Dynacq Healthcare, Inc. ("Dynacq" or the Company) operates specialty hospitals that provide surgical healthcare services.

The original Complaint alleges that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Plaintiff charges, inter alia, that the Defendants fraudulently certified that Dynacq's financial statements for the first three quarters of fiscal 2003 were compiled in compliance with Generally Accepted Accounting Principles ("GAAP"). On December 2, 2003, the Company announced that it was requesting an automatic extension of up to 15 days to file its Form 10-K for fiscal year ended August 31, 2003 with the SEC. On December 18, 2003, the Company announced that its independent auditor, Ernst & Young LLP, had resigned due to the Company's "lack of internal controls necessary to develop reliable financial statements." Also on December 18, 2003, the Company announced that it had received a Nasdaq Staff Determination stating that Dynacq's stock could be delisted on December 30, 2003 due to Dynacq's failure to file its fiscal year 2003 10-K in a timely manner. Finally, on December 18, 2003, the Company announced that it had received notice that the SEC was conducting an investigation into Dynacq's reporting of its financial statements, revenue and cost recognition, allowances for doubtful accounts, and internal financial and accounting controls.

The Complaint further alleges that the market reacted negatively to these disclosures. Dynacq shares, after trading during the Class Period at a high of $27.37 per share, plummeted to a low of just $4.09 per share on December 19, 2003.

As disclosed by the Company’s FORM 10-Q for the quarterly period ended May 31, 2006, in the second quarter of 2004, eight class action lawsuits were filed in the United States District Court for the Southern District of Texas alleging federal securities law causes of action against the Company and various current and former officers and directors. The Plaintiffs were persons who purchased shares of the Company’s common stock on the open market generally during the period of January 14, 2003 through December 18, 2003. Under the procedures of the Private Securities Litigation Reform Act, the Court consolidated the actions and appointed lead Plaintiffs in the matter. An amended Complaint was filed on June 30, 2004, asserting a class period of November 27, 2002, through December 19, 2003 and naming additional Defendants, including Ernst & Young, the Company’s prior auditors. On July 30, 2004, the Plaintiffs filed a Second Amended Consolidated Class Action Complaint on September 30, 2004. All Defendants filed motions to dismiss the Complaint. The Plaintiffs voluntarily dismissed two of the former officers from the case. The Court dismissed the claims against one former officer and Ernst & Young, but denied the motions to dismiss of the Company and two current officers who are Defendants. The Court denied the Company’s and those two officers’ motion for reconsideration of the denial of their motions to dismiss. The Company and the two current officers filed an answer on September 30, 2005. The parties participated in a mediation of the case on April 17, 2006. The mediation did not resulted in a settlement. A hearing on Plaintiffs’ motion for class certification, which the Company and the two current officers oppose, was scheduled for July 21, 2006. Trial was scheduled to begin on November 6, 2006.

According to a press release dated August 11, 2006, Dynacq (Nasdaq SmallCap:DYII) announced that it has reached an agreement in principle to settle the shareholder class action lawsuit pending against it for the amount of $1.5 million. The amount of the settlement will include payment of all administrative costs and class attorneys' fees as well as the payout to the class. The $1.5 million will be paid first by $100,000 within 30 days of final approval of the settlement by the court and the balance in 36 equal monthly interest bearing installments beginning 30 days thereafter. The settlement will fully release the Company, its two executive officers named as Defendants and its subsidiaries from liability and prohibits the filing of any future claims by the members of the class relating to this matter. Conditions to the effectiveness of the settlement are: no more than 5% of the class (both in number of shareholders and in percentage of total shares in the class) opting out, confirmation that the lead Plaintiffs are adequate class representatives for the proposed settlement class, and the execution of definitive settlement and release agreements acceptable to the Company's Board and the Company's primary lender. In addition, acceptance of the settlement is subject to approval of the United States District Court for the Southern District of Texas.

On January 10, 2007, the Settlement Conference was held before U.S. District Judge Keith P. Ellison. At the Conference, the parties announced an agreed settlement, and the settlement agreement was signed. The Court entered the Order approving the Plan of Allocation and awarding fees and expenses to Plaintiffs' Counsel. The Court further entered the Order of Final Judgment and Dismissal as to the Dynacq. The action is dismissed with prejudice.