SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                 FORM 10-KSB

                [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934
                 For the Fiscal Year Ended December 31, 2001

              [ ] 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, 2001
were $25,147,000.

     The aggregate  market value of voting  common stock held by  non-affiliates
was  $4,871,000  on March 13, 2002,  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 March 13,  2002,
4,847,624 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  2002  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 ANNUAL REPORT
                     FOR THE YEAR ENDED DECEMBER 31, 2001



Item                                                              Page

PART I


1.    Description of Business                                           1

2.    Description of Property                                           6

3.    Legal Proceedings                                                 7

4.    Submission of Matters to a Vote of Security Holders               7

PART II

5.    Market for Common Equity and Related
            Stockholder Matters                                         7

6.    Management's Discussion and Analysis of Financial
            Condition and Results of Operations                         8

7.    Financial Statements                                              10

8.    Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                      28

PART III

9.    Directors, Executive Officers, Promoters and Control
            Persons; Compliance with Section 16 (a) of the
            Exchange Act                                                29

10.   Executive Compensation                                            31

11.   Security Ownership of Certain Beneficial
      Owners and Management                                             31

12.   Certain Relationships and Related Transactions                    31

13.   Exhibits and Reports on Form 8-K                                  31

14.   Signatures                                                        33



<PAGE>

                     AVALON CORRECTIONAL SERVICES, INC

     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 our  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-K,  10-Q and 8-K. The Company does
not undertake any obligation to update any forward-looking statements.

                                    PART I


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
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),  and the violent  crime level is expected to increase  with the downturn in
the economy.

     Avalon's  particular  areas of growth will come in three  areas.  One,  the
trend in corrections is toward utilizing community-based  sentencing rather than
secure facilities. The 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.  And 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.  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 into society.  The United States
incarcerated  one million nine hundred  thousand  persons at year-end  2000. The
total prison and jail population grew 2.0% in 2000.

     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 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

                                       1

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

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 16 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  385  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.

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

Facilities -

     The  following  table  summarizes  certain   information  with  respect  to
facilities and programs managed by Avalon at March 13, 2002.

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 Correctional
Santion Facility,                                   Facility
El Paso, Texas

Union City Juvenile Center,          160 Beds       Medium Security Juvenile
Union City, Oklahoma                                Facility

El Paso Multi Purpose Facility,      300 Beds       Medium Security Correctional
El Paso, Texas                                      Facility

Phoenix Center,                      115 Beds       Community Corrections
Henderson, Colorado                                 Facility

The Villa at Greeley,                307 Beds       Community Corrections
Greeley, Colorado                                   Facility

The Loft House,                      36 Beds        Community Corrections
Denver, Colorado                                    Facility

Community Sentencing Center,         N/A            Day Reporting Center,
Northglenn, Colorado                                Community Corrections
                                                    Facility

Riverside Intermediate               352 Beds       Intermediate Sanctions Unit,
Santion Unit,                                       Public Inebriant Program,
Tulsa, Oklahoma                                     and Community Corrections
                                                    Facility

Austin Transitional Center,          180 Beds       Community Corrections
Del Valle, Texas                                    Facility

Avalon Corporate Office,             N/A            Administration
Oklahoma City, Oklahoma

                                       2

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

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 three leased  facilities;  the Loft
House, a 36-bed community  corrections program; the Community Sentencing Center,
a day  reporting  center;  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.

     Oklahoma.  Avalon's  contracts with the Oklahoma  Department of Corrections
extend  through June 30, 2002 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 and
is in the  fourth  year of a  five-year  contract  with the  Oklahoma  Office of
Juvenile Affairs.  The contract includes a provision  requiring single occupancy
of all cells in the facility and a maximum capacity of 80 offenders.

     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 2002.  Avalon
Correctional  Center was initially  accredited in 1996 and is accredited through
2002. Turley Correctional Center was initially accredited in October 2000 and is
accredited until 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. Approximately one third of the facility is used by Avalon

                                       3
<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

to operate the Public Inebriant Alternative ("PIA") program for the Tulsa County
Criminal Justice Authority. The remainder of 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
300-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.

     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.

     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 115-bed  residential center in Henderson,  Colorado;  The Loft
House,  a 36-bed  residential  program in  Denver,  Colorado  and the  Community
Sentencing Center, a day reporting center in Northglenn,  Colorado.  The Company
began a 24-bed  expansion to the Phoenix  Center in the fourth  quarter of 2001.
The expansion was completed 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  approximately   $202,000  at  December  31,  2001.  The  Company
guaranteed facility debt related to the building of the investment.  The Company
has evaluated  various offers to sell this investment,  and management  believes
that the facility will be sold in the future.

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.

                                       4

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

     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.

     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 sixteen-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 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, 2001,  approximately  27% of the Company's
revenue  is 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  Turley
("Turley  Correctional  Center").  Approximately 24% of the Company's revenue is
derived from contracts with Colorado governmental agencies. Approximately 15% of
the Company's revenue is derived from a contract with the Oklahoma  governmental
agency  relating to the Union City  Juvenile  Center.  Approximately  18% of the
Company's  revenue is derived from contracts with Texas  governmental  agencies,
relating  to  the  Company's   correctional   facilities  in  El  Paso,   Texas.
Approximately 10% of the Company's revenue was derived from collections directly
from individual offenders during 2001.

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

                                       5
<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

since 1990 and is currently  accredited through 2002. Avalon Correctional Center
was accredited in 1996 and is accredited through mid-2002.  Turley  Correctional
Center was accredited in 2000 and is accredited  until 2003. Union City Juvenile
Center was accredited in 2000 and is accredited until 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 13, 2002,  Avalon had  approximately  500 full-time  employees,
including  directors and officers.  Avalon has not  experienced a work stoppage,
and management considers its employee relations to be good.

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 300-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 115-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. 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.

                                       6
<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

     The Loft  House is a  36-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.

     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  5  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, 2001.

                                   PART II

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

     Avalon's  common stock trades on the NASDAQ SmallCap 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 2001
and 2000. 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, 2000                      2 15/32                 1 1/8
            June 30, 2000                       2 1/16                  1 1/4
            September 30, 2000                  2                       2 29/64
            December 31, 2000                   1 5/8                   1 1/16
            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

                                       7

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

     Avalon had  approximately  700 holders of record of its common  stock as of
March 13, 2002.  No dividends  were declared  during 2001 and 2000.  Avalon's
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 SmallCap Market System was $2.27 per share on March 13, 2002.

ITEM 6.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
RESULTS OF OPERATIONS.

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 has created the need for
additional  capital and financing.  The Company has been  successful in securing
$38 million of new capital and credit facilities since September 1997.

     Working  capital at December 31, 2001 was $685,000  representing  a current
ratio of 1.15:1.00,  compared to working capital of $455,000 and a current ratio
of 1.10:1.00 at December 31, 2000.  Capital  expenditures  were $2.18 million in
2001, compared to $1.42 million in 2000. 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.  The 2000 capital expenditures  include:  additional
construction  costs of the El Paso  Multi-Purpose  facility  in  February  2000,
completion  of the Turley  Correctional  Center in May 2000,  and other  normal,
operating purchases of vehicles, equipment, and building improvements.

     The Company had  approximately  $3.7 million of cash and  revolving  credit
available  for new projects at December 31,  2001.  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  reserves,  while  minimizing  income taxes through the
utilization of tax loss carry forwards.

     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.

Results of Operations

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000 -

     Total revenues increased by 10% to $25.1 million in 2001 from $22.9 million
in 2000.  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 management consulting revenues. The Company's net income increased 38%
to  $1,325,000  or $0.28 basic and $0.25  diluted per share in 2001  compared to
$963,000 or $0.20 basic and diluted per share in 2000.

     Operating income, before interest, depreciation, and income taxes increased
5% to $6,199,000 in 2001 from  $5,928,000  in 2000.  The average daily  offender
census  increased to 1,750 in 2001 from 1,576 in 2000. The 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.

                                       8

<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.

     Direct operating  expenses increased by 11% in 2001 over 2000. The 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.

     General and administrative  expenses increased by 13% in 2001. The increase
was partly a result of 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 2001 and 2000.
Interest  expense  decreased by $438,000 in 2001 as a result of a lower interest
rate from the senior lender and lower borrowing levels.

                                       9

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

ITEM 7.  FINANCIAL STATEMENTS.

      Index to Financial Statements:                                  Page

      Report of Independent Certified Public Accountants              11

      Consolidated Balance Sheets                                     12

      Consolidated Statements of Operations                           13

      Consolidated Statements of Stockholders' Equity                 14

      Consolidated Statements of Cash Flow                            15

      Notes to Consolidated Financial Statements                      17

                                       10

<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.

               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 (the "Company") as of December 31,
2001  and  2000,  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 consolidated financial position of
the Company as of December 31, 2001 and 2000,  and the  consolidated  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.



                                                      GRANT THORNTON LLP

Oklahoma City, Oklahoma
March 22, 2002

                                       11

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

                        CONSOLIDATED BALANCE SHEETS
                                                            December 31,
                                                         2001           2000
ASSETS
Current assets:

   Cash and cash equivalents                         $2,389,000     $    726,000

   Related party receivables                            161,000          317,000

   Accounts receivable, net                           2,611,000        3,721,000

   Prepaid expenses and other                           239,000          160,000
                                                     __________      ___________
      Total current assets                           $5,400,000     $  4,924,000

Property and equipment, net                          30,414,000       29,673,000

Other assets                                          4,273,000        4,858,000
                                                     __________      ___________
      Total assets                                  $40,087,000     $ 39,455,000
                                                     __________      ___________
                                                     __________      ___________
IABILITIES AND STOCKHOLDERS'S EQUITY

Current liabilities:

   Accounts payable, accrued liabilities and         $2,170,000     $  1,477,000

   Current maturities of long-term debt               2,545,000        2,992,000
                                                      _________       __________
      Total current liabilities                      $4,715,000     $  4,469,000

Long-term debt, less current maturities              22,547,000       23,614,000

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

Redeemable common stock, $.001 par value

   1,622,448 shares issued and outstanding in
       2001 and 2000                                  3,470,000        3,593,000

Stockholders' equity:

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

     shares authorized; 4,847,624 and

     4,765,630 shares issued and outstanding

     in 2001 and 2000, respectively, less

     1,622,448 shares subject to repurchase

     in 2001 and 2000.                                   3,000             3,000

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

     shares authorized; none issued                        ---               ---

   Paid-In capital                                    7,536,000        7,285,000

   Accumulated deficit                               (2,034,000)     (3,359,000)
                                                     __________      ___________
     Total liabilities and stockholders' equity     $40,087,000     $ 39,455,000
                                                     __________      ___________
                                                     __________      ___________






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

                                       12


<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

                    CONSOLIDATED STATEMENTS OF OPERATIONS


                                                   Year Ended December 31,

                                                        2001            2000
                                                      __________      __________
Revenues                                             $25,147,000     $22,922,000
                                                      __________      __________
Costs and expenses:

   Direct operating                                  $17,147,000     $15,406,000

   General and administrative                          1,801,000       1,588,000

   Depreciation and amortization expense               1,881,000       1,534,000

   Interest expense                                    2,993,000       3,431,000
                                                       _________       _________
Net income                                            $1,325,000       $ 963,000
                                                       _________       _________
                                                       _________       _________
Basic income per share:

   Net income per share                               $     0.28       $    0.20
                                                       _________       _________
Weighted average number of common                      _________       _________

      shares outstanding, basic                        4,808,067       4,747,734
                                                       _________       _________
Diluted income per share:                              _________       _________

   Net income per share                                $    0.25       $    0.20
                                                       _________       _________
Weighted average number of common                      _________       _________

      shares outstanding, diluted                      6,332,607       4,752,901
                                                       _________       _________
                                                       _________       _________




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

                                       13

<PAGE>


                          AVALON CORRECTIONAL SERVICES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                             Years ended December 31, 2001 and 2000
                                    Common            Total        Total
                     Common         Stock    Paid-In  Accumulated  Stockholders'
                     Stock Shares   Amount   Capital  Deficit      Equity
                     ____________   _______  _______  ___________  _____________





Balance, January         4,715,630  $ 3,000  $6,686,000 $(4,322,000) $ 2,367,000
  1,2000
Net Income                     ---      ---        ---  $   963,000      963,000
Accretion of redeemable
 stock                         ---      ---  $  531,000          ---     531,000
Warrants exercised, net
  of issuance cost          50,000      ---  $   68,000          ---      68,000
                         _________   ______   _________   __________   _________
Balance, December
  31, 2001               4,765,630  $ 3,000  $7,285,000 $(3,359,000) $ 3,929,000
Net income                     ---      ---        ---    1,325,000    1,325,000
Stock options exercised     81,994      ---    128,000          ---      128,000
Accretion of redeemable
   stock                       ---      ---    123,000          ---      123,000
                         _________   ______   ________    _________    _________
Balance, December
  31, 2001               4,847,624  $ 3,000 $7,536,000  $(2,034,000   $5,505,000
                         _________   ______  _________    _________    _________
                         _________   ______  _________    _________    _________




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

                                       14

<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOW

                                                        Year ended December 31,

                                                          2001            2000
                                                       __________      _________
OPERATING ACTIVITIES

Net income                                        $    1,325,000    $    963,000

Adjustments to reconcile net income to

   net cash provided by (used in) operating
   activities:

      Depreciation and amortization                   1,881,000        1,534,000

      Amortization of debt issue costs                  254,000          231,000

Loss on sale of property                                 32,000           13,000

Changes in operating assets and liabilities:

   Decrease (increase) in

      Accounts receivable                               986,000      (1,568,000)

      Prepaid expenses and other assets                 (36,000)         191,000

   Increase in accounts payable and other               693,000           82,000
                                                 $   __________       __________
         Net cash provided by operations              5,135,000    $   1,446,000
                                                     __________       __________
INVESTING ACTIVITIES:

Capital expenditures                             $  (2,179,000)    $ (1,420,000)

Acquisition of business                                (71,000)             ---

Proceeds from payments on notes receivable                 ---            29,000

Proceeds from disposition of property                  164,000            64,000
                                                    __________        __________
      Net cash used in investing activities        (2,086,000)      $(1,327,000)
                                                    __________        __________
FINANCING ACTIVITIES:

Proceeds from borrowing                          $  27,330,000       $11,918,000

Repayment of borrowing                            (28,844,000)      (11,980,000)

Proceeds from warrant and option exercise             128,000             68,000
                                                  ____________       ___________
          Net cash provided by (used in)
            financing activities                  $(1,386,000)       $     6,000
                                                  ____________       ___________
Net increase in Cash

     And Cash Equivalents                        $  1,663,000        $   125,000

Cash and Cash Equivalents,

   Beginning of Period                                 726,000           601,000
                                                    __________       ___________
Cash and Cash Equivalents

   End of Period                                 $   2,389,000       $   726,000
                                                  ____________       ___________
                                                  ____________       ___________



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

                                       15

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid during the year for:

         Interest                            $ 2,735,000       $ 3,246,000

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             ---
                                                  ___________
                                                  ___________

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

                                       16

<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEARS ENDED 2001 AND 2000


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
significantly  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 300-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 115-bed community  corrections  facility in Henderson,
Colorado;  and a 307-bed multi-use  community  corrections  facility in Greeley,
Colorado.  Avalon also operates three programs in leased  facilities:  a 352-bed
intermediate  sanction unit in Tulsa,  Oklahoma; a 36-bed community  corrections
facility  in  Denver,  Colorado;  and  a day  reporting  center  in  Northglenn,
Colorado.   The   Colorado   community   corrections   programs   also   provide
non-residential  services  to  approximately  385  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 intercompany
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.

Concentrations of Credit Risk -

     Financial instruments  potentially subjecting the Company to concentrations
of credit risk consist  principally  of  temporary  cash  investments,  accounts
receivable  and  notes  receivable.   The  Company  places  its  temporary  cash
investments  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,
2001 and 2000 was $27,000 and $30,000, respectively.

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 is 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:

                                       17

<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEARS ENDED 2001 AND 2000

             Buildings and Improvements              10 to 40 Years
             Furniture and Equipment                   5 to 7 Years
             Transportation Equipment                 3 to 15 Years

     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.

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.

New Accounting Pronouncements -

     In  2001,   the   Financial   Accounting   Standards   Board   issued   new
pronouncements:  Statement of  Financial  Accounting  Standards  (SFAS) No. 141,
Business  Combinations;  SFAS No. 142, Goodwill and Other Intangible Assets; SAS
No.  143,  Accounting  for  Asset  Retirement  Obligations;  and SFAS  No.  144,
Accounting for the Impairment or Disposal of Long-Lived Assets.

     SFAS No. 141,  which  requires the purchase  method of  accounting  for all
business combinations, applies to all business combinations initiated after June
30, 2001 and to all business  combinations  accounted for by the purchase method
that are  completed  after  June 30,  2001.  SFAS No.  141 will not apply to the
Company unless it enters into a future business combination.

     SFAS No. 142 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 current  requirement to amortize  goodwill or intangible  assets
with indefinite  useful lives, and is effective for fiscal years beginning after
December 15, 2001.

     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.

                                       18

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        FOR THE YEARS ENDED 2001 AND 2000


SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.

     SFAS No. 144 is  effective  for the Company  for the fiscal year  beginning
January 1, 2002 and addresses  accounting  and  reporting for the  impairment or
disposal of long-lived assets.  SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and APB Opinion No. 30,  Reporting the Results of Operations - Reporting the
Effects  of  Disposal  of a Segment of a  Business.  SFAS No.  144  retains  the
fundamental provisions of SFAS No. 121 and expands the reporting of discontinued
operations to include all  components of an entity with  operations  that can be
distinguished  from the rest of the entity and that will be eliminated  from the
ongoing operations of the entity in a disposal transaction.

     Management has not yet determined the effect, if any, the adoption of these
new  statements  will have on the  Company's  financial  condition or results of
operations.

Reclassifications -

     Certain  reclassifications  have been made to the 2000 financial statements
to conform with 2001 presentation.


                                       19
<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        FOR THE YEARS ENDED 2001 AND 2000

NOTE 2.  PROPERTY AND EQUIPMENT

     The elements of property and equipment and related accumulated depreciation
as of December 31, 2001 and 2000 are as follows:


                                                                     Accumulated
                                                     Cost           Depreciation
                                                   __________         __________
      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
                                                  ___________        ___________
                                                  ___________        ___________
      December 31, 2000

          Land                                     $3,150,000        $       ---

          Buildings and Improvements               26,347,000          1,886,000

          Furniture and Equipment                   2,081,000            996,000

          Transportation Equipment                  1,530,000            553,000
                                                  ___________        ___________
                                                  $33,108,000          3,435,000
                                                  ___________        ___________
                                                  ___________        ___________

     Capitalized interest on construction  projects totaled approximately $0 and
$75,000 respectively, for the years ended December 31, 2001 and 2000.

NOTE 3.  ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND OTHER

          The elements of accounts payable,  accrued liabilities and other as of
December 31, 2001 and 2000 are as follows:

                                                 2001                 2000
                                               _________            _________
     Trade accounts payable                   $  585,000          $   414,000

     Accured interest payable                    142,000              150,000

     Accured salary and benefits               1,127,000              686,000

     Other accured liabilities                   316,000              227,000
                                              __________            _________
                                             $ 2,170,000          $ 1,477,000
                                              __________            _________
                                              __________            _________

                                       20

<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEARS ENDED 2001 AND 2000

NOTE 4.  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:


                                  2001                2000
                                __________          __________
Governmental Agency A              27%                 24%

Governmental Agency B              24%                 28%

Governmental Agency C              15%                 16%

Governmental Agency D              18%                 19%


     The Company has a fifteen (15) 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, 2002. The Company's  current contracts with
the Colorado  Department  of  Corrections  extend  through  June 30,  2002.  The
Company's  current contract with the Oklahoma Office of Juvenile Affairs extends
through December 2, 2002 with renewal options through December 2, 2003.

NOTE 5.  LONG-TERM DEBT

    Long-term debt consists of the following:

                                                             December 31,
                                                         2001           2000
                                                       _________      _________
Revolving line of credit with finance company,
  collateralized by accounts receivable, with
  interest at 1% over prime (effective rate of 5.0%
  at December 31,2001); due Feb. 2003.                 $ 495,000      $1,070,000

Notes payable to banks, collateralized by
  transportation equipment, due in installments
  through October 2019 with interest ranging from
  1.90% to 10.85%.                                       699,000         806,000

Notes payable to banks and finance companies,
  collateralized by land, buildings, and
  improvements due in installments through
  March 2004 with interest ranging from
  4.40% to 11%                                        13,644,000      14,441,000

Note payable to an investment company,
  uncollateralized with interest at 12.5%
  due in four installments beginning in 2005,
  including original issue premium                    10,254,000      10,289,000
                                                      __________      __________
                                                     $25,092,000     $26,606,000
     Less - current maturities                         2,545,000       2,992,000
                                                      __________      __________
                                                     $22,547,000     $23,614,000
                                                      __________      __________
                                                      __________      __________

                                       21

<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEARS ENDED 2001 AND 2000


     The aggregate  maturities of long-term debt for each of the next five years
are as follows:  2002:  $2,545,000;  2003:  $11,660,000;  2004: $401,000;  2005:
$2,580,000; 2006: $7,542,000 and $364,000 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  are 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.

     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.

NOTE 6.  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% 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 7.  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 issuance.  This cost was recorded as debenture issue
costs and is  classified  in other assets on the balance  sheet.  The  debenture
issue cost is amortized to expense over the term of the convertible  debentures.
The Class E stock  purchase  warrants  provide for the purchase of the Company's
common stock at a price of $3.00 per share at any time until September 12, 2002.
The Company may redeem the warrants upon certain events for $.01 per share.

     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 provide for the purchase of the Company's common stock at any
time until  their  expiration  at  September  2002.  The  exercise  price of the
warrants is $3.75 per share as of December 31, 2001.  The Company may redeem the
warrants upon certain events for $.01 per share.  The fair value of the warrants
was allocated between the proceeds the debt and equity issues as debt issue cost
and a reduction in redeemable common stock, respectively.

                                       22

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEARS ENDED 2001 AND 2000

     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 8.  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 461,060 shares of Class A common stock at
exercise prices ranging from $1.50 to $4.25 per share. Options providing for the
issuance of 380,028 shares were exercisable at December 31, 2001.

     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.

                                                       2001             2000
                                                    ___________      ___________
          Net Income
            As reported                            $  1,325,000       $  963,000
            Pro forma                                 1,048,000          730,000

          Basic income per share
            As reported                            $       0.28             0.20
            Pro forma                                      0.22             0.15

          Diluted income per share
            As reported                            $       0.25       $     0.20
            Pro forma                                      0.21             0.15


     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:


                                            2001        2000
                                          _______     ________
               Dividends                        -           -

               Expected Volatility          67.0%        73.0%

               Risk free interest rate       5.1%         6.8%

               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 necessarily  provide a reliable single measure of the
fair value of its employee stock options.

                                       23

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        FOR THE YEARS ENDED 2001 AND 2000

     A summary of the status of the  Company's  stock option plan as of December
31,  2001 and  2000,  and  changes  during  the years  ending on those  dates is
presented below.

                                     2001                       2000
                                    _______                    ________

                                            Weighted                   Weighted
                                             average                    average
                                Shares      exercise       Shares      exercise
                              ________      ________     ________      _________
Outstanding at beginning
  of year                      479,610      $   1.69      342,560      $   1.73
Granted                         96,700          1.70      159,500          1.60
Exercised                     (81,994)          1.56           _             -
Forfeited                     (33,256)          1.70     (22,450)          1.69
Canceled                           -              -           -              -
                              ________                  _________

Outstanding at end of year     461,060          1.69      479,610          1.69
                              ________                  _________
                              ________                  _________
Options exercisable at
  year end                     380,028          1.71      273,425          1.67
                              ________                  _________
                              ________                  _________
                                             __________              ___________
Weighted average fair value of               __________              ___________
options granted during the year             $   1.37                  $    1.31


     The following table summarizes  information about fixed-price stock options
outstanding at December 31, 2001.


                          Options outstanding             Options exercised
                         _____________________         _______________________
                                 Weighted
                                 average       Weighted                 Weighted
                     Number      remaining     average    Number        average
                    outstanding  contractual   exercise   exercisable   exercise
                    at 12/31/01  life (years)  price      at 12/31/01   price
Range of exercise
  price
$1.50 to $2.25      458,060            7.53    $   1.70      377,778    $   1.70
$2.26 to $3.39        1,000            7.39        2.56          500        2.56
$3.40 to $4.25        2,000            6.12        4.00        1,750        3.96
                    _______                                  _______
$1.50 to $4.25      461,060                                  380,028
                    _______                                  _______
                    _______                                  _______


NOTE 9.  ACQUISITIONS AND CONTRACT AWARDS

     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.

                                       24

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR YEARS ENDED 2001 AND 2000


     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.

NOTE 10. EARNINGS PER SHARE

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

                                                       2001            2000
                                                   ____________    ____________
     Numerator
       Net Income - basic                         $  1,325,000     $    963,000

       Effect of dilutive securities:

        - interest reduction on assumed
            debenture conversions                      289,000              ---
                                                  ____________    _____________
     Numerator for earnings per share
        assuming dilution                            1,614,000           963,000
                                                  ____________    ______________
                                                  ____________    ______________
     Denominator for earnings per share:

       Weighted average shares outstanding -basic    4,808,067        4,747,734

       Effect of dilutive securities:

          -debenture conversions                     1,283,333              ---

          -stock options                                62,919              314

          -stock warrants                              178,288            4,853
                                                  ____________   ______________
     Demoninator for earnings per share
       assuming dilution                             6,332,607        4,752,901
                                                  ____________   ______________
                                                  ____________   ______________
     Earnings per share, basic                    $       0.28             0.20
                                                  ____________   _______________
                                                  ____________   _______________
     Earnings per share assuming dilution         $       0.25             0.20
                                                  ____________   _______________
                                                  ____________   _______________

      Outstanding options and warrants of 203,539 and 910,679 for the periods
ended December 31, 2001 and 2000, respectively, have been excluded from the
above calculations as they would be anti-dilutive.

                                       25
<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEARS ENDED 2001 AND 2000

NOTE 11.  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:

                                                  Year Ended December 31,

                                          2001                   2000
                                   _____________________    ____________________
                                    Carrying   Estimated    Carrying   Estimated
                                      amount  fair value      amount  fair value
                                   _________  __________    ________  __________
    Financial Assets

      Cash and cash equivalents  $ 2,389,000 $ 2,389,000   $ 726,000   $ 726,000

      Notes receivable                35,000      35,000       2,000       2,000

Fianacial liabilities

     Variable rate debt           12,940,000  12,940,000  13,920,000  13,920,000

     Fixed rate debt              12,152,000  11,347,000  12,686,000  11,944,000

     Convertible debentures        3,850,000   3,318,000   3,850,000   3,540,000

     Redeemable common stock       3,470,000   3,229,000   3,593,000   1,850,000



     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.

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, 2001 and 2000.

                                       26

<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEARS ENDED 2001 AND 2000

NOTE 12.  INCOME TAX

     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, 2001 and 2000:

                                                     Year ended December 31,
                                                       2001            2000
                                                  ____________     ____________
Provisions for income taxes
 at statutory rate                                   $ 451,000       $  327,000

Nondeductible expenses                                  14,000           11,000

Changes in valuation allowance                       (523,000)         (81,000)

Change in prior year estimate                          58,000         (257,000)
                                                  _____________    ____________
   Total provisions for income taxes               $     --         $      --
                                                  _____________    ____________
                                                  _____________    ____________


Deferred tax assets and liabilities are as           Year ended December 31,
  follows:                                            2001             2000
                                                  _____________    ____________

Deferred tax asset

  Net operating loss carry forward                  $  303,000       $  641,000

  Nondeductible accurals and allowances                342,000          415,000

  Other                                                     __            1,000
                                                  _____________    ____________
                                                    $  645,000       $1,057,000
   Less: Valuation allowance                          (73,000)        (596,000)
                                                  _____________    ____________
   Deferred tax assets                                572,000           461,000

Deferred tax liabilities:

   Property and equipment                            (506,000)        (395,000)
                                                     _________        _________
    Deferred tax liabilities                        $(506,000)       $(395,000)
                                                     _________        _________
     Net deferred tax assets                        $   66,000       $   66,000
                                                    __________        __________
                                                    __________        __________

     The  valuation  allowance  on tax  assets  decreased  $523,000  in 2001 and
$81,000  in 2000.  The  decrease  in  valuation  allowance  in 2001 and 2000 was
primarily due to the  utilization  of net  operating  loss carry  forwards.  The
Company has  approximately  $756,000  of net  operating  loss carry  forwards at
December 31, 2001, expiring through 2019.

NOTE 13.  RELATED PARTY TRANSACTIONS

     In  November  2000,  the  Company  executed  an  agreement  to  manage  the
operations of an entity owned by an affiliate  (see Note 9). Fees received under
this  agreement  totaled  $548,000 and $35,000 for the years ended  December 31,
2001 and 2000, respectively.

     The Company  holds a 15% equity  interest in an assisted  living center and
has an investment of  approximately  $202,000 at December 31, 2001.  The Company
guaranteed  facility  debt  related  to  the  building  of the  investment.  The
outstanding  debt balances were  $1,780,000  and $1,855,000 at December 31, 2001
and 2000, respectively.

                                       27

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.


NOTE 14.  COMMITMENTS AND CONTINGENCIES

     Total  lease   expense  was   $109,000  and  $93,000  for  2001  and  2000,
respectively,  under all operating leases. The future minimum lease payments are
as follows: 2002 - $137,000,  2003 - $157,000, 2004 - $147,000, 2005 - $140,000,
2006 - $137,000, thereafter - $89,000.

     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 has an
unfunded deferred compensation plan for certain key executives.

NOTE 15.  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.

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

      None.

                                       28


<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

                                    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 ...............49   Chief Executive Officer, President,
                                          and Director
      James L. Saffle ...............49   President
      Mary L Livers .................48   Chief Operating Officer
      Marvin Wiebener ...............58   Vice President of Programs
      James C. Poland .............. 55   Vice President of Texas Operations
      Randall J. Wood .............. 43   Corporate Secretary and Counsel
      Tiffany Smith ................ 34   Vice President of Corporate
                                          Communications
      Lloyd Lovely ..................52   Vice President of Finance
      Clinton E. Johnson ............54   Vice President of Oklahoma Operations
      Eric Gray .....................45   Vice President and Counsel
      Robert O. McDonald ........... 63   Director
      Mark S. Cooley ................44   Director
      James P. Wilson ...............43   Director
      Charles W. Thomas .............58   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.

     Mary L.  Livers  joined the  Company in 2000 and serves as Chief  Operating
Officer  of  Avalon.  Dr.  Livers  has more than  twenty  years of  correctional
management experience with the Oklahoma Department of Corrections, having served
in  many  positions  including  Deputy  Warden,  Administrator,  Warden,  Deputy
Director, Chief of Operations,  Regional Director, and Associate Director. Prior
to joining the Oklahoma Department of Corrections,  Dr. Livers worked four years
with the  Arkansas  Department  of  Corrections.  Dr.  Livers has a Bachelor  of
Science  degree  in  Sociology/Psychology  and a  Master  of  Social  Work  from
Louisiana State University.  Dr. Livers completed her Adult and Higher Education
Doctoral Program at the University of Oklahoma.

     Marvin  Wiebener  joined the  Company  in  January  2001 and serves as Vice
President of Programs. Mr. Wiebener's  responsibilities  include the development
and implementation of quality programs  throughout  Avalon's various facilities.
Mr. Wiebener has over twenty-five years of experience as a program administrator
and as an institutional  superintendent,  responsible for delivering an array of
services to  juvenile  and  youthful  offenders.  Mr.  Wiebener  graduated  from
Northwestern  Oklahoma  State  University  with a Bachelor of Science  degree in
1968. Mr. Wiebener  received a Master of Social Work degree from Our Lady of the
Lake University, San Antonio, Texas, in 1975.


<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

     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.

     James C. Poland is Avalon's Vice President of Texas Operations and has over
twenty-seven  years of experience in the field of criminal  justice and security
operations. He has administrative responsibility and oversight for the Company's
secure and  non-secure  correctional  facilities  in Texas.  As such, he reviews
facility incidents, employee investigations,  employee disciplinary actions, and
meets with contracting  agencies.  Before joining Avalon in October of 2001, Mr.
Poland was Regional Director for Texson  Management Group,  Inc., Vice President
of Business  Development for Correctional  Services  Corporation,  and a private
consultant.  Mr. Poland  previously  held  positions in the Texas  Department of
Criminal Justice including Administrator,  Regional Supervisor,  Parole Analyst,
and  Institutional  Parole  Officer.  Mr.  Poland holds a  Bachelor's  degree in
Political Science.

     Clinton E. Johnson is Avalon's Vice President of Oklahoma  Operations.  Mr.
Johnson  has  overall  responsibility  for the  residential  and  nonresidential
service delivery to Avalon's contracting agencies and customers in Oklahoma.  He
oversees operational  components,  including  budgeting,  for the facilities and
programs in  Oklahoma.  Mr.  Johnson  also has  responsibility  for the emerging
growth of the Oklahoma community  sentencing programs,  day reporting,  offender
monitoring,  supervision,  and developing alternative programs. Prior to joining
Avalon in May of 2001, Mr. Johnson  completed a 27-year career with the Oklahoma
Department  of  Corrections.  During his tenure at the  Oklahoma  Department  of
Corrections, Mr. Johnson held several positions,  including probation and parole
officer,  deputy warden,  and assistant to the Associate  Director.  Mr. Johnson
holds a Bachelor  of  Science in  Sociology  and a Masters in  Criminal  Justice
degrees.

     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

                                       30
<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

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.

     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 a  private
consultant  who  specializes  in issues of relevance to the private  corrections
industry.

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, 2001.

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 Class "E" Warrant Agreement (6)
            iii   Form of Convertible Debenture Agreement (6)

     10.    i     Contrac  between  Southern  Correction  Systems, Inc. and  the
                  Oklahoma  Department of Corrections for halfway house services
                  for  the  year ended  June  30, 2001  and  extension  of  said
                  contract after June 30, 2001.

                                       31

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

           ii    Stock Option Plan adopted by Board of Directors on August 16,
                  1994 (4)
            iii   Change of Control Agreement between Donald E. Smith and Avalon
                  Community Services, Inc. dated August 25, 1997. (5)
            iv    Employment Agreement with Donald E. Smith dated August 8,
                  1997. (5)
            v     Contract with State of Oklahoma Office of Juvenile Affairs for
                  80-bed medium security residential treatment center for
                  youthful offenders; one year contract with options to renew
                  for three additional years. (11)
            vi    Agreement dated June 1, 1998 between Southern Corrections
                  Systems, Inc. and the Texas Department of Criminal Justice.(8)
            vii   Financing agreement between Avalon Community Services, Inc.,
                  and Fleet Capital Corporation dated February 25, 1999. (9)
            viii  Amended and Restated Loan and Security Agreement between
                  Avalon Correctional Services, Inc., et al., and Fleet Capital
                  Corporation, dated December 9, 1999. (11)
            ix    Agreement dated September 16, 1998, between Avalon Community
                  Services, Inc., and RSTW Partners III. (10)

     21.    i     Subsidiaries of Registrant (5)

     (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 Form 8-K dated
            March 19, 1998.
         8) Incorporated herein by reference to the Registrant's Registration
            Statement on Form S-2 dated September 14, 1998.
         9) Incorporated by reference to the Registrant's Form 8-K dated March
            10, 1999.
         10)Incorporated by reference to the Registrant's Form 8-K dated
            October 1, 1998.
         11)Incorporated by reference to the Registrant's Registration
            Statement on Form S-2 dated March 24, 2000

                                       32

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

TEM 14.  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: March 15, 2002

     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: March 15, 2002



By:   s\ Robert O. McDonald
Robert O. McDonald
Director                                                  Dated: March 15, 2002



By:   s\ Mark S. Cooley
Mark S. Cooley
Director                                                  Dated: March 15, 2002



By:   s\ James P. Wilson
James P. Wilson
Director                                                  Dated: March 15, 2002



By:   s\ Charles W. Thomas, Ph.D.
Charles W. Thomas
Director                                                  Dated: March 15, 2002



By:   s\ Lloyd Lovely
Lloyd Lovely
Vice President of Finance                                 Dated: March 15, 2002


                                       33


<PAGE>


                                 Exhibit 10(i)

                      OKLAHOMA DEPARTMENT OF CORRECTIONS
                            HALFWAY HOUSE CONTRACT
                          (Based on Fixed Rate Fee)

     This  contract  made and entered  into this 1st day of July,  2000,  by and
between  the  Oklahoma  Department  of  Corrections,   Chief  of  Administrative
Operations,  hereinafter  "DOC",  acting  pursuant to the  provisions of 57 O.S.
1991,  Section  561  as  amended,  and  Southern   Corrections  Systems,   Inc.,
hereinafter, Contractor.

                                   WITNESSETH

     Whereas,  DOC desires to contract  for the services of the  Contractor  for
those purposes and duties hereinafter  enumerated on paragraphs numbered 1 and 2
below, and;

     Whereas, the Contractor is willing to provide such services under the terms
and conditions hereinafter set forth.

     Now,  therefore,  in  consideration  of the mutual  covenants  and promises
hereinafter set forth, the parties agree as follows:

1.    Facility Location:

      1.1. Contractor agrees to house  the  inmates assigned under this contract
           in the facilities located at 302 West Archer, Tulsa, Oklahoma.
                        6101 North Cincinnati, Tulsa, Oklahoma
                        2801 Southwest 3rd, Oklahoma City, Oklahoma

     1.2  The  Contractor  shall not be allowed to house any  inmates at another
          location or  building  under this  contract  without  first  receiving
          written  permission  from the DOC contract  monitor.

2.   Contractor's Conditions and Services:

     2.1  Shall provide three nutritionally  balanced meals, according to a menu
          approved  by a  licensed  dietician,  daily per  correctional  inmate.
          Additionally,  religious  and  special  diets  shall  be  prepared  as
          required.

     2.2  Shall  provide at least one on duty  alert  staff for each forty ( 40)
          inmates for supervision and assistance to correctional  inmates at all
          times.  One  individual  shall be a roving patrol when all other staff
          are absent.  In the  alternative,  the contractor may submit a written
          staffing  plan for its  location(s)  which if accepted by DOC shall be
          attached hereto and incorporated by reference.

                                       34

<PAGE>

                        AVALON CORRETIONAL SERVICES, INC.

     2.3  Shall  only  provide  occupancy  that does not  exceed  the State Fire
          Marshall  occupancy  rating;  Shall maintain  clean,  safe and healthy
          living areas and grounds.  Housing,  job and program assignments shall
          be distributed  equitably,  in accordance  with  Department  OP-O30l02
          "Inmate   Housing  Policy  and  OP-O30l03   "Inmate  Job  and  Program
          Assignments".

     2.4  Shall provide indoor and outdoor recreational activities for inmates.

     2.5  Shall provide  telecommunications  access to inmates.  However,  in no
          event shall  Inmates or the  recipients  of their calls be required to
          pay more than inmates assigned to Department operated facilities.

     2.6  Shall provide physical space, furniture, equipment and supervision for
          visitation,  including  Attorney  visitation,  in accordance  with the
          Department OP- 030118 "Visitation" Policy.

     2.7  Shall provide  procedures to maintain all inmate information in strict
          confidence  and shall not  release  such  information  pertinent  to a
          presently or previously  assigned inmate in accordance with Department
          of  Corrections  policy.  One  exception  being DOC host  facility  or
          contracting  office  employees,  after showing proper  identification,
          shall have access to the facility  and inmate  records at all times in
          accordance with OP-O60212.

     2.8  Shall  maintain  facilities in such condition so as to comply with all
          applicable  local  and  state  fire  and  health  codes,  as  well  as
          compliance with the Life Safety Codes. Copies of each inspection shall
          be  provided  to the local  district  office/contract  monitor  office
          within seven (7) days of occurrence  with a plan of corrective  action
          to address deficiencies attached.

     2.9  Shall  maintain the facility in compliance  with the standards of this
          contract and the American Correctional Association Standards for Adult
          Community  Residential  Services.  The contractor must establish files
          which contain  information to demonstrate  compliance with 100 percent
          of the  mandatory  standards  and  90  percent  of  the  non-mandatory
          standards  at the time of the  initial  audit.  The  Contractor  shall
          conduct an internal audit of the standards in the first quarter of the
          fiscal  year.  A copy of this audit shall be forwarded to the contract
          monitor's  office and the host  facility.  Written  corrective  action
          plans by the  contractor  shall be forwarded  to the  contract  office
          within 15 days of the contractor's audit.

     2.10 Shall provide such additional  services as DOC may reasonably  require
          which are necessary to maintain the health and safety of the inmate(s)
          serviced under this contract.

     2.11 The  Contractor  will provide for  maintenance  of Inmate  Property in
          Accordance with the Department  OP-O30l20 Inmate Property Policy,  all
          property  will be in  accordance  with  the  property  matrix.  Inmate
          property lost or damaged when in control of the Contractor will remain
          the sole responsibility of the Contractor.

                                       35

<PAGE>


     2.12 The Contractor shall comply with the Department OP-100402 "Smoke- Free
          Workplace  Program"  Policy and ensure  areas are  designated  as non-
          smoking areas.

     2.13 The   Contractor   shall   attend   and   participate   in   scheduled
          meeting/training  sessions with the Department of Corrections district
          office/contract   office   staff  in  order   to   maximize   contract
          performance:

     2.14 The  facility  shall  "employ case  managers,  trained by the district
          office, who provide guidance and make appropriate  community referrals
          for employment and budgeting services.

     2.15 Shall insure case managers/counselors, assist the inmates in obtaining
          employment,  ensure that the offender has housing arranged for his/her
          release,  as  well  as  assisting  in  other  pre-release  preparatory
          activities,  as  well  as  maintains  individual  chronological  files
          documenting each inmate's program goals, crew assignment, evaluations,
          compliance with DOC policies governing  classification  status, earned
          credit  level,   parole  board   summaries,   individual  case  plans,
          budgeting,  release  preparation,  place  of  employment  verification
          checks,  programmatic  leaves, and any other significant  events. This
          information  shall be  submitted  in a timely  manner to the  district
          office for review to ensure accuracy and timeliness of information.

     2.16 Classification  actions  as  a  result  of  programmatic  failures  or
          disciplinary  action  to  higher  security  shall be  prepared  by the
          contractor,  and forwarded to the district office/host facility within
          two working days.

     2.17 All inmates  shall  undergo  routine,  random,  and  suspect  drug and
          alcohol  testing.  At least 5 percent  shall be tested  monthly  and a
          summary of the results furnished to the contract monitor, according to
          state  policy.  Suspect  drug and alcohol  shall be in addition to the
          random 5  percent  testing.  Facilities  that  show a random  drug and
          alcohol test positive rate of 10% or greater for four testing  periods
          will be  required  to  prepare  a  detailed  interdiction  plan  which
          includes a 100% testing of the facility's inmate population.

     2.18 Shall ensure in accordance with DOC OP-120230 that each inmate budgets
          earned  income,  and OP-O60211 jobs are monitored and time credits are
          submitted  monthly to the local  district  office on each  inmate in a
          timely manner.

     2.19 Shall provide all  transportation  and  supervision in accordance with
          DOC policy  OP- 040I I I to  medical/counseling  appointments  for all
          inmates at University Hospital,  Oklahoma City and Griffin Hospital in
          Norman, as well as appointments  scheduled at local medical facilities
          and doctor's offices;  also transportation of all inmates scheduled to

                                       36

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

          appear  at  the  monthly  parole  board  meeting;  transportation  for
          program, employment, emergency leaves, to and from the district office
          and all other  activities  except from one  Department of  Corrections
          facility to another.  If the destination point for transported inmates
          exceeds  50 map  miles,  one  way,  the  contractor  shall  be paid an
          additional   fifteen  dollars  per  hour  per  employee  required  for
          transport.  Separate billings must be submitted for the travel changes
          under  this  section.  If the  contractor  charges  for more  than one
          employee  per trip,  the billing must  adequately  describe the reason
          more than one employee was necessary.

     2.20 Contractor  shall  require  inmates to clean their  respective  living
          areas to include sweeping,  mopping,  washing windows, etc: as well as
          communal  group  programs such as visiting  rooms,  group rooms,  etc.
          Inmates  may also be used for lawn  mowing,  trash  dumping  and minor
          maintenance of the facility.  Nothing  contained herein shall prohibit
          the use of trustees  as provided  for by law and the payment of inmate
          pay. Prior to assigning  inmates on trustee status to the  contractor,
          the DOC host facility must approve the assignment.  The intent is that
          inmates will not be used in lieu of paid workers.

     2.21 Shall provide  information  to DOC staff of the arrest of any employee
          of the  halfway  house.  Effective  upon  contract  signing all of the
          Contractor's  employees who perform regular work at the facility shall
          be finger  printed and a  background  check  conducted by the Oklahoma
          State Bureau of Investigation  at the expense of the Contractor.  This
          check  shall occur when an  employee  is  initially  hired or upon the
          effective  date  of  this  contract  if  the  facility  is  operating.
          Effective upon contract signing all Contractor's  employment positions
          shall  have the same  minimum  qualifications  or  requirements  as in
          comparable  to the office of personnel  management  positions  for the
          Department.  The  contractor  shall  submit  a report  monthly  to the
          contract  monitor that  certifies  that all personnel  employed by the
          facility  comply with this  section of the  contract  and that all new
          personnel   have  a  completed   background   investigation.Prior   to
          appointment  the  contractor   shall  submit  to  the  Department  the
          credentials  of  facility  senior  level   management   personnel  for
          certification  of  qualifications.  Such  certification  will  not  be
          unreasonably withheld.

     2.22 The contractor will not employ any individual who is under supervision
          or jurisdiction of any parole,  probation,  or correctional  authority
          .Persons with  previous  criminal  convictions,  but who are not under
          supervision,  may be considered for employment as treatment coaches or
          counselors;  however, the Department of Corrections reserves the right
          of approval in such cases. Consideration will be given to such factors
          as  criminal  history,  time  elapsed  since  conviction(s)  must be a
          minimum of six months, and subsequent adjustment in the community.

     2.23 At a minimum,  the facility  shall  continuously  maintain  accredited
          status  for  American  Correctional  Association  Standards  for Adult
          Community Residential Services, Third Edition.  Accreditation shall be
          continuously  maintained  for  the  term  of  this  contract  and  any
          extensions  thereof.  Failure to comply shall result in termination of
          this contract.

                                       37

<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.

     2.24 The facility shall operate in accordance  with and keep Sections 3, 4,
          5,  6,  9,  10 and 12  of the  Department  of  Corrections  Operations
          Policies updated as they are issued:

           2.24.1 Specifically, Section 3 policies as listed:

                  OP-030102-Inmate Housing Policy
                  OP-030103-Inmate Job and Program Assignments
                  OP-030118-Visitation
                  OP-030 120-Inmate Property
                  OP-030134-Chemical Abuse Testing
                  OP-031001-Inmate Escorted Leave Program

            2.24.2 Section 4 Policies as listed:

                  OP-040101-Facility Security Standards
                  OP-040103-Standards for Maintaining Permanent Logs
                  OP-040109-Control of Contraband and Physical Evidence
                  OP-040 111--- Transportation

            2.24.3 Section 5 Policies as listed:

                  OP-050l0l-Procedures in the Event of Job Actions or Walkouts
                  by Correctional Staff
                  OP-050102-Departmental and Facility Emergency Plans for Riots,
                  Disturbances and Major Disasters
                  OP-050103-Escape Notification Procedures
                  OP-050104-Emergency Procedures for Utility Failures
                  OP-050108-Use of Force and Reportable Incidents

            2.24.4 Section 6 Policies as listed:
                  OP- 060101-Overview of Case Management:
                  OP- 060103-Custody Assessment procedures
                  OP- 060104-Community Corrections Assessment
                  OP- 060105-Classification Assessment Reviews
                  OP- 060125-Disciplinary Procedures
                  OP- 060204-Inmate Transfers
                  OP- 060205-Pre-Parole Procedures
                  OP- 060211-Inmate Sentence Administration
                  OP- 060212-Maintenance and Access of Offender Records

            2.24.5 Section 9 Policies as listed:
                  OP-090101-Standards for Inmate Programs
                  OP-090106-Assignment of Inmates to Public Works Programs
                  OP-090124-Inmate/Offender Grievance Process
                  OP-090129-Reintegration
                  OP-090131-0ffender Financial Responsibility Program
                  OP-090211-Volunteer Program


                                       38
<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.

            2.24.6 Section 10 Policies as listed:
                  OP-100402-Smoke-Free Workplace Program

            2.24.7 Section 12 Policies as listed:
                  OP-120202-Inmate Pay Program
                  OP-120230-Inmate Trust Fund

     2.25 The  Contractor  shall be  responsible  for the costs of DOC  required
          forms.

     2.26 The facility shall provide office space and  equipment/furnishings for
          the district office/contract monitor staff in close proximity to other
          administrative  offices and  reasonably  comparable.  The office shall
          have a lock,  which is not master  keyed and shall be provided  with a
          desk, chairs, access to telephone/fax/computer lines.

     2.27 The facility shall provide  restrictive  housing (RHU) space for those
          offenders,  in its facility  .This space is to be provided  within the
          halfway house by  construction of a unit or through the payment to the
          local  city/county  jail for the  housing  of the  offender(s).  If an
          inmate, who the contractor deems  inappropriate,  is placed in RHU the
          contractor  shall notify the district office and the contract  monitor
          the fIrst  working day after the inmate is placed in RHU .If an inmate
          is found  to be  inappropriate  for  remaining  at the  HWH,  then the
          district  and the  contract  monitor will be notified the same working
          day.

     2.28 Inmates  shall enter halfway house status only as approved by the host
          facility.

     2.29 The  contractor  shall notify the  Department  regarding use of force,
          escapes  and  serious   incidents  in  accordance  with   Departmental
          Operations Policy  OP-050108.  The facility will notify both the local
          district office and contract monitor  according to policy by telephone
          of all serious  incidents and will fax copies of all reports  prepared
          within 24 hours to the  district  office  and  contract  office on the
          forms  provided.  After  business  hours,  the local  district  office
          /contract office will receive the notice and reports via fax.

     2.30 Shall provide services for a program to operate an inmate  residential
          center  as  authorized  in 57  O.S.  1991,  Section  563  as  amended.
          Additionally  the Contractor  shall be  responsible  for acquiring the
          necessary Public,Works Contracts to fulfill the needs and requirements
          of its Public Works inmates (if  applicable).  Preference shall always
          be given to honor  State  Agency  contracts  first.  All Public  Works
          Contracts  entered into by the contractor  must be approved in writing
          by the District Supervisor and DOC Legal.( as applicable)

                                       39

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

     2.31 Shall  provide  public works  inmates  transportation  in staff driven
          vehicles or ensure transportation by crew supervisors to and from work
          site  location(s)  or a common drop  off/pick up site as may be agreed
          upon by the parties and approved by the district office. Shall provide
          transportation  of halfway house  inmates in staff driven  vehicles to
          and from prospective job sites, until employment is obtained.  If non-
          traditional work hours are required and public  transportation  in not
          available, the halfway house shall provide transportation.  Bus tokens
          or  arrangements  with  employers as agreed by all parties may also be
          utilized.

     2.32 Shall provide regular and periodic work site  inspections and document
          such inspections in a permanent log.

     2.33 The  Contractor  shall  provide the public works inmates three sets of
          work clothes,  to include a coat, work  shoes/boots,  caps and gloves.
          The  Contractor  shall have 90 days' from the  effective  date of this
          contract  to comply  with  this  sub-section  and  clothe  inmates  in
          compliance with the  Departments  community work centers and community
          corrections centers.

     2.34 The Contractor  shall provide all inmates on site for the public works
          program and those trustees  utilized on site for  maintenance and food
          service,  monthly pay in accordance with OP-120202,  20% of which must
          be  placed  in the  inmate's  mandatory  savings.  The  Contractor  is
          responsible  for  negotiating  contracts for all Prisoner Public Works
          crews being maintained by the Halfway House.

     2.35 The Contractor will afford inmates access to reasonable, impartial and
          non- discriminatory  grievance and misconduct  procedures addressed in
          the Departments Operations Policies, including a final level of appeal
          as provided in this section,  Misconduct procedures and penalties must
          reflect  the  department's,   since  it  affects  security  level  and
          classification

          2.35.1 The  facility  is  responsible  to respond  to  grievances  and
                 appeals on matters occurring during the inmate's  incarceration
                 in the facility,  except s entence  administration  issues  and
                 classification to lower or higher security status in accordance
                 with DOC policy.

          2.35.2 Complete, accurate,detailed reports of the disciplinary actions
                 against  inmates  are  provided  to  the  local district office
                 within seven (7)  working  days  of  the  date  the  action  is
                 finalized  or  the punishments administered.  Administration of
                 the disciplinary sanction which  affects  time   calculation or
                 sentence length must be in accordance with Departmental  policy
                 OP-060125  and approved by the local district office supervisor
                 /designee. Loss  of  earned  credits  must be  approved  by the
                 department and may be adjusted.

     2.36 Contractor agrees to maintain general liability  insurance and workers
          compensation  insurance  in  an  amount  acceptable  to  DOC  for  all
          employees and activities  performed under this contract. A certificate
          of insurance acceptable to DOC will be furnished within 15 days of the
          execution of this agreement.

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<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

     3.1  Inmate Programs.  The Department  Programs  Administrator and Contract
          Monitor will  approve all  programs.  All  habilitation/rehabilitation
          programs i.e., substance abuse; self-help, cognitive/behavioral,  etc.
          will target  criminogenic  needs and the reduction of criminal risk of
          the inmate. Program participation will be recorded on all participants
          and submitted monthly per operating  standards.  Programs,  except for
          education  and vo- tech,  will be assessed and evaluated by Department
          staff according to the Correctional Programs Assessment Instrument (CP
          AI).  Programs  must be assessed as  "satisfactory"  or above to be an
          approved  program.  Corrective  action  plans must be submitted to the
          Contract Monitor on programs assessed as less than satisfactory and/or
          have noted deficiencies. Programs with deficiencies will be reassessed
          upon  completion of the tasks in the  corrective  action plan,  but no
          later than one year from the date of the  corrective  action  plan for
          programs with major deficiencies.

     4.   Areas of Performance:

           The general  operations of the contractor shall
          be  overseen  by the  local  district  office  supervisor/designee  to
          include  review of  classification  paperwork,  disciplinary  actions,
          attendance of staff meetings, review of policy changes, review of both
          incoming  and  outgoing  transfer  requests  and  changes in a inmates
          status on center.  The services of the  Contractor  shall be performed
          under  the  general  administration  of  David  C.  Miller,  Chief  of
          Administrative  Operations,  Oklahoma  Department of Corrections.  The
          Contractor will be inspected  quarterly and audited annually to ensure
          the conditions and services are being adequately provided.

     5.   Medical Responsibilities:

          5.1  DOC shall  provide  all  medical,  mental  health  and/or  dental
               services unless DOC approves  alternate services or such services
               are as a result of a medical and/or dental emergency.

               5.1.1 Medical emergency  shall be  defined as danger or threat of
                     the loss of life or extremity.

               5.1.2 Dental emergency  shall be defined as acute problems in the
                     mouth exhibiting symptoms of pain, swelling, bleeding and/
                     or evaluation of temperature.

          5.2  The Contractor shall notify DOC as prescribed in section 2.29 and
               the DOC CHSA of any medical/dental  emergency  .immediately after
               such  emergency  or within  the  first  working  day  after  said
               emergency occurs.

                                       41
<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.

       6. Payment for Services:

          6.1  The State agrees to pay as compensation for the services provided
               hereunder a fixed rate of $31.75 times the number of inmate days,
               excluding date of arrival,  in a single monthly payment which may
               be adjusted in accordance herewith.

          6.2  Pursuant  to statute and any  amendments  thereto,  any  increase
               shall not exceed the previous  years Consumer Price Index for all
               Urban  Consumers  (CPI-U) as prepared by the United States Bureau
               of Labor Statistics or as otherwise may be provided by State law.

          6.3  DOC shall not be liable for and shall not pay the  Contractor for
               any expenses not herein expressly provided for.

          6.4  The contractor has agreed to a minimum number of 212 inmates that
               it will  accept.  Should the  number of  inmates  fall below this
               number  and  remain  at that  level  for more  than 30 days,  the
               Contractor  may at his option,  waive the minimum  number or give
               notice of his  intent  to  terminate  the  contract  pursuant  to
               paragraph 6 below.

          6.5  This  contract is for an  indefinite  number of inmates and days.
               DOC makes no  representations  or guarantee  that the  Contractor
               will  house any number of  inmates  for any  amount of time.  The
               State will not pay for any unused beds.

       7. Liquidated Damages Non-Performance Penalties:

          7.1  In the event of non-compliance  by the contractor,  the State may
               withhold  as  liquidated   damages  the  amounts   designated  in
               Attachment B from any amounts owed to the contractor. The parties
               agree  that  due to the  complicated  nature  of the  contractors
               obligations   under  this  contract  it  would  be  difficult  to
               specifically  designate  a monetary  amount for the Breach by the
               contractor  designated in Attachment B as said amounts are likely
               to be uncertain and not easily proven.

          7.2  The State shall  notify the  contractor  in writing of the Breach
               and afford 30 days time to cure the  breach  unless the matter is
               so serious that immediate correction is needed or unless a longer
               time period is mutually agreed upon.

          7.3  After the time to cure has  passed and the  breach  continues  or
               remains uncured, the State shall notify the contractor in writing
               of the amounts to be withheld as liquidated damages.

          7.4  Liquidated  damage  shall be  assessed  for  each day the  Breach
               remains uncured.

          7.5  The State is not obligated to assess  liquidated  damages  before
               availing itself of any other remedy.

                                       42

<PAGE>
                       AVALON CORRECTIONAL SERVICES, INC.


     7.6  The  State  may  choose  to  discontinue liquidated  damages and avail
          itself of any other remedy available  under this contract or at law or
          in equity .

8.   Termination of Convenience:

     Either party may  terminate  this  agreement at any time  by giving written
     notice to the other party of such termination and specifying the effective
     date  thereof  at  least  30  days  prior  to the  effective  date  of such
     termination. Such written notice shall be by registered mail to DOC in care
     of David C. Miller, Chief Administrative Operations, Oklahoma Department of
     Corrections,  Private Prison Unit 2200 Classen Blvd,  Suite 1200,  Oklahoma
     City, OK 73106 and to the Contractor at Avalon Correctional Center 302 West
     Archer,  Tulsa,  Oklahoma.  Notice given pursuant to the provisions of this
     paragraph shall be deemed sufficient for all purposes.

9.   Duration of Agreement:

     This  contractual  Agreement  shall be in effect through June 30, 2001, the
     end of the fiscal year for the State of Oklahoma.

10.  Regulations:

     10.1 This  Agreement,  all rights and duties  arising  thereunder  shall be
          governed  interpreted and construed according to the provisions of and
          under the laws of the State of Oklahoma.

     10.2 This document represents the entire agreement between the parties. Any
          modification,  amendment  or  addition  thereto  must  be in  writing,
          executed by the parties and specifically referencing this Agreement.

     10.3 In accepting  this  contract the  Contractor  agrees that their books,
          records, documents,  accounting procedures or any other items relevant
          to this contract are subject to examination by the other party and the
          State Auditor and Inspector.

     10.4 The  contractor  shall perform all the duties  herein  through its own
          employees.  None of the duties required by this  agreement,  including
          restrictive housing space, shall be performed by another contractor or
          sub-contractor unless the agreement has been first approved in writing
          by the DOC.

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<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

    In Witness Thereof,  the parties have executed this Agreement in triplicate
on the

 1st   day of  August
____           _______


Oklahoma Department of Corrections              Contractor




s//Kathy Waters                                  s//Jerry Sunderland
_________________________                        ___________________________
Katy Waters, Deputy Director                     Jerry Sunderland, President
Department of Corrections                        Avalon Correctional Services



Approved as to form:


s//Richard W. Kirby                              s//David C. Miller
_____________________________                    ___________________________
Richard W. Kirby                                 David C. Miller, Chief
General Counsel                                  Administrative Operations


                                       44

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.

                          Affidavit of Non Collusion

STATE OF OKLAHOMA  )
                   ) ss
COUNTY OF  Oklahoma)



Jerry Sunderland of lawful age, being first duly sworn, on oath says:

1.   (s)he is the duly authorized agent of Southern Correctional Services,  Inc.
     Contractor under the contract which is attached to this statement,  for the
     purpose of certifying the facts pertaining to the giving of things of value
     to government personnel in order to procure said contract;

2.   (s)he is fully aware of the facts and circumstances  surrounding the making
     of the contract to which this statement is attached and has been personally
     and directly involved in the proceedings leading to the procurement of said
     contract; and

3.   neither the Contractor nor anyone subject to the Contractor's  direction or
     control has paid,  given or donated or agreed to pay, give or donate to any
     officer or employee  of the State of  Oklahoma  any money or other thing of
     value,  either  directly or indirectly,  in procuring the contract to which
     this statement is attached.




                                                s// Jerry Sunderland, President
                                                ___________________________
                                                (Name/Title)




Subscribed and sworn to before me this 20 day of July, 2000


                                               s// Beverly A. Porter
                                               _________________________________
                                               Notary Public (or Clerk or Judge)



(Seal)

                                       45


<PAGE>

                       AVALON CORRECTIONAL SREVICES, INC.

                                 APPENDIX B

                              LIQUIDATED DAMAGES

Liquidated damages for each day of a breach will be calculated as follows:

                             V x B x $15.00 when

                      V = Relative value of Service Area
                       B = Relative value of the Branch

Service  Area 1: Value = 5:  Security  and Control,  ACA  Accreditation,  Health
Services, Use of Force, Escapes, Contract Monitoring,


Operator Breach                               B
Failure to Provide Service                    5
Failure to Document                           2
Failure to Report                             2
Failure to Comply with Other                  5
   Applicable Requirements


Service Area 2: Value = 4: Sanitation and Hygiene, Food Service, Mail, Religion,
Access to Court, Inmate Discipline,  Grievance, Visitation, Records and Reports,
Employee Qualifications & Training


Operator Breach                               B
Failure to Provide Service                    4
Failure to Document                           2
Failure to Report                             2
Failure to Comply with Other                  4
    Applicable Requirements

Service Area 3: Value = 3:  Operating  Standards,  Transportation,  Maintenance,
Repairs and Replacements,  Inmate Work, Academic & Vocational Training, Sentence
Computation    Data,    Classification    &   Case    Management,    Commissary,
Policies/Procedures/Post Orders, Inmate Management Fund/Bank Accounts


                                       46

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC

Operator Breach                               B

Failure to Provide Service                    3
Failure to Document                           1
Failure to Report                             1
Failure to Comply with Other                  3
     Applicable Requirements



                            APPENDIX B (continued)

Service  Area 4: Value + 2:  Laundry  and Inmate  Clothing,  Telecommunications,
Supplies/Perishables, Recreation



Operator Branch                               B
Failure to Provide Service                    3
Failure to Document                           1
Failure to Report                             1
Failure to Comply with Order                  3
    Applicable Requirements

                                       47

<PAGE>


                       AVALON CORRECTIONAL SERVICES, INC.

                                  EXTENSION OF
                         HALFWAY HOUSE SERVICE CONTRACT

                                (Revised 6-4-01)

     This  contract,  made and  entered  into July 1, 2000,  by and  between the
Oklahoma  Department of Corrections,  hereinafter "DOC",  acting pursuant to the
provisions of 57 O.S. 1991,  Section 561 as amended,  and Southern  Correctional
Systems, Inc, hereinafter "Contractor".

                               W I T N E S S E T H

     Whereas,  DOC has previously entered into an agreement with the above named
Contractor,  to provide  Halfway House  services to the inmates under DOC's care
and custody. The original agreement was dated the 1st of July 2000, and

     Whereas,  the  expiration  date of this  contract  is the 30th day of June,
2001, the last day of DOC's current fiscal year and

     Whereas,  because of the circumstances beyond the control of the Contractor
and DOC it is not possible for new contracts to be executed and processed before
the expiration of the current contracts.

     Now,  therefore,  in  consideration  of the mutual  covenants  and promises
hereinafter set forth, the parties agree as follows:

                                       -1-

     The above named  Contractor  agrees to extend the current contract with DOC
for Halfway  House  services  until a new  contract  for Fiscal Year 2002 can be
executed and processed.

                                       -2-

     The terms,  conditions  and duties of both parties shall be the same during
the period this extension is in place


                                       -3-

     The extension  shall be effective  from the 30th day of June 2001 and shall
expire upon the execution of a new contract or 30 days notice of  termination as
provided for in the original agreement is given by either party.


                                       -4-

      In accepting this contract the Contractor agrees that its books,
documents, accounting procedures or any other items relevant to this contract
are subject to examination by the other party and the State Auditor and
Inspector.

                                       48

<PAGE>

                       AVALON CORRECTIONAL SERVICES, INC.


      In Witness Thereof, the parties have executed this Agreement in
triplicate on the day and year first written above.


Oklahoma Department of Corrections              Halfway House

s//Justin Jones, Deputy Director                s// Mary L. Livers
____________________________________            ____________________________
Justin Jones, Deputy Director                         Contractor
Probation, Parole and Community Sentencing



Approved:

s// Ross Johnson
____________________________________
Ross Johnson, Assistant General Counsel



                                       49