On January 26, 2009, the Ravenswood Investment Company, L.P. and Ravenswood Investments III, L.P. filed a direct, derivative and class action lawsuit against Avalon Correctional Services Inc. and Donald E. Smith, Avalon's founder, CEO, chairman, and sole director. In the suit, the Ravenswood Companies alleged breaches of fiduciary duty against Smith in connection with causing Avalon to make sales of its preferred stock to insiders, repurchase Avalon's shares and pledge such repurchased shares to a trust as collateral for a Supplement Executive Retirement Plan, make excessive cash contributions to the SERP, make excessive cash contributions for a separate retirement plan for the benefit of Smith, lend cash to insiders to purchase common and preferred stock of Avalon, lease transportation equipment from an entity owned by Smith and make payments to such entity at above-market rates, and extend for a term of 15 years the exercise period of 750,000 Common Stock Purchase Warrants granted by Avalon to Smith. In addition, the lawsuit alleges oppression of minority shareholders by Smith and alleged unjust enrichment of Smith, both in connection with the foregoing actions, and made a demand for books and records.

Avalon Correctional Services Inc. reported consolidated earnings results for the third quarter and nine months ended September 30, 2008. For the quarter, the company reported net loss of $30,000 or $0.01 per diluted share on revenues of $5,472,000 against net income of $500,000 or $0.12 per diluted share on revenues of $5,492,000 for the same period in the previous year. Loss from continuing operations was $157,000 or $0.04 per diluted share compared to income from continuing operations of $500,000 or $0.07 per diluted share for the same period a year ago. For the nine months, the company reported net loss of $627,000 or $0.16 per diluted share on revenues of $16,874,000 against net income of $551,000 or $0.14 per diluted share on revenues of $14,913,000 for the same period in the previous year. Net loss from continuing operations was $120,000 or $0.03 per diluted share compared to net loss from continuing operations of $41,000 or $0.01 per diluted share for the same period a year ago.

Avalon Correctional Services Inc. announced unaudited consolidated earnings results for the second quarter and six months ended June 30, 2008. For the second quarter, the company reported net loss of $640,000 or $0.19 basic and $0.16 diluted loss per share on the revenue of $5,688,000 compared to net loss of $286,000 or $0.08 basic and $0.07 diluted loss per share on the revenue of $4,998,000 for the same period last year. Loss from continuing operations of $77,000 or $0.02 basic and $0.02 diluted loss per share from continuing operations compared to loss from continuing operations of $441,000 or $0.13 basic and $0.11 diluted loss per share from continuing operations for the same period last year. For the six months, the company reported net loss of $597,000 or $0.18 basic and $0.15 diluted loss per share on the revenue of $11,402,000 compared to net income of $51,000 or $0.01 basic and $0.01 diluted income per share on the revenue of $9,421,000 for the same period last year. Income from continuing operations of $37,000 or $0.01 basic and $0.01 diluted income per share from continuing operations compared to loss from continuing operations of $341,000 or $0.10 basic and $0.09 diluted loss per share from continuing operations for the same period last year. Net cash in operating activities of $758,000 compared to $(867,000) in 2007.