Dynacq Healthcare, Inc. ("Dynacq" or the Company) is engaged in the ownership and management of an acute care hospital, the operation of two outpatient surgical facilities, the operation of a medical office complex, the management of physician practices (all located in the Vista medical center campus in Pasadena, Texas) and the business of providing home infusion healthcare services to patients in their homes.

The original Complaint charges Dynacq 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 represented that Dynacq's favorable financial results were due to its commitment to quality and cost-effective care. Throughout the Class Period, Defendants repeatedly stated that Dynacq's financials were strong and that it was consistently achieving "record results." Defendants actually knew that the quality of Dynacq's balance sheet was eroding, that it was violating federal law in the maintenance of its facilities and that it improperly cared for patients. On Jan. 16, 2002, TheStreet.com ran an article on Dynacq entitled, "Dynacq's Doubtful Accounts Send Distress Signals." Essentially, the article exposed many of the Company's problems which, in the days that followed, caused the Company's share price to crumble. These disclosures shocked the market, causing Dynacq's stock to decline to less than $15 per share before closing at $15.20 per share on Jan. 17, 2002, on volume of more than 2.6 million shares, and later plummeting to less than $12 per share.

Additionally, shortly after the class action was filed, two purported shareholder derivative suits, including almost verbatim the same allegations as the class action, were filed against the Company and certain of its officers. Flory v. Chan et al., H-02-3123, in U.S. District Court for the Southern District of Texas, is a shareholder derivative action which was stayed on Nov. 12, 2002 by the District Court pending the outcome of the Hamilton case. Dynacq moved to dismiss this case on Sept. 10, 2003 following the dismissal of the Hamilton case. In Brill v. Chan et al., (2002-07135 in the 295th Judicial District Court of Harris County, Texas), the second shareholder derivative case, a Stipulation of Settlement was executed by both parties and filed with the Court on Sept. 11, 2003. The Settlement provides that (1) the suit will be dismissed and (2) Defendants will pay a portion of Plaintiffs' legal fees and expenses, subject to the approval of the Court at a Final Settlement Hearing scheduled for Nov. 10, 2003.

According to a press release dated July 14, 2004, the Company and its officers moved to dismiss the Complaint on February 25, 2003. On August 26, 2003, the Court granted the Motion to Dismiss and denied Plaintiffs leave to amend further. The Plaintiffs thereafter filed a notice of appeal. In May of 2004, the Plaintiffs dismissed their appeal, thereby concluding the case. A separate shareholder derivative action was also brought in federal court, but was stayed pending resolution of the shareholder class action described above. The Plaintiff in the derivative case did not make a demand on the Company or its Board of Directors prior to filing suit. It remained stayed pending the Plaintiff's appeal of the dismissal of the shareholder class action. Given the Plaintiff's dismissal of the appeal in the shareholder class action, the Company has moved to dismiss the derivative action.