SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                 FORM 10-KSB

                [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934
                 For the Fiscal Year Ended December 31, 2000

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

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

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

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

                   Issuer's telephone number (405) 752-8802

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

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

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

     The issuer has (1) filed all reports  required to be filed by Section 13 or
15 (d) of the Exchange Act during the past 12 months (or such shorter  period as
the registrant  was required to file such reports),  and (2) has been subject to
such filing requirements for the past 90 days:  Yes __X__  No _____

     Disclosure of delinquent  filers in response to Item 405 of Regulation  S-B
is not contained in this form, and no disclosure will be contained,  to the best
of  Registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this form 10-KSB. [ X ]

     Revenues from  continuing  operations  for the year ended December 31, 2000
were $22,922,000.

     The aggregate  market value of voting  common stock held by non  affiliates
was  $5,140,000  on March 1, 2001,  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 1,  2001,
4,765,630 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 2001 Annual Meeting of  Shareholders  are  incorporated by reference in Part
III, Items 10, 11, and 12.

          Transitional Small Business Disclosure Format: Yes ____ No __ X__ .

<PAGE>

            AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                              TABLE OF CONTENTS
                          FORM 10-KSB ANNUAL REPORT
                     FOR THE YEAR ENDED DECEMBER 31, 2000



Item                                                              Page

PART I

1.    Description of Business                                     1

2.    Description of Property                                     6

3.    Legal Proceedings                                           7

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

PART II

5.    Market for Common Equity and Related
            Stockholder Matters                                   7

6.    Management's Discussion and Analysis of Financial
            Condition and Results of Operations                   7

7.    Financial Statements                                        9

8.    Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                27

PART III

9.    Directors, Executive Officers, Promoters and Control
            Persons; Compliance with Section 16 (a) of
            the Exchange Act                                      27

10.   Executive Compensation                                      29

11.   Security Ownership of Certain Beneficial Owners
            and Management                                        29

12.   Certain Relationships and Related Transactions              29

13.   Exhibits and Reports on Form 8-K                            29

14.   Signatures                                                  31



<PAGE>

              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES


                                    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.  Avalon's  management  has  been
providing private community correctional services since 1985.

     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.  The United States incarcerated
two million one hundred  thousand persons at year-end 1999. The total prison and
jail  population grew 3.4% in 1999. It is estimated that the weekly need for new
corrections  beds remains between 1,500 and 2,000 beds.  State prisons  operated
between 1% and 17% above capacity,  while Federal prisons  operated at 32% above
capacity on December  31,  1999.  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.  Intensive  programming  is an
essential part of community  based  corrections.  Avalon has provided  substance
abuse  programs  in  facilities  for over 15  years.  The  provided  programming
includes  substance abuse treatment and counseling,  vocational  training,  work
release programs,  basic educational programs,  job and life skill training, and
reintegration services. The Colorado community corrections programs also provide
non-  residential  services  to  approximately  520  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 local
judicial systems as an alternative to secure incarceration.

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




                                    Page 1

<PAGE>

              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES

Facilities -


     The  following  table  summarizes  certain   information  with  respect  to
facilities and programs managed by Avalon at March 1, 2001.


Facility Name
And Location           Company Role            Capacity   Facility/Program Type

Carver Center,         Complete Facility       248 Beds   Community Security
 Oklahoma City, OK     Siting,                            Corrections
                       Design Construction,
                       Ownership, and
                       Management

Avalon Correctional    Complete Facility       266 Beds   Community Security
Center,                Siting,                            Corrections
 Tulsa, OK             Design Construction,
                       Ownership, and
                       Management

Turley Correctional    1997 Acquisition        168 Beds   Community  Security
Center,                Design, Construction               Corrections
 Tulsa, OK             Ownership and
                       Management


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

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

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

Phoenix Center         1999 Acquisition        115 Beds   Community Security
 Henderson, Colorado   Complete Facility                  Corrections
                       Ownership and
                       Management

The Villa at Greeley   1999 Acquisition        300 Beds   Community Security
   Greeley, Colorado   Complete Facility                  Corrections
                       Ownership and
                       Management



                                    Page 2

<PAGE>

              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES




Facility Name
And Location             Company Role          Capacity   Facility/Program Type

The Loft House           1999 Acquisition      37 Beds    Community Security
 Denver, Colorado        Complete Facility                Corrections
                         Management

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

Avalon Corporate Office  Corporate Headquartes  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
37-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, 2001.  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  Federal  contract was renewed in 1999 and extends
through 2004.

     Carver Center is a 248-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 248 beds to accommodate
the increasing  needs of the Oklahoma  Department of Corrections.  Carver center
was sited, designed, and constructed by Avalon.

     Avalon  Correctional  Center is a  266-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  168-bed  minimum  security  correctional
facility  located  in  Tulsa,  Oklahoma.  The  Turley  Correctional  Center  was
purchased  by  Avalon in  October  1997.  A new  168-bed  correctional  facility
finished construction on the grounds at the Turley Correctional Center in May of
2000. The buildings  previously utilized for administration and offender housing
have been demolished.

     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  third  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.


                                    Page 3

<PAGE>

              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES


     Carver Center,  Avalon Correctional  Center, and Turley Correctional Center
are  accredited  by the  American  Correctional  Association  ("ACA")  as  Adult
Community Correctional Facilities. ACA accreditation or candidacy is required to
contract  with the State of  Oklahoma  for  correctional  services.  The ACA,  a
private not-for-profit  organization,  was established to develop uniformity and
industry standards for the operation of correctional facilities and provision of
inmate care. Accreditation involves an extensive audit and compliance procedure,
and is  generally  granted  for a  three-year  period.  Carver  Center  has been
accredited  since 1990 and the  current  accreditation  expires in 2002.  Avalon
Correctional  Center was initially  accredited in 1996 and is accredited through
2002. Turley Correctional Center was initially accredited in October 2000 and is
accredited until 2003.

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

     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 in Northglen,  Colorado. The Program
provides  residential  and  non-residential  services  in three  locations:  The
Phoenix Center, a 115-bed  residential center in Henderson,  Colorado;  The Loft
House, a 37-bed residential program in Denver,  Colorado and The Garland Center,
a day reporting center in Northglen,  Colorado.  The Program  provides  services
pursuant to contracts with 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.

Assets 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, 2000,  consists of an investment in one assisted  living center.
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.



                                    Page 4

<PAGE>

              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES


     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.

     For the year ended  December 31, 2000,  approximately  24% 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  28% of the Company's  revenue is derived
from contracts with Colorado  governmental  agencies.  Approximately  16% of the
Company's  revenue is derived  from a contract  with the  Oklahoma  governmental
agencies  relating to the Union City Juvenile Center.  Approximately  19% 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,
employment  practices liability 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 2000 and is accredited  until 2003. Union City Juvenile
Center was accredited in 2000 and is accredited until 2003.

     The corrections industry is subject to federal, state and local regulations
administered by a variety of regulatory  authorities.  The correctional services
offered by Avalon in various states are subject to regulations  and oversight by
the various government agencies. Management believes its operations are


                                  Page 5

<PAGE>

              AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES

currently in  compliance  with all  applicable  laws and  regulations  affecting
Avalon's business.

Employees -

     At March  1,  2001,  Avalon  had  approximately  480  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 248-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  266-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  168-bed  minimum  security  correctional
facility  located in Tulsa,  Oklahoma.  The facility is located on a thirty-five
acre tract of land and includes two buildings.  The Turley  Correctional  Center
was  purchased  by the  Company  in  October  1997.  A new  26,000  square  foot
correctional  facility was  constructed and opened in May 2000 on the grounds at
the  Turley   Correctional   Center.  The  buildings   previously  utilized  for
administration and offender housing have been demolished.

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

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

     El Paso Multi Purpose  Facility is a 300-bed medium  security  correctional
facility  on  seven  acres  of  land  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 115-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 37-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.



                                    Page 6

<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES

     Substantially  all property owned by Avalon is pledged as collateral on the
Company's  credit  facilities.   See  Note  5  to  the  Consolidated   Financial
Statements.

ITEM 3. LEGAL PROCEEDINGS.

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


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

     No matters  were  submitted to a vote of Avalon's  stockholders  during the
quarter ended December 31, 2000.


                                   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 2000
and 1999. 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, 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
            March 31, 2000                2 15/32           1 1/8
            June 30, 2000                 2 1/16            1 1/4
            September 30, 2000            2                 1 29/64
            December 31, 2000             1 5/8             1 1/16

     Avalon had  approximately  800 holders of record of its common  stock as of
March 1, 2001. No dividends were declared  during 2000 and 1999.  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 $1.38 per share on March 1, 2001.


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, 2000 was $455,000  representing  a current
ratio of 1.10:1.00,  compared to working capital of $915,000 and a current ratio
of 1.36:1.00 at December 31, 1999.  Capital  expenditures  were $1.42 million in
2000, compared to $21.1 million in 1999. The 2000 capital expenditures  include:


                                    Page 7

<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES


additional  construction costs of the El Paso Multi-Purpose facility in February
2000,  completion  of the  Turley  Correctional  Center in May  2000,  and other
normal operating purchases of vehicles,  equipment, and building improvements.
The 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 Adams County in May, 1999; the acquisition of the Villa at Greeley
in June, 1999; and  construction of the new facility at the Turley  Correctional
Center.

     The Company had  approximately  $1.8 million of cash and  revolving  credit
available  for new projects at December 31,  2000.  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.

Results of Operations -

Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999 -

     Total revenues from continuing operations increased by 36% to $22.9 million
in 2000 from $16.8 million in 1999. The net increase in revenues was a result of
a full year of operations after 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 Adams County  operations in May 1999, and the acquisition
of The Villa at Greeley in June 1999.

     The Company's net income  before  extraordinary  loss was $963,000 or $0.20
basic and diluted per share in 2000 compared to $118,000 or $0.03 basic and 0.02
diluted per share in 1999.

     The Company  reported net income of $963,000 or $0.20 basic and diluted per
share in 2000 compared to a net income of $83,000 or $0.02 basic and diluted per
share in 1999.

     Operating income, before interest, depreciation, and income taxes increased
approximately  53% to  $5,928,000 in 2000 from  $3,871,000 in 1999.  The average
daily inmate  census  increased to 1,576 in 2000 from 1,145 in 1999.  The census
increase  was a result of a full year of  operations  after 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  Adams  County
operations  in May 1999,  and the  acquisition  of The Villa at  Greeley in June
1999.

     Direct operating  expenses increased by 36% in 2000 over 1999. The increase
was a result of a full year of  operations  after 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 Adams County  operations in May
1999, and the acquisition of The Villa at Greeley in June 1999.

     General and administrative  expenses increased by 23% in 2000. The majority
of the increase was a result of a full year of  additional  staffing for the new
facilities opening in 1999 and the 1999 acquisitions. General and administrative
expenses decreased to 7% of revenues in 2000 compared to 8% of revenues in 1999.

     Interest  expense  increased by $864,000 in 2000 as a result of a full year
of interest expense relating to the indebtedness utilized for the new facilities
opening in 1999 and the 1999 acquisitions.





                                    Page 8

<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES


ITEM 7. FINANCIAL STATEMENTS.

     Index to Financial Statements:                                Page

     Report of Independent Certified Public Accountants             10

     Consolidated Balance Sheets                                    11

     Consolidated Statements of Operations                          12

     Consolidated Statements of Stockholders' Equity                13

     Consolidated Statements of Cash Flow                           14

     Notes to Consolidated Financial Statements                     16

















                                    Page 9

<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES



              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,  2000 and 1999,  and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the  years  then  ended.  These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of the
Company as of December 31, 2000 and 1999, and the consolidated  results of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.



                                                      GRANT THORNTON LLP

Oklahoma City, Oklahoma
February 23, 2001



                                   Page 10
<PAGE>

                   AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                               CONSOLIDATED BALANCE SHEETS

                                                            December 31,

                                                                        1999
                                                         2000
                                                       ---------       ---------

ASSETS

Current assets:

  Cash and cash equivalents                        $    726,000   $    601,000
  Related party receivables                             317,000        294,000
  Accounts receivable, net                            3,719,000      2,174,000
  Notes receivable                                        2,000         31,000
  Prepaid expenses and other                            160,000        360,000
                                                       ---------     ---------
       Total current assets                        $  4,924,000   $  3,460,000

Property and equipment, net                          29,673,000     29,552,000

Other assets                                          4,858,000      5,428,000
                                                      ---------      ---------
       Total assets                                $ 39,455,000   $ 38,440,000
                                                       =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Accounts payable, accrued liabilities and other  $  1,477,000    $  1,395,000

  Current maturities of long-term debt                2,992,000       1,150,000
                                                     ---------        ---------

            Total current liabilities              $  4,469,000    $  2,545,000

Long-term debt, less current maturities            $ 23,614,000    $ 25,554,000

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

Redeemable common stock, $.001 par value

     1,622,448  shares issued and outstanding      $  3,593,000    $  4,124,000
     in 2000 and 1999

Stockholders' equity:

     Common stock - par value $.001; 24,000,000
            shares authorized; 4,765,630 and
            4,715,630 shares issued and outstanding
            in 2000 and 1999, respectively, less
            1,662,448 shares subject to repurchase
            in 2000 and 1999.                       $     3,000     $     3,000

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

            shares authorized; none issued                  ---            ---

  Paid-In capital                                      7,285,000       6,686,000

  Accumulated deficit                                 (3,359,000)    (4,322,000)
                                                       ---------      ---------
 Total liabilities and stockholders' equity           $39,455,000    $38,440,000
                                                       =========      =========



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

                                   Page 11
<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS

                                                       Year Ended December 31,

                                                         2000            1999
                                                       --------        --------

Revenues                                            $22,922,000     $ 16,803,000
                                                      --------        ----------
Costs and expenses:
  Direct operating                                    15,406,000      11,302,000
  General and administrative                           1,588,000       1,292,000
  Development costs                                          ---         338,000
  Depreciation and amortization expense                1,534,000       1,186,000
  Interest expense                                     3,431,000       2,567,000
                                                        --------        --------
Net income from continuing operations
  before extraordinary item                          $   963,000    $    118,000
  Extraordinary loss on extinguishment of debt               ---        (35,000)
                                                        --------        --------
Net income                                           $   963,000    $     83,000
                                                        ========        ========

Basic income (loss) per share:

  Net income before extraordinary item               $      0.20    $       0.03
  Extraordinary loss on extinguishment of debt               ---          (0.01)
                                                        --------        --------
  Net income per share                               $      0.20    $       0.02
                                                        ========        ========
Weighted average number of common
  shares outstanding, basic                            4,747,734       4,670,333
                                                        ========        ========

Diluted income per share:
    Net income before extraordinary item             $      0.20    $       0.02
  Extraordinary loss on extinguishment of debt               ---             ---
                                                        --------        --------
     Net income per share                            $      0.20    $       0.02
                                                        ========        ========
Weighted average number of common
     shares outstanding, diluted                       4,752,901       5,125,333
                                                        ========        ========



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











                                   Page 12

<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES


             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                  Years ended December 31, 2000 and 1999

                             Common     Common             Total         Total
                           Stock Share  Stock   Paid-In  Accumulat. Stockholders
                                        Amount  Capital    Deficit       Equity
                             ---------  -------  --------  ---------  ----------

Balance, January 1, 1999      4,664,328 $ 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    4,715,630 $ 3,000 $6,686,000 (4,322,000) 2,367,000
Net income                          ---     ---       ---     963,000    963,000
Accretion of redeemable stock       ---     ---    531,000        ---    531,000
Warrants exercised, net of
insurance costs                  50,000     ---     68,000        ---     68,000
                              --------- -------- ---------- ---------  ---------
Balance, December 31, 2000    4,765,630 $ 3,000 $7,285,000 (3,359,000) 3,929,000
                              =========  ======== ========= ========== =========



















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




                                    Page 13

<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOW

                                                       Year ended December 31,
                                                         2000             1999
                                                      ----------       ---------

OPERATING ACTIVITIES:

    Net income                                       $  963,000      $   83,000

    Adjustments to reconcile net income to

      net cash provided by (used in) operating activities

    Amortization of discount on investments                ---          (81,000)

    Depreciation and amortization                     1,534,000        1,186,000

    Amortization of debt issue costs                    231,000          211,000

    Extraordinary loss on extinguishment of                ---            35,000

    (Gain) loss on sale of property                     13,000           (5,000)

    Write down of property                                 ---            13,000

    Other                                                  ---            29,000

    Changes in operating assets and liabilities:

      Decrease (increase) in

        Accounts receivable                         (1,545,000)        (826,000)

        Due to / from related parties                  (23,000)        (294,000)

        Prepaid expenses and other assets              191,000         (260,000)

        Increase in accounts payable and other          82,000           700,000
                                                     ----------        ---------
        Net cash provided by operations           $  1,446,000     $    791,000
                                                     ----------        ---------



INVESTING ACTIVITIES:

  Capital expenditures and acquisitions           $ (1,420,000)    $ (9,513,000)

  Acquisitions of businesses and contracts                 ---      (11,634,000)

  Proceeds from sale of short term investments             ---         6,000,000

  Proceeds from payments on notes receivable            29,000           291,000

  Proceeds from disposition of property                 64,000            17,000
                                                     ----------     ------------
     Net cash used in investing activities        $ (1,327,000)    $(14,839,000)
                                                     ----------    -------------







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





                                    Page 14

<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOW


                                                    Year Ended December 31,
                                                      2000              1999
                                                  ----------        ------------

FINANCING ACTIVITIES:

  Proceeds from borrowing                        $ 11,918,000       $ 26,480,000

  Repayment of borrowing                         (11,980,000)       (16,272,000)

  Payment of debt issue costs                            ---           (808,000)

  Proceeds from warrant and option exercise           68,000              68,000

  Proceeds from issuance of redeemable common stock      ---                 ---
                                                   ---------        ------------
     Net cash provided by  financing activitie   $     6,000       $   9,468,000
                                                   ---------        ------------
Net increase (decrease) in Cash

  And Cash Equivalents                           $   125,000       $ (4,580,000)

Cash and Cash Equivalents,

  Beginning of Period                            $   601,000       $   5,181,000
                                                  ----------       -------------
 Cash and Cash Equivalents

   End of Period                                 $   726,000       $     601,000
                                                   =========        ============

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid during the year for:

         Interest                                $ 3,246,000        $  2,389,000

         Income Taxes                                    ---                 ---

Non cash investing and financing activities:

     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.





                                Page 15
<PAGE>

             AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      FOR THE YEARS ENDED 2000 AND 1999


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  operating  private  community
correctional facilities and providing intensive correctional programming. Avalon
currently  operates 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 248-bed adult residential facility in Oklahoma City,
Oklahoma,  a 266-bed adult residentail  facility in Tulsa,  Oklahoma,  a 168-bed
adult  residential  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
115-bed halfway house located in Henderson,  Colorado;  and a 300-bed  multi-use
facility in Greeley,  Colorado.  Avalon also operates a 37-bed  halfway house in
Denver,  Colorado,  and a day  reporting  center  in  Northglen,  Colorado.  The
Colorado community corrections programs also provide non-residential services to
approximately 520 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 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  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.

     Declines in the fair value of individual securities below cost or amortized
cost other than temporary  result in write- downs are 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,
2000 and 1999 was  $30,000 and $9,000,  respectively.  Actual bad debt  expenses
have not been material.


                                    Page 16

<PAGE>

                 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR THE YEARS ENDED 2000 AND 1999



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 -

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

Net Income Per Common Share -

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





                                       Page 17

<PAGE>

                 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR THE YEARS ENDED 2000 AND 1999


NOTE 2.  PROPERTY AND EQUIPMENT

     The elements of property and equipment and related accumulated depreciation
as of December 31, 2000 and 1999 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, 2000

     Land                                $  3,150,000      $       ---
     Buildings and Improvements            26,347,000        1,886,000
     Furniture and Equipment                2,081,000          996,000
     Transportation Equipment               1,530,000          553,000
                                             --------         --------
                                         $ 33,108,000      $ 3,435,000
                                             ========        =========

     Capitalized interest on construction projects totaled approximately $75,000
and $221,000 respectively, for the years ended December 31, 2000 and 1999.

NOTE 3.  ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND OTHER

     The  elements  of accounts  payable,  accrued  liabilities  and other as of
December 31, 2000 and 1999 are as follows:

                                             2000                1999
                                          ----------          ----------
     Trade accounts payable              $   368,000         $   364,000
     Accrued interest payable                150,000             121,000
     Accrued salary and benefits             686,000             501,000
     Other accrued liabilities               273,000             409,000
                                          ----------          ----------
                                         $ 1,477,000         $ 1,395,000
                                         ===========          ==========

NOTE 4.  CORRECTIONAL CONTRACTS

     The  Company  contracts  with  various  governmental  agencies  to  provide
correctional  services.  The  contracts  generally  specify  for the  Company to
provide  correctional  services  including  complete  residential  services  and
programming in the Company's  facilities  ("Residential  Services") 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:



                                       Page 18

<PAGE>

                 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR THE YEARS ENDED 2000 AND 1999



                                               2000           1999
                                            ----------      ---------
     Governmental Agency A                     24%             25%
     Governmental Agency B                     28%             23%
     Governmental Agency C                     16%             19%
     Governmental Agency D                     19%             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 extending
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, 2001. The Company's  current contracts with the Colorado
Department of Corrections  extend  through June 30, 2001. The Company's  current
contract with the Oklahoma Office of Juvenile  Affairs extends through  December
2, 2001 with renewal options through December 2, 2003.


NOTE 5.  LONG-TERM DEBT

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

                                                           2000          1999
                                                        --------      ---------
Revolving bank line of credit, collateralized by    $  1,070,000    $    110,000
  accounts receivable, with interest at 1% over
  prime (effective rate of 10.5% at December 31,
  2000); due Feb 2003.
Notes payable to banks, collateralized by
  transportation equipment, due in installments
  through October 2019 with interest ranging
  from 1.90% to 10.85%.                                  806,000         822,000
Notes payable to banks, collateralized by land,
  buildings, and improvements due in installments
  through March 2004 with interest ranging from
  9.75% to 11%.                                       14,441,000      15,448,000
Note payable to an investment company,
  uncollateralized with interest at 12.5%,
  due in four installments beginning in
  2005, including original issue premium              10,289,000      10,324,000

                                                      ----------      ----------
                                                    $ 26,606,000    $ 26,704,000

Less - current maturities                           $  2,992,000    $  1,150,000
                                                        ----------    ----------
                                                    $ 23,614,000    $ 25,554,000
                                                      ==========      ==========


     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: 2001: $2,992,000;  2002: $1,901,000;
2003: $10,847,000; 2004: $380,000; 2005: $2,580,000 and $7,906,000 thereafter.


                                     Page 19

<PAGE>

                 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR THE YEARS ENDED 2000 AND 1999


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.  The
Company is accreting the difference between the carrying value and the estimated
redemption  price of the  stock by  periodic  charges /  credits  to  additional
paid-in  capital.  The  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  original  book  value to  $4,124,000.  Costs  of  $1,143,000
allocated  to the debt  instrument  are  included in other  assets and are being
amortized  to interest  expense over the life of the debt  instrument  using the
effective interest method.


NOTE 6.  CONVERTIBLE DEBENTURES

     The Company  completed a private  placement of  $4,150,000  of  convertible
debentures on September 12, 1997. The  convertible  debentures  bear interest at
7.5% and  mature on  September  12,  2007.  The  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.


NOTE 7.  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 502,500 shares of common stock upon the exercise of the Class
C stock purchase  warrants through December 31, 2000. The Class C stock purchase
warrants expired on March 31, 2000.

     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,
2000.  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


                                     Page 20

<PAGE>

                 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR THE YEARS ENDED 2000 AND 1999


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,  2000.  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.

NOTE 8.  STOCK OPTION PLAN

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

     The options generally vest within five years and have a ten year expiration
period.  The  Company  amended  its  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 479,610
shares of Class A common  stock at exercise  prices  ranging from $1.50 to $4.25
per share. Options providing for the issuance of 273,425 shares were exercisable
at December 31, 2000.

     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  income  per share  would  have been  decreased  to the pro forma
amounts indicated below.


                                                   2000         1999
                                                ---------   ---------
Net Income (Loss)
    As reported                                 $ 963,000  $   83,000
    Pro forma                                     730,000    (147,000)
Income (Loss) per share, basic and diluted
    As reported                                 $    0.20  $     0.02
    Pro forma                                        0.15       (0.03)


     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


                                     Page 21

<PAGE>

                 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR THE YEARS ENDED 2000 AND 1999


weighted-average assumptions used for grants in 2000 and 1999, respectively:  no
expected dividends;  expected volatility of 73% and 76%; risk-free interest rate
of 6.8% 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,  2000 and  1999,  and  changes  during  the years  ending on those  dates is
presented below.

                                          2000                   1999
                                          ----                   ----

                                             Weighted                Weighted
                                              average                  average
                                    Shares  exercise price Shares exercise price
                                   --------  -----------   ------ --------------
Outstanding at beginning of year    342,560       $ 1.73   492,900       $  3.18
    Granted                         159,500         1.60   281,920          1.98
    Exercised                             0          ---   (6,302)          1.86
    Forfeited                      (22,450)         1.69  (57,058)          3.56
    Cancelled                             0          ---  (368,900)         3.56
                                   --------    ---------   --------    ---------

Outstanding at end of year          479,610         1.69  342,560        $  1.73
Options exercisable at year end     273,425         1.67  202,466           1.69
Weighted average fair value of                 ---------               ---------
  options granted during the year                 $ 1.31                 $  1.54
                                               =========               =========


     The following table summarizes  information about fixed-price stock options
outstanding at December 31, 2000.

                        Options outstanding          Options exercisable
                        -------------------          -------------------


                               Weighted
                  Number       average     Weighted                   Weighted
                outstanding   remaining     average      Number        average
                at 12/31/00  contractual   exercise    exercisable    exercise
                                life         price     at 12/31/00      price
                ----------    ---------    ---------   -----------   -----------
Range of exercise

$1.50 to $2.25     475,610         7.82     $  1.67         271,675     $  1.66
$2.26 to $3.39       2,000         8.58        2.44             500        2.44
$3.40 to $4.25       2,000         7.13        4.00           1,250        3.95
                ----------                              -----------
$1.50 to $4.25     479,610                                  273,425
                ==========                              ===========







                                     Page 22

<PAGE>

                 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR THE YEARS ENDED 2000 AND 1999


NOTE 9.  ACQUISITIONS AND CONTRACT AWARDS

     The Company acquired the management contract and correctional  contracts of
Adams Community  Corrections Program, Inc. 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.  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 $129,000 in 2000 and $67,000 in 1999.

     The acquisition  included three  facilities,  the Phoenix Center,  the Loft
House and the 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  280
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 $98,000 in 2000 and $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, 1999:

                                            Year ended December 31,
                                                    1999
                                             -----------------
     Revenues                                  $ 18,989,000
     Net income                                $    217,000
     Income per share, basic                   $       0.05
     Income per share, diluted                 $       0.04

     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.








                                     Page 23

<PAGE>

                 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          FOR THE YEARS ENDED 2000 AND 1999


NOTE 10.  EARNINGS PER SHARE

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


                                                         2000         1999
                                                       --------     ---------
Numerator
     Net income before extraordinary loss           $   963,000   $   118,000
                                                       --------     ---------
Denominator for earnings per share
     Weighted average shares outstanding - basic      4,747,734     4,670,333
     Effect of dilutive securities
        - stock options                                     314       127,541
        - stock warrants                                  4,853       327,459
                                                       --------     ---------
Denominator for earnings per share assuming dilution  4,752,901     5,125,333
                                                       ========     =========
Earnings per share, basic                            $     0.20   $      0.03
                                                       ========     =========
Earnings per share assuming dilution                 $     0.20   $      0.02
                                                       ========     =========

NOTE 11.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                            Year Ended December 31,
                                        2000                       1999
                                ---------------------      ---------------------

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

  Cash and cash equivalents $   726,000    $  726,000     $  601,000  $  601,000

  Notes receivable                2,000         2,000         31,000      31,000

Financial liabilities

  Variable rate debt         13,920,000    13,920,000     13,610,000  13,610,000

  Fixed rate debt            12,686,000    11,944,000     13,094,000  12,770,000

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

  Redeemable common stock     3,593,000     1,850,000      4,124,000   2,069,000


     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.


                                     Page 24
<PAGE>

     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, 2000 and 1999.

NOTE 12.  INCOME TAX

     The  following is a  reconciliation  of the  provision  for (benefit  from)
income  taxes from  continuing  operations  computed  by  applying  the  Federal
statutory  rate of 34% and the  effective  income  tax rate for the years  ended
December 31, 2000 and 1999:
                                                      Year ended December 31,

                                                        2000            1999
                                                     ---------       ---------

Provision for (benefit from) income taxes

     at statutory rate                               $   327,000   $    28,000

Nondeductible expenses                                    11,000        12,000

State income taxes                                           ---         3,000

Change in valuation allowance                           (81,000)     (381,000)
Change in prior year estimate                          (257,000)       338,000
                                                       --------        -------

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



                                     Page 25

<PAGE>

               AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        FOR THE YEARS ENDED 2000 AND 1999



Deferred tax assets and liabilities are as follows:   Year ended December 31,

                                                      2000         1999
                                                      ----         ----

Deferred tax assets

   Net operating loss carry forward             $    641,000   $   918,000
   Nondeductible accruals and allowances             415,000       393,000
   Other                                               1,000         1,000
                                                   ---------     ---------
                                                $  1,057,000   $ 1,312,000

  Less: Valuation allowance                        (596,000)     (677,000)
                                                   ---------     ---------
    Deferred tax assets                         $    461,000   $   635,000
                                                   ---------     ---------
Deferred tax liabilities:

   Property and equipment                       $   (395,000)  $ (569,000)
                                                   ---------     ---------
        Deferred tax liabilities                $   (395,000)  $ (569,000)
                                                   ---------     ---------
          Net deferred tax asset                $     66,000   $    66,000
                                                   =========     =========


     The  valuation  allowance  on tax  assets  decreased  $81,000  in 2000  and
$381,000  in  1999,   including  $81,000  and  $381,000  related  to  continuing
operations in 2000 and 1999,  respectively.  The decrease in valuation allowance
in  2000  was  primarily  due  to  the   utilization   of  net  operating   loss
carryforwards.  The decrease in valuation  allowance in 1999 was  primarily  the
result of a change in prior year estimate.

     The  Company  has  approximately  $1,602,000  of net  operating  loss carry
forwards at December 31, 2000, expiring through 2019.

NOTE 13.  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  $208,000 at December 31,  2000.  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
$1,855,000 is guaranteed by the Company at December 31, 2000.

NOTE 14.  COMMITMENTS AND CONTINGENCIES

     Total   lease   expense   was  $93,000  and  $67,000  for  2000  and  1999,
respectively,  under all operating leases. The future minimum lease payments are
as follows: 2001 - $56,000, 2002 - $14,000 , 2003 - $3,000, and 2004 - $1,000.

     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 the CEO and
President from engaging in a business deemed similar to that of the Company. The
Company has a deferred compensation plan.

     The Company's CEO assumed the  responsibilities  and title of the President
upon the former  President's  retirement in December 2000. The CEO's  employment
agreement was extended through December 2001.







                                     Page 26
<PAGE>

               AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES

 NOTE 15.  LITIGATION

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


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

      None.

                                    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 ....................48....Chief Executive Officer,
                                                President, and Director
      Mary L Livers ......................47....Chief Operating Officer
      Marvin Wiebener ....................57....Executive Vice President
      Joliet Mousso ......................33....Vice President of Operations
      Randall J. Wood ....................42....Corporate Secretary and Counsel
      Tiffany Smith ......................33....Vice President of Corporate
                                                Communications
      Lloyd Lovely .......................51....Vice President of Finance
      Jerry M. Sunderland ................64....President and Director*
      Shawn Sunderland ...................38....Vice President of Operations
      Eric Gray ..........................44....Vice President and Counsel
      Robert O. McDonald .................62....Director
      Mark S. Cooley .....................43....Director
      James P. Wilson ....................42....Director
      Charles W. Thomas ..................57....Director

            *Retired December 31, 2000

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
serves  as  the  Chief  Executive  Officer  and  President  of  Avalon  and  its
subsidiaries.  Mr.  Smith has served as CEO since the  inception of the company.
Mr.  Smith has owned,  managed and  developed  a number of private  corporations
since  1985 to  provide  private  corrections,  health  care and  other  related
services.  Mr.  Smith  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.

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


                                     Page 27
<PAGE>



               AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES

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

     Joliet Mousso  joined Avalon in 1992 and has held several  positions in the
company, including Counselor Supervisor,  Assistant Administrator,  and Facility
Administrator.  Ms. Mousso was promoted to Vice  President of Operations  during
the year 2000. Ms. Mousso has a Bachelor of Science  degree in Criminal  Justice
from  Oklahoma  City  University.  She  currently  is  responsible  for Avalon's
Colorado  operations.   Ms.  Mousso's   responsibilities   include  supervision,
administration, quality assurance, and formulation of policies and procedures.

     Randall J. Wood joined Avalon in 1995 and serves as Corporate Secretary and
Counsel  for the  Company.  Prior to joining  the  Company in 1995,  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.  Ms. Smith  developed and oversees  Avalon's  private-pay
program in  Oklahoma.  She is also  responsible  for  responding  to  government
requests  for  proposals  in  Oklahoma,  Colorado,  and Texas.  Ms. Smith is the
primary contact for the Company's shareholders and investors. Ms. Smith received
a Bachelors  Degree in Business  Administration,  Marketing and Management  from
Missouri Southern State College.  Ms. Smith is the spouse of Donald Smith, Chief
Executive Officer.

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

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

     Jerry M.  Sunderland  joined the Company in 1988 and served as President of
Avalon from June 1995 to his  retirement  on December 31, 2000.  Mr.  Sunderland
also  served  as a  Director  of  Avalon  and  its  subsidiaries  prior  to  his
retirement. 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 of  Corrections  for sixteen
years,  including  ten  years  as  warden  of a  maximum  security  prison.  Mr.
Sunderland   also  served  as  an  agent  for  the  Oklahoma   State  Bureau  of
Investigation  for twelve  years.  Mr.  Sunderland  has a  Bachelor's  degree in
Sociology and a Masters degree in Corrections.



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<PAGE>

     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  nine  years.  Mr.
Sunderland served as Vice President of Business Development for the Company from
1997 to 1999. Mr.  Sunderland  received his Bachelors  Degree in  Organizational
Leadership  from  Southern  Nazarene  University.  Mr.  Sunderland  resigned his
position subsequent to year end to pursue other interests.

     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.

     Charles W. Thomas,  Ph.D.  was appointed as a  director-elect  of Avalon in
December 2000, subject to shareholder  approval at the 2001 shareholder meeting.
Dr. Thomas received his B.S. degree from McMurry University in 1966 and his M.A.
and Ph.D.  degrees from the  University of Kentucky in,  respectively,  1969 and
1971.  After  serving on the faculty of Virginia  Commonwealth  University,  the
College of William and Mary,  and Bowling  Green State  University,  he became a
Professor of  Criminology  at the University of Florida in 1980. He retired from
his  academic  position  in 1999 but  continues  to publish  the  results of his
on-going  research  on  the  economic,  legal,  and  public  policy  aspects  of
privatization.  From 1997-2000 Dr. Thomas was a member of the board of directors
of Prison Realty Trust.  Dr. Thomas is now a private  consultant who specializes
in issues of relevance to the private corrections industry.

ITEMS 10, 11 and 12.

               The information  required by these Items has been incorporated by
          Reference from the Company's  definitive proxy statement which will be
          filed with the  Commission  not later than 120 days after December 31,
          2000.

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

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

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


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<PAGE>

            ii    Stock Option Plan adopted by Board of Directors on August 16,
                  1994 (4)
            iii   Change of Control Agreement between Donald E. Smith and Avalon
                  Community Services, Inc. dated August 25, 1997.  (5)
            iv    Employment Agreement with Donald E. Smith dated August 8,
                  1997.(5)
            v     Contract with State of Oklahoma Office of Juvenile Affairs
                  for 80-bed medium security residential  treatment center for
                  youthful offenders;  one year contract with options to renew
                  for three additional  years. (11)
            vi    Agreement dated June 1, 1998  between Southern Corrections
                  Systems, Inc. and the Texas Department of Criminal Justice.(8)
            vii   Financing agreement between Avalon Community Services, Inc.,
                  and Fleet Capital  Corporation  dated  February  25,  1999.(9)
            viii  Amended and  Restated  Loan and Security  Agreement  between
                  Avalon  Correctional  Services,  Inc.,  et  al.,  and  Fleet
                  Capital  Corporation,   dated  December  9,  1999.  (11)
            ix    Agreement dated September 16, 1998, between Avalon Community
                  Services,  Inc.,  and RSTW  Partners  III.  (10)
            x     Contract between Southern Corrections Systems, Inc., and Adams
                  County Board of County Commissioners dated July 1, 1999 (11)
            xi    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 - none

Footnotes:
       1)   Incorporated herein by reference to the Registrant's Registration
            Statement on Form S-18 dated March 26, 1991.
       2)   Incorporated herein by reference to the Registrant's Post-Effective
            Amendment No. 1 to Registration Statement on Form S-18 dated
            August 3, 1992.
       3)   Incorporated herein by reference to the Registrant's Form 10-KSB for
            the fiscal year ended December 31, 1993 and dated March 24, 1994.
       4)   Incorporated herein by reference to the Registrant's Registration
            Statement on Form SB-2 dated September 13, 1995 and amended.
       5)   Incorporated herein by reference to the Registrant's Registration
            Statement on Form S-2 Amendment No. 1, dated April 16, 1996 and
            amended.
       6)   Incorporated herein by reference to the Registrant's Form S-2 dated
            December 22, 1997.
       7)   Incorporated herein by reference to the Registrant's Form 8-K dated
            March 19, 1998.
       8)   Incorporated herein by reference to the Registran'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 Registrants Registration Statement
            on Form S-2 dated March 24, 2000



                                     Page 30

<PAGE>

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.

                                          AVALON CORRECTIONAL SERVICES, INC.


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

                                          Dated: March 19, 2001

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



By:  s\  Donald E. Smith
Donald E. Smith
Chief Executive Officer and Director                  Dated: March 19, 2001



By:  s\ Mary L. Livers
Mary L. Livers
Chief Operating Officer                               Dated: March 19, 2001



By:  s\ Robert O. McDonald
Robert O. McDonald
Director                                              Dated: March 19, 2001



By:  s\ Mark S. Cooley
Mark S. Cooley
Director                                              Dated: March 19, 2001



By:  s\ James P. Wilson
James P. Wilson
Director                                              Dated: March 19, 2001



By:  s\ Charles W. Thomas, Ph.D.
Charles W. Thomas
Director                                              Dated: March 19, 2001



By:  s\ Lloyd Lovely
Lloyd Lovely                                          Dated: March 19, 2001
Vice President of Finance


                                     Page 31