Cornell Companies, Inc. is a provider of privatized correctional, detention and pre-release services to governmental agencies.

The original Complaint charges Cornell and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The Complaint alleges that during the Class Period, Defendants issued favorable but false financial statements and made false and misleading statements about the Company's business. As a result of these false statements, the Company's stock traded as high as $18.40. Defendants took advantage of this artificial inflation, selling 3.4 million shares of Cornell stock for proceeds of over $48 million in a November 2001 secondary offering. On February 6, 2002, Bloomberg ran an article on the Company which stated in part: ``Cornell Cos., which operates 69 prisons in 13 states and the District of Columbia, said it will review the accounting of an August real estate transaction involving 11 properties. Its shares fell as much as 63 percent. The company received a letter Thursday from auditor Arthur Andersen LLP that raised concern about the transaction, said Larry Stein of FRB Weber Shandwick, a firm that handles public relations for Cornell. The Andersen review was part of a year-end audit.'' Upon these disclosures, Cornell's stock dropped to as low as $6.50 before closing at $9.96 on February 6, 2002, some 45% below the Class Period high of $18.40. On March 6, 2002, the Company issued a press release entitled, ``Cornell Companies Inc. to Restate Its Financials for Year Ended December 31, 2000 and Subsequent Quarters.'' On this news, the Company's shares plummeted once again by more than 10%.

As reported by the Company’s FORM 10-Q for the Quarterly Period Ended September 30, 2005, in March and April 2002, the Company, its former President and Chief Executive Officer, and its former Chief Financial Officer, were named as Defendants in four federal putative class action lawsuits. These four lawsuits were consolidated into the Graydon Williams action and Flyline Partners, LP was appointed lead Plaintiff. As a result, a consolidated Complaint was filed by Flyline Partners, LP. Since then, the court allowed Plaintiffs to file an amended consolidated Complaint. The amended consolidated Complaint alleges that the Defendants violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated under Section 10(b) of the Exchange Act, Section 20(a) of the Exchange Act, Section 11 of the Securities Act of 1933 and/or Section 15 of the Securities Act. The amended consolidated Complaint seeks, among other things, restitution damages, compensatory damages, rescission or a rescissory measure of damages, costs, expenses, attorneys’ fees and expert fees. The Company filed a motion to dismiss the lawsuit. In an order entered April 1, 2005, the court granted the motion to dismiss with respect to the Plaintiffs’ securities fraud claims pursuant to Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5. The court denied the motion to dismiss as to the remaining claims covering the Company’s secondary offering in 2001. Subject to court approval and documentation, the parties have agreed to settle this matter.

In a press release dated February 10, 2006, Cornell announced the settlement of a securities class action lawsuit. In re Cornell Companies, Inc. Securities Litigation was originally filed by certain Cornell stockholders in March 2002 on behalf of all purchasers of Cornell's common stock from March 6, 2001 to March 5, 2002. The Company has agreed to settle this class action lawsuit for $7.0 million to avoid further protracted and expensive litigation. The settlement amount will be funded through the Company's directors' and officers' liability insurance and will have no impact on the Company's financial position, results of operations or cash flows. Under the terms of the settlement, Cornell has not admitted to any wrongdoing.

According to the Final Judgment and Order of Dismissal, entered on February 14, 2006, from U.S. District Judge Honorable Vanessa D. Gilmore of the U.S. District Court of the Southern District of Texas, the case was settled.