SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  For the Fiscal Year Ended December 31, 1999

              [ ] 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 day: 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, 1999
were $16,803,000.

     The aggregate  market value of voting  common stock held by non  affiliates
was  $5,800,200  on March 23, 2000,  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 23,  2000,
4,715,900 shares of the issuer's common stock, par value $.001,  were issued and
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:
     Portions  of  the  Proxy   Statements   for  the  2000  Annual  Meeting  of
Shareholders are incorporated by reference in Part III.6

Transitional Small Business Disclosure Format: Yes [ ]   No [X].



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 intensive 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  to capitalize on the current rapid growth trends in
the private correctional services industry.

     According to the U.S. Bureau of Justice Department  statistics,  40 percent
of the current U.S. inmate  population is expected to be released in the next 12
months.  Inmates  serving  the last 6 to 12 months of their  incarceration  in a
community  correctional  facility report a lower  recidivism rate than those who
bypass programs to help inmates reenter society.  As of the second quarter 1998,
1.3 million  individuals were  incarcerated in this country's prisons and jails,
an increase of 4.8% from the prior year.  The total  prison and jail  population
has grown 6.7%  annually  during the last five years.  It is estimated  that the
weekly need for new  corrections  beds remains  between 1,500 and 2,000 beds. At
the end of 1998, 30 states  reported  24,925 state prisoners held in local jails
or other facilities  because of crowding in state  facilities.  Avalon contracts
with various governmental agencies to provide community  corrections  operations
and services.  Studies have  documented a 10 to 30 percent savings to government
agencies  when  utilizing  private  corrections  providers  to build and operate
correctional facilities. Avalon management believes its background and abilities
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 has
grown an  astounding  2,200%  over the past 10 years.  The  number of  privately
operated corrections beds is projected to triple over the next five years.

     Avalon  currently  owns and operates  1,700 private  community  corrections
beds.  The  Company  owns  and  operates  three  minimum-security   correctional
facilities  in Oklahoma,  a 160-bed  juvenile  residential  treatment  center in
Oklahoma;  two  medium-security  correctional  facilities  in  Texas;  and three
community  correctional  facilities in Colorado.  Avalon is the largest  private
provider of community  correctional services in Oklahoma.  The Avalon facilities
provide numerous programs for offenders generally serving the last six months of
their sentence.  Avalon provides  contract agencies a complete range of services
relating to the security,  detention  and care of inmates,  and a broad range of
rehabilitative programs to reduce recidivism.  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  800  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 out of the private  community
correctional  facilities,  has a growing  population of clients  referred by the
local judicial district system as an alternative to secure incarceration.

     Intensive  programming is an essential part of community based corrections.
Avalon has provided  substance  abuse  programs in facilities for over 14 years.
Avalon's  management  has been  engaged in the  business  of  providing  private
community correctional services since 1985.

     Avalon's  management made the decision to change the Company name to Avalon
Correctional Services,  Inc., to reflect the Company's focus on the correctional
industry.  This name change was approved by the  stockholders at the 1999 annual
meeting.

     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 23, 2000.

Facility Name                                                     Facility/
And Location          Company Role                   Capacity     Program Type
------------          ------------                   --------     ------------

Carver Center,        Complete Facility Siting,      250 Beds     Community
 Oklahoma City, OK    Design, Construction,                       Security
                      Ownership, and                              Corrections
                      Management

Avalon Correctional    Complete Facility Siting,     252 Beds     Community
 Center, Tulsa, OK     Design, Construction,                      Security
                       Ownership, and                             Corrections
                       Management

Turley Correctional    1997 Acquisition              150 Beds     Community
 Center, Tulsa, OK     Complete Facility                          Security
                       Ownership and                              Corrections
                       Management

El Paso Intermediate   1996 Acquisition              150 Beds     Medium
 Sanction Facility     Complete Facility                          Security
 El Paso, TX           Ownership and                              Correctional
                       Management                                 Facility

Union City             Complete Facility Siting,     160 Beds     Medium
 Juvenile Center,      Design, Construction,                      Security
 Union City, OK        Ownership, and                             Juvenile
                       Management                                 Facility

El Paso Multi          Complete Facility Siting,     300 Beds     Medium
 Purpose Facility,     Design, Construction,                      Security
 El Paso, TX           Ownership, and                             Correctional
                       Management                                 Facility

Phoenix Center         1999 Acquisition              135 Beds     Community
 Henderson, CO         Complete Facility                          Security
                       Ownership and                              Corrections
                       Management

The Villa at Greeley   1999 Acquisition              300 Beds     Community
 Greeley, CO           Complete Facility                          Security
                       Management                                 Corrections

The Loft House         1999 Acquisition              35 Beds      Community
 Denver, Colorado      Complete Facility                          Security
                       Management                                 Corrections

The Garland Center     1999 Acquisition              N/A          Day
 Northglen, Colorado   Complete Facility                          Reporting
                       Management                                 Center
                                                                  Corrections

Avalon Corporate       Corporate Headquarters        N/A          Administrative
 Oklahoma City, OK

Correctional Services -

     Avalon owns and operates eight correctional centers,  Carver Center, Avalon
Correctional Center,  Turley Correctional Center, Union City Juvenile Center, El
Paso Intermediate  Sanction  Facility,  El Paso Multi Purpose Facility,  Phoenix
Center and The Villa at Greeley.  The Company also operates the Loft House, a 35
-bed  community  corrections  program and The Garland  Center,  a day  reporting
center, both in leased facilities.  The community  correctional  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, 2000.  The  contracts  with the Oklahoma  Department of
Corrections are bid 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 connection with the acquisition of the Turley Correctional Center in
October 1997. The five year contract  extends  through 2004.  Carver Center is a
250-bed  minimum  security  correctional  facility  located  in  Oklahoma  City,
Oklahoma.  Carver Center has been expanded from its initial  capacity of 25 beds
in 1985, to its current capacity of 250 beds to accommodate the increasing needs
of the Oklahoma  Department of Corrections.  Carver center was sited,  designed,
and constructed by Avalon and opened in 1986.

     Avalon  Correctional  Center is a  252-bed  minimum  security  correctional
facility located in Tulsa,  Oklahoma.  The Avalon Correctional Center was sited,
designed, and constructed by Avalon and opened in July 1995.

     Turley  Correctional  Center is a  150-bed  minimum  security  correctional
facility  located  in  Tulsa,  Oklahoma.  The  Turley  Correctional  Center  was
purchased  by Avalon in October  1997.  A new 150-bed  correctional  facility is
under  construction on the grounds at the Turley  Correctional  Center.  The new
center is scheduled to open in April 2000.

     Union  City  Juvenile  Center  is  an  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  second  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 will renew its ACA accreditation in the fall of
2000.

     Texas.  Avalon purchased 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.

     Colorado.  The  Company  purchased  a  management  contract  in May 1999 to
operate Adams Community Corrections Program (ACCP) in Northglen,  Colorado.  The
ACCP  Program  provides  residential  and  non-residential   services  in  three
locations:  The  Phoenix  Center,  a 135-bed  residential  center in  Henderson,
Colorado;  The Loft House, a 35-bed residential program in Denver,  Colorado and
The Garland  Center,  a day reporting  center in Northglen,  Colorado.  The ACCP
Program provides services pursuant to various state and local agencies.

     The Company purchased The Villa at Greeley in June 1999. The Villa owns and
operates  a  300-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 and local agencies.

     Avalon is evaluating additional correctional projects in several states.

Asstets Held For Sale-

     Avalon  previously  provided  mental  health  services and assisted  living
services in Oklahoma  and  Colorado.  Avalon's  management  made the decision to
divest all  non-correctional  services at the end of 1996 to allow management to
focus exclusively on private corrections.  The remaining non-correctional assets
at December 31, 1999,  consists of an investment  in one assisted  living center
which is marketed for sale.  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  prison  conditions.   Privately  operated  correctional  management
companies  are able to provide  high  quality  services at lower  cost.  Private
correctional  facilities  operating  as  contractors  for  government  agencies,
pursuant to court order or otherwise, exist in virtually every state.

     Avalon's  primary  focus is the area of  community  corrections.  Community
corrections has experienced  substantial growth over the past decade.  Community
corrections  provides 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 even upgrade  their job skills.  The inmates  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 fifteen-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 providing 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 project
consulting for the design and development of new correctional facilities, to the
complete turnkey development of 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.

     Approximately  25% of the Company's  revenue is derived from contracts with
the  Oklahoma   governmental   agencies   relating  to  the  Company's   private
correctional  facilities  in Oklahoma  City ("Carver  Center"),  Tulsa  ("Avalon
Correctional Center"), and Turley ("Turley Correctional Center").  Approximately
23%  of  the  Company's   revenue  is  derived  from   contracts  with  Colorado
governmental  agencies.  Approximately  19% of the Company's  revenue is derived
from a contract with the Oklahoma  governmental  agencies  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.

Insurance -

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

Regulations -

     Avalon's  community  correctional  facilities in Oklahoma are accredited by
the American  Correctional  Association  ("ACA"),  an  independent  organization
comprised  of  professionals  in the  corrections  industry.  The  ACA  utilizes
compliance  audit  teams to  rigorously  examine  all  aspects of the  Company's
facilities and operations.  The Company recognizes the importance of maintaining
high quality  management  and  operations at its  facilities.  Accreditation  is
generally  granted for a three-year  period.  Carver Center has been  accredited
since 1990 and is currently  accredited through 2002. Avalon Correctional Center
was  accredited in 1996 and is  accredited  through  2002.  Turley  Correctional
Center was accredited in 1997 and is accredited  through 2000.  The  application
for accreditation of the Union City Juvenile Center was submitted during 1999.

     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 March 23,  2000,  Avalon  had  approximately  470  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 250-bed minimum security  correctional  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  252-bed  minimum  security  correctional
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  minimum  security  correctional
facility  located in Tulsa,  Oklahoma.  The facility is located on a thirty-five
acre tract of land and includes seven buildings.  The Turley Correctional Center
was  purchased  by the  Company  in  October  1997.  A new  26,000  square  foot
correctional  facility  is  being  constructed  on the  grounds  at  the  Turley
Correctional Center. The new facility is scheduled to open in April 2000.

     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 36,000 square
foot facility was purchased by the Company in 1996.

     Union  City  Juvenile  Center  is  an  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  purchased  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 135-bed  minimum  security  correctional  facility
located in  Northglen,  Colorado.  The 13,200 square foot facility is located on
approximately  2.2 acres of land. The Phoenix Center was acquired by the Company
in 1999.

     The Villa at Greeley is a 300-bed multi-use  correctional  facility located
in  Greeley,   Colorado.   The  101,000  square  foot  facility  is  located  on
approximately  four acres of land.  The Villa at  Greeley  was  acquired  by the
Company in 1999.

     The Loft House is a 35-bed  minimum  security  leased  facility  located in
Denver, Colorado.

     The Garland  Center is a day reporting  correctional  program in Northglen,
Colorado. The center is leased and contains approximately 3,500 square feet.

     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 8,000 square feet of office space.

     Substantially  all property owned by Avalon is pledged as collateral on the
Company's  credit  facilities.   See  Note  6  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, 1999.

                                    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 1999
and 1998. 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, 1998                          4 3/4                   2 3/4
June 30, 1998                           4 11/16                 3 1/4
September 30, 1998                      4 1/4                   3 7/8
December 31, 1998                       4                       3 7/8
March 31, 1999                          4 7/8                   3 5/8
June 30, 1999                           4 3/4                   3 7/8
September 30, 1999                      2 7/8                   2 1/32
December 31, 1999                       2 1/2                   1 1/4

     Avalon had  approximately  800 holders of record of its common  stock as of
March 23, 2000. No dividends were declared during 1999 and 1998.  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 $1.87 per share on March 23, 2000.

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
$37 million of new capital and credit facilities since September 1997.

     Working  capital at December 31, 1999 was $915,000  representing  a current
ratio of  1.36:1.00,  compared to working  capital of  $8,643,000  and a current
ratio of 3.04:1.00 at December  31, 1998.  The decrease in working  capital from
December 31, 1998 is primarily due to the  utilization  of the proceeds from the
$15 million private placement completed September 16, 1998. Capital expenditures
were $21.1 million in 1999,  compared to $3.7 million in 1998.  The 1999 capital
expenditures  include:  construction  costs for the Union City Juvenile  Center,
completed in February  1999;  construction  costs for the El Paso  Multi-Purpose
facility,  completed in June, 1999; the acquisition of the operations of ACCP in
May,  1999;  and the  acquisition  of the Villa at  Greeley in June,  1999;  and
construction of the new facility at the Turley  Correctional  Center,  scheduled
for completion in April 2000.

     The Company had  approximately  $2.3 million of cash and  revolving  credit
available  for new projects at December 31,  1999.  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  secured an $18  million  senior  credit  facility  with Fleet
Capital  Corporation in February  1999.  The credit  facility with Fleet Capital
Corporation  was amended in  December  of 1999 to provide for a credit  facility
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.

     All non-correctional  operations were discontinued in the fourth quarter of
1996 and all  related  assets  have been sold or are being  held for sale.  1998
earnings  include  only  correctional  facility  operations,  except for $91,000
recorded for losses on facilities held for sale.

Results of Operations -

     Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 -

     Total  revenues  from  continuing  operations  increased  by 118% to  $16.8
million in 1999 from $7.7  million in 1998.  The net  increase in revenues was a
result of increased census at the Avalon Correctional Center, the opening of the
Union  City  Juvenile  Center  in  February  1999,  the  opening  of the El Paso
Multi-Purpose  facility in June 1999, the  acquisition of the ACCP operations in
May 1999, and the acquisition of The Villa at Greeley in June 1999.

     The Company's net income before  cumulative  effect of change in accounting
principles and extraordinary  loss was $118,000 or $0.03 basic and $0.02 diluted
per share in 1999  compared  to a loss in 1998 of  $376,000  or $0.11  basic and
diluted per share.

     The Company  reported  net income of $83,000 or $0.02 basic and diluted per
share in 1999  compared  to a net loss in 1998 of  $450,000  or $0.13  basic and
diluted per share.

     Operating income, before interest, depreciation, and income taxes increased
approximately  162% to $3,871,000 in 1999 from  $1,476,000 in 1998.  The average
daily  inmate  census  increased  to 1,145 in 1999 from 496 in 1998.  The census
increase was a result of an increase in census at the Avalon Correctional Center
during 1999, the opening of the Union City Juvenile Center in February 1999, the
opening of the El Paso  Multi-Purpose  facility in June 1999, the acquisition of
the ACCP  operations in May 1999, and the acquisition of The Villa at Greeley in
June 1999.

     Direct operating expenses increased by 140% in 1999 over 1998. The increase
was a result of the  opening of the Union City  Juvenile  facility  in  February
1999,  the  opening of the El Paso  Multi-Purpose  facility  in June  1999,  the
acquisition of the ACCP operations in May 1999, and the acquisition of The Villa
at Greeley in June 1999.

     General and administrative  expenses increased by 18% in 1999. The majority
of the  increase  was a result of  additional  staffing  for the new  facilities
opening in 1999 and the 1999 acquisitions.  General and administrative  expenses
decreased to 8% of revenues in 1999 compared to 14% of revenues in 1998.

     Interest  expense  increased  by  $1,343,000  in  1999 as a  result  of the
indebtedness  utilized  for the new  facilities  opening  in 1999  and the  1999
acquisitions.

ITEM 7.  FINANCIAL STATEMENTS.


               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")  (formerly Avalon
Community  Services,  Inc.) as of December  31,  1999 and 1998,  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  generally   accepted  auditing
standards. 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, 1999 and 1998, and the consolidated  results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.

As  discussed  in Note 17 to the  financial  statements,  during the year ending
December 31, 1998,  the Company  adopted the provisions of Statement of Position
98-5 " Reporting on Costs of Start Up  Activities"  which  changed its method of
accounting for deferred development and new facility opening costs.

GRANT THORNTON LLP

Oklahoma City, Oklahoma
March 17, 2000

              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                                                      Year Ended December 31,
                                                       1999            1998
                                                   ------------    ------------
ASSETS
Current assets:
  Cash and cash equivalents ....................   $    601,000    $  5,181,000
  Investment in short term U.S. treasury bills .           --         5,919,000
  Related party receivables ....................        294,000            --
  Accounts receivable, net .....................      2,174,000       1,348,000
  Current maturities of notes receivable .......         31,000         322,000
  Prepaid expenses and other ...................        360,000         100,000
                                                   ------------    ------------
       Total current assets ....................      3,460,000      12,870,000
Property and equipment, net ....................     29,552,000      13,644,000
Other assets ...................................      5,428,000       2,251,000
                                                   ------------    ------------
Total assets ...................................   $ 38,440,000    $ 28,765,000
                                                   ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable, accrued liabilities
    and other ..................................   $  1,395,000    $  2,026,000
  Current maturities of long-term debt .........      1,150,000       2,201,000
                                                   ------------    ------------
       Total current liabilities ...............      2,545,000       4,227,000
Long-term debt, less current maturities ........     25,554,000      14,348,000
Convertible debentures .........................      3,850,000       3,850,000
Redeemable common stock, $.001 par
  value 1,622,448  shares issued and
  outstanding in 1999 and 1998 .................      4,124,000       4,124,000
Stockholders' equity:
  Common stock - par value $.001; 24,000,000
    shares authorized; 4,715,900 and 4,664,598
    shares issued and outstanding in 1999 and
    1998, respectively, less 1,662,448 shares
    subject to repurchase in 1999 and 1998 .....          3,000           3,000
  Preferred stock; par value $.001; 1,000,000
    shares authorized; none issued .............           --              --
  Paid-In capital ..............................      6,686,000       6,618,000
  Accumulated deficit ..........................     (4,322,000)     (4,405,000)
                                                   ------------    ------------
       Total stockholders' equity ..............      2,367,000       2,216,000
                                                   ------------    ------------
Total liabilities and stockholders' equity .....   $ 38,440,000    $ 28,765,000
                                                   ============    ============

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


              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                             Year Ended December 31,

                                                       1999            1998
                                                   ------------    ------------

Revenues .......................................   $ 16,803,000    $  7,686,000
Costs and expenses:
  Direct operating .............................     11,302,000       4,692,000
  General and administrative ...................      1,292,000       1,091,000
  Development costs ............................        338,000         336,000
  Losses from property held for sale ...........           --            91,000
  Depreciation and amortization expense ........      1,186,000         628,000
  Interest expense .............................      2,567,000       1,224,000
                                                   ------------    ------------
Net income (loss) before cumulative effect of
  change in accounting principles and
  extraordinary loss ...........................        118,000        (376,000)

Cumulative effect of change in
  accounting principles ........................           --           (74,000)

Extraordinary loss on extinguishment of debt ...        (35,000)           --
                                                   ------------    ------------

Net income (loss) ..............................   $     83,000    $   (450,000)
                                                   ============    ============

Basic income (loss) per share:
  Net income (loss) before items noted below ...   $       0.03    $      (0.11)
  Cumulative effect of change in
    accounting principles ......................           --             (0.02)
  Extraordinary loss on retirement of debt .....          (0.01)           --
                                                   ------------    ------------

  Net income (loss) per share: .................   $       0.02    $      (0.13)
                                                   ============    ============

Weighted average number of common
  shares outstanding, basic ....................      4,670,333       3,499,403
                                                   ============    ============

Diluted income (loss) per share:
  Net income (loss) before items noted below ...   $       0.02    $      (0.11)
  Cumulative effect of change in
    accounting principles ......................           --             (0.02)
  Extraordinary loss on retirement of debt .....           --              --
                                                   ------------    ------------

  Net income (loss) per share: .................   $       0.02    $      (0.13)
                                                   ============    ============

Weighted average number of common
  shares outstanding, diluted ..................      5,125,333       3,499,403
                                                   ============    ============

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

<TABLE>
<CAPTION>
              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                              Common                      Total          Total
                                Common        Stock        Paid-In     Accumulated   Stockholders'
                             Stock Shares     Amount       Capital       Deficit        Equity
                             -----------   -----------   -----------   -----------    -----------
<S>                            <C>         <C>           <C>           <C>            <C>
Balance, January 1, 1998 .     2,982,170   $     3,000   $ 6,189,000   $(3,955,000)   $ 2,237,000

Net loss .................          --            --            --        (450,000)      (450,000)

Stock options exercised ..        17,480          --          29,000          --           29,000

Issuance of redeemable
  common stock............     1,622,448          --            --            --             --

Issuance of warrants .....          --            --         266,000          --          266,000

Warrants exercised, net
  of issuance costs ......        42,500          --         134,000          --          134,000
                             -----------   -----------   -----------   -----------    -----------

Balance, December 31, 1998     4,664,598         3,000     6,618,000    (4,405,000)     2,216,000

Net income ...............          --            --            --          83,000         83,000

Stock options exercised ..         6,302          --           8,000          --            8,000

Warrants exercised, net
  of issuance costs ......        45,000          --          60,000          --           60,000
                             -----------   -----------   -----------   -----------    -----------

Balance, December 31, 1999     4,715,900   $     3,000   $ 6,686,000   $(4,322,000)   $ 2,367,000
                             ===========   ===========   ===========   ===========    ===========
<FN>
              The accompanying notes are an integral part of these
                       consolidated financial statements.
</FN>
</TABLE>

               AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW


                                                      Year ended December 31,
                                                       1999            1998
                                                   ------------    ------------
OPERATING ACTIVITIES:
  Net income (loss) ............................   $     83,000    $   (450,000)
   Adjustments to reconcile net income
    (loss) to net cash provided by
    (used in) operating activities
       Amortization of discount on investments .        (81,000)        (47,000)
       Depreciation and amortization ...........      1,186,000         628,000
       Amortization of debt issue costs ........        211,000          55,000
       Extraordinary item - extinguishment of debt       35,000            --
       (Gain) loss  on sale of property ........         (5,000)         18,000
       Write down of property ..................         13,000          17,000
       Cumulative effect of change in accounting
         principles ............................           --            74,000
       Other ...................................         29,000            --
       Changes in operating assets and liabilities:
         Decrease (increase) in -
           Accounts receivable .................       (826,000)       (675,000)
           Due to / from related parties .......       (294,000)        (97,000)
           Prepaid expenses and other assets ...       (260,000)          7,000
           Increase (decrease) in accounts
             payable and other .................        700,000        (335,000)
                                                   ------------    ------------
               Net cash provided by (used in)
                 operations ....................        791,000        (805,000)

INVESTING ACTIVITIES:
  Purchase of short term investments ...........           --        (5,872,000)
  Proceeds from maturity of certificate
    of deposit .................................           --           500,000
  Capital expenditures and acquisitions ........     (9,513,000)     (3,737,000)
  Acquisitions of businesses and contracts .....    (11,634,000)           --
  Proceeds from sale of short term investments .      6,000,000            --
  Funding of note receivable ...................           --            (4,000)
  Proceeds from payments on notes receivable ...        291,000          16,000
  Proceeds from disposition of property ........         17,000          16,000
  Proceeds from disposition of discontinued
    operations .................................           --           280,000
                                                   ------------    ------------

               Net cash used in investing
                 activities ....................    (14,839,000)     (8,801,000)

FINANCING ACTIVITIES:
  Proceeds from borrowing ......................     26,480,000      16,515,000
  Repayment of borrowing .......................    (16,272,000)     (6,532,000)
  Payment of debt issue costs ..................       (808,000)     (1,452,000)
  Proceeds from warrant and option exercise ....         68,000         163,000
  Proceeds from issuance of redeemable
    common stock ...............................           --         4,635,000
                                                   ------------    ------------

               Net cash provided by
                 financing activities ..........      9,468,000      13,329,000
                                                   ------------    ------------

              Net increase (decrease)
                in Cash And Cash Equivalents ...     (4,580,000)      3,723,000

 Cash and Cash Equivalents, Beginning of Period       5,181,000       1,458,000

 Cash and Cash Equivalents End of Period .......   $    601,000    $  5,181,000
                                                   ============    ============

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
         Interest ..............................   $  2,389,000    $ 1,286, 000
         Income Taxes ..........................           --              --


Non cash investing and financing activities:

      The Company had approximately  $1,231,000  relating to construction costs,
and $100,000  relating to debt issue costs financed  through accounts payable at
December 31, 1998.  The Company  issued  warrants of  approximately  $266,000 in
exchange for financial advisory services during 1998.

     The Company purchased  businesses and contract rights during the year ended
December 31, 1999. The following  liabilities  were assumed in conjunction  with
those purchases.

  Assets acquired                                  $ 11,800,000

  Cash paid                                          11,634,000
                                                    -----------
  Liabilities assumed                              $    166,000
                                                    ===========

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


              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       FOR THE YEARS ENDED 1999 AND 1998

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business-

     Avalon Correctional  Services,  Inc. ("Avalon" or the "Company")  (formerly
Avalon Community  Services,  Inc.) is an owner and operator of private community
correctional  services.  Avalon specializes in privatized community correctional
facilities and intensive 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 250-bed minimum security  facility in Oklahoma City,  Oklahoma,  a
252-bed  minimum  security  facility  in  Tulsa,   Oklahoma,   a  150-bed  adult
residential 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  160-bed  medium  security  juvenile  facility  in Union  City,
Oklahoma; a 135-bed halfway house located in Henderson,  Colorado; and a 300-bed
multi-use facility in Greeley,  Colorado.  Avalon also operates a 35-bed halfway
house  located in Denver,  Colorado,  and a day  reporting  center in Northglen,
Colorado.   The   Colorado   community   corrections   programs   also   provide
non-residential  services  to  approximately  800  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 estimated.

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.

Investments -

     The Company  accounts for certain  investments  in debt  securities  in the
following  manner.  Debt  securities  that the Company has a positive intent and
ability to hold to maturity are  classified as  held-to-maturity  securities and
are  reported  at  amortized  cost.  Debt  securities  that are  bought and held
principally  for the  purpose  of  selling  in the near term are  classified  as
trading  securities and reported at fair value, with unrealized gains and losses
included in earnings.  Debt securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale securities
and  reported  at fair  value,  with  unrealized  gains and  losses,  net of tax
effects,  excluded from earnings and reported in other comprehensive income. The
Company has classified its entire debt securities  portfolio as held-to-maturity
securities.

     Declines in the fair value of individual securities below cost or amortized
cost that are other than temporary  result in write-downs  included in earnings.
The  specific  identification  method is  followed  in  determining  the cost of
securities sold.

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 are from
government  agencies.  The Company  maintains an allowance for doubtful accounts
for potential credit losses. The allowance for doubtful accounts at December 31,
1999 and 1998 was  $9,000.  Actual  bad debt  expenses  have not been  material.
Credit risk on a note  receivable  by the Company is partially  mitigated by the
collateralization of the note by second lien on real estate.

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:

        Buildings and Improvements                     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  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 inmates on a per diem basis at the
Company's  correctional  facilities.  All  correctional  revenues  are  received
monthly from various governmental agencies.

Deferred Development Costs -

     Pursuant to Statement of Position 98-5  "Reporting on the Costs of Start Up
Activities",  the Company began expensing  development and new facility  opening
costs as incurred. See Note 17.

Net Income (Loss) Per Common Share -

     Basic  income  (loss) per share has been  computed on the basis of weighted
average shares outstanding  during each period.  Diluted income (loss) per share
has been computed based on the assumption that all dilutive options and warrants
are exercised.

NOTE 2.  INVESTMENTS

     The amortized cost of debt  securities,  together with their estimated fair
value, are summarized as follows as of December 31, 1998.

                                               Gross      Gross
                                   Cost/    Unrealized  Unrealized
Type of Investment    Year   Amortized Cost    Gains      Losses     Fair Value
-------------------------------------------------------------------------------
U.S. Treasury Bills   1998    $ 5,919,000       ---        ---      $ 5,919,000
U.S. Treasury Bills   1999          ---         ---        ---            ---

     The Company had no sale or maturities of investments  during 1998. All U.S.
Treasury Bills held at December 31, 1998 were sold during 1999.

NOTE 3.  PROPERTY AND EQUIPMENT

     The elements of property and equipment and related accumulated depreciation
as of December 31, 1999 and 1998 are as follows:

                                                                   Accumulated
                                                 Cost              Depreciation
                                                 ----              ------------
        December 31, 1999
          Land                                 $  3,148,000       $      ---
          Buildings and Improvements             25,516,000          1,247,000
          Furniture and Equipment                 1,750,000            726,000
          Transportation Equipment                1,488,000            377,000
                                                -----------        -----------
                                               $ 31,902,000       $  2,350,000
                                                ===========        ===========
        December 31,1998
          Land                                 $  1,388,000       $      ---
          Buildings and Improvements              7,586,000            758,000
          Furniture and Equipment                   933,000            533,000
          Transportation Equipment                1,086,000            258,000
          Construction in Progress                4,200,000              ---
                                                -----------        -----------
                                               $ 15,193,000       $  1,549,000
                                                ===========        ===========

     Capitalized  interest  on  construction   projects  totaled   approximately
$221,000  and $71,000  respectively,  for the years ended  December 31, 1999 and
1998.

NOTE 4.  ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND OTHER

     The  elements  of accounts  payable,  accrued  liabilities  and other as of
December 31, 1999 and 1998 are as follows:

                                           1999                  1998
                                       ------------          ------------
        Trade accounts payable         $    364,000          $  1,450,000

        Accrued interest payable            121,000               154,000

        Accrued salary and benefits         501,000               168,000

        Other accrued liabilities           409,000               254,000
                                       ------------          ------------
                                       $  1,395,000          $  2,026,000
                                       ============          ============

NOTE 5.  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") or specified
correctional  programming  services  in  the  governmental  agency's  facilities
("Programming  Services").  Compensation  paid to the  Company  for  Residential
Services is generally based on a per person, per day basis. Compensation paid to
the  Company  for  Programming  Services  is  generally  based upon the units of
service  provided.  Contract  revenues  from  contracts  exceeding  10% of total
Company revenue for the years ending December 31, are as follows:


                                                 1999               1998
                                              ---------          ---------
        Governmental Agency A                    25%                49%

        Governmental Agency B                     *                 18%

        Governmental Agency C                     *                 13%

        Governmental Agency D                    23%                 *

        Governmental Agency E                    19%                 *

        Governmental Agency F                    10%                 *


  *Less than 10%

     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 that extend
through August 31, 2011 and August 31, 2004, respectively. The Company's current
Residential  Services  contracts  with the Oklahoma  Department  of  Corrections
extend through June 30, 2000. The Company's  current contracts with the Colorado
Department of Corrections  extend  through June 30, 2000. The Company's  current
contract with the Oklahoma Office of Juvenile  Affairs extends through  December
1, 2000 with renewal options through December 1, 2003.

NOTE 6.  LONG-TERM DEBT

Long-term debt consists of the following:

                                                      Year Ended December 31,

                                                        1999          1998
                                                     -----------   -----------
               Revolving bank line of credit,
                collateralized by accounts
                receivable, with interest at
                1% over prime (effective rate
                of 9.5% at December 31, 1999);
                due Feb 2004  ......................   $   110,000   $   724,000

               Notes payable to banks,
                collateralized by equipment
                due in installments through
                July 1999 with interest at 7.99%  ..          --           2,000

               Notes payable to banks,
                collateralized by transportation
                equipment, due in installments
                through March 2012 with interest
                ranging from 4.90% to 9.49%  .......       822,000       676,000

               Notes payable to banks,
                collateralized by land, buildings,
                and improvements due in installments
                through June 2012 with interest
                ranging from 8.95% to 11%  .........    15,448,000     4,631,000

               Note payable to an individual,
                uncollateralized, with interest at
                8.5%, due in April 1999 ............          --         160,000

               Note payable to an investment
                company, uncollateralized with
                interest at 12.5%, due in four
                installments beginning in 2005,
                including original issue premium ...    10,324,000    10,356,000
                                                       -----------   -----------
                                                        26,704,000    16,549,000

               Less - current maturities ...........     1,150,000     2,201,000
                                                       -----------   -----------

                                                       $25,554,000   $14,348,000
                                                       ===========   ===========

     The  Company   completed  a  senior  credit  facility  with  Fleet  Capital
Corporation on February 25, 1999. The Company utilized existing cash reserves in
February 1999 to retire $5,053,000 in existing  indebtedness upon the completion
of the senior credit  facility.  The difference  between the Company's  carrying
value  of debt and the  amounts  paid to  extinguish  the  debt  resulted  in an
extraordinary  loss of $35,000.  The aggregate  maturities of long-term debt for
each of the next five years are as follows: 2000: $1,150,000;  2001: $1,834,000;
2002: $1,811,000; 2003: $10,866,000;  2004: $335,000 and $10,708,000 thereafter.
The senior credit facility has certain financial covenants requiring the Company
to maintain certain earnings and financial ratios among other things.


     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. Since
the redemption price is not determinable, the stock is carried at its fair value
at the time of issuance.  The  financial  covenants  require the Company,  among
other things, to maintain certain earnings and debt coverage ratios.

     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
have reduced its 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.

NOTE 7.  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  convertible  debentures  may be
redeemed  by the  Company 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.  The Company
redeemed $300,000 of convertible debentures at face value in September 1998.


NOTE 8.  STOCKHOLDERS' EQUITY

     The Company  completed a private  placement  in August  1994,  of 1,000,000
shares of common  stock and  1,000,000  Class C stock  purchase  warrants and an
additional  100,000  shares of common stock and 100,000  Class C stock  purchase
warrants were reserved for underwriters. The Company issued an additional 25,000
and 165,000 Class C stock purchase warrants, respectively, in 1997 and 1996. The
Company has issued 452,500 shares of common stock upon the exercise of the Class
C stock purchase  warrants  through December 31, 1999 and has a total of 837,500
Class C stock purchase warrants outstanding.

     The  Class C stock  purchase  warrants  provide  for  the  purchase  of the
Company's common stock at any time until their expiration at March 31, 2000. The
exercise price of the Class C stock  purchase  warrants is $3.19 per share as of
December  31,1999.  The  warrants  may be redeemed by the Company  upon  certain
events for $.01 per share.

     The Company issued 200,000 Class D stock purchase  warrants in August 1996,
in  connection  with  the  acquisition  of the  El  Paso  Intermediate  Sanction
Facility.  The Class D stock purchase  warrants  provide for the purchase of the
Company's common stock at any time until their expiration at August 2, 2001. The
exercise  price of the  class D  warrants  is  $4.20  per  share as of  December
31,1999.  The warrants  may be redeemed by the Company  upon certain  events for
$.01 per share.

     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 their expiration at
August 2, 2001.  The warrants may be redeemed by the Company 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 31,1999. The warrants may be redeemed
by the Company  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.

     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 will
have a five year term from the date of issuance.  Management  believes  that the
warrants had no economic value when granted, and accordingly, no amount has been
assigned to such warrants in the financial statements.

NOTE 9.  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 over a four or five-year period with a ten year
expiration  period.  The Company  amended  its stock  option 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 342,560
shares of Class A common  stock at exercise  prices  ranging from $1.50 to $4.25
per share. Options providing for the issuance of 202,446 shares were exercisable
at December 31, 1999.

     During 1999, the Company  offered  holders of options with exercise  prices
exceeding  $1.75 per share an exchange of their options for a reduced  number of
options with an exercise  price of $1.75 per share,  no change in vesting terms,
and extension of the expiration  date to ten years from the conversion  date. At
December  31, 1999,  368,900  options were  cancelled  and 203,020  options were
reissued pursuant to this offer.

     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 loss per share would have been  increased to the pro forma amounts
indicated below.

                                           1999            1998
                                        -----------     -----------
             Net Income (Loss)

               As reported ..........   $    83,000     $  (450,000)

               Pro forma ............      (147,000)       (760,400)

             Income (Loss) per share,
               basic and diluted

               As reported ..........   $      0.02     $     (0.13)

               Pro forma ............         (0.03)          (0.22)


     These pro forma  amounts may not be  representative  of future  disclosures
because they do not take into effect pro forma  compensation  expense related to
grants made before  1995.  The fair value of each grant is estimated on the date
of grant  using  the  Black-Scholes  options-pricing  model  with the  following
weighted-average assumptions used for grants in 1999 and 1998, respectively:  no
expected dividends;  expected volatility of 76% and 85%; risk-free interest rate
of 5.9% and 5.9%; and expected lives of ten years.

     The  Black-Scholes  options  valuation  model  was  developed  for  use  in
estimating the fair value of traded options with no vesting restrictions and 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.

     A summary of the status of the  Company's  stock option plan as of December
31,  1999 and  1998,  and  changes  during  the years  ending on those  dates is
presented below.

                                           1999                   1998
                                   --------------------    --------------------
                                               Weighted                Weighted
                                               average                 average
                                               exercise                exercise
                                   Shares       price      Shares       price
                                   -------     --------    -------     --------
  Outstanding at
   beginning of year .........     492,900     $   3.18    477,330     $   3.11
      Granted ................     281,920         1.98     85,830         3.11
      Exercised ..............      (6,302)        1.86    (17,480)        1.67
      Forfeited ..............     (57,058)        3.56    (52,780)        2.95
      Cancelled ..............    (368,900)        3.56       --            --
                                   -------     --------    -------     --------
  Outstanding at
   end of year ...............     342,560         1.73    492,900         3.18
  Options exercisable
   at year end ...............     202,466         1.69    216,690         2.64
                                               --------                --------
  Weighted average
   fair value of
   options granted
   during the year ...........                 $   1.54       --       $   3.29
                                               ========                ========
     The following table summarizes  information about fixed-price stock options
outstanding at December 31, 1999.

                              Options outstanding          Options exercisable
                       --------------------------------    --------------------
                                      Weighted
                        Number       average    Weighted    Number      Weighted
                      outstanding   remaining   average   outstanding   average
                          at       contractual  exercise      at        exercise
                       12/31/99       life       price     12/31/99      price
                       --------      ------     -------    --------     -------
$1.50 to $2.25 .....    338,560       8.32      $  1.71     201,966     $  1.68
$2.26 to $3.39 .....      2,000       9.58      $  2.44       --            --
$3.40 to $4.25 .....      2,000       8.00      $  4.00         500     $  4.00
                       --------                            --------
$1.50 to $4.25 .....    342,560                             202,466
                       ========                            ========

NOTE 10.  ACQUISITIONS AND CONTRACT AWARDS

     The  Company  was  awarded  a five  year  contract  in March  1998 with the
Oklahoma Office of Juvenile Affairs. The contract is to site, design, build, and
operate a facility to provide services for 80 youthful delinquent male offenders
ages 13 to 19. The contract is expected to generate revenues of $18,800,000 over
a five year  period.  The Company  completed  construction  of the  facility and
commenced operations under this contract in the first quarter of 1999.

     The  Company  was  awarded  a new  contract  in July  1998  with the  Texas
Department of Criminal  Justice for an additional 200 adult male offenders.  The
Company sited,  designed,  and  constructed a new 300 bed secure  facility in El
Paso,  Texas.  The El Paso  Multi  Purpose  Facility  was  completed  and became
operational in the second quarter of 1999.

     The Company acquired the management contract and correctional  contracts of
Adams  Community  Corrections  Program,  Inc. (ACCP) from CSC, Inc. on April 30,
1999.  The  purchase  price was  allocated  $1,515,000  to  contract  rights and
$1,450,000 to real estate. The management  contract provides for fees,  overhead
and direct  expense  reimbursement  from ACCP.  The revenues and expenses of the
contracts  subsequent  to April  30,  1999 are  included  in  operations  of the
Company.  The contract rights are amortized over their expected lives of fifteen
years and resulted in amortization expense of approximately $67,000 in 1999.

     ACCP is a Colorado non-profit company specializing in Community Corrections
in Adams County,  Colorado. ACCP operates three facilities,  the Phoenix Center,
Loft House and Garland  Center.  The Phoenix  Center is a 135-bed  halfway house
located in Henderson, Colorado. The Loft House is a 35-bed halfway house located
in Denver, Colorado. The Garland Center is a day reporting center in Northglenn,
Colorado providing services to non-residential offenders.

     The Company  acquired The Villa at Greeley,  LLC on June 9, 1999. The Villa
at Greeley is a private  provider  of  residential  services  and  programs  for
community  corrections  offenders.  The  Company  assumed  management  and began
operating  the  facility  effective  June 1,  1999.  The Villa at  Greeley,  LLC
provides services to approximately 300 individuals for residential  services and
also provides day reporting and  non-residential  services to approximately  560
offenders.  The  Company  also  purchased  the  buildings  and land in  Greeley,
Colorado  utilized  by the Villa at Greeley,  LLC.  Pursuant to the terms of the
agreement,  all assets and  liabilities  existing at June 1, 1999 were  excluded
from the transaction  with the exception of the property,  plant,  and equipment
and contracts with various state and local government agencies and legal rights.
The purchase price was allocated $7,100,000 to real estate, $147,000 to property
and  equipment,  $12,000 to other assets,  and  $1,576,000  to contract  rights.
Contract  rights are amortized over their  estimated  lives of fifteen years and
resulted in amortization expense of approximately $57,000 in 1999.

The following summarized pro forma unaudited information assumes the acquisition
  of The Villa at  Greeley,  LLC had  occurred  on January  1, 1998:  Year ended
  December 31,

                                                 1999                 1998
                                             ------------         ------------
        Revenues                             $ 18,989,000         $ 11,899,000
        Net income (loss)                    $    217,000         $   (202,000)
        Income (loss) per share, basic       $       0.05         $      (0.06)
        Income (loss) per share, diluted     $       0.04         $      (0.06)

     The above  amounts are based upon certain  assumptions  and  estimates  the
Company  believes  are  reasonable.  The pro forma  results  do not  necessarily
represent results that would have occurred if the business combination had taken
place at the date and on the basis assumed above.

NOTE 11.  EARNINGS PER SHARE

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

                                               1999               1998
                                            -----------       -----------
Numerator

  Net income (loss) before cumulative
    changes in accounting principles        $   118,000       $  (376,000)
                                            -----------       -----------
  Denominator for earnings per share

    Weighted average shares
    outstanding - basic                     $ 4,670,333       $ 3,499,403

    Effect of dilutive securities

      - stock options                           127,541             ---

      - stock warrants                          327,459             ---
                                            -----------       -----------
Denominator for earnings per share
  assuming dilution                           5,125,333         3,499,403
                                            ===========       ===========
Earnings (loss) per share, basic            $      0.03       $    (0.11)
                                            ===========       ===========
Earnings (loss) per share
  assuming dilution                         $      0.02       $    (0.11)
                                            ===========       ===========

NOTE 12.  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,

                                       1999                     1998
                             ------------------------  ------------------------
                                           Estimated                 Estimated
                               Carrying      fair       Carrying       fair
                                amount       value       amount        value
                             -----------  -----------  -----------  -----------
Financial Assets

  Cash and cash equivalents  $   601,000  $   601,000  $ 5,181,000  $ 5,181,000

  Short-term investments ..         --           --      5,919,000    5,919,000

  Notes receivable ........       31,000       31,000      322,000      322,000

Financial liabilities

  Variable rate debt ......      110,000      110,000      724,000      724,000

  Fixed rate debt .........   26,594,000   26,270,000   15,825,000   15,998,000

  Convertible debentures ..    3,850,000    3,850,000    3,850,000    3,933,000

  Redeemable common stock .    4,124,000    2,069,000    4,124,000    4,470,000

     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  nonfinancial  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 and Short-Term Investments - The carrying amounts
reported  in the  accompanying  consolidated  balance  sheets  for cash and cash
equivalents and short-term investments  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, 1999 and 1998.

NOTE 13.  INCOME TAX

     The difference  between the tax basis of assets and  liabilities  and their
financial  reporting amounts that give rise to significant  portions of deferred
income  tax  assets  and   liabilities   are:   assets  -  net  operating   loss
carry-forwards   and   nondeductible   accruals  and  allowances;   liabilities,
accelerated tax depreciation.  The Company has  approximately  $2,294,000 of net
operating loss carry forwards at December 31, 1999, expiring through 2019.

     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, 1999 and 1998:

                                                     Year ended December 31,
                                                      1999             1998
                                                   -----------      -----------
Provision for (benefit from) income taxes

  at statutory rate ..........................     $    28,000      $  (128,000)

Nondeductible expenses .......................          12,000            9,000

State income taxes ...........................           3,000          (18,000)

Change in valuation allowance ................        (381,000)         118,000

Change in prior year estimate ................         338,000           19,000
                                                   -----------      -----------

  Total provision for (benefit from)
    income taxes .............................     $      --        $      --
                                                   ===========      ===========

Deferred tax assets and liabilities
  are as follows:

Deferred tax assets

  Net operating loss carry forward ...........     $   918,000      $ 1,058,000

  Nondeductible accruals and allowances ......         393,000          338,000

  Other ......................................           1,000            1,000
                                                   -----------      -----------
                                                   $ 1,312,000      $ 1,397,000

  Less: Valuation allowance ..................        (677,000)      (1,058,000)
                                                   -----------      -----------
        Deferred tax assets ..................         635,000          339,000
                                                   ===========      ===========

Deferred tax liabilities:

  Property and equipment .....................        (569,000)        (273,000)
                                                   -----------      -----------
        Deferred tax liabilities .............        (569,000)        (273,000)
                                                   -----------      -----------
          Net deferred tax asset .............     $    66,000      $    66,000
                                                   ===========      ===========

     The valuation allowance on tax assets increased  (decreased)  ($381,000) in
1999  and  $421,000  in 1998,  including  ($381,000)  and  $396,000  related  to
continuing operations in 1999 and 1998, respectively.  The increase in valuation
allowance for 1998 was a result of an increase in prior year  operating  loss of
$188,000  and  increase in the tax basis of assets of $63,000.  The  decrease in
valuation  allowance in 1999 was  primarily the result of a change in prior year
estimate.

NOTE 14. RELATED PARTY TRANSACTIONS

     The Company entered into  agreements  with affiliated  entities in 1995 and
1996 to develop and manage two assisted living centers.  The Company  received a
15% equity  interest in each  assisted  living  center and has an  investment of
approximately  $183,000 at December 31,  1999.  The Company sold one facility in
1997 and plans to sell its  interest  in the  remaining  facility.  The  Company
believes it will recover its investment  from sales  proceeds.  Facility debt of
$1,925,000 is guaranteed by the Company at December 31, 1999.

NOTE 15.  COMMITMENTS AND CONTINGENCIES

     Total   lease   expense   was  $67,000  and  $58,000  for  1999  and  1998,
respectively,  under all operating leases. The future minimum lease payments are
as follows: 2000 - $67,000, 2001 - $59,000 , 2002 - $26,000, and 2003 - $6,000.

     The Company executed  three-year  employment  agreements with the Company's
CEO and President in 1997. The  agreements  provide for  compensation  at a base
rate  and  increases  to be  determined  on an  annual  basis  by the  Board  of
Directors.  The  agreements  also  contain  provisions  for  severance  pay  and
disability  payments,  as well as non-compete  agreements  preventing  them from
engaging in a business deemed similar to that of the Company.  The Company has a
Retirement  Compensation  Plan with its CEO and President.  The unfunded accrual
for this plan of $94,000 is included  in accrued  liabilities  at  December  31,
1999.

NOTE 16.  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.

NOTE 17.  CHANGE IN ACCOUNTING PRINCIPLE

     During the fourth quarter of 1998 the Company elected to adopt,  for all of
1998 and future years, the provision of Statement of Position 98-5 "Reporting on
Costs of Start Up  Activities".  Prior to January 1, 1998,  development  and new
facility  opening  costs had been  deferred and  amortized  over the life of the
contract.  As a result of the adoption of the new pronouncement,  deferred costs
of  approximately  $74,000 were charged to operations and reported as cumulative
effect of change in accounting principle,  effective January 1, 1998. The effect
of the change in 1998 was to increase net loss before the  cumulative  effect of
change in accounting  principles by  approximately  $207,000 or $0.06 per share.
Pursuant  to  the  pronouncement,  presentation  of the  pro  forma  effects  of
retroactive application are not required.


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

          None.

                                    PART III

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

MANAGEMENT -

Name                          Age     Position(s) with the Company

Donald E. Smith ...........   47      Chief Executive Officer, Director
Jerry M. Sunderland .......   63      President, Director
Tim West ..................   51      Vice President of Operations
Ronald Champion............   45      Vice President of Operations
Randall J.  Wood ..........   41      Corporate Secretary and Counsel
Tiffany Smith..............   33      Vice President of Corporate Communications
Lloyd Lovely ..............   50      Vice President of Finance
Shawn Sunderland...........   36      Vice President of Operations
Eric Gray..................   43      Vice President and Counsel
Robert O. McDonald ........   61      Director
Mark S.  Cooley ...........   42      Director
James P. Wilson ...........   41      Director

Directors and Officers of the Company -

     The following is a brief description of the business  experience during the
past five years of each of the above-name persons:

     Donald E. Smith is the founder of the Company's corrections  operations and
has served as the Chief Executive  Officer of Avalon and its subsidiaries  since
their inception.  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 received a Bachelor of Science degree in 1974 from
Northwestern State College.  Mr. Smith was employed by Arthur Andersen & Co. for
seven years prior to founding the Company.

     Jerry M. Sunderland  joined the Company in 1988 and has served as President
of Avalon since June 1995.  Mr.  Sunderland  also serves as a Director of Avalon
and its subsidiaries.  Mr. Sunderland has in excess of 38 years of experience in
developing and operating  quality  programs and facilities for adult  offenders.
Mr.  Sunderland  was  employed by the Oklahoma  Department  or  Corrections  for
sixteen years  including  ten years as warden of maximum  security  prison.  Mr.
Sunderland   also  served  as  an  agent  for  the  Oklahoma   State  Bureau  of
Investigation  for  twelve  years.  Mr.  Sunderland  has a  Bachelors  degree in
Sociology and a Masters degree in Corrections.

     Tim West joined Avalon as Vice  President of Operations in May 1998 and was
promoted to Senior Vice  President of Operations in February  1999. Mr. West has
in  excess  of 25 years  of  experience  designing,  developing,  and  operating
correctional  institutions.   Mr.  West  is  jointly  responsible  for  Avalon's
correctional  operations,  including  recruitment  and  training  of  personnel,
maintaining  accreditation  by  the  American  Correctional   Association,   and
compliance  with  contractual  requirements.  Mr.  West has  served in  numerous
capacities in the Texas  criminal  justice  system,  most recently as the Senior
Warden at the Mark W. Stiles Unit in Huntsville,  Texas. Mr. West also served as
the project director for the "Michael Prototype" in the Texas prison system. Mr.
West received a Bachelors and Masters Degree in  Contemporary  Corrections  from
the Institute for  Contemporary  Corrections and the Behavioral  Sciences at Sam
Houston University.

     Ron Champion was  appointed as Vice  President of  Operations in July 1999.
Mr.  Champion  has been  engaged in the  corrections  industry for 25 years with
special skills in facility operations in community  corrections and adult secure
institutions.  Mr. Champion's experience includes serving as a superintendent of
a work release center and a supervisor of two adult  correctional  institutions.
Mr. Champion served as warden of a medium security prison in Oklahoma for 11 1/2
years prior to joining Avalon. His administrative  responsibilities  have ranged
from day-to-day management including  supervision,  administration,  and quality
assurance,   formulating  policies  and  procedures,   hiring,   training,   and
supervising  staff.  His leadership is recognized in  accreditation  through the
American Correctional Association throughout his administrative tenure.

     Randall J. Wood joined Avalon in 1995 and serves as Corporate Secretary and
Counsel  for the  Company.  Prior to joining  the  Company in 1996,  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
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 and implementing  marketing  strategies.  Ms. Smith is the
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.

     Shawn  Sunderland  joined  the  Company  in 1997 and was  promoted  to Vice
President of Operations in February 1999. Mr. Sunderland has been engaged in the
corrections and law enforcement industry for more than 9 years and has served as
Vice  President  of  Business  Development  for  the  Company  since  1997.  Mr.
Sunderland's responsibilities as Vice President of Business Development included
project  development  including site development,  lease  negotiation,  proposal
development,  facility  design and program  implementation.  Mr.  Sunderland was
responsible for the planning, development, construction and opening of the Union
City Juvenile Center and the construction of the El Paso Multi Purpose Facility.
Mr. Sunderland  received his Bachelors Degree in Organizational  Leadership from
Southern  Nazarene  University.  Mr.  Sunderland is the son of Jerry Sunderland,
President.

     Eric Gray joined Avalon as a Vice  President in June 1999.  Mr. Gray serves
as  Corporate   Counsel  for  the  Company  and  is   responsible   for  various
administrative functions. Mr. Gray's responsibilities include pending litigation
matters,  contract  review and State law  compliance  issues.  Mr.  Gray is also
responsible for administering and directing the Company's  activities  regarding
implementation of the Oklahoma Community  Sentencing Act, Oklahoma nighttime and
weekend incarceration,  and Oklahoma mandated prison transition legislation. Mr.
Gray has also directed the Company's school contract  negotiations for the Union
City Juvenile Center.

     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 approved 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.

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, 1999.

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)
     vi      Consent of Board of Directors  authorizing extension of expiration
             dates of Class "C" Redeemable Warrants (11)

1.   i       Form of Stock Certificate (1)
     ii      Form of Class "C" Redeemable Warrant (4)
     iii     Form of Class "C" Warrant Agreement (4)
     iv      Form of Class "D" Redeemable Warrant (5)
     v       Form of Class "D" Warrant Agreement (5)
     vi      Form of Class "E" Warrant Agreement (6)
     vii     Form of Convertible Debenture Agreement (6)

10.  i       Contract between Southern Correction Systems, Inc. and the Oklahoma
             Department of Corrections for halfway house services for the
             year ended June 30, 2000. (11)
     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       Employment Agreement with Jerry M.  Sunderland dated August 8,
             1997 (5)
     vi      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)
     vii     Agreement dated June 1, 1998 between Southern Corrections Systems,
             Inc.  and the Texas Department of Criminal Justice. (8)
     viii    Financing agreement between Avalon Community Services, Inc., and
             Fleet Capital Corporation dated February 25, 1999. (9)
     ix      Amended and Restated Loan and Security Agreement between Avalon
             Correctional Services, Inc., et al., and Fleet Capital Corporation,
             dated December 9, 1999. (11)
     x       Agreement dated September 16, 1998, between Avalon Community
             Services, Inc., and RSTW Partners III.  (10)
     xi      Contract between Southern Corrections Systems, Inc., and Adams
             County Board of County Commissioners dated July 1, 1999 (11)
     xii     Contract between The Villa at Greeley and Weld County Community
             Corrections Board, dated July 1, 1999. (11)

21.  i       Subsidiaries of Registrant (5)

(b)     Reports on Form 8-K
     i       Form 8-K dated October 17, 1997 re: Acquisition of Assets from
             Freedom Ranch, Inc.
     ii      Form 8-K dated March 19, 1998 re: Award from the Oklahoma Office of
             Juvenile  Affairs.
     iii     Form 8-K dated October 1, 1998 re: Financing agreement with Rice,
             Sangalis, Toole & Wilson.
     ix      Form 8-K dated March 10, 1999 re; Financing agreement with Fleet
             Capital Corporation.

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

Item 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.

By: Donald E. Smith
    ---------------
    Donald E. Smith
    Chief Executive Officer and Director                   Dated: March 23, 2000

     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: Donald E. Smith
    ---------------
    Donald E. Smith
    Chief Executive Officer and Director                   Dated: March 23, 2000


By: Jerry M. Sunderland
    -------------------
    Jerry M. Sunderland
    President and Director                                 Dated: March 23, 2000


By: Robert O. McDonald
    ------------------
    Robert O. McDonald
    Director                                               Dated: March 23, 2000


By: Mark S. Cooley
    --------------
    Mark S. Cooley
    Director                                               Dated: March 23, 2000


By: James Wilson
    ------------
    James Wilson
    Director                                               Dated: March 23, 2000


By: Lloyd Lovely
    ------------
    Lloyd Lovely
    Vice President of  Finance                             Dated: March 23, 2000