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     Since our beginning in 1996 we have achieved a compounded annual growth rate of approximately 44%.  2003 revenue growth as a percentage over 2002 was 15%.  Revenue and profitability during 2003 was negatively impacted by an interpretation by the US Attorney’s Office dated December 27, 2002 (“interpretation”).  The interpretation effectively limited the time federal inmates are allowed to serve at community correction facilities (halfway houses).  During 2003 and 2002 approximately 33% and 32% of our revenue was derived from projects subject to the interpretation.  We believe that the interpretation resulted in a decrease of revenues at our halfway houses of approximately 20%.  Additionally, as planned, 2003’s focus was mostly related to the building of infrastructure.  As we enter 2004, the Company is significantly stronger then years past at all levels.  During 2004 we will continue to provide solid value added services for our clients and hope to be successful in obtaining additional projects.

     Correctional Systems, Inc. has been managing jails for cities and counties since 1994. We provide jails, halfway houses, electronic monitoring and drug counseling. We are organized around three correctional divisions as a full-service correctional agency:

 1.         Institutional Division - this includes eight jail facilities in Southern California and two Detention Centers in New Mexico.

 2.         Community Treatment Center Division – CSI manages six halfway house contracts: Four for the Federal Bureau of Prisons  (three in Texas in the Cities of Austin, Brownsville, and Edinburg, and one in Leavenworth, Kansas), one Community Residential Treatment Center for the County of Travis, Texas, and one Therapeutic Treatment Center for the State of Texas in Beaumont, Texas.

 3.         Alternative Sentencing - Sentencing Concepts, Inc. (SCI) is our division for electronic monitoring, offender supervision, alcohol and drug counseling and drug testing, with agreements and/or contracts in multiple sites in California. We may have 1,000 offenders under supervision at any given time.

Project Development.  The CSI Corporate Proposal Crew worked on obtaining re-awards of contracts on four existing projects. Another major effort, a 100-bed Homeland Security, INS-Bureau of Customs Enforcement project, was withdrawn by the government after we submitted the proposal. Other proposals were submitted and we hope to have positive reports on these this year. The results of our efforts will provide approximately $20 million of our corporate revenue over the next six years. Our current awards:

          •  TDCJ Beaumont Substance Abuse Contract – we were re-awarded this 24 bed contract, but the Texas Department of Criminal Justice refused to increase the per diem rate over the rate under which the facility has operated for the last six years.  A Corporate decision was made that we could not operate those beds, under requirements which were highly elevated over the previous contract, at a rate which had gone stale years ago.  Consequently, we declined this contract and instead negotiated an increase in our 160-bed Halfway House contract to 184 beds, at a rate which was respectable.

          •  Travis County SMART Program Halfway House -- CSI was re-awarded this contract following a competitive bidding process. The new contract is for three years.

 What's next for CSI?

     Year 2004 – CSI has developed a solid management team that is positioning the company for long term standing in the correctional marketplace.  Over the next year we will continue to strengthen our infrastructure and to provide high quality services to our customers. Development efforts will continue to identify small and medium sized jail facilities to bid on or to negotiate contracts, and to focus on Federal Halfway House business and unique opportunities with Homeland Security. We will expand through controlled growth that fits our mandates and is economically viable.

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