SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                FORM 10-KSB/A

                [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934
                 For the Fiscal Year Ended December 31, 2002

              [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934
                      For the transition period from to

                       Commission File Number: 0-20307
                      AVALON CORRECTIONAL SERVICES, INC.
                (Name of small business issuer in its charter)

Nevada                                                            13-3592263
(State of Incorporation)                           (I.R.S. Employer I.D. Number)

              13401 Railway Drive, Oklahoma City, Oklahoma 73114
             (Address of Principal executive offices) (Zip Code)

                   Issuer's telephone number (405) 752-8802

     Securities registered under Section 12 (b) of the Exchange Act: None

       Securities registered under Section 12 (g) of the Exchange Act:

               Shares of Class A Common Stock, par value $.001
                               (Title of class)

     The issuer has (1) filed all reports  required to be filed by Section 13 or
15 (d) of the Exchange Act during the past 12 months (or such shorter  period as
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 ___

     Disclosure of delinquent  filers in response to Item 405 of Regulation  S-B
is not contained in this form, and no disclosure will 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-KSB or any  amendment to
this form 10-KSB. [ X ]

     Revenues from  continuing  operations  for the year ended December 31, 2002
were $27,456,000.

     The aggregate  market value of voting  common stock held by  non-affiliates
was $2,759,000 on February 14, 2003, based on the average high and low prices of
such  stock as  reported  by the  National  Association  of  Securities  Dealers
Automated  Quotations  Systems  ("NASDAQ") on that day. As of February 14, 2003,
4,895,002 shares of the issuer's common stock, par value $.001,  were issued and
outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE:
      Portions  of  the  Proxy  Statement  for  the  2003  Annual  Meeting  of
Shareholders are incorporated by reference in Part III, Items 10, 11, and 12.

          Transitional Small Business Disclosure Format: Yes No X .

<PAGE>


                      AVALON CORRECTIONAL SERVICES, INC
                              TABLE OF CONTENTS
                         FORM 10-KSB/A ANNUAL REPORT
                     FOR THE YEAR ENDED DECEMBER 31, 2002

Item                                                                  Page

PART I

      Introductory Statement                                           3

1.    Description of Business                                          3

2.    Description of Property                                          9

3.    Legal Proceedings                                                10

4.    Submission of Matters to a Vote of Security Holders              10

PART II

5.    Market for Common Equity and Related
            Stockholder Matters                                        10

6.    Management's Discussion and Analysis or Plan of Operations       11

7.    Financial Statements                                             13

8.    Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                     33

PART III

9.    Directors, Executive Officers, Promoters and Control Persons;
            Compliance with Section 16 (a) of the Exchange Act         33

10.   Executive Compensation                                           35

11.   Security Ownership of Certain Beneficial Owners
            and Management                                             35

12.   Certain Relationships and Related Transactions                   35

13.   Exhibits and Reports on Form 8-K                                 35

14.   Control and Procedures                                           36

15.   Signatures                                                       37

      Certifications                                                   38


<PAGE>

                                   PART I


Introductory Statement -

     Upon original implementation of Statement of Financial Accounting Standards
("SFAS") No. 142, the Company  determined  that  intangible  assets  related the
value  of  contracts  previously  acquired  in  business   combinations  had  an
indefinite life, and therefore were not amortized.  After communication with the
SEC staff resulting in a reevaluation of the life of contract  intangibles,  the
Company decided to restate the consolidated  financial  statements as of and for
the year ended  December  31,  2002,  to amortize  contract  intangibles  over a
fifteen-year life (the life assigned prior to the implementation of SFAS No. 142
on January 1, 2002).  The effect of the  restatement  reduced  total assets from
$39,916,000,  as  originally  reported at December  31,  2002,  to  $39,691,000,
reduced total  liabilities  from  $29,602,000 to $29,517,000  (due to income tax
effects)  and  therefore  reduced   stockholders'   equity  from  $7,138,000  to
$6,998,000.  The restatement also reduced net income from  $1,261,000,  or $0.22
per diluted share, to $1,121,000,  or $0.20 per diluted share. See Note 3 to the
consolidated  financial statements,  for a summary of the effects of these items
on previously reported results of operations.

     This amended and  restated  Form  10-KSB/A for the year ended  December 31,
2002 includes  restated  consolidated  financial  statements  for the year ended
December 31, 2002.  The  consolidated  financial  statements  for the year ended
December  31,  2001  were  not  impacted  as  the  restatement  pertains  to the
implementation of SFAS No. 142 on January 1, 2002.

ITEM 1.  DESCRIPTION OF BUSINESS.

The Company -

     Avalon  Correctional  Services,  Inc.,  is an owner and operator of private
community correctional  facilities.  Avalon Correctional Services,  Inc. and its
wholly owned  subsidiaries  ("Avalon" or the "Company")  specialize in operating
private   community   correctional   facilities   and   providing   correctional
programming.  Avalon  currently  operates  facilities  and  manages  programs in
Oklahoma,   Texas,  and  Colorado,  with  plans  to  significantly  expand  into
additional states. Avalon's business strategy is designed to elevate the Company
into a dominant role as a provider of community correctional services.  Avalon's
development plan is to expand operations through new state and federal contracts
and  selective  acquisitions.   Avalon  has  been  providing  private  community
correctional  services since 1985.  Avalon  contracts with various  governmental
agencies to provide community corrections operations and services.

     Avalon management  believes its background and ability to build and operate
community   correctional   facilities  and  provide  correctional   programming,
positions the Company for substantial  growth in the corrections  industry.  The
number of adult  correctional  beds  operated by private  managers in the United
States has grown sevenfold since 1992, from 20,000 to 140,000 beds, according to
the Private Adult  Correctional  Facility  Census,  dated  September 4, 2001, by
Charles  W.  Thomas,  and  even  with  a  slowing  in  the  growth  rate  of the
correctional populations, opportunities for more growth exist. Prison population
growth is largely tied to three factors:  the number of 18 to 29 year old males,
the status of the general  economy,  and the level of violent crime.  Currently,
the number of young males is  increasing,  the economy has slowed  (particularly
since  September 11, 2001),  and the violent crime level is expected to increase
with the downturn in the economy.

     Avalon's particular areas of growth will come in four areas. One, the trend
in corrections is toward utilizing community-based sentencing rather than secure
facilities. Community-based sentencing relies to a significant degree on halfway
house  facilities,  which are  Avalon's  primary  focus.  Two,  acquisitions  of
existing  community   corrections   companies  continue  to  be  attractive  and
available.  Three,  Federal  requests  for  proposals  should  continue to offer
opportunities for expansion due to the ongoing shortage of beds that the Federal
Bureau of Prisons is experiencing.  And four, the increasing number of offenders
incarcerated,  the  decline  in  states'  revenues  and the  decrease  in  funds
available  to pay to house these  offenders  are creating  economic  pressure to
utilize the least  restrictive  and most cost  effective  form of  incarceration
available.  Community  corrections  programs are the least  restrictive and most
cost effective form of incarceration available. Inmates serving the last 6 to 12
months of their  incarceration  in a community  correctional  facility  report a
lower recidivism rate than those released  directly from secure  facilities into
society. The United States incarcerated two million one hundred thousand persons
at  year-end  2001,  according  to the Bureau of Justice  Statistics.  The total
prison and jail population grew 2.5% in 2001.

                                     Page 3
<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC

     Avalon  currently  owns and operates  2,300 private  community  corrections
beds. The Company owns and operates three community correctional  facilities and
one  intermediate  sanction  unit in Oklahoma;  a 160-bed  juvenile  residential
treatment   center   in   Oklahoma;   two   medium-security    facilities,   one
post-adjudication  juvenile  substance abuse treatment center, and one community
correctional  facility in Texas; and four community  correctional  facilities in
Colorado.  Avalon is the  largest  private  provider of  community  correctional
services in  Oklahoma.  The Avalon  facilities  provide  numerous  programs  for
offenders  generally  serving  the last six  months  of their  sentence.  Avalon
provides  contract  agencies  a  complete  range  of  services  relating  to the
security,  detention and care of offenders,  and a broad range of rehabilitative
programs to reduce  recidivism.  Intensive  programming  is an essential part of
community-based  corrections.  Avalon has provided  substance abuse programs for
over 17 years. The provided  programming  includes substance abuse treatment and
counseling,  vocational  training,  work  release  programs,  basic  educational
programs, job and life skill training, and reintegration  services. The Colorado
community  corrections  programs  also  provide   non-residential   services  to
approximately  210  offenders in the State of Colorado.  The Union City juvenile
residential   treatment  facility  is  the  first  privately  operated  juvenile
residential  treatment  facility in the State of Oklahoma.  Avalon's private pay
program,  operated from the Company's community correctional  facilities,  has a
growing  population  of  clients  referred  by  local  judicial  systems  as  an
alternative to secure incarceration.

                                     Page 4

<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC


     Avalon's  corporate  office is located at 13401  Railway  Drive in Oklahoma
City,  Oklahoma 73114.  Avalon's common stock is traded on the NASDAQ  Small-Cap
Market with the symbol "CITY".

Facilities -

     The  following  table  summarizes  certain   information  with  respect  to
facilities   and   programs   managed   by  Avalon   at   February   14,   2003.

Facility Name
And Location                         Capacity             Facility/Program Type
---------------------------------    ---------            ----------------------
Carver Center,                       300 Beds             Community Corrections
   Oklahoma City, Oklahoma                                Facility
Avalon Correctional Center,          320 Beds             Community Corrections
   Tulsa, Oklahoma                                        Facility
Turley Correctional Center,          150 Beds             Community Corrections
   Tulsa, Oklahoma                                        Facility
El Paso Intermediate                 150 Beds             Medium Security
Sanction Facility                                         Corrections Facility
   El Paso, Texas
Union City Juvenile Center,          160 Beds             Medium Security
   Union City, Oklahoma                                   Juvenile Facility
El Paso Multi-Purpose Facility,      324 Beds             Medium Security
   El Paso, Texas                                         Corrections Facility
Phoenix Center,                      139 Beds             Community Corrections
    Henderson, Colorado                                   Facility
The Villa at Greeley,                307 Beds             Community Corrections
    Greeley, Colorado                                     Facility
The Loft House,                      35 Beds              Community Corrections
    Denver, Colorado                                      Facility
Community Sentencing Center,         N/A                  Day Reporting Center,
    Northglenn, Colorado                                  Community Corrections
                                                          Facility
Riverside Intermediate Sanction      352 Beds             Intermediate Sanctions
    Tulsa, Oklahoma                                       Unit, Community
                                                          Corrections Facility
Austin Transitional Center,          180 Beds             Community Corrections
    Del Valle, Texas                                      Facility
Roy K. Robb,                         48 Beds              Post-adjudication
    San Angelo, Texas                                     Juvenile Substance
                                                          Abuse Facility
Avalon Corporate Office,             N/A                  Administration
    Oklahoma City, Oklahoma

Correctional Services -

     Avalon owns and operates nine correctional  centers,  Carver Center, Avalon
Correctional Center,  Turley Correctional Center, Union City Juvenile Center, El
Paso Intermediate  Sanction  Facility,  El Paso Multi-Purpose  Facility,  Austin
Transitional  Center,  Phoenix Center and The Villa at Greeley. The Company also
operates  community  corrections  programs in four leased  facilities;  the Loft
House, a community  corrections  program; the Community Sentencing Center, a day
reporting center; the Roy K. Robb center, a youth rehabilitation  facility;  and
the Riverside  Intermediate  Sanction Unit, a multi-use corrections program. The
community  corrections  centers provide  complete  correctional  administration,
correctional officer staffing,  housing, food services,  vocational  assistance,
transportation, and rehabilitation services.

                                     Page 5
<PAGE>
     Oklahoma.  Avalon's  contracts with the Oklahoma  Department of Corrections
extend  through June 30, 2003 and are generally  renewed every three years.  The
structure  of the  Oklahoma  contracts  is based  upon three  one-year  contract
periods.  Avalon has contracted  with the State of Oklahoma  pursuant to similar
contracts since 1985. The State of Oklahoma's performance under the contracts is
subject  to  annual  appropriation  by the  legislature.  Avalon  also  provides
services  pursuant to a Federal contract obtained in 1997. The five-year Federal
contract was renewed in 1999 and extends through 2004.

     Carver  Center is a  300-bed  community  corrections  facility  located  in
Oklahoma  City,  Oklahoma.  Carver  Center has been  expanded  from its  initial
capacity of 50 beds in 1985, to its current  capacity of 300 beds to accommodate
the increasing  needs of the Oklahoma  Department of Corrections.  Carver center
was sited, designed, and constructed by Avalon.

     Avalon  Correctional  Center is a 320-bed  community  corrections  facility
located in Tulsa,  Oklahoma.  The  facility has been  expanded  from its initial
capacity of 255 beds to its  current  capacity  of 320 beds to  accommodate  the
increasing  needs  of  the  Oklahoma  Department  of  Corrections.   The  Avalon
Correctional Center was sited, designed, and constructed by Avalon and opened in
July 1995.

     Turley  Correctional  Center is a 150-bed  community  corrections  facility
located in Tulsa,  Oklahoma.  Avalon acquired the Turley  Correctional Center in
October 1997. A new 150-bed correctional facility was constructed on the 35-acre
grounds  at  the  Turley  Correctional  Center  in May of  2000.  The  buildings
previously utilized for administration and offender housing were demolished.

     Union  City  Juvenile  Center  is  a  160-bed  medium   security   juvenile
correctional  facility located in Union City, Oklahoma.  The Union City Juvenile
Center was sited, designed, and constructed by the Company.  Construction of the
Union  City  Juvenile  Center  was  completed  and the  Center  began  receiving
offenders in February 1999. The Center has a licensed  capacity of 160 beds. The
Oklahoma  Office of Juvenile  Affairs  (OJA),  in a  cost-cutting  move, did not
exercise the option for the final year of a five-year contract providing for the
care of 80 juveniles at the facility.  The contract  expired on December 2, 2002
and as of February 14, 2003, the facility  remains vacant while other sources of
offenders are being pursued.

     Carver Center,  Avalon  Correctional  Center and Turley Correctional Center
are  accredited  by the  American  Correctional  Association  ("ACA")  as  Adult
Community Correctional Facilities. ACA accreditation or candidacy is required to
contract  with the State of  Oklahoma  for  correctional  services.  The ACA,  a
private not-for-profit  organization,  was established to develop uniformity and
industry standards for the operation of correctional facilities and provision of
inmate care. Accreditation involves an extensive audit and compliance procedure,
and is  generally  granted  for a  three-year  period.  Carver  Center  has been
accredited  since 1990 and the  current  accreditation  expires in 2005.  Avalon
Correctional  Center was initially  accredited in 1996 and is accredited through
2005. Turley Correctional Center was initially accredited in October 2000 and is
accredited until October 2003.

     Union City  Juvenile  Center was  initially  accredited  in April 2000 as a
Juvenile Training School and is accredited until April 2003.

     Riverside  Intermediate  Sanction  Unit was opened in  December  2001.  The
facility is leased from the Tulsa County Criminal Justice Authority for a period
of up to twenty  years.  The  facility is utilized  to provide  substance  abuse
programming and community corrections programs for various jurisdictions.

     Texas.  Avalon acquired the El Paso  Intermediate  Sanction  Facility in El
Paso, Texas in August 1996. The facility has a capacity of 150-beds. The Company
entered into a fifteen-year contract to provide services in the facility for the
West Texas Community Supervision and Corrections Department in July 1996.

     The Company  was awarded a contract in June 1998 with the Texas  Department
of Criminal Justice to provide 250  multi-purpose  beds in El Paso, Texas. A new
324-bed  facility was  constructed  adjacent to the existing El Paso Facility in
1999 to accommodate this new contract.  The El Paso  Multi-Purpose  Facility was
completed and became operational in the second quarter of 1999. The contract has
been extended for the years 2001 through 2003.

                                     Page 6
<PAGE>

     Avalon  acquired  the Austin  Transitional  Center in  December  2001.  The
community  corrections  facility has a capacity of 180  offenders  and contracts
with the Texas  Department of Criminal  Justice for halfway house services.  The
facility  consists of thirteen modular  buildings owned by Avalon and located on
leased land. The land is leased for a period of five years with a renewal option
of five years.

      In September 2002,  Avalon  contracted with Tom Green County in Texas to
operate its  post-adjudication  juvenile substance abuse facility.  The Roy K.
Robb  facility  consists  of one  secure  building  that  can  house  up to 48
youthful  offenders.  The contract with Tom Green County has a five-year  term
with an option for extension of a additional  five-year  term. The Roy K. Robb
facility  contracts  with  the  surrounding  counties  to  rehabilitate  their
juvenile substance abusers.

     Colorado. The Company acquired a management contract in May 1999 to operate
the Adams Community  Corrections  Program in Northglenn,  Colorado.  The Program
provides  residential  and  non-residential  services  in three  locations:  The
Phoenix Center, a 139-bed  residential center in Henderson,  Colorado;  The Loft
House,  a 35-bed  residential  program in  Denver,  Colorado  and the  Community
Sentencing Center, a day reporting center in Northglenn,  Colorado.  The Company
completed a 24-bed expansion to the Phoenix Center in the first quarter of 2002.
The Program provides services pursuant to contracts with various state, federal,
and local agencies.

     The Company  acquired The Villa at Greeley in June 1999. The Villa owns and
operates  a  307-bed   multi-purpose   facility  and  provides  residential  and
non-residential  offender  services and an assisted  living  program in Greeley,
Colorado. The Villa contracts with various state, federal, and local agencies.

Assisted Living Center -

     Avalon holds a 15% equity  interest in an assisted living center and has an
investment  of $0 at December 31, 2002.  The Company  guaranteed  facility  debt
related to the building of the investment.

Competition -

     Corrections.  The  trend  in the  United  States  toward  privatization  of
government  services and  functions  continues to increase as  governments  have
faced continuing  pressure to control costs and improve the quality of services.
Governmental  agencies responsible for the operation of correctional  facilities
are privatizing and contracting  with private  providers for services to address
these pressures.

     A  combination  of factors in many  states  has led to a  revamping  of the
corrections processes (i.e., decreasing revenues,  increasing prison population,
litigation  arising  from  substandard   prison   conditions,   and  substantial
overcrowding) in addition to reallocation of limited prison  resources.  Private
correctional  services  provide a  substantial  economic  savings  allowing  the
contracting governmental agency to comply with legislative and judicial pressure
to improve incarceration conditions.  Privately operated correctional management
companies  are able to provide  high  quality  services at lower  cost.  Private
correctional  facilities  operating  as  contractors  for  government  agencies,
pursuant to court order or otherwise exist in virtually every state.

     Avalon's  primary  focus is the area of  community  corrections.  Community
corrections  programs have experienced  substantial growth over the past decade.
Community  corrections  programs  provide  services to individuals  still in the
correctional  system and  individuals  granted parole or sentenced to probation.
Offenders are often placed in a community  corrections facility for the last six
to twelve months of their  sentence.  Community  corrections  facilities  enable
offenders to remain  employed and often upgrade their job skills.  The offenders
also  contribute to society by paying taxes,  paying court costs,  paying victim
restitution,  and  paying  for a  portion  of the cost of  their  incarceration.
Community corrections  facilities have the lowest re-imprisonment rate among the
various  types  of  incarceration.  Community  corrections  facilities  generate
revenue for local communities,  are more cost effective than building additional
jail  cells,  and help reduce the  prison-overcrowding  problem.  The  community
corrections  market  segment is  estimated  at $4 billion  annually and includes
approximately 5,000 providers.
                                     Page 7
<PAGE>

     Contracts for correctional  services are awarded by government agencies and
are generally based upon competitive  bidding and quality of services  provided.
Avalon  management  believes the Company has several  competitive  advantages in
contracting for community  correctional services including:  a) a seventeen-year
history of providing quality services to the Oklahoma Department of Corrections;
b) a geographic location allowing for lower administrative overhead charges when
bidding against  competitors for regional  contracts;  c)  accreditation  by the
American  Correctional  Association  since 1990 and  certification as a drug and
alcohol  treatment  services  provider  since  1985;  and d) a high  quality and
cost-effective  corporate  infrastructure for management,  marketing,  financial
management, financial reporting, quality assurance, and support services.

     Avalon  has  developed  a  broad  range  of  programs  designed  to  reduce
recidivism,  including  substance  abuse  treatment and  counseling,  vocational
training,  work release programs, GED classes, job and life skills training, and
reintegration services in addition to providing fundamental residential services
for adult  inmates.  The  management  services  offered by Avalon range from the
design and development of new correctional  facilities,  to the complete turnkey
development   including,   siting,   designing,   constructing,   and  operating
correctional  facilities.  Avalon management believes its experience and success
in  owning  and  operating  community  correctional   facilities  and  providing
successful  programming  will be the basis for becoming the dominant  company in
the community corrections  industry.  Avalon is the only publicly traded company
focused on the community corrections segment of the corrections industry.

     For the year ended  December 31, 2002,  approximately  24% of the Company's
revenue was derived  from  contracts  with the  Oklahoma  governmental  agencies
relating to the Company's  adult community  correctional  facilities in Oklahoma
City ("Carver  Center"),  Tulsa  ("Avalon  Correctional  Center" and  "Riverside
ISF"),  and Turley  ("Turley  Correctional  Center").  Approximately  24% of the
Company's  revenue  was  derived  from  contracts  with  Colorado   governmental
agencies. Approximately 13% of the Company's revenue was derived from a contract
with the  Oklahoma  governmental  agency  relating  to the Union  City  Juvenile
Center.  Approximately  24% of the Company's  revenue was derived from contracts
with  Texas  governmental  agencies,  relating  to  the  Company's  correctional
facilities  in El Paso and  Austin,  Texas.  Approximately  9% of the  Company's
revenue was derived from collections directly from individual offenders.

Insurance -

     Avalon maintains  insurance  coverage for general  liability,  property and
contents, automobile physical damage and liability,  workers' compensation,  and
directors  and  officers.  Avalon  believes its existing  insurance  coverage is
adequate.

Regulations -

     Avalon's  community  correctional  facilities in Oklahoma are accredited by
the American  Correctional  Association  ("ACA"),  an  independent  organization
comprised  of  professionals  in the  corrections  industry.  The  ACA  utilizes
compliance  audit  teams to  rigorously  examine  all  aspects of the  Company's
facilities and operations.  The Company recognizes the importance of maintaining
high quality  management  and  operations at its  facilities.  Accreditation  is
generally  granted for a three-year  period.  Carver Center has been  accredited
since 1990 and is currently  accredited through 2005. Avalon Correctional Center
was accredited in 1996 and is accredited through mid-2005.  Turley  Correctional
Center was accredited in 2000 and is accredited  until October 2003.  Union City
Juvenile Center was accredited in 2000 and is accredited until April 2003.

     The corrections industry is subject to federal, state and local regulations
administered by a variety of regulatory  authorities.  The correctional services
offered by Avalon in various states are subject to regulations  and oversight by
the  various  government  agencies.   Management  believes  its  operations  are
currently in  compliance  with all  applicable  laws and  regulations  affecting
Avalon's business.

Employees -

     At February 14, 2003,  Avalon had  approximately  490 full-time  employees,
including  directors and officers.  Avalon has not  experienced a work stoppage,
and management considers its employee relations to be good.

                                     Page 8
<PAGE>


ITEM 2.  DESCRIPTION OF PROPERTY.

     Carver  Center is a  300-bed  community  corrections  facility  located  in
Oklahoma  City,  Oklahoma.  The  facility  is  located on five acres of land and
includes five buildings.  Avalon  constructed a new 16,000 square foot dormitory
at Carver  Center in the second  quarter of 1995.  The  Carver  Center  facility
contains  approximately  35,000 square feet of building space. Carver Center was
sited, designed, and constructed by the Company.

     Avalon  Correctional  Center is a 320-bed  community  corrections  facility
located on approximately two acres of land in Tulsa,  Oklahoma. The construction
of the approximately 36,000 square foot facility was completed and opened by the
Company in July 1995. The Avalon  Correctional Center was sited,  designed,  and
constructed by the Company.

     Turley  Correctional  Center is a 150-bed  community  corrections  facility
located in Tulsa,  Oklahoma. The facility is located on a thirty-five acre tract
of land and includes two buildings. The Company acquired the Turley Correctional
Center in October  1997.  A new 26,000  square foot  correctional  facility  was
constructed  and opened in May 2000 on the  grounds  at the Turley  Correctional
Center.  The  buildings  previously  utilized  for  administration  and offender
housing have been demolished.

     El  Paso  Intermediate  Sanction  Facility  is a  150-bed  medium  security
correctional  facility  located on seven  acres of land in El Paso,  Texas.  The
facility was  constructed  as an  intermediate  sanction  facility.  The Company
acquired the 36,000 square foot facility in 1996.

     Union  City  Juvenile  Center  is  a  160-bed  medium   security   juvenile
correctional  facility  located  on 20 acres of land in  Union  City,  Oklahoma.
Construction  of the 45,000  square foot  facility was  completed and the Center
began  receiving  offenders in February 1999. The Union City Juvenile Center was
sited, designed, and constructed by the Company.

     El Paso  Multi-Purpose  Facility is a 324-bed medium security  correctional
facility on seven acres of land acquired in 1998 in El Paso, Texas. Construction
of the  54,000  square  foot  facility  was  completed  in  1999.  The  El  Paso
Multi-Purpose Facility was sited, designed, and constructed by the Company.

     The Phoenix Center is a 139-bed community  corrections  facility located in
Northglenn,   Colorado.   The  13,200   square  foot   facility  is  located  on
approximately 2.2 acres of land. The Company began a 1,680 square-foot expansion
to the facility in the fourth  quarter of 2001.  The  expansion was completed in
the first  quarter of 2002. A second  expansion of the facility was begun in the
latter half of 2002. This latest expansion, which is scheduled for completion in
June of 2003,  will raise the  capacity of the  facility to 219  offenders.  The
Company acquired the Phoenix Center in 1999.

     The Villa at Greeley is a 307-bed multi-use  correctional  facility located
in  Greeley,   Colorado.   The  101,000  square  foot  facility  is  located  on
approximately  four acres of land. The Company  acquired the Villa at Greeley in
1999.

     The Loft  House is a  35-bed  community  corrections  facility  located  in
Denver, Colorado. The Company leases the Loft House.

     Community  Sentencing  Center is a day  reporting  correctional  program in
Northglenn,  Colorado.  The Center is leased and  contains  approximately  3,500
square feet.

     Riverside  Intermediate Sanction Unit is a 352-bed facility leased from the
Tulsa County  Criminal  Justice  Authority.  The initial lease term ends in June
2007, with three five-year  options for extension.  The facility was extensively
renovated by the Company and opened in December 2001.

     Austin  Transitional  Center is a 180-bed  community  corrections  facility
located in Del  Valle,  Texas,  a suburb of Austin.  The  facility  consists  of
thirteen modular  buildings owned by Avalon and located on leased land. The land
is leased for a period of five years with a renewal  option of five  years.  The
Company acquired the Austin Transitional Center in December 2001.

                                     Page 9
<PAGE>

     Roy K. Robb a 48-bed,  secure facility  located in San Angelo,  Texas.  The
facility  is leased  from Tom Green  County in Texas for a period of five  years
with one  renewal  option of five  years.  The  contract  allows the  Company to
terminate  with a  120-day  notice.  Avalon  began  operating  the  facility  on
September 1, 2002.

     Avalon  Corporate  Office is  located  in  Oklahoma  City,  Oklahoma,  in a
commercial  building at 13401 Railway Drive,  Oklahoma City, Oklahoma 73114. The
Company owned building  contains  approximately  21,000 square feet of warehouse
space including approximately 13,000 square feet of office space.

     Substantially  all property owned by Avalon is pledged as collateral on the
Company's  credit  facilities.   See  Note  7  to  the  Consolidated   Financial
Statements.

ITEM 3.  LEGAL PROCEEDINGS.

     Avalon is a party to  litigation  arising in the normal course of business.
Management  believes that the ultimate  outcome of these matters will not have a
material effect on Avalon's financial condition or results of operations.

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

     No matters  were  submitted to a vote of Avalon's  stockholders  during the
quarter ended December 31, 2002.

                                   PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Avalon's common stock trades on the NASDAQ Small-Cap Market with the symbol
"CITY".  The following table reflects the range of high and low sales prices, as
reported by the National  Quotation Bureau for each quarterly period during 2002
and 2001. The prices represent inter-dealer prices, without retail mark up, mark
down,  or  commission  and may not  represent  actual  transactions.  Trading in
Avalon's  common stock is limited and may not be an  indication  of the value of
the common stock.


            Quarterly Period Ended               High              Low
           -----------------------              -----             -----
            March 31, 2001                      $1.75             $1.13
            June 30, 2001                       $2.50             $1.72
            September 30, 2001                  $2.50             $1.60
            December 31, 2001                   $2.20             $1.75
            March 31, 2002                      $2.45             $2.05
            June 30, 2002                       $2.55             $2.26
            September 30, 2002                  $2.30             $1.80
            December 31, 2002                   $1.87             $1.20

     Avalon had  approximately  700 holders of record of its common  stock as of
February  14,  2003.  The Company did not declare any  dividends  during 2002 or
2001. Avalon' Board of Directors presently intends to retain all earnings in the
foreseeable  future for use in Avalon's  business.  Payment of  dividends on the
Common Stock is restricted by certain credit facilities.

     The  average  high and low price for the Common  Stock,  as reported on the
NASDAQ Small-Cap Market System was $1.23 per share on February 14, 2003.

                                    Page 10
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.

Restatement

     See  "Introductory  Statement"  on page 3 for  information  concerning  the
restatement of financial statements.

General

     This  document  contains   statements  that  are  not  historical  but  are
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933 and  Section  21E of the  Securities  Exchange  Act of  1934.  These
include statements regarding the expectations, beliefs, intentions or strategies
for 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  availability  and cost of financing to
redeem common shares and to expand the Company's business; and public resistance
to  privatization.  Additional  risk factors  include those discussed in reports
filed by the  Company  from time to time on Forms  10-KSB,  10-QSB and 8-K.  The
Company  does  not  undertake  any  obligation  to  update  any  forward-looking
statements.


Liquidity and Capital Resources -

     The  Company's  business  strategy  is to  focus on the  private  community
corrections industry, expanding its operations in existing and additional states
through  new  Federal  and  state  contracts  and  selective  acquisitions.  The
successful  implementation of the Company's growth plan will create the need for
additional capital and financing.

     Working capital at December 31, 2002 was $1,130,000  representing a current
ratio of 1.23:1.00,  compared to working capital of $685,000 and a current ratio
of 1.15:1.00 at December 31, 2001.  Capital  expenditures  were $1.21 million in
2002, compared to $2.18 million in 2001. The 2002 capital  expenditures  include
renovations  to Carver  Center,  expansion  of the  Phoenix  Center to  increase
capacity  to 215 beds,  and  other  normal,  operating  purchases  of  vehicles,
equipment,  and building  improvements.  The 2001 capital  expenditures  include
expansion  and new  furniture to increase the capacity of Carver Center from 250
beds to 300 beds, expansion and new furniture to increase the capacity of Avalon
Correctional  Center  from 255 beds to 320 beds in the  third  quarter  of 2001,
renovation  of the  Riverside  Intermediate  Sanction  Unit  in  November  2001,
expansion of office space at the Central Office in June 2001, the acquisition of
the Austin Transitional Center in December 2001, expansion of the Phoenix Center
in December 2001, and other normal, operating purchases of vehicles,  equipment,
and building  improvements.  Operations provided $2,760,000 in cash flow in 2002
as compared to  $5,135,000  in 2001.  The cash flow  decrease  was a result of a
slowdown in receivable  collections at the end of 2000 subsequently collected in
2001,  and a decrease  in accrued  payables  in 2002  compared to an increase in
accrued payables at the end of 2001.

     The Company had  approximately  $4.5 million of cash and  revolving  credit
available  for new projects at December 31,  2002.  The Company  believes it has
adequate  cash  reserves and cash flow from  operations to meet its current cash
requirements.  The Company  expects  current  contracts  to generate  sufficient
income to increase cash balances. The Company invested excess cash by purchasing
$1.8 million of  certificates  of deposit with interest rates ranging from 2.85%
to 3.06% during the last three months of 2002.

     The Company has a senior credit facility with Fleet Capital consisting of a
$13.5 million term loan and a revolving line of credit equal to the lesser of $3
million or 80% of eligible accounts receivable.

                                    Page 11

<PAGE>

Results of Operations

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

     Total revenues  increased by 9% to $27,456,000 in 2002 from  $25,147,000 in
2001. The net increase in revenues was primarily a result of increased  offender
census,  the opening of the  Riverside  Intermediate  Sanction  Unit in December
2001, the  acquisition of the Austin  Transitional  Center in December 2001, and
the addition of Roy K. Robb contract in September 2002. The Company's net income
before taxes increased 26% to $1,668,000 in 2002 compared to $1,325,000 in 2001.

     Operating income, before interest, depreciation, and income taxes increased
5% to $6,518,000 in 2002 from $6,199,000 in 2001. The average daily  residential
offender  census  increased  by 14% to 1,693  in 2002  from  1,486 in 2001.  The
average daily non-residential offender census was 224 in 2002 compared to 243 in
2001. The residential  census increase was a result of increased offender census
in the Company's existing facilities,  the opening of the Riverside Intermediate
Sanction Unit in December 2001 and the  acquisition  of the Austin  Transitional
Center in December  2001.  The Union City contract  with the Oklahoma  Office of
Juvenile   Affairs  expired  on  December  2,  2002.  The  Union  City  facility
contributed  revenues of $3.575  million in 2002 and $3.819 million in 2001. The
Union City facility contributed earnings before interest,  taxes,  depreciation,
amortization and corporate overhead of $1.195 million 2002 and $1.047 million in
2001.

     Direct  operating  expenses  increased by 10% in 2002 compared to 2001. The
increase was a result of additional  costs  associated  with increased  offender
census in the  Company's  existing  facilities,  the  opening  of the  Riverside
Intermediate  Sanction  Unit in December  2001,  and the  addition of the Austin
Transitional  Center in December  2001.  The Company  incurred start up costs of
approximately  $357,000 associated with the Riverside Intermediate Sanction Unit
and Roy K. Robb facility during 2002.

     General and administrative  expenses increased by 11% in 2002. The increase
was a result  of  additional  costs  associated  with the  increase  in  overall
offender  census  and  additional  staffing  for the new  facilities  opened and
acquired in 2001. General and administrative  expenses equaled  approximately 7%
of  revenues  in 2002  and  2001.  Depreciation  and  amortization  expense  was
$2,256,000  for 2002,  an  increase  of 20% over the  $1,881,000  for 2001.  The
increase was a result of the additional expenses associated with the addition of
the Riverside and Austin facilities and increased write-offs of existing assets.
Interest  expense  decreased  by $399,000 in 2002 as a result of lower  interest
rates and lower borrowing levels.

     The Company fully  utilized its remaining tax loss  carry-forwards  in 2002
and recorded  income tax expense of  $547,000.  The Company did not incur income
tax expense in 2001. Net income for 2002 was $1,121,000,  compared to $1,325,000
for 2001.

New Accounting Pronouncements -

     See Notes 1 and 3 to the Consolidated  Financial  Statements for discussion
of new accounting pronouncements.

                                    Page 12
<PAGE>
ITEM 7.  FINANCIAL STATEMENTS.

      Index to Financial Statements:
                                                                       Page

      Report of Independent Certified Public Accountants                14

      Consolidated Balance Sheets                                       15

      Consolidated Statements of Operations                             16

      Consolidated Statements of Stockholders' Equity                   17

      Consolidated Statements of Cash Flow                              18

      Notes to Consolidated Financial Statements                        20

                                    Page 13
<PAGE>
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
Avalon Correctional Services, Inc.

     We have  audited the  accompanying  consolidated  balance  sheets of Avalon
Correctional  Services,  Inc. and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of operations,  stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the  financial  position of Avalon
Correctional Services, Inc. as of December 31, 2002 and 2001, and the results of
their  operations  and their cash  flows for the years then ended in  conformity
with accounting principles generally accepted in the United States of America.

     As discussed in Note 3, the consolidated financial statements as of and for
the year ended  December 31,  2002,  have been  restated to amortize  intangible
assets  related  to the  value of  contracts  previously  acquired  in  business
combinations   over  a  fifteen-year  life  (the  life  assigned  prior  to  the
implementation of SFAS No. 142 on January 1, 2002). Upon original implementation
of SFAS  No.  142,  the  Company  determined  the  contract  intangibles  had an
indefinite life, and therefore were not amortized, resulting in an overstatement
of net income for the year ended  December  31,  2002 of  $140,000,  or $.02 per
share.



GRANT THORNTON LLP

Oklahoma  City,  Oklahoma
January 27, 2003  (except for Note 3, as to which the date is February 15, 2004)

                                    Page 14
<PAGE>

                         CONSOLIDATED BALANCE SHEETS
                                                              December 31,

                                                         2002            2001
                                                     -----------    ------------
                                                      (Restated)

Current assets:
   Cash and cash equivalents                          $1,250,000     $ 2,389,000

   Certificates of deposit                             1,800,000             ---

   Related party receivables                                 ---         161,000

   Accounts receivable, net                            2,768,000       2,611,000

   Prepaid expenses and other                            287,000         239,000
                                                      ----------     -----------
      Total current assets                             6,105,000       5,400,000

Property and equipment, net                           30,041,000      30,414,00

Other assets                                           3,545,000       4,273,000
                                                     -----------     -----------
      Total assets                                   $39,691,000     $40,087,000
                                                     ===========     ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

   Accounts payable, accrued liabilities and          $1,460,000     $ 2,170,000

   Current maturities of long-term debt                3,515,000       2,545,000
                                                      ----------     -----------
      Total current liabilities                        4,975,000       4,715,000

Long-term debt, less current maturities               20,545,000      22,547,000

Convertible debentures                                 3,850,000       3,850,000

Deferred income taxes                                    147,000             ---
Redeemable common stock, $.001 par value

   1,622,448 shares issued and outstanding in          3,176,000       3,470,000

Stockholders' equity:

   Common stock - par value $.001; 24,000,000

         4,895,002 and 4,847,624 shares issued

         in 2002 and 2001, respectively, less

         1,622,448 shares subject to repurchase

         in 2002 and 2001.                                 3,000           3,000

   Preferred stock; par value $.001; 1,000,000

         shares authorized; none issued                      ---             ---

   Paid-in capital                                     7,908,000       7,536,000

   Accumulated deficit                                 (913,000)     (2,034,000)
                                                      ----------     -----------
      Total liabilities and stockholders' equity     $39,691,000     $40,087,000
                                                     ===========     ===========


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

                                     Page 15
<PAGE>
                    CONSOLIDATED STATEMENTS OF OPERATIONS

                                                   Year Ended December 31,

                                                    2002             2001
                                                 ---------        ---------
                                                 (Restated)

Revenues                                        $27,456,000     $25,147,000
Costs and expenses                              -----------     -----------
   Direct operating                              18,938,000      17,147,000

   General and administrative                     2,000,000       1,801,000

   Depreciation and amortization expense          2,256,000       1,881,000

   Interest expense                               2,594,000       2,993,000
                                                 ----------     -----------
Net income before income tax expense              1,668,000       1,325,000

       Income tax expense                           547,000             ---
                                                 ----------      ----------
-Net income                                      $1,121,000     $ 1,325,000
                                                ===========     ===========
Basic income per share:                           $    0.23       $    0.28
                                                ===========     ===========
Diluted income per share:                         $    0.20       $    0.25
                                                ===========     ===========



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

                                    Page 16

<PAGE>
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                    Years ended December 31, 2002 and 2001
<TABLE>
<CAPTION>
<S>                            <C>          <C>            <C>             <C>            <C>
                                                  Common                                      Total
                                   Common         Stock        Paid-In       Accumulated   Stockholders'
                                Stock Shares      Amount       Capital         Deficit        Equity
                                -------------   ---------     ---------     -------------  --------------

Balance, January 1, 2001        4,765,630      $   3,000    $7,285,000     $(3,359,00)       $ 3,929,000

Net Income                            ---            ---           ---       1,325,000         1,325,000

Stock options exercised            81,994            ---       128,000             ---           128,000

Accretion of redeemable               ---            ---       123,000             ---           123,000
                                _________       ________    __________      __________       ___________
Balance, December 31, 2001      4,847,624      $   3,000    $7,536,000     $(2,034,000)      $ 5,505,000

Net income (Restated)                 ---            ---           ---        1,121,000        1,121,000

Stock options exercised            47,378            ---        78,000              ---           78,000

Accretion of redeemable               ---            ---       294,000              ---          294,000
                                _________      _________    __________        __________      __________
Balance, December 31, 2002      4,895,002      $   3,000    $7,908,000        $(913,000)      $6,998,000
                                =========      =========    ==========        ==========      ==========
Page 17
</TABLE>


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

                                    Page 17
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOW

                                                    Year ended December 31,

                                                     2002              2001
                                                  -----------       ----------
                                                   (Restated)

Net income                                     $   1,121,000      $  1,325,000

Adjustments to reconcile net income to

   Net cash provided by operating

      Depreciation and amortization                2,256,000         1,881,000

      Amortization of debt issue costs               363,000           254,000

Loss on sale of property                              11,000            32,000

Changes in operating assets and liabilities:

   Decrease (increase) in

      Accounts receivable                              4,000           986,000

      Prepaid expenses and other assets            (376,000)          (36,000)

   Increase (decrease) in accounts payable         (619,000)           693,000
                                                ------------       -----------
         Net cash provided by operations           2,760,000         5,135,000
                                                ------------       -----------
INVESTING ACTIVITIES:

Capital expenditures                             (1,206,000)       (2,179,000)

Acquisition of business                                  ---          (71,000)

Purchase of certificates of deposit              (1,800,000)              ---

Proceeds from disposition of property                 61,000          164,000
                                               -------------       -----------
          Net cash used in investing             (2,945,000)       (2,086,000)
                                               -------------       -----------
FINANCING ACTIVITIES:

Proceeds from borrowing                           28,479,000        27,330,000

Repayment of borrowing                          (29,511,000)       (28,844,000)

Proceeds from stock option exercise                   78,000           128,000
                                               -------------       -----------
         Net cash used in financing                (954,000)        (1,386,000)
                                               -------------       -----------
Net increase (decrease) in Cash

   And Cash Equivalents                          (1,139,000)         1,663,000

Cash and Cash Equivalents,

   Beginning of Period                             2,389,000           726,000
                                               -------------       -----------
Cash and Cash Equivalents

   End of Period                                 $ 1,250,000        $2,389,000
                                               =============       ===========



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

                                    Page 18
<PAGE>


               CONSOLIDATED STATEMENTS OF CASH FLOW (continued)


SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid during the year for:                   2002             2001
                                            -------------    ------------

    Interest                                $ 2,269,000      $ 2,735,000
                                            ============     ============
    Income taxes                            $   279,000      $       ---
                                            ============     ============
Non-cash investing and financing activities:

      The Company acquired businesses during the year ended December 31,
    2001.  The following liabilities were assumed in conjunction with those
    purchases.



          Assets acquired                            $       71,000


          Cash paid                                          71,000
                                                     --------------
          Liabilities assumed                        $          ---
                                                     ==============

                                    Page 19


<PAGE>

                      AVALON CORRECTIONAL SERVICES, INC
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                         FOR THE YEARS 2002 AND 2001



NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business -

     Avalon Correctional Services,  Inc. ("Avalon" or the "Company") is an owner
and operator of private community correctional  services.  Avalon specializes in
privatized  community  correctional  facilities  and  correctional  programming.
Avalon is  currently  operating in  Oklahoma,  Texas and Colorado  with plans to
expand into additional states. Avalon's business strategy is designed to elevate
the Company  into a dominant  provider  of  community  correctional  services by
expanding its operations  through new state and federal  contracts and selective
acquisitions.  Avalon owns a 300-bed community  corrections facility in Oklahoma
City, Oklahoma; a 320-bed community  corrections facility in Tulsa,  Oklahoma; a
150-bed  community  corrections  facility in Tulsa,  Oklahoma;  a 150-bed medium
security  facility in El Paso,  Texas; a 324-bed medium security  facility in El
Paso,  Texas;  a 180-bed  community  corrections  facility on leased land in Del
Valle,  Texas;  a 160-bed  medium  security  juvenile  facility  in Union  City,
Oklahoma; a 139-bed community corrections facility in Henderson, Colorado; and a
307-bed multi-use community  corrections facility in Greeley,  Colorado.  Avalon
also  operates  four  programs  in leased  facilities:  a  352-bed  intermediate
sanction unit in Tulsa,  Oklahoma;  a 35-bed community  corrections  facility in
Denver,  Colorado; a 48-bed youth rehabilitation  facility in San Angelo, Texas;
and a day  reporting  center in  Northglenn,  Colorado.  The Colorado  community
corrections programs also provide non-residential  services to approximately 210
offenders in the State of Colorado.

Principles of Consolidation -

     The consolidated  financial  statements include the accounts of the Company
and  its   wholly-owned   subsidiaries   after   elimination   of  all  material
inter-company balances and transactions.

Use of Estimates -

     The preparation of the consolidated  financial  statements requires the use
of management's  estimates and assumptions in determining the carrying values of
certain  assets  and  liabilities  and  disclosures  of  contingent  assets  and
liabilities  at the  date  of the  consolidated  financial  statements  and  the
reported amounts for certain revenues and expenses during the reporting  period.
Actual results could differ from those estimates.

Cash and Cash Equivalents -

     The  Company   considers  all  highly  liquid   investments  with  original
maturities  of three months or less when  purchased and money market funds to be
cash equivalents.

Accounts Receivable -

     Accounts  receivable  consists  of amounts  due from  various  governmental
agencies under contractual  agreement for correctional services in the Company's
facilities.  Receivables  are recorded at the estimate of amounts due based upon
the terms of the related agreements.

     Management  periodically  assesses the Company's  accounts  receivable  and
establishes an allowance for estimated uncollectible amounts based on historical
write-offs.  Accounts  determined to be uncollectible  are charged to operations
when that determination is made.

Concentrations of Credit Risk -

     Financial instruments  potentially subjecting the Company to concentrations
of credit risk consist  principally of temporary cash investments,  certificates
of deposits,  accounts  receivable and notes receivable.  The Company places its
temporary cash  investments and certificates of deposit with high credit quality
financial  institutions  and money  market funds and limits the amount of credit
exposure  to any one  institution  or fund.  Concentrations  of credit risk with
respect to accounts  receivable  are limited due to the fact that a  significant
portion of the Company's  receivables is from government  agencies.  The Company
maintains an allowance for doubtful  accounts for potential  credit losses.  The
allowance  for  doubtful  accounts at  December  31, 2002 and 2001 is $5,000 and
$27,000, respectively.

                                    Page 20
<PAGE>

Property and Equipment -

     Property  and  equipment  are  recorded  at cost.  Expenditures  for  major
additions  and   improvements  are   capitalized,   while  minor   replacements,
maintenance  and repairs are charged to expense as incurred.  When  property and
equipment are retired or otherwise disposed of, the cost and related accumulated
depreciation  are removed from the accounts  and any  resulting  gain or loss is
reflected   in  current   operations.   Depreciation   is  provided   using  the
straight-line method over the following estimated useful lives:

                  Buildings and Improvements              10 to 40 Years
                  Furniture and Equipment                  5 to 10 Years
                  Transportation Equipment                 2 to 15 Years

     The Company  follows the  provisions  of Statement of Financial  Accounting
Standards  (SFAS)  No.  144,  Accounting  for  the  Impairment  or  Disposal  of
Long-lived  Assets  in  determining   impairment  losses  on  long-term  assets.
Impairment   losses  are  recorded  on  long-lived  assets  when  indicators  of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying  amounts.  Impairment  losses
are recognized based upon the estimated fair value of the asset when required.

     SFAS No. 142, Goodwill and Other Intangible Assets,  requires that goodwill
and  intangible  assets with  indefinite  useful  lives be tested  annually  for
impairment. SFAS No. 142 also requires that intangible assets with finite useful
lives be amortized and be evaluated for  impairment in accordance  with SFAS No.
144. In addition,  the Statement eliminates the requirement to amortize goodwill
or intangible assets with indefinite useful lives.

Equity Method Investments -

     Investments in unconsolidated  subsidiaries,  jointly owned companies,  and
other  investees  in which the  Company has a 20% to 50%  interest or  otherwise
exercises  significant influence are carried at cost, adjusted for the Company's
proportionate share of their undistributed earnings or losses.

Income Taxes -

     Deferred  income taxes are  recognized for the tax  consequences  in future
years of differences  between the tax bases of assets and  liabilities and their
financial  reporting  amounts at each  year-end  based on  enacted  tax laws and
statutory  tax rates  applicable  to the  period in which  the  differences  are
expected to affect  taxable  income.  Valuation  allowances  are  established by
management  when necessary to reduce  deferred tax assets to the amount expected
to be  realized.  Income tax  expense is the tax  payable for the period and the
change during the period in deferred tax assets and liabilities.

Revenue Recognition -

     The Company  recognizes  revenues as services  are  provided.  Revenues are
generally  earned  based upon the number of offenders on a per diem basis at the
Company's  correctional  facilities.  All  correctional  revenues  are  received
monthly from various governmental agencies.

Development Costs -

     The  Company  expenses  development  and  new  facility  opening  costs  as
incurred.

Net Income Per Common Share -

     Basic  net  income  per share has been  computed  on the basis of  weighted
average shares outstanding during each period. Diluted income per share has been
computed  based on the  assumption  that all  dilutive  options and warrants are
exercised using the treasury stock method.

                                    Page 21
<PAGE>

Reclassifications -

     Certain  reclassifications  have been made to the 2001 financial statements
to conform with 2002 presentation.

Recently Issued Accounting Pronouncements -

     In June 2001,  Financial Accounting Standards Board (FASB) issued Statement
of  Financial   Accounting  Standards  (SFAS)  No.  143,  Accounting  for  Asset
Retirement Obligations.  SFAS No. 143 requires entities to record the fair value
of a liability for an asset  retirement  obligation in the period in which it is
incurred  and a  corresponding  increase in the  carrying  amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic  and rational  method.  SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company does not expect SFAS No.
143 to  have  a  material  effect  on  its  financial  position  or  results  of
operations.

     In June 2002,  FASB issued SFAS No. 146,  Accounting  for Costs  Associated
with Exit or Disposal Activities.  This Statement addresses financial accounting
and  reporting  for  costs  associated  with  exit or  disposal  activities  and
nullifies   Emerging   Issues  Task  Force  (EITF)  Issues  No.  94-3  Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The Statement is
effective for exit or disposal activities initiated after December 31, 2002 with
early application  encouraged.  The Company estimates that the new standard will
not have a  material  effect  on its  financial  statements  but is still in the
evaluation process.

     In December 2002, the FASB issued SFAS No. 148,  Accounting for Stock-Based
Compensation-Transition  and Disclosure-an amendment of SFAS No. 123 (SFAS 148).
This  statement  amends  Statement of Financial  Accounting  Standards  No. 123,
Accounting  for  Stock-Based  Compensation,  to provide  alternative  methods of
transition  for a voluntary  change to the fair value method of  accounting  for
stock-based employee compensation and amends the disclosure requirements of SFAS
123 to  require  prominent  disclosure  in both  annual  and  interim  financial
statements about the method of accounting for stock-based employee  compensation
and the effect of the method used on reported results. The transition and annual
disclosure provisions of SFAS 148 will be effective for the Company in the first
quarter of 2003.  The Company  estimates  that the new standard  will not have a
material  effect  on its  financial  statements  but is still in the  evaluation
process.

     In  November  2002,  the  FASB  issued  Interpretation  No.  45  (FIN  45),
Guarantor's  Accounting and Disclosure  Requirements  for Guarantees,  Including
Indirect  Guarantees of Indebtedness of Others.  For a guarantee subject to FASB
Interpretation  45, a guarantor  is required to measure and  recognize  the fair
value of the guarantee liability at inception.  For many guarantees,  fair value
will likely be determined  using the expected  present value method described in
FASB  Concepts  Statement 7, Using Cash Flow  Information  and Present  Value in
Accounting   Measurements.   In  addition,   FIN  45  provides  new   disclosure
requirements.  The disclosure  requirements  of FIN 45 will be effective for the
Company in the first quarter of 2003. The measurement and liability  recognition
provisions  are applied  prospectively  to guarantees  issued or modified  after
December  31,  2002.  The  Company  estimates  that FIN 45 will have no material
effect on its financial statements.

     In January 2003, the FASB issued  Interpretation  No. 46,  Consolidation of
Variable  Interest Entities (FIN 46). Subject to certain criteria defined in the
Interpretation,  FIN 46 will require  consolidation  by business  enterprises of
variable  interest  entities if the enterprise has a variable interest that will
absorb the majority of the entity's  expected residual losses on returns if they
occur,  or both.  The  Interpretation  will be effective  for the Company in the
third quarter of 2003.  Management has not yet determined the effect, if any, of
FIN 46 on the Company's  financial  position or results of  operations.  Certain
disclosures  concerning  variable  interest  entities  are required in financial
statements  initially  issued after January 31, 2003.  The Company is evaluating
the effect of FIN 46 on its financial statements.

                                    Page 22
<PAGE>

NOTE 2.  PROPERTY AND EQUIPMENT

      The  elements  of  property  and  equipment   and  related   accumulated
depreciation as of December 31, 2002 and 2001 are as follows:

                                                                 Accumulated
                                                 Cost            Depreciation
                                              ----------        -------------
         December 31, 2002

           Land                                $3,143,000        $      ---

           Buildings and Improvements          28,121,000         3,365,000

           Construction in Progress               329,000               ---

           Furniture and Equipment              2,662,000          1,426,000

           Transportation Equipment             1,567,000            990,000
                                            -------------        -----------

                                              $35,822,000        $ 5,781,000
                                            =============       ============


        December 31, 2001

          Land                                $3,150,000        $       ---

          Buildings and Improvements          27,648,000          2,582,000

          Furniture and Equipment              2,697,000          1,299,000

          Transportation Equipment             1,543,000            743,000
                                            -------------       -----------

                                              $35,038,000       $ 4,624,000
                                            =============       ===========

NOTE 3.  INTANGIBLE ASSETS

     Upon original implementation of Statement of Financial Accounting Standards
("SFAS") No. 142, the Company  determined  that  intangible  assets  related the
value  of  contracts  previously  acquired  in  business   combinations  had  an
indefinite life, and therefore were not amortized.  After communication with the
SEC staff resulting in a reevaluation of the life of contract  intangibles,  the
Company decided to restate the consolidated  financial  statements as of and for
the year ended  December  31,  2002,  to amortize  contract  intangibles  over a
fifteen-year life (the life assigned prior to the implementation of SFAS No. 142
on January 1, 2002).  Intangible assets originally determined to have indefinite
lives  totaled  $2,631,000 at December 31, 2002.  The effect of the  restatement
reduced total assets from  $39,916,000,  as originally  reported at December 31,
2002, to $39,691,000,  reduced total liabilities from $29,602,000 to $29,517,000
(due to income tax  effects) and  therefore  reduced  stockholders'  equity from
$7,138,000  to  $6,998,000.   The  restatement  also  reduced  net  income  from
$1,261,000,  or $0.22 per diluted  share,  to  $1,121,000,  or $0.20 per diluted
share. A summary of the effects of these items on previously reported results of
operations follows:


                                       As
                                   Originally     Effect of
               2002                 reported     Restatement       Restated
     ------------------------     ------------   ----------      ------------

     Revenues.................    $27,456,000    $         -     $ 27,456,000

     Costs and expenses.......     25,563,000        225,000       25,788,000
                                  -----------    -----------      -----------
     Net income before income

     tax expense.                   1,893,000      (225,000)        1,668,000

     Income tax expense........       632,000       (85,000)          547,000
                                    ---------    -----------      -----------
     Net income................   $ 1,261,000    $ (140,000)   $    1,121,000
                                  ===========    ===========   ==============
     Basic income per share....   $       .26    $     (.03)   $          .23
                                  ==========     ===========   ==============

     Diluted income per share...  $       .22    $     (.02)   $          .20
                                  ===========    ===========   ==============

      The  consolidated  financial  statements for the year ended December 31,
2001 were not impacted as the restatement  pertains to the  implementation  of
SFAS No. 142 on January 1, 2002.

                                    Page 23

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                          FOR THE YEARS 2002 AND 2001

NOTE 4.  OTHER ASSETS

      Other assets consist of the following at December 31:

                                                      2002            2001
                                                    -------         --------

       Intangible assets                        $   2,620,000    $  2,845,000

       Debt issue costs, net                          713,000       1,076,000

       Other, net                                     212,000         352,000
                                                --------------   ------------

                                                $   3,545,000    $  4,273,000
                                                =============    ============

NOTE 5.  ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND OTHER


      The elements of accounts payable, accrued liabilities and other as of
December 31, 2002 and 2001 are as follows:


                                                  2002                2001
                                              ----------           ----------
     Trade accounts Payable                  $   158,000           $  585,000

     Accrued interest payable                    141,000              142,000

     Accrued taxes                               427,000              283,000

     Accrued salary and benefits                 660,000            1,127,000

     Other accrued liabilities                    74,000               33,000
                                             -----------           ----------
                                             $ 1,460,000           $2,170,000
                                             ===========           ==========

NOTE 6.  CORRECTIONAL CONTRACTS

     The  Company  contracts  with  various  governmental  agencies  to  provide
correctional  services.  The  contracts  generally  specify  for the  Company to
provide  correctional  services  including  complete  residential  services  and
programming in the Company's facilities ("Residential  Services").  Compensation
paid to the Company for Residential Services is generally based on a per person,
per day basis.  Contract revenues from contracts  exceeding 10% of total Company
revenue for the years ending December 31 are as follows:


                                        2002           2001
                                     ---------      ---------
        Governmental Agency A           24%            27%

        Governmental Agency B           24%            24%

        Governmental Agency C           13%            15%

        Governmental Agency D           24%            18%



     The Company has a fifteen  year  Residential  Services  contract  with West
Texas  Community  Supervision  and  Corrections   Department  and  a  four  year
Residential  Services  contract with the Texas  Department  of Criminal  Justice
Parole Department to provide  correctional  services in El Paso, Texas extending
through  August 31,  2011 and August 31,  2004,  respectively,  plus a multi-use
contract for the period from  September  2001 through August 2003. The Company's
current   Residential   Services  contracts  with  the  Oklahoma  Department  of
Corrections  extend through June 30, 2003. The Company's  current contracts with
the Colorado Department of Corrections extend through June 30, 2003.

                                    Page 24

<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                           FOR THE YEARS 2002 AND 2001

NOTE 7.  LONG-TERM DEBT AND REDEEMABLE COMMON STOCK

      Long-term debt consists of the following:
                                                               December 31,

                                                            2002          2001
                                                         ----------   ----------
     Revolving line of credit with finance company,
        collateralized by accounts receivable, with
        interest at 1% over prime (effective rate
        of 5.0% at December 31, 2002), payable
        monthly; due Feb 2005                          $ 1,423,000    $  495,000
     Notes payable to banks, collateralized by
        transportation equipment, due in installments
        through March 2012 with interest ranging from
        1.9% to 10.85%                                     641,000       699,000
     Notes payabe to banks and finance companies,
         collateralized by land buildings, and
        improvements due in monthly and quarterly
        installments through February 2005 with
        interest ranging from 4.31% to 11%              11,794,000    13,644,000
     Note payable to an investment company,
        collateralized with interest at 12.5%
        payable quarterly, due in four quarterly
        installments beginning in 2005, including
        original issue premiun                          10,202,000    10,254,000
                                                       -----------    ----------
                                                        24,060,000    25,092,000
      Less - current maturities                          3,515,000     2,545,000
                                                       -----------   -----------
                                                       $20,545,000   $22,547,000
                                                       ===========   ===========


     The aggregate  maturities of long-term debt for each of the next five years
are as follows: 2003: $3,515,000;  2004:  $10,055,000;  2005: $2,610,000;  2006:
$7,551,000; 2007: $25,000 and $304,000 thereafter.

     The Company  completed a $15,000,000  private  placement of debt and equity
with an investment  company on September 16, 1998.  Pursuant to the terms of the
agreement, the Company tendered an unsecured subordinated note with a face value
of  $10,000,000  bearing  interest of 12.5% with  interest  payable in quarterly
installments until December 31, 2005, when the first of four quarterly principal
installments  is due. The Company also tendered  1,622,448  shares of redeemable
common stock to the investment  company.  These shares are subject to repurchase
by the Company under certain  circumstances,  or beginning September 16, 2003 at
the holders option,  at the then current average traded price of the stock.  The
Company is accreting the difference between the carrying value and the estimated
redemption  price of the  stock by  periodic  charges /  credits  to  additional
paid-in capital.

     The Company  obtained an independent  fair value  appraisal of the debt and
equity instruments reflecting a fair value allocation of the debt of $10,365,000
and the fair value allocation of the redeemable common stock of $4,635,000.  The
original  issue premium of $365,000 is being accreted as a reduction of interest
expense  over the term of the debt  instrument.  Debt issue costs of  $1,654,000
(including $266,000  representing the fair value of warrants issued to financial
advisors) have been allocated to the debt and redeemable common stock based upon
their fair values.  Costs of $511,000  allocated to the redeemable  common stock
reduced its original book value to $4,124,000.  Costs of $1,143,000 allocated to
the debt  instrument  are  included in other  assets and are being  amortized to
interest  expense  over the  life of the debt  instrument  using  the  effective
interest method.

                                    Page 25

<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                           FOR THE YEARS 2002 AND 2001

     Certain notes payable to finance and investment companies contain covenants
that require the Company,  among other things,  to maintain certain earnings and
debt coverage ratios and receive  approval for certain  capital  expenditures as
defined in the agreements. The Company was in compliance with all debt covenants
at December 31, 2002.

NOTE 8.  CONVERTIBLE DEBENTURES

     The Company  completed a private  placement of  $4,150,000  of  convertible
debentures on September 12, 1997. The  convertible  debentures  bear interest at
7.5%, payable  semi-annually,  and mature on September 12, 2007. The Company may
redeem  the  convertible  debentures  at any time  after  May 2000 at  106.5% of
principal,  declining  to 100%  at  maturity.  The  convertible  debentures  are
convertible  into  common  stock at $3.00  per  share  at any time  until  their
maturity. The convertible debenture holders signed agreements to subordinate the
debentures to the $10,000,000 face value note issued on September 16, 1998.

NOTE 9.  STOCKHOLDERS' EQUITY

     The Company  issued  Class E warrants to purchase  79,000  shares of Common
Stock in September 1997, in connection with the private placement of Convertible
Debentures. The Company recognized $148,000 of cost based upon the difference in
the exercise  price of the Class E warrants and the current  market price of the
common  stock on the date of the  issuance.  This cost was recorded as debenture
issue  costs and was  classified  in other  assets  on the  balance  sheet.  The
debenture  issue cost was amortized to expense over the term of the  convertible
debentures. The Class E stock purchase warrants expired in September 2002.

     The Company issued 200,539 stock purchase warrants to financial advisors in
September 1998, in connection with the $15,000,000 private placement.  The stock
purchase warrants expired in September 2002.

     A 1994  agreement  provided for the issuance of an option to issue  750,000
common stock purchase  warrants to purchase  common stock at $1.50 per share for
each dollar of Company debt guaranteed by the Company's CEO. The warrants have a
five-year term from the date of issuance, March 9, 2001.

NOTE 10.  STOCK OPTION PLAN

     The Company  adopted a stock  option plan (the  "Plan")  providing  for the
issuance of 250,000  shares of Class A common stock  pursuant to both  incentive
stock  options,  intended to qualify under  Section 422 of the Internal  Revenue
Code,   and  options   that  do  not   qualify  as   incentive   stock   options
("non-statutory").  The  Option  Plan was  registered  with the  Securities  and
Exchange  Commission  in  November  1995.  The purpose of the Plan is to provide
continuing incentives to the Company's officers,  key employees,  and members of
the Board of Directors.

     The options generally vest within five years and have a ten-year expiration
period. The Company amended its Plan on December 1, 1996,  increasing the number
of shares available under the Plan to 600,000.  Non-statutory  options have been
granted  providing for the issuance of 505,832 shares of Class A common stock at
exercise prices ranging from $1.50 to $4.25 per share. Options providing for the
issuance of 441,490 shares were exercisable at December 31, 2002.

     The Company uses the intrinsic value method to account for its stock option
plan in which compensation is recognized only when the fair value of each option
exceeds its exercise price at the date of grant.  Accordingly,  no  compensation
cost has been  recognized for the options  issued.  Had  compensation  cost been
determined  based on the fair  value of the  options  at the  grant  dates,  the
Company's  net income and net income per share would have been  decreased to the
pro forma amounts indicated below.

                                    Page 26
<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                           FOR THE YEARS 2002 AND 2001


                                                2002           2001
                                           ------------    -----------

           Net Income

                As reported                 $ 1,121,000     $ 1,325,000
                                            ===========     ===========
                Pro forma                   $   931,000     $ 1,048,000
                                            ===========     ===========
           Basic income per share

                As reported                 $      0.23     $      0.28
                                            ===========     ===========

                Pro forma                   $      0.19     $      0.22
                                            ===========     ===========
           Diluted income per share

                As reported                 $      0.20     $      0.25
                                            ===========     ===========
                Pro forma                   $      0.14     $      0.21
                                            ===========     ===========

     The fair value of each grant is  estimated  on the date of grant  using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used:


                                              2002      2001
                                           --------   ---------

               Dividends                         -          -

               Expected Volatility           35.0%      67.0%

               Risk free interest rate        3.1%       5.1%

               Expected life (years)            10         10

     The  Black-Scholes  options  valuation  model  was  developed  for  use  in
estimating  the fair value of traded  options with no vesting  restrictions  and
which are fully  transferable.  Option  valuation  models  require  the input of
highly subjective assumptions including the expected stock price volatility. The
Company's employee stock options have  characteristics  significantly  different
from those of traded options,  and changes in the subjective  input  assumptions
can materially affect the fair value estimate.  It is management's  opinion that
the existing  models do not provide a reliable  measure of the fair value of its
employee stock options  because the model assumes the security being measured is
widely  traded and  liquid.  The  Company's  stock  does not have a  significant
trading volume and is illiquid.

     A summary of the status of the  Company's  stock option plan as of December
31,  2002 and  2001,  and  changes  during  the years  ending on those  dates is
presented below.



                                     2002                       2001
                                 -----------                 ----------

                                         Weighted                   Weighted
                                         Average                    Average
                                         Exercise                   Exercise
                             Shares      Price          Shares      Price
                            --------    ---------       -------     ---------
Outstanding at beginning
   of year                   461,060    $   1.69        479,610     $    1.69

Granted                      104,500        2.31         96,700          1.70

Exercised                   (47,378)        1.65        (81,994)         1.56

Forfeited                   (12,350)        1.88        (33,256)         1.70
                            --------                   ---------
Outstanding at end of year   505,832        1.83         461,060         1.69
                            ========                   =========
Options exercisable at
   year end                 441,490        1.79         380,028         1.71
                            ========                   =========
Weighted average fair
   value of

Options granted during
   the year                          -----------                 ------------
                                     $      1.24                 $       1.37
                                     ===========                 ============

                                     Page 27
<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                           FOR THE YEARS 2002 AND 2001

     The following table summarizes  information about fixed-price stock options
outstanding at December 31, 2002.


                          Options Outstanding                 Options
                   ------------------------------------   ----------------------
                                 Weighted
                                 Average       Weighted                 Weighted
                     Number      Remaining     Average    Number        Average
                    Outstanding  Contractual   Exercise   Exercisable   Exercise
                    at 12/31/02  Life (Years)  Price      at 12/31/02   Price
                   ------------  ------------  ---------  -----------   --------

Range of exercise
$1.50 to $2.25         402,332          6.66      $1.70       378,615   $   1.69
$2.26 to $3.39         101,500          9.19      $2.32        60,875   $   2.35
$3.40 to $4.25           2,000          5.13      $4.00         2,000   $   4.00
                      --------                                -------
                       505,832                                441,490
                      ========                                =======
NOTE 11.  ACQUISITIONS AND CONTRACTS

     On September 1, 2002,  the Company began  managing the Roy K. Robb facility
in San Angelo,  Texas.  The  operation of the facility is governed by a contract
with Tom  Green  County in Texas.  Roy K. Robb is a  post-adjudication  juvenile
substance  abuse facility  contracting  with  surrounding  counties to house and
rehabilitate youth. The contract to operate the facility extends for five years,
contains an option to extend for another five years, and allows a 120-day notice
of  termination.  The  facility  is  a  single  building  in a  medium  security
environment.

     The Company  acquired the assets and operations of the Austin  Transitional
Center in Del Valle,  Texas in December  2001.  The Center was acquired  from an
entity owned by an officer of the Company. The Center was acquired by the entity
upon approval of a Texas  bankruptcy  court. The terms of the acquisition to the
Company  were  identical  to the  terms  of the  acquiring  entity.  The  Austin
Transitional Center is a community corrections center contracting with the Texas
Department  of Criminal  Justice.  The  facility  consists  of thirteen  modular
buildings  located on leased  land.  The land is leased from a third party for a
period of five years with a renewal option of five years. The acquisition  price
was  approximately  $71,000 and included the assumption of a contract,  with the
Texas Department of Criminal Justice, that extends to August 2003. The financial
results of the operation  were included in the  Company's  financial  statements
beginning in December 2001.

     The  Company  signed a  contract  with the Tulsa  County  Criminal  Justice
Authority in April 2001 to lease the  Riverside  Intermediate  Sanction  Unit in
Tulsa. The costs to renovate the building were paid jointly by the Authority and
the Company.  The  Company's  share of the  renovation  costs was  approximately
$1,000,000.  Approximately $900,000 of the costs was financed with the Company's
senior  lender.  The  cost  of the  renovations  is  being  amortized  over  the
twenty-year term of the lease. Renovation was completed in December 2001 and the
facility began receiving offenders in December 2001.

     The Oklahoma Office of Juvenile Affairs (OJA), in a cost-cutting  move, did
not exercise the option for the final year of a five-year contract providing for
the care of 80 juveniles at the Union City Juvenile Center. The contract expired
on December 2, 2002 and as of February 14, 2003,  the  facility  remains  vacant
while other sources of offenders are being  pursued.  This is the first time the
Company has not had a multi-year contract extension renewed. The contract is the
only one the  Company  had with OJA.  The Union City  facility  is a  marketable
facility and the Company is actively seeking a replacement population.

     The Company's  contracts relating to capitalized  intangible assets are not
associated  with the Union City  facility.  Avalon  seeks to follow the industry
practice in  valuation of  intangible  assets and has no  indication  that other
private prison  companies  have adopted  differing  policies.  Management is not
aware of any additional contract non-renewals or losses.

                                    Page 28
<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                           FOR THE YEARS 2002 AND 2001

NOTE 12.  EARNINGS PER SHARE

     The following  table sets forth the  computation  of earnings per share and
earnings per share assuming dilution.

                                                              2002       2001
                                                           ---------   ---------
   Numerator

     Net income - basic                                  $ 1,121,000 $ 1,325,000

     Effect of dilutive securities, net of income tax:

       - interest reduction on assumed debenture

           conversions                                      173,000      289,000
                                                         ----------   ----------
     Numerator for earnings per share assuming

         dilution                                        $1,294,000   $1,614,000
                                                         ==========   ==========
     Denomination for earning per share:

       Weighted average shares outstanding - basic        4,891,942    4,808,067

       Effect of dilutive securities:

       - debenture conversions                            1,283,333    1,283,333

       - stock options                                       68,149       62,919

       - stock warrants                                     201,220      178,288
                                                         ----------    ---------
     Denominator for earnings per share assuming
         dilution                                         6,444,644    6,332,607
                                                         ==========    =========

     Earnings per share, basic                           $     0.23    $    0.28
                                                         ==========    =========
     Earnings per share assuming dilution                $     0.20    $    0.25
                                                         ==========    =========


     Outstanding  options  and  warrants  of 103,500 and 203,539 for the periods
ended  December 31, 2002 and 2001,  respectively,  have been  excluded  from the
above calculations as they would be anti-dilutive.

                                    Page 29
<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                           FOR THE YEARS 2002 AND 2001

NOTE 13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying  amounts and estimated fair values of the Company's  financial
instruments, none of which were held for trading purposes, were as follows:

<TABLE>
<CAPTION>

                                                         Year Ended December 31,

                                                  2002                         2001
                                        -------------------------      ----------------------
<S>                                   <C>            <C>            <C>          <C>
                                         Carrying      Estimated       Carrying     Estimated
                                          Amount       Fair Value       Amiunt     Fair Value
                                       -----------    ------------   -----------  ------------
     Financial Assets

       Cash and cash equivalents       $ 1,250,000    $ 1,250,000    $ 2,389,000  $ 2,389,000
                                       ===========    ===========    ===========  ===========
       Certificates of deposit         $ 1,800,000    $ 1,800,000    $       ---  $       ---
                                       ===========    ===========    ===========  ===========
       Notes receivable                $    10,000    $    10,000    $    35,000  $    35,000
                                       ==========     ===========    ===========  ===========
     Fianancial liabilities

       Variable rate debt              $12,448,000    $12,448,000    $12,940,000  $12,940,000
                                       ===========    ===========    ===========  ===========
       Fixed rate debt                 $11,612,000    $13,070,000    $12,152,000  $12,957,000
                                       ===========    ===========    ==========   ===========
       Convertible debentures          $ 3,850,000    $ 4,430,000    $ 3,850,000  $ 4,382,000
                                       ===========    ===========    ===========  ===========
       Redeemable common stock         $ 3,176,000    $ 2,369,000    $ 3,470,000  $ 3,229,000
                                       ===========    ===========    ===========  ===========
</TABLE>


     The fair values presented represent management's best estimates and may not
be substantiated by comparisons to independent markets and, in many cases, could
not be realized in immediate  settlement of the instruments.  Certain  financial
instruments and all non-financial  instruments are not required to be disclosed;
therefore,  the  aggregate  fair  value  amounts  presented  do not  purport  to
represent the underlying fair value of the Company.

     The following  methods and assumptions were used to estimate the fair value
of each class of financial  instruments  for which it is practicable to estimate
that value.

     Cash  and  Cash   Equivalents  -  The  carrying  amounts  reported  in  the
accompanying   consolidated   balance  sheets  for  cash  and  cash  equivalents
approximate fair value due to the highly liquid nature of the instruments.

     Certificates of Deposit - The carrying amounts reported in the accompanying
consolidated  balance sheets for certificates of deposit  approximate fair value
due to the liquid nature of the instruments.

     Notes Receivable - The carrying value of notes receivable approximates fair
value because effective rates  approximate  current rates for loans to borrowers
with similar maturities and credit risk.

     Variable Rate Debt - The carrying value of variable rate debt  approximates
fair value due to the variable rate nature of the instruments.

     Fixed  Rate Debt - Fair  values of fixed  rate debt were  calculated  using
interest  rates in effect  as of each year end with the other  terms of the debt
unchanged.

     Convertible   Debentures  -  Fair  value  of  convertible   debentures  was
calculated  using  interest  rates in effect as of each  year-end with the other
terms unchanged.

     Redeemable  Common  Stock  - Fair  value  of  redeemable  common  stock  is
calculated assuming exercise of the purchase option under the terms of the stock
purchase agreement at December 31, 2002 and 2001.

                                    Page 30
<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                           FOR THE YEARS 2002 AND 2001

 NOTE 14. INCOME TAX

   Income tax expense consists of the following for the years ended December 31:



                                                    2002             2001
                                              --------------    --------------

             Current

                    Federal                   $   357,000       $         ---

                    State                          41,000                 ---
                                              -----------       ----------------
                                                  398,000                 ---
                                              -----------       ----------------
             Deferred
                    Federal                       132,000                 ---

                    State                          17,000                 ---
                                              -----------       ----------------
                                                  149,000                 ---
                                              -----------       ----------------

                   Total                      $   547,000       $         ---
                                              ===========       ================

     The  following is a  reconciliation  of the  provision  for (benefit  from)
income  taxes from  continuing  operations  computed  by  applying  the  Federal
statutory  rate of 34% and the  effective  income  tax rate for the years  ended
December 31, 2002 and 2001:


                                                        Year ended December 31,
                                                          2002            2001
                                                       -----------     ---------

Provision for income taxes at statutory rate           $  567,000     $  451,000

State income taxes, net of federal benefit                 67,000            ---

Nondeductible expenses                                     19,000         14,000

Change in valuation allowance                            (73,000)      (523,000)

Change in prior year estimate                            (33,000)         58,000
                                                      -----------    -----------
       Total provision for income taxes               $   547,000    $       ---
                                                      ===========    ===========
    Deferred tax assets and liabilities                Year ended December 31,

                                                         2002           2001
                                                     ------------   ------------
Deferred tax assets:

   Net operating loss carry forward                   $      ---     $   303,000

   Nondeductible investee losses                         344,000         256,000

   Nondeductible accruals and allowances                  64,000          86,000
                                                     -----------     -----------
                                                         408,000         645,000
   Less: Valuation allowance                                 ---        (73,000)
                                                     -----------     -----------
      Deferred tax assets                                408,000         572,000
                                                     -----------     -----------
Deferred tax liabilities

   Property and equipment                              (491,000)       (506,000)
                                                     -----------     -----------

      Net deferred tax asset (liability)             $  (83,000)     $    66,000

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

                                    Page 31
<PAGE>
                        AVALON CORRECTIONAL SERVICES, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
                           FOR THE YEARS 2002 AND 2001


     The  valuation  allowance  on tax  assets  decreased  $73,000  in 2002  and
$523,000 in 2001.  The  decrease  in  valuation  allowance  in 2002 and 2001 was
primarily due to the utilization of net operating loss carry forwards.

NOTE 15.  RELATED PARTY TRANSACTIONS

     In  November  2000,  the  Company  executed  an  agreement  to  manage  the
operations  of an  entity  owned  by an  affiliate.  Fees  received  under  this
agreement  totaled  $180,000 and $548,000 for the years ended  December 31, 2002
and 2001, respectively.

NOTE 16.  COMMITMENTS AND CONTINGENCIES

     Total  lease   expense  was  $220,000  and  $109,000  for  2002  and  2001,
respectively,  under all operating leases. The future minimum lease payments are
as follows: 2003 - $222,000,  2004 - $216,000, 2005 - $162,000, 2006 - $141,000,
2007 - $89,000, thereafter - $0.

     The Company  holds a 15% equity  interest in an assisted  living center and
has  guaranteed  debt related to the building of the  investee.  The Company has
recognized  losses of the  investee  and has reduced its  carrying  value in the
investment  to zero.  Debt payments are made by the investee  semi-annually  and
range in amounts from $45,000 to $90,000 by the time of the final payment on May
1, 2016.  The  outstanding  debt  balances  were  $1,705,000  and  $1,780,000 at
December 31, 2002 and 2001, respectively,  were contingent and not recognized in
the  Company's  consolidated  financial  statements.  The Company would have the
right to sell the living center as a going  concern and use any proceeds,  after
payment of debts,  to  recover  amounts  owed to it by the living  center in the
event of default of the debt  payments.  The Company  expects  that the proceeds
from the sale of the living center would exceed the existing debt.

     The Company executed a three-year  employment  agreement with the Company's
CEO in  1997.  The  agreement  provides  for  compensation  at a base  rate  and
increases to be  determined  on an annual basis by the Board of  Directors.  The
agreement also contains provisions for severance pay and disability payments, as
well as a non-compete  agreement  preventing the CEO from engaging in a business
deemed  similar to that of the  Company.  The Board of Directors  extended  this
agreement for three  additional  years in December 2001. The Company  terminated
its deferred compensation plan for key executives in 2002.

NOTE 17.  LITIGATION

     The  Company  is a party to  litigation  arising  in the  normal  course of
business.  Management  believes that the ultimate  outcome of these matters will
not have a material  effect on the Company's  financial  condition or results of
operations.

                                    Page 32
<PAGE>
                      AVALON CORRECTIONAL SERVICES, INC

ITEM 8.  CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

      None.

                                   PART III

ITEM  9.  DIRECTORS,   EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

MANAGEMENT -

      Name                  Age  Position(s) with the Company

      Donald E. Smith ......50  Chief Executive Officer and Director
      James L. Saffle ......50  President
      Patrick Sullivan .....36  Vice President of Texas Operations
      Thomas M Sullivan ....44  Vice President of Colorado Operations
      Randall J. Wood ..... 44  Corporate Secretary, Vice President, and Counsel
      Tiffany Smith ........35  Vice President of Corporate Communications
      Lloyd Lovely .........53  Vice President of Finance
      Eric Gray ............46  Vice President and Counsel
      Robert O. McDonald ...64  Director
      Mark S. Cooley .......45  Director
      James P. Wilson ......44  Director
      Charles W. Thomas ....59  Director


Directors and Officers of the Company -

     The following is a brief description of the business  experience of each of
the above-named persons:

     Donald E. Smith is the Chairman,  Founder,  and Chief Executive  Officer of
Avalon Correctional  Services and its subsidiaries.  Mr. Smith has served as CEO
since the inception of the Company. Mr. Smith has owned, managed and developed a
number of private corporations since 1985 to provide private corrections, health
care and other related  services.  Mr. Smith has a Bachelor of Science degree in
Accounting   with  minors  in  Economics   and  Business   Administration   from
Northwestern State College.  Mr. Smith was employed by Arthur Andersen & Co. for
seven years prior to founding the Company.

     James L.  Saffle is  President  of the Company  and its  subsidiaries.  Mr.
Saffle  oversees the Company's  operating  facilities  throughout  three states.
Prior to joining  the  Company in 2001,  Mr.  Saffle  retired as Director of the
Oklahoma  Department of  Corrections,  where he was  instrumental in leading the
department  through a period of tremendous growth and change.  His distinguished
career  with the  Oklahoma  Department  of  Corrections  began as a  Corrections
Officer and progressed through the positions of sergeant,  lieutenant,  training
and safety officer,  chief of security,  deputy warden,  and warden.  He further
served the Oklahoma  Department of Corrections in the capacities of Southeastern
Regional  Director and Interim Director and ultimately was appointed as Director
of the Oklahoma  Department of Corrections by the Oklahoma Board of Corrections.
Mr. Saffle holds a Bachelor of Science in Criminal Justice and Psychology, and a
Masters of Science degree in Human Resources.

     Patrick Sullivan is Vice President of Texas Operations and has over fifteen
years of  experience in the field of criminal  justice and security  operations.
His expertise is in staff management,  facility operations, risk management, and
rehabilitative  programs.  He currently has  administrative  responsibility  and
oversight for the Company's  Texas  intermediate  sanction secure and non-secure
correctional facilities, and a post-adjudication facility for juveniles.  Before
joining  Avalon,  Mr. Sullivan was Vice President of Facility  Operations,  Unit
Director for a multi-use secure facility,  Operations Director,  and Life Skills
Coordinator  for the Texson  Management  Group,  Inc.  Prior to Texson,  he held
positions  as  Captain  at  the  Kyle  Unit,  Assistant  Shift  Supervisor,  and
Correctional Officer for the Wackenhut Corrections Corporation.  He attended Sam
Houston University in Huntsville, Texas, and San Antonio College.


                                    Page 33
<PAGE>



     Thomas M. Sullivan is Vice President of Colorado  Operations.  Mr. Sullivan
is a 24 year veteran of law  enforcement and  corrections,  having worked at the
Montana State Prison, at the Alpha Center as Community Corrections provider, and
in  Denver  as a  Parole  Officer  and  Parole  Supervisor.  He is a  nationally
recognized  speaker on gangs and has  co-authored  a research book on the Racist
Asatru Religion. Mr. Sullivan continues to be the Colorado State Coordinator for
the National Major Gang Task Force. He is a veteran of the US Navy, and received
his bachelor's  degree from the University of Hawaii.  Mr. Sullivan was the 1994
Division of Adult  Parole  "Employee of the Year",  received the Colorado  STING
"Gang  Officer  of the  Year" in 2002,  and was the  recipient  of the  Colorado
Association of Robbery Investigators "Lifetime Achievement" award in 2002.

     Randall J. Wood joined Avalon in 1995 and serves as Corporate Secretary and
Counsel for the Company.  Prior to joining the Company,  Mr. Wood's practice was
focused primarily in the field of real property and commercial  litigation.  Mr.
Wood practiced with the firm of Stack & Barnes, P.C. for ten years, and was with
the firm of Hammons,  Vaught, & Conner prior to joining the Company. Mr. Wood is
a member of the  Oklahoma  Bar  Association  and is  authorized  to  practice in
Oklahoma  Federal  Courts and the Tenth  Circuit  Court of Appeals.  Mr. Wood is
responsible  for the  duties of the  Corporate  Secretary,  management  of legal
matters,  and compliance  with  government  regulations  for the Company and its
subsidiaries.  Mr. Wood received his law degree from the  University of Oklahoma
in 1983.

     Tiffany Smith joined the Company in 1994 as the Public Information  Officer
and was promoted to Assistant Corporate Secretary for the Company in 1997 and to
Vice  President of Corporate  Communications  in 1999. Ms. Smith served for four
years as  marketing  manager  for  Eagle  Picher  Industries,  a New York  Stock
Exchange listed company, prior to joining Avalon. Ms. Smith has developed and is
responsible  for  directing the Company's  Corporate  Communications  and Public
Relations department. Ms. Smith also developed and oversees Avalon's private-pay
program in  Oklahoma.  She is also  responsible  for  responding  to  government
requests  for  proposals  in  Oklahoma,  Colorado,  and Texas.  Ms. Smith is the
Company's  primary  contact for the Company's  shareholders  and investors.  Ms.
Smith  received a Bachelors  Degree in Business  Administration,  Marketing  and
Management  from Missouri  Southern  State  College.  Ms. Smith is the spouse of
Donald Smith, Chief Executive Officer.

     Lloyd Lovely was  appointed  Vice  President of Finance in March 2000.  Mr.
Lovely has overall  responsibility for administration of the financial reporting
functions for the Company and  subsidiaries.  Mr. Lovely is also responsible for
administration   of  the  Company's  human  resources   department,   and  other
administrative  functions  including  GAAP  and  SEC  compliance.  Mr.  Lovely's
business experience includes retailing,  manufacturing,  and medical industries.
Mr. Lovely  received his degree in Accounting from Central State  University,  a
Masters  degree  from  Central  State  University,  and  is a  Certified  Public
Accountant.

     Eric Gray joined Avalon as a Vice  President in June 1999.  Mr. Gray serves
as  Corporate   Counsel  for  the  Company  and  is   responsible   for  various
administrative functions. Mr. Gray's responsibilities include pending litigation
matters,  contract  review and State law  compliance  issues.  Mr.  Gray is also
responsible for administering and directing the Company's  activities  regarding
implementation  of the  Oklahoma  Community  Sentencing  Act  and  the  Oklahoma
mandated prison transition  legislation.  Before joining Avalon, he was Managing
Director and President of his law firm, Gray and Goresen, P.C., an associate and
shareholder/director  of Edwards,  Roberts & Propester,  P.C.,  and an associate
with Kirk and Chaney.  He graduated  from the  University of  Pittsburgh  with a
Bachelor  of Arts  degree.  He holds  his Juris  Doctorate  from  Oklahoma  City
University.

     Robert O.  McDonald was  appointed as a Director of Avalon in October 1994.
Mr.  McDonald is Chairman of the Board of Directors  of Capital West  Securities
and its parent holding company,  Affinity Holding Corp. Mr. McDonald started his
investment  career  in 1961  with  Allen  and  Company  and left in 1967 to form
McDonald  Bennahum and Co., which later joined with  Ladenburg  Thalmann and Co.
where Mr. McDonald was a Senior Partner.  Mr. McDonald joined Planet Oil Mineral
Corporation  in 1971 and became  president  in 1973.  From 1975 until 1993,  Mr.
McDonald was affiliated  with Stifel Nicolaus & Company and headed its municipal
syndicated  effort. Mr. McDonald received a Bachelors Degree in Finance from the
University  of  Oklahoma  in 1960.  He also  served as an  Officer in the United
States Army and Army Reserve.

                                    Page 34
<PAGE>

     Mark S. Cooley was appointed as a Director of Avalon in January  1998.  Mr.
Cooley is a Principal  of Cooley & Company and Pro Trust  Equity  Partners.  Mr.
Cooley was with Citicorp and Chemical  Bank for twelve years in their  Corporate
Finance  Divisions in New York and Denver.  Mr.  Cooley  received his  Bachelors
degree in Economics  from DePauw  University  and an MBA in Finance from Indiana
University.

     James P. Wilson was  appointed as a  Director-elect  of Avalon in September
1998, and was elected as a Director by  shareholders at the 1999 annual meeting.
Mr. Wilson is a managing partner in the investment firm of Rice, Sangalis, Toole
& Wilson.  Prior to founding Rice,  Sangalis,  Toole & Wilson,  Mr. Wilson was a
vice president with First Texas  Merchant  Banking Group,  and was also an audit
manager with Arthur Young & Co. Mr. Wilson  received a BBA degree from Texas A&M
University, and is a Certified Public Accountant.

     Charles W. Thomas,  Ph.D.  was appointed as a  Director-elect  of Avalon in
December  2000 and was  elected as a Director  by the  shareholders  at the 2001
annual meeting.  Dr. Thomas received his B.S. degree from McMurry  University in
1966 and his  M.A.  and  Ph.D.  degrees  from the  University  of  Kentucky  in,
respectively,   1969  and  1971.  After  serving  on  the  faculty  of  Virginia
Commonwealth  University,  the  College of William and Mary,  and Bowling  Green
State  University,  he became a Professor of  Criminology  at the  University of
Florida in 1980. He retired from his academic  position in 1999 but continues to
publish the results of his on-going research on the economic,  legal, and public
policy aspects of privatization.  From 1997-2000, Dr. Thomas was a member of the
board of directors of Prison Realty Trust.  Dr. Thomas is now Vice President for
Quality  Assurance  at  ConnecGov,  Inc.,  a  privately  held  corporation  that
specializes in computer-based training and distance learning.

ITEMS 10, 11 and 12.

     The information  required by these Items has been incorporated by Reference
from the  Company's  definitive  proxy  statement,  which will be filed with the
Commission not later than 120 days after December 31, 2002.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

     3. i    Articles of Incorporation (1)
        ii   Bylaws (1)
        iii  Articles of Amendment to Registrant's Articles of Incorporation (2)
        iv   Amendment to Registrant's Articles of Incorporation dated
             December 31, 1995
        v    Certificate of Corporate Resolutions, dated December 13, 1993,
             regarding authorization of Class B Common  Stock  and  Amendment to
             Articles (3)

     4. i    Form of Stock Certificate (1)
        ii   Form of Convertible Debenture Agreement (6)

    10. i    Stock  Option  Plan  adopted  by  Board  of Directors on August 16,
             1994 (4)
        ii   Change of Control Agreement between Donald E. Smith and Avalon
             Community Services, Inc. dated  August 25, 1997. (5)
        iii  Employment Agreement with Donald E. Smith dated August 8, 1997. (5)
        iv   Agreement dated June 1, 1998 between Southern Corrections
             Systems, Inc. and the Texas Department of Criminal Justice. (7)
        v    Financing agreement between Avalon Community Services,
             Inc., and Fleet Capital Corporation dated February 25,
             1999. (8)
        vi   Amended and Restated Loan and Security Agreement between
             Avalon Correctional Services, Inc., et al., and Fleet
             Capital Corporation, dated December 9, 1999. (10)
        vii  Agreement dated September 16, 1998, between Avalon
             Community Services, Inc., and RSTW Partners III. (9)

    21. i    Subsidiaries of Registrant.  The Registrant's wholly owned
             subsidiary, Southern Corrections Systems, Inc., is the sole
             member of The Villa at Greeley, L.L.C., a Colorado limited
             liability company.   Southern Corrections Systems, Inc., is
             the sole voting member of Adams Community Corrections
             Program, Inc., a Colorado nonprofit corporation.

                                    Page 35
<PAGE>

     31.1 Annual   Certification  of  the  Chief  Executive  Officer  of  Avalon
          Correctional   Services,   Inc.,   pursuant  to  Section  302  of  the
          Sarbanes-Oxley Act of 2002.

     31.2 Annual  Certification  of the Vice  President  of  Finance  of  Avalon
          Correctional  Services,  Inc., pursuant to Section 302 of the Sarbanes
          -Oxley Act of 2002.

     32   Annual Certification to 18 U.S.C. Section 1350, as adopted pursuant to
          Section 906 of the Sarbanes Oxley Act of 2002.

     (b)    Reports on Form 8-K - none

Footnotes:
         1) Incorporated herein by reference to the Registrant's Registration
            Statement on Form S-18 dated March 26, 1991.
         2) Incorporated herein by reference to the Registrant's Post
            Effective Amendment No. 1 to Registration Statement on Form S-18
            dated August 3, 1992.
         3) Incorporated herein by reference to the Registrant's Form 10-KSB
            for the fiscal year ended December 31, 1993 and dated March 24,
            1994.
         4) Incorporated herein by reference to the Registrant's Registration
            Statement on Form SB-2 dated September 13, 1995 and amended.
         5) Incorporated herein by reference to the Registrant's Registration
            Statement on Form S-2 Amendment No. 1 dated April 16, 1996 and
            amended.
         6) Incorporated herein by reference to the Registrant's Form S-2
            dated December 22, 1997.
         7) Incorporated herein by reference to the Registrant's Registration
            Statement on Form S-2 dated September 14, 1998.
         8) Incorporated by reference to the Registrant's Form 8-K dated
            March 10, 1999.
         9) Incorporated by reference to the Registrant's Form 8-K dated
            October 1, 1998.
         10)Incorporated by reference to the Registrant's Registration
            Statement on Form S-2 dated March 24, 2000

ITEM 14.  CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES -

     The  Company  maintains  controls  and  procedures  designed to ensure that
information  required to be  disclosed  in this report is  recorded,  processed,
accumulated,  and  reported to its  management,  including  the chief  executive
officer and the vice president of finance,  to allow timely decisions  regarding
the  required  disclosure.  Within the 90 days prior to the filing  date of this
report,  Avalon's  management,  with the  participation  of its chief  executive
officer  and its vice  president  of finance,  performed  an  evaluation  of the
effectiveness  of the design and  operation  of these  disclosure  controls  and
procedures.  Those  officers have concluded  that such  disclosure  controls and
procedures  are effective at ensuring that required  information is disclosed in
the Company's reports.

CHANGES IN INTERNAL CONTROLS -

     There were no significant  changes in the Company's internal controls or in
other factors that could  significantly  affect these controls subsequent to the
evaluation date.

                                    Page 36
<PAGE>

ITEM 15.  SIGNATURES.

     In accordance  with 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, there unto duly authorized.

                                          AVALON CORRECTIONAL SERVICES, INC.


                                          By:    s\  Donald E. Smith
                                          Donald E. Smith
                                          Chief Executive Officer and Director

                                          Dated: February 27, 2004

     In accordance  with 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.



By:   s\ Donald E. Smith
Donald E. Smith
Chief Executive Officer and Director                 Dated: February 27, 2004



By:   s\ Robert O. McDonald
Robert O. McDonald
Director                                             Dated: February 27, 2004



By:   s\ Mark S. Cooley
Mark S. Cooley
Director                                             Dated: February 27, 2004



By:   s\ James P. Wilson
James P. Wilson
Director                                             Dated: February 27, 2004



By:   s\ Charles W. Thomas, Ph.D.
Charles W. Thomas
Director                                             Dated: February 27, 2004



By:   s\ David Grose
David Grose
Vice President of Finance                            Dated: February 27, 2004

                                    Page 37
<PAGE>

                                                                   Exhibit 31.1
                                 ANNUAL CERTIFICATION

I, Donald E. Smith, certify that:

     1.  I  have  reviewed  this  annual  report  on  Form  10-KSB/A  of  Avalon
Correctional Services, Inc.;

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The  registrant's  other  certifying  officer and I are  responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a.   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this annual report is being prepared;

     b.   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures  and presented in this report our conclusion  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c.   Disclosed  in this  report any  changes in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an  annual  report)  that has  materially  affected, or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,  to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

     a.   all significant  deficiencies and material weaknesses in the design or
          operation of internal  controls over  financial  reporting,  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record,  process,  summarize and report financial information; and

     b.   any fraud, whether or  not material, that involves management or other
          employees who have a significant role  in  the  registrant's  internal
          control over financial reporting.


February 27, 2004

/s/ Donald E. Smith

Donald E. Smith
Chief Executive Officer



<PAGE>
                                                                    Exhibit 31.2

                              ANNUAL CERTIFICATION

I, David Grose, certify that:

     1.  I  have  reviewed  this  annual  report  on  Form  10-KSB/A  of  Avalon
Correctional Services, Inc.;

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The  registrant's  other  certifying  officer and I are  responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a.   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this annual report is being prepared;

     b.   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures  and presented in this report our conclusion  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c.   Disclosed  in this  report any  changes in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an  annual  report)  that has  materially  affected, or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,  to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

     a.   all significant  deficiencies and material weaknesses in the design or
          operation of internal  controls over  financial  reporting,  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record,  process,  summarize and report financial information; and

     b.   any fraud, whether or  not material, that involves management or other
          employees who have a significant role  in  the  registrant's  internal
          control over financial reporting.


February 27, 2004

/s/ David Grose

David Grose
Vice President of Finance


<PAGE>


                                                                      Exhibit 32

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350,  Chapter 63 of Title 18,  United States Code),  each of
the undersigned  officers of Avalon Correctional Services, Inc.(the  "Company"),
does hereby certify, to such officer's knowledge, that:

     The annual report on Form 10-KSB/A for the year ended December 31, 2002, of
the Company fully  complies with the  requirements  of Section 13(a) or 15(d) of
the  Securities  Exchange  Act of 1934  and  information  contained  in the Form
10-KSB/A fairly presents, in all material respects,  the financial condition and
results of operations of the Company.

/s/ Donald E. Smith

Donald E. Smith
Chief Executive Officer
February 27, 2004

/s/ David Grose

David Grose
Vice President of Finance
February 27, 2004