(FORTUNE Small Business) – Squinting against a cruel sun, Gil Walker emerges from the inmate holding area and heads into the dusty prison yard in Brush, Colo., a blip of a town 91 miles northwest of downtown Denver. Lanky, gray hair impeccably combed, and clad in a navy-blue business suit, white shirt, and striped tie, the 64-year-old Southerner looks jarringly out of place among the 60 or so women dressed in baggy green jumpsuits who are serving time for everything from drug dealing to murder.

Walker owns this medium-security facility, which—except for all the cameras and the razor-wire fence ringing the perimeter—could be mistaken for a small university campus. Some inmates lounge on a patch of yellowing grass. Others file out of a computer class, one of a number of career-building programs—including horticulture, cooking, and even robotics—offered here. The atmosphere is collegial. "Good mornin', Ms. Trusky," Walker calls out in his lazy drawl to a small, middle-aged woman. "Hot out here, huh, sir?" she responds, smiling.

Walker may not act like a stereotypical prison warden, but he does act like a stereotypical entrepreneur. He knows his customers by name, even serving them meals on occasion. He runs his company, GRW, out of his split-level home. And Walker's tiny, family-run firm may be the new face of private prisons, an industry long dominated by faceless megacorporations such as Cornell, Corrections Corp. of America, and Wackenhut.

"GRW is good at what it does," says Carl Voigtsberger, director of inmate placement for the state of Wyoming, which has sent 80 female inmates to GRW's Brush facility. "With the big companies, there's a lot red tape. With GRW, there are fewer heads on the monster."

In addition to the Brush facility, GRW owns a youthful-offender program in Oswego, Kan., and manages six prisons, including facilities in Illinois, Missouri, and Texas. Last year GRW raked in $20 million, a good deal more than the $10,000 Walker made when he founded the company in 1991. This year he plans to kick the growth into high gear as he works to pick up land-management contracts in Alabama and New Mexico and buy a 400-bed facility—his largest prison to date—in Ocilla, Ga. If those bets pay off, Walker says that revenues will hit $30 million in 2005.

There is more, however, than Walker's business at stake. Financial success would validate the philosophy behind his company—one that has been out of fashion for decades. "These inmates weren't born criminal," he says, standing at the edge of the Brush prison yard. "We're here to make them better.... If you do things right here, you can really change lives."

Walker's office and home is a modest brick colonial with four columns in front, presiding over an acre of land. It is similar to the other houses that populate the upper-middle-class neighborhood of Brentwood, Tenn., six miles from downtown Nashville. No sign announces that this is GRW's headquarters; there are only plum trees, azaleas, and a sprawling elm. Walker lives alone on the first floor—he is divorced—and operates the company out of three upstairs bedrooms with his two daughters, Chantelle and Shelly, both in their late 30s.

The prison business is run a lot like the hotel industry: Federal and state governments pay Walker to rent rooms at his facilities. A daily rate is charged for each inmate, from $20 to $60. Walker takes responsibility for the day-to-day operations of his prisons, piloting his own twin-engine Piper Aztec plane from site to site. His daughters' duties include writing up proposals for new prisons, marketing the company to state, local, and federal government agencies, and paying the phone bills. Dick Mills, a former secretary of corrections in Kansas, serves as GRW's Topeka-based vice president, monitoring the facilities and conducting staffing analyses for prospective projects.

A lifetime oil man raised in Gulfport, Miss., Walker baffled friends when he took a job in 1987 as president of a Tennessee corrections company called Prycor. The prison industry had never occurred to him as an alternative until a headhunter persuaded him to interview with the company, and Walker was hooked. But, more than oil, the corrections business offered an opportunity to influence people's lives. "I'm a man of faith, and I majored in education in college. I always wanted to teach or coach football or do something with young people."

The work at Prycor proved so enjoyable that, two years after taking the job, Walker used $85,000 in personal savings to launch GRW. "I thought I could both impact a person's life and also make some money," he says. His time at Prycor convinced him that the prison industry offered the rarest of entrepreneurial opportunities: Doing good (by instituting a more progressive approach) could lead to doing well (by differentiating his prisons from the existing private corrections facilities, many of which at the time had terrible reputations as little more than human cages).

The private prison industry sprouted in the mid-1980s and peaked in the early 1990s as an alternative to federal, state, and local prison systems. At the time, an incarceration boom was overwhelming public prisons. The inmate population almost doubled between 1986 and 1993, thanks in large part to the crack epidemic and strict sentencing laws—leaving prisons overcrowded, poorly managed, dangerous, and expensive.

But privatization was no panacea. Many new companies expanded too quickly, costs skyrocketed, and undertrained guards led to reputation-smashing incidents that included beatings, inmate escapes, and riots. Angered, some states withdrew their prisoners, forcing a handful of companies to consolidate, while others had to close facilities. And when the economy faltered in the late 1990s, the government cut back further. Against this backdrop, Walker's early years were difficult. He began by focusing on managing state and federal prisons with fewer than 350 beds, minor properties that most businesses overlooked. Yet even developing this modest niche proved difficult. In 1997 a woman escaped from a Walker facility in Odessa, Texas. In 1998 he lost a large state contract to Wackenhut. A year later he had to take out a second mortgage to pay for upkeep on a 220-bed prison in Ullin, Ill., that he had failed to fill. "Everyone in the industry thought I couldn't compete," Walker recalls.

Undaunted, he continued to snap up small-prison contracts while managing them with an unprecedented degree of personal attention. He polled prisoners to see what classes they desired—sewing or cooking, for instance—and created them. At state facilities, he offered mediation services for families of inmates at no charge. When a female inmate in Odessa lost her father in 1998, GRW paid for her to go to the funeral.

By 2000, Walker was beginning to show results. State records showed that only 25% of former inmates of the GRW juvenile facility in Oswego, Kan., ever returned to jail, compared with a national average of 58% for such facilities. "We've been very impressed with GRW," says Ken Swender, a member of the independent board that picked Walker's company to oversee the Oswego youth camp. "They're not only a business; they're also sincerely committed to getting people turned around."

The acclaim could not have come at a better time. State and federal governments are overwhelmed once again by swollen inmate populations: Federal prisons are operating at as much as 30% above capacity, while many states are 17% above capacity. (What kind of opportunity is that creating? See the box at right.) And governments are taking a new look at private facilities. Last year federal and state agencies spent roughly $4.5 billion on private contracts. That number is expected to grow between 5% and 10% in the next year, according to Eli Gage, who publishes the industry magazine Correctional News.

That's good news for Walker. "If you can be reputable about the business," Gage says, "there's a growing demand for you."

As Walker Tours the Brush facility, he is proud and aware of every detail. The walls are covered with murals depicting idyllic landscapes. Multiple slat windows and skylights drench the place in light. Most of the cells can house six inmates and measure about 600 square feet, including a shower and toilet. Recently, additional outlets were added in the cells to accommodate hair dryers, curling irons, and lighted cosmetic mirrors. Outside the women are building a volleyball court. For some of the inmates, who range in age from 19 to 60, this might be the cleanest, most ordered place in which they will ever live. "At other places, you're just a number," says one 56-year-old inmate who, in the first seven years of a 30- to 40-year sentence for homicide, has already spent time in three other prisons. "Here, I'm a human being."

Walker plans to move GRW's headquarters into a corporate office space this fall. And his company faces challenges, even as it twitches into adulthood. The private prison industry must endure increased public scrutiny, anemic state budgets, pressure for alternative sentences, and a falling crime rate. While the total prison population increased 2.9% last year, the most in four years, that's well below 3.6%, the average annual increase in the mid-1990s. And larger companies will do whatever it takes to maintain their market dominance, even if that means taking on smaller, less appealing facilities—the ones that have been GRW's bread and butter.

Walker says he's ready. "I'm a realist. I know what I'm dealing with," he says. "But I also know that the right word, the right environment, the right situation gets somebody turned around. It's like the three-strikes law that everyone goes by. I don't believe it. It might take more than that to make it. Sometimes it might take 11 times, or even 12. The last thing you want to do is give up too soon."