarding the plaintiffs $35.0 million in compensatory damages and $5.1 million in punitive damages, the trial Judge in the case entered judgment against the Company for a total of $37.5 million in compensatory damages and $750,000 in punitive damages. On October 17, 2003 the Company filed post-judgment motions with the trial Judge in the case requesting that the judgment be set aside in whole or in part and/or that the trial Judge grant the Company a new trial. On November 21, 2003 those motions were denied. The Company filed an appeal on December 15, 2003 with the Second Court of Appeals of Texas, and expects to file briefs during the first half of 2004.

In the meantime, on or about December 28, 2003, the Company’s general liability insurance carriers arranged for the posting of unconditional surety bonds in the aggregate amount of $25 million, the maximum amount of security required by Texas law in order to secure the judgment pending the outcome of the appeal; consequently, the plaintiffs are precluded by Texas law from executing upon the judgment pending the outcome of the appeal.

The general and professional liability insurance policies of the Company in effect at the time of Mr. Alexander’s death provided $35 million of coverage which, less amounts paid on other claims under the policies, should be available for payment on account of the awards. However, the Company’s primary liability insurance carrier has filed a declaratory judgment action against the Company seeking to disclaim any obligation to defend or indemnify the Company or its former employee with respect to this case. This declaratory judgment action is still pending. The Company has retained counsel to enforce its rights under the policies, and believes that coverage should be available for this case under the applicable general liability insurance policies; however, there can be no assurance that the Company will be successful in its efforts to obtain full insurance coverage for this case. If the Company’s insurance carrier prevails in its declaratory judgment action with regard to coverage for this case, the insurance carrier could seek to recover from the Company the defense costs advanced by the carrier in the defense of the case, and, if the Company is unsuccessful in its appeal and the plaintiffs thereafter enforce the judgment by drawing upon the bonds, the carrier also could seek to recover such amounts from the Company. If the insurance carrier is successful in taking such actions, the outcome of those actions could have a material adverse impact on the financial condition of the Company and its ability to operate. Based on its evaluation and the advice of counsel, management has determined that no loss requires recognition as of December 31, 2003.

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In June, 2001, the City of Tallulah filed suit against Trans-American Development Assoc. & Correctional Services Corporation, alleging that either or both parties are obligated to continue to pay to the City an annual “management fee” of $150,000 related to the Tallulah Correctional Center for Youth, despite the fact that neither party is currently operating the facility. The Complaint filed by the City in this matter does not specify the amount of damages that the City is seeking, but, based on the theory outlined in the City’s complaint, the Company has estimated that the City likely will seek approximately $3,250,000 in this case. The Company believes that the City’s case against the Company is wholly without merit and is vigorously defending against this claim. However, in light of the fact that this matter is not covered by any form of insurance available to the Company, and given the inherent uncertainties associated with litigation, no assurance can be given that the outcome of this litigation will not have a materially adverse effect on the Company.

During 2001, the State of Arizona filed suit against the Company and the other named defendants, including Correctional Medical Services, Inc. (CMS), the Company’s former medical services provider at the Arizona RTC/DWI Private Prison in Phoenix, Arizona, in which the State sought indemnification from the named defendants for any and all damages and losses suffered or incurred by the State in connection with a case captioned, Valdez, Jose, Martinez, Zacarias & Edwarda, parents, v. Maricopa County, Correctional Medical Services, Inc., Arizona Department of Corrections, State of Arizona, Correctional Services Corporation, et al., which was tried before a jury in the Superior Court of the State of Arizona in and for the County of Maricopa in September, 2001.

The Valdez case was brought by a former inmate at the Phoenix facility whose eyesight deteriorated to near total blindness while he was in the custody of the State of Arizona, and incarcerated at various facilities, including the Phoenix facility operated by the Company. At trial, the jury awarded $6,500,000 in damages against the State of Arizona, but, pursuant to an agreement reached with the plaintiffs prior to trial, the amount recoverable by the plaintiffs was limited to $5,000,000. The Company was not a defendant at the trial of the Valdez case, although it was named as a defendant. The State subsequently sought indemnification from the Company and other co-defendants for the full amount of the jury award and other costs and expenses associated with that case.

The Company’s contract with the State of Arizona that was in effect at the time of the incidents giving rise to the Valdez suit required that the State of Arizona be named as an “additional insured” under the Company’s general liability and professional liability insurance policies, and the State of Arizona was so named thereunder. The State of Arizona took the position with the Company’s insurance carrier that, because it was named as an additional insured, the Company’s insurance policies provided full coverage to the State, including coverage for all acts and omissions of the State’s employees and medical providers prior to the time that Mr. Valdez was transferred to the Arizona State Prison – Phoenix West. The State subsequently filed a declaratory judgment action in Arizona state court against Northland Insurance Company seeking a declaration that its status as an additional insured provided it with such coverage. Northland disputed this position, but, ultimately, the State obtained a declaratory judgment in its favor. Northland has appealed this decision to the Arizona Supreme Court.

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Nevertheless, in the meantime, Northland settled the Valdez case with the plaintiffs on behalf of the State and the Company. As a result, Northland has been subrogated to the Company’s claims for indemnification and/or contribution against the State and CMS, and is currently pursuing those claims.

The Plaintiffs in this case, each a former resident of the LeMarquis Community Correctional Center, allege that a former employee of the Company sexually assaulted and battered them while they were housed at the LeMarquis Community Correctional Center formerly operated by the Company in Manhattan. Each Plaintiff brought causes of action for negligence against the Company. Each Plaintiff sought $50,000,000 in compensatory damages from the Company.

In 2003, the Company’s general liability insurance carrier settled the claims of Plaintiffs Scianetti and Adorno for a total of $25,000, leaving only the claims of Plaintiffs Womble and Johnson remaining in the suit. The Company believes that it has meritorious defenses to the claims made by the remaining plaintiffs in this case and is vigorously pursuing its defense, and recently filed dispositive motions in this case, which are currently pending. However, given the inherent uncertainties associated with litigation and the fact that the damages sought by the plaintiffs in this case substantially exceeds the amount of insurance coverage available to the Company, no assurance can be given that the outcome of this litigation will not have a materially adverse effect on the Company.

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

No matters were submitted to the stockholders during the fourth quarter of 2003.

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PART II

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

The common stock of the Company is traded on the Nasdaq National Market, under the symbol “CSCQ.” Such quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions. The following table sets forth, for the calendar quarters indicated, the high and low closing sale prices per share on the Nasdaq National Market, based on published financial sources.

On February 27, 2004, there were 217 holders of record and approximately 1,865 beneficial shareholders registered in nominee and street name. The Company paid no cash dividends during the years ended December 31, 2003 and 2002 and the Company does not expect to pay dividends in the near future.

The following table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2003.

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Item 6. Selected Financial Data

The information below is only a summary and should be read in conjunction with Correctional Services Corporation’s historical financial statements and related notes (in thousands, except per share data).

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

Overview

The Company is one of the largest and most comprehensive providers of juvenile rehabilitative services with 19 facilities and approximately 2,500 juveniles in its care. In addition, the Company is a leading developer and operator of adult correctional facilities operating 13 facilities representing approximately 5,000 beds. On a combined basis, as of December 31, 2003, the Company provided services in 14 states, representing approximately 7,500 beds including juvenile aftercare services.

The Company is primarily compensated on the basis of the population in each of its facilities on a fixed rate per inmate per day basis, by various federal, state and local government agencies. As various state and local government agencies face budgetary issues, the agencies have gradually decreased juvenile placements in privately operated, long-term residential facilities, such as those operated by the Company, in favor of government-operated facilities. Additionally, various juvenile justice agencies are opting for less costly non-residential programs, reserving residential placements for the most challenging at-risk youth who have demonstrated significant mental health or behavioral health needs. The Company has responded to these emerging needs by developing programming to provide needed specialized behavioral health services for sexually delinquent juveniles, fire starters and other specialized behavioral issues, substance abuse treatment services, and additional mental health services. Additionally, the Company has terminated contracts at certain unprofitable juvenile facilities and continues to evaluate the future earning potential of other juvenile facilities, as needed.

Although the same budgetary issues impacting the juvenile division affected the Company’s adult division in certain jurisdictions, occupancy rates have increased, as the Company has been able to fill beds vacated by state and local agencies with higher per diem federal inmates, and the Company has been successful seeking out-of-state inmates at certain locations.

The Company expects the shift towards privatization to continue as various states have implemented programs to issue RFP’s for the purpose of transferring the operations of state-operated prisons to privately operated companies. Florida, for example, has established the Corrections Privatization Committee for just such a purpose. As of year-end 2002 (the most recent available data), privately operated adult prison facilities held 93,771 prisoners, up 3.1% from 2001. This accounted for 6.5% of all Federal and State adult inmates as of year-end 2002 and 2001.

The Company continues to pursue adult and juvenile contracts in new and existing markets, and has been successful in procuring four new juvenile and one new adult contract during the last six months of 2003. However, there can be no assurance that the Company will continue to be successful in obtaining new contracts.

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Results of Operations

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

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenue decreased by $18.8 million or 12.2% for the year ended December 31, 2003 to $135.8 million compared to the same period in 2002. The decrease was primarily due to:

The Company anticipates beginning operations of seven new programs during the first half of 2004, totaling 639 beds, and opening its new Tacoma facility which will add another 300 beds during the second quarter 2004. The Company’s management contract at the 329-bed Charles H. Hickey, Jr. School that expires March 31, 2004 will be awarded to a different provider, as the Company elected not to participate in the bid process to renew its contract with the State of Maryland. This contract accounted for approximately $15.6 million in annual revenues and a $(40,000) contribution margin in 2003.

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Operating expenses decreased $17.3 million or 12.5% for the year ended December 31, 2003 to $121.2 million compared to the same period in 2002 primarily due to the closing of the eleven facilities mentioned above. This decrease was partially offset by legal costs of $1.6 million incurred during the year ended December 31, 2003. Approximately $1.1 million of costs are related primarily to certain outstanding legal matters from closed facilities. The Company’s legal reserve balance is approximately $1.7 million as of December 31, 2003.

As a percentage of revenues, operating expenses decreased to 89.3% for the twelve months ended December 31, 2003 from 89.6% for the twelve months ended December 31, 2002. The Company made significant improvements in cost control initiatives, such as payroll target initiatives and changes in the structure of the Company’s health benefit plan. Those improvements were partially offset by the increased cost of workers compensation insurance and general liability insurance, and the increase in the Company’s legal settlement costs discussed above.

Startup costs were $378,000 for the twelve months ended December 31, 2003, related primarily to the startup of the Tacoma, Washington ICE facility, which is expected to open in the second quarter of 2004. Costs consisted primarily of payroll expenses associated with transitioning the operations of the Seattle, Washington ICE facility to the new Tacoma facility. There were no start up costs incurred during 2002.

General and administrative expenses increased to $9.2 million for the twelve months ended December 31, 2003, compared to $8.9 million for the twelve months ended December 31, 2002. As a percentage of revenues, general and administrative expenses increased to 6.7% for the twelve months ended December 31, 2003 from 5.8% for the same period in 2002. The increase in 2003 was primarily due to increases in directors and officers’ liability insurance costs, professional and consulting fees, corporate payroll, and workers’ compensation costs, compared to the same period in 2002.

The Company recorded a $220,000 loss reserve for the year ended December 31, 2002, for estimated contract losses through the contract termination at the Bayamon, Puerto Rico juvenile facility, which ended January 31, 2003.

During the twelve months ended December 31, 2002, the Company recorded a gain on the disposal of assets of $1.5 million primarily related to the sale of the Salinas, Puerto Rico facility to the Puerto Rican government for $15.0 million. The facility was constructed by the Company, and was completed in 2001, but had never been operational, due to the Puerto Rican government’s inability to fulfill its contract with the Company and provide inmates for the facility.

Interest expense, net of interest income, was $2.2 million for the twelve months ended December 31, 2003 compared to $2.3 million for the twelve months ended December 31, 2002, a net increase in interest expense of approximately $50,000. The Company incurred interest charges during 2003 primarily related to the 2002 sale of its Phoenix and Florence, Arizona facilities, which under applicable accounting principles resulted in the recognition of a long-term liability and a capital lease obligation with higher imputed interest rates than the bank debt to which the Company was subject prior to the sale of those facilities, interest on the note payable, the amortization of deferred loan costs, borrowings under the Company’s line of credit, and interest on outstanding letters of credit. Interest incurred during the comparable period in 2002 was related primarily to borrowings under the Company’s line of credit and the amortization of deferred loan costs. During the twelve months ended December 31, 2003, the Company capitalized interest of approximately $1.3 million related to the construction of its Tacoma, Washington facility. No interest was capitalized during the same period in 2002.

For the twelve months ended December 31, 2003, the Company recognized an income tax provision of $1.4 million compared to an income tax provision of $1.3 million for the twelve months ended December 31, 2002. The Company’s effective tax rate for the year ended December 31, 2003 was 48.5% compared to 21.3% for the comparable period in 2002. For 2003, the Company’s effective tax rate was primarily impacted by items that are non-deductible for tax purposes. For the 2002 period, the Company recognized a $1.4 million tax benefit principally attributable to a change in estimate of the recoverability of deferred tax assets associated with exiting Puerto Rico operations.

The Company recorded a loss from discontinued operations of $120,000, net of an $80,000 tax benefit, compared to loss from discontinued operations of $2.5 million, net of a $1.6 million tax benefit, in 2002, related to its Keweenaw, Michigan and Newport News, Virginia facilities, which were closed due to low utilization. The Company recognized a $1.3 million loss on facility contracts for the year ended December 31, 2002 related to the Company’s Keweenaw, Michigan juvenile facility, which is included in the loss from discontinued operations for the year ended December 31, 2002, as a result of low utilization by the contracting agencies. However, the Company reached an agreement with its landlord to terminate the lease effective December 2003, at which time the Company began terminating facility contracts. The Company recorded a loss contract recovery credit of $896,000, representing a change in estimate of contract losses. No reserve remains at December 31, 2003. The Company recorded a charge for the impairment of

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assets during the year ended December 31, 2002, related to the Keweenaw, Michigan facility, in the amount of $1.9 million, which is included in the loss from discontinued operations for 2002. No impairment reserve was recorded related to the closure of the Newport News facility, as the Company believes the net book values of facility assets are recoverable. Revenue included in discontinued operations amounted to $4.5 million and $5.8 million in 2003 and 2002, respectively.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenue decreased by $13.1 million or 7.8% for the year ended December 31, 2002 to $154.6 million compared to the same period in 2001. The decrease was primarily due to:

Operating expenses decreased $15.8 million or 10.2% for the year ended December 31, 2002 to $138.5 million compared to the same period in 2001 primarily due to the closing of the nine facilities mentioned above.

As a percentage of revenues, operating expenses decreased to 89.6% for the twelve months ended December 31, 2002 from 92.0% for the twelve months ended December 31, 2001. Although the Company made significant improvements in cost control initiatives, those improvements were partially offset by the increased cost of healthcare and workers’ compensation insurance, as well as other fixed costs at the facilities, including, rent, certain administrative salaries, and depreciation expense.

Startup costs were $406,000 for the twelve months ended December 31, 2001, related primarily to the startup of the Salinas, Puerto Rico facility. The Salinas facility was never operational and was sold to the Puerto Rican government in November 2002.

General and administrative expenses decreased to $8.9 million for the twelve months ended December 31, 2002, compared to $13.0 million for the twelve months ended December 31, 2001. As a percentage of revenues, general and administrative expenses decreased to 5.8% for the twelve months ended December 31, 2002 from 7.8% for the same period in 2001. The decrease is due primarily to the results of the restructuring initiative formulated during the third quarter of 2001. Other charges that were included in general and administrative expenses for the year ended December 31, 2001 include: $1.3 million of additional accounts receivable allowance, established primarily for receivables which have been in dispute over a number of years, including a receivable from a non-profit entity; $1.1 million related to reserves established for legal obligations; and management’s estimate of the results of agency audits.

In addition to less significant settlements included in operating expenses, the Company recorded a $375,000 legal settlement related to the Mansfield, Texas facility. The settlement was paid in April 2001. The settlement paid by the Company exceeded the amount of its insurance deductible, as certain facts of the case caused the third party insurer to dispute the enforceability of its policy with the Company. Consequently, the Company agreed with the third party insurer to pay $375,000.

The Company recorded a $220,000 loss reserve for estimated contract losses through the contract termination at the Bayamon, Puerto Rico juvenile facility, which ended January 31, 2003.

During the same period in 2001, the Company recorded costs of approximately $1.2 million for various contracts that required the related facility to incur losses to fulfill the contracts. The facilities were closed during the year ended December 31, 2002.

During the twelve months ended December 31, 2002, the Company recorded a gain on the disposal of assets of $1.5 million primarily related to the sale of the Salinas, Puerto Rico facility to the Puerto Rican government for $15.0 million. The facility was constructed by the Company, and was completed in 2001, but had never been operational, due to the Puerto Rican government’s inability to fulfill its contract with the Company, and provide inmates for the facility.

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The Company recorded a loss on the disposal of assets of $938,000 for the same period in 2001. The loss related primarily to the sale of the 489-bed Dickens County facility, and the sale of both airplanes previously used to transport residents from the various contracting jurisdictions to the facilities in the Midwest region. The Company sold the 489-bed Dickens County Correctional Facility in Dickens, Texas, which had been held in the operating lease-financing facility, to the host county. The net proceeds from the sale were approximately $10.7 million, which were used to reduce the Company’s obligations under its operating lease-financing facility. The Company recorded a loss on this sale of approximately $441,000 in the third quarter of 2001. The Company continues to operate the facility under a management agreement with the County. The Company also recorded a loss of approximately $370,000 on the sale of two airplanes that were used to transport residents to and from the Company’s Midwest facilities.

Interest expense, net of interest income, was $2.3 million for the twelve months ended December 31, 2002 compared to $2.2 million for the twelve months ended December 31, 2001, a net increase in interest expense of approximately $100,000.

For the twelve months ended December 31, 2002, the Company recognized an income tax provision of $1.3 million compared to an income tax benefit of $3.2 million for the twelve months ended December 31, 2001. The Company’s effective tax rate for the year ended December 31, 2002 was 21.3% compared to 35.2% for the comparable period in 2001. For the 2002 period, the Company recognized a $1.4 million tax benefit principally attributable to a change in estimate of the recoverability of deferred tax assets associated with exiting Puerto Rico operations.

The Company recorded a loss from discontinued operations of $2.5 million, net of a $1.6 million tax benefit in 2002, compared to a loss from discontinued operations of $44,000, net of a $27,000 tax benefit in 2001, related to its Keweenaw, Michigan and Newport News, Virginia facilities. The Company recognized a $1.3 million loss on facility contracts for the year ended December 31, 2002 related to the Company’s Keweenaw, Michigan juvenile facility, which is included in loss from discontinued operations for the year ended December 31, 2002, as a result of low utilization by the contracting agencies. The Company recorded a charge for the impairment of assets during the year ended December 31, 2002, related to the Keweenaw, Michigan facility, in the amount of $1.9 million, which is included in the loss from discontinued operations for the year ended December 31, 2002. Revenue included in discontinued operations amounted to $5.8 million and $6.7 million in 2002 and 2001, respectively.

Liquidity and Capital Resources

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

The Company had working capital at December 31, 2003 of $13.6 million, compared to working capital of $17.2 million at December 31, 2002. The decrease in working capital is primarily attributable to the decrease in accounts receivable associated with the closure of various facilities during 2003 and 2002. The Company’s current ratio decreased to 1.7 at December 31, 2003, from 2.0 at December 31, 2002. The decrease in the current ratio is primarily attributable to the reduction in accounts receivable discussed above, and the increase in the current portion of restricted cash and accrued liabilities associated with the construction of the Tacoma, Washington facility.

Net cash of $7.1 million was provided by operating activities for the year ended December 31, 2003 as compared to $2.9 million provided by operations for the year ended December 31, 2002. The increase is primarily attributable to the release of previously restricted cash of $1.4 million that secured a letter of credit related to the sale of the Phoenix, Arizona facility, the non-cash impact of the deferred portion of the tax provision, and the timing of the receipt and payment of receivables and payables, respectively.

Net cash of $58.6 million was used by investing activities during the year ended December 31, 2003 as compared to $21.5 million provided by investing activities during the year ended December 31, 2002. During 2003, cash was expended related to the construction of the Tacoma, Washington facility. Proceeds from the construction financing, discussed below, were invested in non-current restricted cash until the funds were utilized for construction, at which time the portion of the funds that are payable are reclassified as current restricted cash until paid. During the same period in 2002, cash provided was primarily attributable to the sale of the Salinas, Puerto Rico facility to the Puerto Rican government for $15.0 million and the sale of the Florence facility for $10.4 million in 2002.

Net cash of $50.9 million was provided by financing activities in the year ended December 31, 2003 as compared to $20.9 million used in financing activities in the year ended December 31, 2002. During 2003, funds from financing activities were primarily provided by proceeds, net of issuance costs, from the note payable related to the construction of the Company’s Tacoma facility, discussed above. During the 2002 period, the Company’s primary uses of funds were net repayments on the Company’s line of credit and term note.

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At December 31, 2003, the Company had no outstanding debt under its Credit Agreement with GE Capital, and had approximately $4.8 million in availability, after considering letters of credit of $5.7 million and borrowing base limitations of $8.5 million. The availability is limited due primarily to the eligible receivables at December 31, 2003.

In October 2002, the Company entered into a new long-term financing agreement with GE Capital (“Credit Agreement”), which has been amended various times since inception. The Amended Credit Agreement is subject to compliance with various financial covenants based on a minimum net worth, minimum monthly cash flow requirements, EBITDA requirements, and borrowing base criteria. The Company is in compliance with all covenants as of December 31, 2003. Additionally, the Credit Agreement prohibits the payment of any dividends. In association with the Credit Agreement, the Company incurred $995,000 in loan fees, which are being amortized as interest expense over the term of the Credit Agreement. The Credit Agreement is secured by all of the assets of the Company, except real property, and consists of the following components:

During the year ended December 31, 2002, the Company sold its Phoenix, Arizona facility to a not-for-profit entity and received proceeds of approximately $8.5 million, which was used to reduce existing bank debt. The not-for-profit entity used proceeds from contract revenue bonds issued through the Maricopa County Industrial Development Authority to purchase the facility from the Company. Neither the Company nor the State of Arizona is obligated to repay the bonds. The bond payments are payable exclusively from the revenue generated by the facility’s operations, or from the disposition of the facility. However, due to certain guarantee obligations of the Company with respect to the purchase of the facility by the State from the not-for-profit entity, and applicable generally accepted accounting principles, the Company was not permitted to record the transaction as a sale for accounting purposes. Therefore, the assets and associated liabilities remain on the financial statements of the Company. Legal title to the property is held by the not-for-profit entity. The ownership of the Phoenix, Arizona facility will eventually be passed to the State of Arizona over the passage of time, or when the State of Arizona exercises its option to purchase the facility. The Company’s non-recourse liability with respect to the debt service payments is $8.3 million as of December 31, 2002, and matures in 2022, or upon the State of Arizona’s exercise of its option to purchase the facility. On either of those occurrences a sale shall be deemed to have occurred, and the Company will recognize a $1.8 million gain.

The Florence, Arizona facility was sold by the Company to an unrelated not-for-profit entity in December 2002 for approximately $10.4 million, which was used to pay down bank debt, and has been subsequently leased back by the Company for an initial ten-year lease term, renewable for an additional ten years at the option of the State. The leaseback qualifies as a capital lease, and is paid from the revenues of the Florence, Arizona facility. The gain on the sale of the facility was deferred. The Company has a capital lease obligation of approximately $9.8 million as of December 31, 2003.

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On June 30, 2003, the Company issued a $57.2 million note payable, net of a $175,000 discount, to the Washington Economic Development Finance Authority, an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the proceeds of the bond issuance to CSC of Tacoma LLC, a wholly owned subsidiary of the Company. The bonds are non-recourse to CSC of Tacoma LLC and the Company. The proceeds of the note were disbursed into escrow accounts held in trust as follows (in thousands):

The proceeds of the note in the construction fund are being used to complete a 500-bed detention facility in Tacoma, Washington, to be utilized by Immigrations and Customs Enforcement (ICE). The total expected construction costs of the project are approximately $49.5 million, of which $38.1 million has been expended, including $8.0 million that was funded by the Company in the current and prior year. Construction on the facility is expected to be complete by early 2004. The note is secured by the facility, and payments will be made exclusively from the revenues of the facility, which will be used to make the debt service payments on the bonds. The annual blended interest rate ranges between 3.3% and 4.1% during the term of the note. The effective rate of the note, net of the estimated interest earned on the debt service reserve fund and amortization of the note discount and loan issuance costs, is approximately 5.0%, and the note matures in October 2014.

The Company expects to continue to have cash needs as it relates to financing start-up costs in connection with new contracts that would improve the profitability of the Company. There can be no assurance that the Company’s operations together with amounts available under the revolving line of credit, which expires in 2005, will continue to be sufficient to finance its existing level of operations, fund start-up costs and meet its debt service obligations.

Tabular Disclosure of Contractual Obligations

Registrants known contractual obligations as of December 31, 2003 (in thousands):

Treasury Stock

On October 20, 2000, the Company announced that its Board of Directors had authorized a share repurchase program of up to $10.0 million. No shares were repurchased in 2003 or 2002, as the Company’s Credit Agreement prohibits the repurchase of common stock.

Critical Accounting Policies

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses

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during the reporting period. The Company routinely evaluates its estimates based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is described in Note A to our financial statements included herein. The significant accounting policies and estimates, which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:

Revenue Recognition and Accounts Receivable

Facility management revenues are recognized as services are provided based on a net rate per day per inmate or on a fixed monthly rate. Certain revenues are accrued, based on population levels or other pertinent available data. Subsequent adjustments to revenue are recorded when actual levels are known or can be reasonably estimated.

The Company extends credit to the government agencies with which it contracts and other parties in the normal course of business. Further, the Company regularly reviews outstanding receivables and provides estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, the Company makes judgments regarding its customers’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required.

Asset Impairments

As of December 31, 2003, the Company had approximately $70.9 million in long-lived property and equipment, assets under capital leases, and construction in progress. Additionally, the Company has assets held for sale of approximately $7.2 million. The Company evaluates the recoverability of the carrying values of its long-lived assets when events suggest that impairment may have occurred. In these circumstances, the Company utilizes estimates of undiscounted cash flows or other measures of fair value, to determine if impairment exists. If impairment exists, it is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. No impairment of assets was recognized during 2003. During 2002, the Company recognized asset impairments of approximately $1.9 million, which was included in the loss from discontinued operations for the year ended December 31, 2002.

Income Taxes

Deferred tax assets and liabilities are recognized as the difference between the book basis and tax basis of assets and liabilities. In providing for allowances for deferred taxes, the Company considers current tax regulations, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. For the 2002 period, the Company recognized a $1.3 million tax benefit principally attributable to a change in estimate of the recoverability of deferred tax assets associated with exiting Puerto Rico operations.

Loss Contracts

The Company evaluates the future profitability of its contracts when events suggest that the contract may not be profitable over its remaining term. The Company measures the estimated future losses as the present value of the estimated net cash flows over the remainder of the contract from the time of measurement, with consideration first given to asset impairments as discussed above. For 2003, the Company did not recognize any loss contract costs. During 2002, the Company recognized a $1.5 million loss on facility contracts for the year ended December 31, 2002, which is included in loss from discontinued operations for the year ended December 31, 2002. The charge primarily relates to the Company’s Keweenaw, Michigan juvenile facility, which, as a result of low utilization by the contracting agencies, was expected to incur losses of $1.3 million over the remaining contract period. The Company reached an agreement with its landlord to terminate the lease effective December 2003, at which time the Company began terminating facility contracts. The Company recorded a loss contract recovery of $896,000, which represents the excess of the reserve over actual costs, and is included in the loss from discontinued operations for the year ended December 31, 2003. No reserve remains at December 31, 2003. The Company also recorded a $220,000 loss reserve at December 31, 2002, for estimated contract losses through the contract termination at the Bayamon, Puerto Rico juvenile facility, which ended January 31, 2003.

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Discontinued Operations

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company has recorded the results of operations of components that have either been disposed of or are classified as held for sale under discontinued operations on the income statement. The Company defines components that have been disposed of as facilities not operating under a management agreement where the Company has unilaterally terminated its various contracts with sending agencies or has otherwise ceased operations. In these disposal situations, the Company typically, has a significant facility investment or lease obligations. In situations where management agreements with a principal agency are terminated in accordance with the contract provisions, whether or not subject to renewal or proposal, and without disposal of a significant facility investment or lease obligation, the results of operations of these facilities continue to be recorded in continuing operations (see NOTE N – DISCONTINUED OPERATIONS).

Commitments and Contingencies

As more fully discussed under “Legal Proceedings,” the company is involved in significant litigation. Additionally, the Company is subject to audits of contracting agencies and other contingencies. Commitments and contingencies are evaluated and assessed individually to determine whether a liability has been incurred or whether disclosure is otherwise required.

New Accounting Pronouncements

On January 31, 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 clarifies existing accounting for whether variable interest entities should be consolidated in financial statements based upon the investees’ ability to finance its activities without additional financial support and whether investors possess characteristics of a controlling financial interest. FIN 46 applies to years or interim periods beginning after June 15, 2003 with certain disclosure provisions required for financial statements issued after January 31, 2003. The Company currently does not have investments in any variable interest entities. In December 2003 the FASB issued FIN No. 46 (revised), which replaced FIN No. 46. FIN No. 46 (revised) is effective immediately for certain disclosure requirements and variable interest entities referred to as special-purpose entities for periods ended after December 15, 2003 and for all other types of entities for financial statements for periods ended after March 15, 2004. The application of FIN 46(revised) in 2003 did not have a material effect on the Company’s financial position, results of operations and cash flows. Additionally the Company does not expect the application of remaining requirements in first quarter 2004 to have material impact on the Company’s financial position, results of operations and cash flows.

RISK FACTORS

Investors should carefully consider the following factors that may affect future results, together with the other information contained in this Annual Report on Form 10-K, in evaluating the Company before purchasing its securities. In particular, prospective investors should note that this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that actual results could differ materially from those contemplated by such statements. See “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” on page 3 of this Annual Report on Form 10-K. The factors listed below represent certain important risks the Company believes could cause such results to differ and are not intended to represent a complete list of the general or specific risks that may affect the Company. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect the Company to a greater extent than indicated.

DECREASES IN OCCUPANCY LEVELS AT OUR FACILITIES OR RISING COSTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS

While the non-personnel cost structures of the facilities we operate are relatively fixed, a substantial portion of our revenues are generated under facility management contracts with government agencies that specify a net rate per day per inmate or a per diem rate, with no minimum guaranteed occupancy levels. Under this per diem rate structure, a decrease in occupancy levels may have a material adverse effect on our financial condition, results of operations and liquidity. We

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are dependent upon the governmental agencies with which we have management contracts to provide inmates for, and maintain the occupancy level of, our managed facilities. We cannot control those occupancy levels. In addition, our ability to estimate and control our costs with respect to all of these contracts is critical to our profitability.

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

As is typical in our industry, our facility management contracts are short-term, generally ranging from one to three years, with renewal or extension options as well as termination for convenience clauses in favor of the contracting governmental agency. Many YSI contracts renew annually. Additionally, the Company received approximately 30% of its 2003 consolidated revenue from two agencies: Maryland Department of Juvenile Justice and Arizona Department of Corrections. Our facility management contracts may not be renewed or our customers may terminate such contracts in accordance with their right to do so. The non-renewal or termination of any of these contracts could materially adversely affect our financial condition, results of operations and liquidity, including our ability to secure new facility management contracts from others. Of the multi-year contracts in place as of December 31, 2003, three contracts representing approximately 725 beds are up for renewal in 2004, and have been renewed. The Company elected not to pursue renewal of one contract representing 329 beds, which will be operated by the contracting agency, beginning in April 2004.

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

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

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

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

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

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OUR ABILITY TO OBTAIN FINANCING WHEN A CONTRACT REQUIRES THAT THE COMPANY CONSTRUCT A NEW FACILITY IN ORDER TO MEET THE NEEDS OF THE CONTRACT AND CONSTRUCT THE FACILITY WITHIN THE ESTABLISHED CONSTRUCTION BUDGET

Certain new contracts awarded to the Company require that the Company construct a new facility to meet the needs of the contract. In the past, the Company has relied upon bank financing and arrangements with government entities to finance the construction of new facilities. However, the Company may be unable to obtain this financing, due to borrowing limitations, or changes in governmental policies that have allowed certain types of financing in the past. The result of any of these events might compel the awarding agency to look for an alternative provider. Additionally, if the Company was not able to construct the facility within the established construction budget, the cost overruns could cause the Company to use cash on hand to fund the cost overruns, which may have a material adverse affect on the Company’s cash flows.

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

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

OPPOSITION TO FACILITY LOCATION MAY ADVERSELY IMPACT THE COMPANY’S ABILITY TO DEVELOP SITES FOR NEW FACILITY LOCATIONS

The Company’s success in opening new facilities is dependent in part upon its ability to obtain facility sites that can be leased or acquired on economically favorable terms. Some locations may be in or near populous areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site. Certain facilities are already located in or adjacent to such areas and, in one instance, the Company abandoned its plan to expand a facility after consulting with community leaders who raised concerns about the expansion. There can be no assurance the Company will be able to open new facilities or expand existing facilities in any particular location.

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

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

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

An escape, riot or other disturbance at one of our facilities could have a material adverse effect on our financial condition, results of operations and liquidity. Among other things, the adverse publicity generated as a result of any such

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

INSURANCE COVERAGE MAY BECOME INADEQUATE OR UNAVAILABLE TO COVER POTENTIAL LIABILITY RELATED TO MANAGEMENT OF CORRECTIONAL AND DETENTION FACILITIES OR ITS COSTS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS

Our management of correctional and detention facilities exposes us to potential third-party claims or litigation by prisoners or other persons for personal injury or other damages, including damages resulting from contact with our facilities, programs, personnel or students (including students who leave our facilities without our authorization and cause bodily injury or property damage). Currently, we are subject to actions initiated by former employees, inmates and detainees alleging assault, sexual harassment, personal injury, property damage and other injuries. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain insurance programs that provide coverage for certain liability risks faced by us, including personal injury, bodily injury, death or property damage to a third party where we are found to be negligent. There is no assurance, however, that our insurance will be adequate to cover potential third-party claims. In addition, we are unable to secure insurance for some unique business risks, which may include, but not be limited to, some types of punitive damages in states where it is prohibited by law.

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

The Company continues to incur increased costs for insurance. Workers’ compensation and general liability insurance represent significant costs to the Company.

STAFF RECRUITMENT DIFFICULTIES MAY IMPACT OPERATIONS

Many of our facilities are located in areas where there are smaller populations and/or where there are more jobs than available workers. Our choice of employees is further limited by our drug free workplace status, and licensure and other policy prohibitions against hiring individuals with past criminal histories. However, many of our contracts require the Company to have certain numbers and certain types of employees on duty at the facility at all times. Although the Company makes rigorous efforts to recruit and retain a sufficient work force, it is sometimes unable to achieve adequate staffing without significant overtime expense. This additional expense may adversely effect the Company’s results.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company’s current Credit Agreement is subject to variable rates of interest and is therefore exposed to fluctuations in interest rates. There are no outstanding borrowings under the variable rate Credit Agreement. The Company’s note payable and loan payable accrue interest at fixed rates of interest.

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

The sensitivity to interest rate changes is not material to the Company.

Item 8. Financial Statements and Supplementary Data

The information required by this item is contained on Pages F-1 thru F-31 hereof.

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

None

Item 9A. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for the Company. Such officers have concluded (based upon their evaluation of these controls and procedures as of a date within 90 days of the filing of this report) that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company’s management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

The Certifying Officers also have indicated that there were no significant changes in the Company’s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.

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PART III

The information required by Items 10, 11, 12, and 13 of Form 10-K will be contained in, and is incorporated by reference from, the proxy statement for the Company’s 2004 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.

PART IV

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Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

The consolidated statements of the Company are included on pages F-1 through F-31 of this Form 10-K.

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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.

Dated: March 30, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.