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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended May 31, 2009



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 000-21574





DYNACQ HEALTHCARE, INC.

(Exact name of registrant as specified in its
charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 76-0375477                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|10304 Interstate 10 East, Suite 369                            |  |                                     
|Houston, Texas                                                 |  | 77029                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(713) 378-2000

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check One):

Large accelerated filer   ̈    Accelerated filer   ̈    Non-accelerated filer   ̈    Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

As of July 10, 2009, the number of shares
outstanding of the registrants common stock, par value $.001 per share, was 15,473,351.









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Table of Contents



|                                                         |  |                                                                                                  |  |   
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | --
|                                                         |  | Page                                                                                            
|Report of Independent Registered Public Accounting Firm. |  | 3                                                                                               
|                                                         | 
|PART IFINANCIAL INFORMATION                             |  | 4                                                                                               
|                                                         |  |                                                                                                 
|Item 1.                                                  |  | Financial Statements.                                                                            |  | 4 
|                                                         |  |                                                                                                 
|                                                         |  | Consolidated Balance Sheets as of May 31, 2009 and August 31, 2008.                              |  | 4 
|                                                         |  |                                                                                                 
|                                                         |  | Consolidated Statements of Operations for the three and nine months ended May 31, 2009 and 2008. |  | 6 
|                                                         |  |                                                                                                 
|                                                         |  | Consolidated Statements of Cash Flows for the nine months ended May 31, 2009 and 2008.           |  | 7 
|                                                         |  |                                                                                                 
|                                                         |  | Notes to Consolidated Financial Statements.                                                      |  | 8 
|                                                         |  |                                                                                                 
|Item 2.                                                  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.           |  | 16
|                                                         |  |                                                                                                 
|Item 3.                                                  |  | Quantitative and Qualitative Disclosures About Market Risk.                                      |  | 21
|                                                         |  |                                                                                                 
|Item 4T.                                                 |  | Controls and Procedures.                                                                         |  | 21
|                                                         | 
|PART IIOTHER INFORMATION                                |  | 21                                                                                              
|                                                         |  |                                                                                                 
|Item 1.                                                  |  | Legal Proceedings.                                                                               |  | 21
|                                                         |  |                                                                                                 
|Item 1A.                                                 |  | Risk Factors.                                                                                    |  | 21
|                                                         |  |                                                                                                 
|Item 2.                                                  |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                     |  | 22
|                                                         |  |                                                                                                 
|Item 3.                                                  |  | Defaults Upon Senior Securities.                                                                 |  | 22
|                                                         |  |                                                                                                 
|Item 4.                                                  |  | Submission of Matters to a Vote of Security Holders.                                             |  | 22
|                                                         |  |                                                                                                 
|Item 5.                                                  |  | Other Information.                                                                               |  | 22
|                                                         |  |                                                                                                 
|Item 6.                                                  |  | Exhibits.                                                                                        |  | 22
|                                                         | 
|Signatures                                               |  | 23                                                                                              
|                                                         | 
|Index of Exhibits                                        |  | 24                                                                                              



2



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



|To: | The Stockholders and Board of Directors
|--- | ---------------------------------------

| | Dynacq Healthcare, Inc.
| | -----------------------

| | Houston, Texas
| | --------------

We have reviewed the accompanying consolidated balance
sheet of Dynacq Healthcare, Inc., as of May 31, 2009, and the related consolidated statements of operations and cash flows for the three-month and nine-month periods ended May 31, 2009 and 2008. These interim financial statements are the
responsibility of the Companys management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit
conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express
such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim
financial statements for them to be in conformity with United States of America generally accepted accounting principles.

We have previously audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Dynacq Healthcare, Inc., as of August 31, 2008, and the related consolidated statements of operations,
stockholders equity, and cash flows for the year then ended not presented herein, and in our report dated November 21, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information
set forth in the accompanying consolidated balance sheet as of August 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Killman, Murrell & Company, P.C.

Killman, Murrell &
Company, P.C.

Houston, Texas

July 8, 2009



3



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PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

Dynacq Healthcare, Inc.

Consolidated Balance Sheets



|                                                                                                                                                    |  |              |            |                 |   |           
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | --------------- | - | ----------
|                                                                                                                                                    |  | May 31, 2009 |            | August 31, 2008
|                                                                                                                                                    |  | (Reviewed)   |            | (Audited)      
|Assets                                                                                                                                              |  |              |            |                 |   |           
|Current assets:                                                                                                                                     |  |              |            |                 |   |           
|Cash and cash equivalents                                                                                                                           |  | $            | 38,871,920 |                 | $ | 45,099,800
|Investments available-for-sale                                                                                                                      |  |              | 8,699,864  |                 |   |          
|Accounts receivable, net of contractual allowances of approximately $228,645,000 and $226,355,000 at May 31, 2009 and August 31,
2008, respectively |  |              | 7,672,900  |                 |   | 18,018,673
|Inventories                                                                                                                                         |  |              | 1,469,750  |                 |   | 1,469,775 
|Interest receivable                                                                                                                                 |  |              | 541,416    |                 |   |          
|Prepaid expenses                                                                                                                                    |  |              | 342,238    |                 |   | 475,251   
|Deferred tax assets                                                                                                                                 |  |              | 732,691    |                 |   | 859,255   
|Income taxes receivable                                                                                                                             |  |              | 170,648    |                 |   | 868,249   
|                                                                                                                                                    |  |              |            |                 |   |           
|Total current assets                                                                                                                                |  |              | 58,501,427 |                 |   | 66,791,003
|Property and equipment, net                                                                                                                         |  |              | 14,964,807 |                 |   | 15,228,887
|Management rights, net of amortization of approximately $57,000                                                                                     |  |              | 2,574,803  |                 |   |          
|Income tax receivable                                                                                                                               |  |              | 800,920    |                 |   |          
|Other assets                                                                                                                                        |  |              | 259,040    |                 |   | 228,672   
|                                                                                                                                                    |  |              |            |                 |   |           
|Total assets                                                                                                                                        |  | $            | 77,100,997 |                 | $ | 82,248,562
|                                                                                                                                                    |  |              |            |                 |   |           

See accompanying notes.



4



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Dynacq Healthcare, Inc.

Consolidated Balance Sheets (continued)



|                                                                                                                                                        |  |              |            |   |                 |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | --------------- | - | ---------- | -
|                                                                                                                                                        |  | May 31, 2009 |            |   | August 31, 2008 |  
|                                                                                                                                                        |  | (Reviewed)   |            |   | (Audited)       |  
|Liabilities and stockholders equity                                                                                                                    |  |              |            |   |                 |   |            |  
|Current liabilities:                                                                                                                                    |  |              |            |   |                 |   |            |  
|Accounts payable                                                                                                                                        |  | $            | 3,597,736  |   |                 | $ | 3,816,585  |  
|Accrued liabilities                                                                                                                                     |  |              | 4,209,808  |   |                 |   | 5,887,353  |  
|Notes payable                                                                                                                                           |  |              | 373,907    |   |                 |   | 480,269    |  
|Current portion of capital lease obligations                                                                                                            |  |              | 83,546     |   |                 |   | 16,534     |  
|Current taxes payable                                                                                                                                   |  |              | 612,369    |   |                 |   | 4,417,334  |  
|                                                                                                                                                        |  |              |            |   |                 |   |            |  
|Total current liabilities                                                                                                                               |  |              | 8,877,366  |   |                 |   | 14,618,075 |  
|Non-current liabilities:                                                                                                                                |  |              |            |   |                 |   |            |  
|Long-term portion of note payable                                                                                                                       |  |              |           |   |                 |   | 251,131    |  
|Long-term portion of capital lease obligations                                                                                                          |  |              | 353,671    |   |                 |   | 11,673     |  
|Deferred tax liabilities                                                                                                                                |  |              | 180,899    |   |                 |   | 355,808    |  
|                                                                                                                                                        |  |              |            |   |                 |   |            |  
|Total liabilities                                                                                                                                       |  |              | 9,411,936  |   |                 |   | 15,236,687 |  
|                                                                                                                                                        |  |              |            |   |                 |   |            |  
|Minority interests                                                                                                                                      |  |              | 166,395    |   |                 |   | 84,926     |  
|                                                                                                                                                        |  |              |            |   |                 |   |            |  
|Commitments and contingencies                                                                                                                           |  |              |            |   |                 |   |            |  
|Stockholders equity:                                                                                                                                   |  |              |            |   |                 |   |            |  
|Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued or outstanding                                                                |  |              |           |   |                 |   |           |  
|Common stock, $.001 par value; 100,000,000 shares authorized, 16,012,424 and 16,010,924 shares issued at May 31, 2009 and August 31,
2008, respectively |  |              | 16,012     |   |                 |   | 16,011     |  
|Treasury stock, 504,277 and 455,193 shares at May 31, 2009 and August 31, 2008, respectively, at cost                                                   |  |              | (2,475,861 | ) |                 |   | (2,309,898 | )
|Additional paid-in capital                                                                                                                              |  |              | 15,392,188 |   |                 |   | 15,023,927 |  
|Accumulated other comprehensive income                                                                                                                  |  |              | 302,417    |   |                 |   | 561,271    |  
|Retained earnings                                                                                                                                       |  |              | 54,287,910 |   |                 |   | 53,635,638 |  
|                                                                                                                                                        |  |              |            |   |                 |   |            |  
|Total stockholders equity                                                                                                                              |  |              | 67,522,666 |   |                 |   | 66,926,949 |  
|                                                                                                                                                        |  |              |            |   |                 |   |            |  
|Total liabilities and stockholders equity                                                                                                              |  | $            | 77,100,997 |   |                 | $ | 82,248,562 |  
|                                                                                                                                                        |  |              |            |   |                 |   |            |  

See accompanying notes.



5



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Dynacq Healthcare, Inc.

Consolidated Statements of Operations

(Reviewed)



|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                      |  | Three months ended May 31, |            |   | Nine months ended May 31, |  
|                                                                      |  | 2009                       |            |   | 2008                      |   |            | 2009 |  |   | 2008       |  
|Net patient service revenue                                           |  | $                          | 13,004,336 |   |                           | $ | 14,175,897 |      |  | $ | 36,670,894 |   |  | $ | 49,098,080 |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Costs and expenses:                                                   |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Compensation and benefits                                             |  |                            | 4,480,580  |   |                           |   | 3,798,519  |      |  |   | 12,064,798 |   |  |   | 11,751,322 |  
|Medical services and supplies                                         |  |                            | 2,909,761  |   |                           |   | 4,367,174  |      |  |   | 9,171,297  |   |  |   | 10,749,871 |  
|Other operating expenses                                              |  |                            | 4,268,658  |   |                           |   | 3,772,171  |      |  |   | 14,146,546 |   |  |   | 11,762,826 |  
|Depreciation and amortization                                         |  |                            | 349,283    |   |                           |   | 525,173    |      |  |   | 1,126,514  |   |  |   | 1,615,867  |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total costs and expenses                                              |  |                            | 12,008,282 |   |                           |   | 12,463,037 |      |  |   | 36,509,155 |   |  |   | 35,879,886 |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Operating income                                                      |  |                            | 996,054    |   |                           |   | 1,712,860  |      |  |   | 161,739    |   |  |   | 13,218,194 |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Other income (expense):                                               |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Rent and other income                                                 |  |                            | 145,484    |   |                           |   | 7,059      |      |  |   | 252,017    |   |  |   | 235,847    |  
|Interest income                                                       |  |                            | 520,030    |   |                           |   | 113,531    |      |  |   | 990,398    |   |  |   | 157,157    |  
|Interest expense                                                      |  |                            | (16,021    | ) |                           |   | (54,009    | )    |  |   | (47,679    | ) |  |   | (158,592   | )
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total other income, net                                               |  |                            | 649,493    |   |                           |   | 66,581     |      |  |   | 1,194,736  |   |  |   | 234,412    |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income before income taxes, minority interests and extraordinary gain |  |                            | 1,645,547  |   |                           |   | 1,779,441  |      |  |   | 1,356,475  |   |  |   | 13,452,606 |  
|Minority interest in earnings                                         |  |                            | (11,050    | ) |                           |   | (15,304    | )    |  |   | (9,719     | ) |  |   | (97,046    | )
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income before income taxes                                            |  |                            | 1,634,497  |   |                           |   | 1,764,137  |      |  |   | 1,346,756  |   |  |   | 13,355,560 |  
|Provision for income taxes                                            |  |                            | (630,082   | ) |                           |   | (741,727   | )    |  |   | (694,484   | ) |  |   | (5,349,664 | )
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations                                     |  |                            | 1,004,415  |   |                           |   | 1,022,410  |      |  |   | 652,272    |   |  |   | 8,005,896  |  
|Income (loss) from discontinued operations, net of income taxes       |  |                            |           |   |                           |   | 6,149      |      |  |   |           |   |  |   | (24,376    | )
|Gain on sale of discontinued operations, net of income taxes          |  |                            |           |   |                           |   |           |      |  |   |           |   |  |   | 2,761,184  |  
|Extraordinary gain, net of income taxes of $49,700                    |  |                            |           |   |                           |   |           |      |  |   |           |   |  |   | 81,365     |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income                                                            |  | $                          | 1,004,415  |   |                           | $ | 1,028,559  |      |  | $ | 652,272    |   |  | $ | 10,824,069 |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic earnings per common share:                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations                                     |  | $                          | 0.06       |   |                           | $ | 0.06       |      |  | $ | 0.04       |   |  | $ | 0.50       |  
|Income (loss) from discontinued operations, net of income taxes       |  |                            |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Gain on sale of discontinued operations, net of income taxes          |  |                            |           |   |                           |   |           |      |  |   |           |   |  |   | 0.17       |  
|Extraordinary gain, net of income taxes                               |  |                            |           |   |                           |   |           |      |  |   |           |   |  |   | 0.01       |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income                                                            |  | $                          | 0.06       |   |                           | $ | 0.06       |      |  | $ | 0.04       |   |  | $ | 0.68       |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted earnings per common share:                                    |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations                                     |  | $                          | 0.06       |   |                           | $ | 0.06       |      |  | $ | 0.04       |   |  | $ | 0.48       |  
|Income (loss) from discontinued operations, net of income taxes       |  |                            |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Gain on sale of discontinued operations, net of income taxes          |  |                            |           |   |                           |   |           |      |  |   |           |   |  |   | 0.17       |  
|Extraordinary gain, net of income taxes                               |  |                            |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income                                                            |  | $                          | 0.06       |   |                           | $ | 0.06       |      |  | $ | 0.04       |   |  | $ | 0.65       |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic average common shares outstanding                               |  |                            | 15,521,489 |   |                           |   | 15,796,387 |      |  |   | 15,540,389 |   |  |   | 15,845,039 |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted average common shares outstanding                             |  |                            | 15,720,852 |   |                           |   | 16,467,932 |      |  |   | 15,781,789 |   |  |   | 16,549,694 |  
|                                                                      |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes.



6



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##### Table of Contents

Dynacq Healthcare, Inc.

Consolidated Statements of Cash Flows

(Reviewed)



|                                                                                  |  |                           |             |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                                  |  | Nine months ended May 31, |            
|                                                                                  |  | 2009                      |             |   | 2008 |  
|Cash flows from operating activities                                              |  |                           |             |   |      |   |            |  
|Net income                                                                        |  | $                         | 652,272     |   |      | $ | 10,824,069 |  
|Less income from discontinued operations, net of income taxes                     |  |                           |            |   |      |   | (2,736,808 | )
|                                                                                  |  |                           |             |   |      |   |            |  
|Net income before discontinued operations                                         |  |                           | 652,272     |   |      |   | 8,087,261  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |             |   |      |   |            |  
|Extraordinary gain, net of tax                                                    |  |                           |            |   |      |   | (81,365    | )
|Depreciation and amortization                                                     |  |                           | 1,126,514   |   |      |   | 1,615,867  |  
|Gain on sale of assets                                                            |  |                           |            |   |      |   | (28,455    | )
|Deferred income taxes                                                             |  |                           | 91,055      |   |      |   | (466,935   | )
|Minority interests                                                                |  |                           | 9,719       |   |      |   | 97,046     |  
|Charge for stock options to employees                                             |  |                           | 364,512     |   |      |   | 373,275    |  
|Income tax benefit for employees exercise of incentive stock options             |  |                           |            |   |      |   | 70,800     |  
|Changes in operating assets and liabilities:                                      |  |                           |             |   |      |   |            |  
|Restricted cash                                                                   |  |                           |            |   |      |   | 1,098,957  |  
|Accounts receivable                                                               |  |                           | 10,345,773  |   |      |   | 5,358,161  |  
|Interest receivable                                                               |  |                           | (541,416    | ) |      |   |           |  
|Inventories                                                                       |  |                           | 25          |   |      |   | 782,932    |  
|Prepaid expenses                                                                  |  |                           | 133,013     |   |      |   | (883,495   | )
|Income taxes receivable                                                           |  |                           | (103,319    | ) |      |   | 736,341    |  
|Other assets                                                                      |  |                           | (30,368     | ) |      |   | 40,197     |  
|Accounts payable                                                                  |  |                           | (317,362    | ) |      |   | (340,908   | )
|Accrued liabilities                                                               |  |                           | (1,677,545  | ) |      |   | (2,171,622 | )
|Income taxes payable                                                              |  |                           | (3,804,965  | ) |      |   | 3,921,989  |  
|                                                                                  |  |                           |             |   |      |   |            |  
|Cash provided by continuing activities                                            |  |                           | 6,247,908   |   |      |   | 18,210,046 |  
|Cash used in discontinued activities                                              |  |                           |            |   |      |   | (635,626   | )
|                                                                                  |  |                           |             |   |      |   |            |  
|Net cash provided by operating activities                                         |  |                           | 6,247,908   |   |      |   | 17,574,420 |  
|                                                                                  |  |                           |             |   |      |   |            |  
|                                                                                  |  |                          
|Cash flows from investing activities                                              |  |                           |             |   |      |   |            |  
|Purchase of property and equipment                                                |  |                           | (370,138    | ) |      |   | (792,728   | )
|Purchase of management rights                                                     |  |                           | (2,631,601  | ) |      |   |           |  
|Accounts payable applicable to purchase of management rights                      |  |                           | 98,513      |   |      |   |           |  
|Proceeds from sale of assets                                                      |  |                           |            |   |      |   | 1,799,477  |  
|Investment available-for-sale securities                                          |  |                           | (9,134,660  | ) |      |   |           |  
|Collections on purchased accounts receivable  other                              |  |                           |            |   |      |   | 17,704     |  
|                                                                                  |  |                           |             |   |      |   |            |  
|Cash provided by (used in) continuing activities                                  |  |                           | (12,037,886 | ) |      |   | 1,024,453  |  
|Cash provided by discontinued activities                                          |  |                           |            |   |      |   | 16,430,895 |  
|                                                                                  |  |                           |             |   |      |   |            |  
|Net cash provided by (used in) investing activities                               |  |                           | (12,037,886 | ) |      |   | 17,455,348 |  
|                                                                                  |  |                           |             |   |      |   |            |  
|                                                                                  |  |                          
|Cash flows from financing activities                                              |  |                           |             |   |      |   |            |  
|Principal payments on notes payable                                               |  | $                         | (357,493    | ) |      | $ | (7,410,538 | )
|Purchase of minority interest                                                     |  |                           |            |   |      |   | (256,308   | )
|Payments on capital lease                                                         |  |                           | (26,488     | ) |      |   | (8,152     | )
|Purchase of treasury shares                                                       |  |                           | (165,963    | ) |      |   | (1,386,959 | )
|Minority contribution/distribution, net                                           |  |                           | 71,750      |   |      |   |           |  
|Proceeds from exercise of stock options                                           |  |                           | 3,750       |   |      |   | 571,546    |  
|                                                                                  |  |                           |             |   |      |   |            |  
|Net cash used in financing activities                                             |  |                           | (474,444    | ) |      |   | (8,490,411 | )
|                                                                                  |  |                           |             |   |      |   |            |  
|Effect of exchange rate changes on cash                                           |  |                           | 36,542      |   |      |   | 22,543     |  
|                                                                                  |  |                           |             |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                              |  |                           | (6,227,880  | ) |      |   | 26,561,900 |  
|Cash at beginning of period                                                       |  |                           | 45,099,800  |   |      |   | 5,436,787  |  
|                                                                                  |  |                           |             |   |      |   |            |  
|Cash at end of period                                                             |  | $                         | 38,871,920  |   |      | $ | 31,998,687 |  
|                                                                                  |  |                           |             |   |      |   |            |  
|                                                                                  |  |                          
|Supplemental cash flow disclosures                                                |  |                           |             |   |      |   |            |  
|Cash paid during the period for:                                                  |  |                           |             |   |      |   |            |  
|Interest                                                                          |  | $                         | 132,370     |   |      | $ | 205,194    |  
|                                                                                  |  |                           |             |   |      |   |            |  
|Income taxes                                                                      |  | $                         | 4,408,393   |   |      | $ | 1,458,289  |  
|                                                                                  |  |                           |             |   |      |   |            |  
|                                                                                  |  |                          
|Non cash investing and financing activities:                                      |  |                           |             |   |      |   |            |  
|Equipment from capital lease                                                      |  | $                         | (435,498    | ) |      | $ | (12,692    | )
|Capital lease obligation                                                          |  |                           | 435,498     |   |      |   | 12,692     |  
|Decrease in value of investment in bonds                                          |  |                           | 660,000     |   |      |   |           |  
|Accumulated other comprehensive income                                            |  |                           | (520,600    | ) |      |   |           |  
|Deferred tax asset                                                                |  |                           | (139,400    | ) |      |   |           |  
|Land cost from foreign currency gains                                             |  |                           |            |   |      |   | (178,097   | )
|Foreign currency gains                                                            |  |                           |            |   |      |   | 178,097    |  

See accompanying notes.



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Dynacq Healthcare, Inc.

Notes to Consolidated Financial Statements

May 31, 2009

(reviewed)

Basis of Presentation

The accompanying reviewed consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal and recurring nature. The
majority of the Companys expenses are cost of revenue items. Costs that could be classified as general and administrative by the Company would include the corporate office costs, including advertising and marketing expenses, which
were approximately $2.7 million and $1.6 million for the quarters ended May 31, 2009 and 2008, respectively, and $8.4 million and $5.5 million for the nine months ended May 31, 2009 and 2008, respectively. These reviewed financial
statements should be read in conjunction with the audited financial statements at August 31, 2008. Operating results for the three and nine months ended May 31, 2009 are not necessarily indicative of the results that may be expected for
the year ending August 31, 2009.

Certain previously reported financial information has been reclassified to conform to the current
year periods presentation. The impact of such reclassification was not significant to the prior year periods overall presentation.

Cash and
Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less on the date of purchase to
be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.

Investments Available-for-Sale

The Company accounts for its investments, which are available-for-sale securities, under the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Securities (SFAS No. 115) as amended by SFAS No. 157, Fair Value Measurements. These investments are subject to default risk.

During the nine months ended May 31, 2009, the Company has invested in various bonds. These investments are classified as available-for-sale
securities, and are carried at the lower of cost or fair value as of May 31, 2009, based on the quoted market prices as of that date. Unrealized depreciation, if any, in the fair value is reported in accumulated other comprehensive income, net
of related income tax effect. The Company monitors its investment portfolio for any decline in fair value that is other than temporary and records any such impairment as an impairment loss.

Inventories

Inventories, consisting primarily of
medical supplies, are stated at the lower of cost or market, with cost determined by use of the average cost method.

General

As of May 31, 2009, the Company operated one facility each in the Houston metropolitan area (Pasadena facility) and in the Dallas-Fort Worth area
(Garland facility) and owned 100% of the equity interest in Dynacq Huai Bei Healthcare, Inc. (Dynacq-Huai Bei), a corporation formed under the laws of the Peoples Republic of China to provide healthcare management services in that
country. Effective March 1 2009, Dynacq-Huai Bei is managing Second Peoples Hospital in Rui An, China.



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Management Rights

In December 2008, Dynacq-Huai Bei advanced approximately $2.6 million to purchase the management rights to RuiAn Second Peoples Hospital in RuiAn, China. On March 2, 2009 Dynacq-Huai Bei acquired through
subsidiaries the right to manage that hospital for eleven years and five and a half months through August 14, 2020. Dynacq-Huai Bei will be ultimately responsible for funding any operating deficits, and be rewarded with any operating profits,
of the hospital during the management period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The most significant of the Companys estimates is the determination of revenue to recognize for the services the Company provides and the determination of the contractual allowance. See
Revenue Recognition below for further discussion. Actual results could differ materially from those estimates used in the preparation of these financial statements.

Net Income per Share

The following is a reconciliation of the weighted average number of common
shares outstanding with the number of shares used in the computations of net income per common and common equivalent share:



|                                                     |  |                            |  |                           |  |            |  |           
|---------------------------------------------------- |  | -------------------------- |  | ------------------------- |  | ---------- |  | ----------
|                                                     |  | Three months ended May 31, |  | Nine months ended May 31,
|                                                     |  | 2009                       |  | 2008                      |  | 2009       |  | 2008      
|Number of weighted average common shares outstanding |  | 15,521,489                 |  | 15,796,387                |  | 15,540,389 |  | 15,845,039
|Assumed exercise of stock options                    |  | 199,363                    |  | 671,545                   |  | 241,400    |  | 704,655   
|                                                     |  |                            |  |                           |  |            |  |           
|Average diluted shares outstanding                   |  | 15,720,852                 |  | 16,467,932                |  | 15,781,789 |  | 16,549,694
|                                                     |  |                            |  |                           |  |            |  |           

Basic net income per share is computed by dividing net income available to common shareholders by
the weighted average number of common shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. However, if it is anti-dilutive, the
dilutive effect of the stock options is not included in the calculation of diluted net income per share. Stock options with exercise prices exceeding current market prices that were excluded from the computation of net income per share amounted to
approximately 575,000 shares and 192,000 shares for the quarters ended May 31, 2009 and 2008, respectively.

Stock Based Compensation

The Companys 2000 Incentive Plan (the Plan) provides for options and other stock-based awards that may be granted to
eligible employees, officers, consultants and non-employee directors of the Company or its subsidiaries. The Company had reserved 5,000,000 shares of common stock for future issuance under the Plan. As of May 31, 2009, there remain 1,402,229
shares which can be issued under the Plan, after giving effect to stock splits and shares issued under the Plan. The Plan permits stock awards, stock appreciation rights, performance units, and other stock-based awards, all of which may or may not
be subject to the achievement of one or more performance objectives.

The purposes of the Plan generally are to retain and attract persons
of training, experience and ability to serve as employees of the Company and its subsidiaries and to serve as non-employee directors of the Company, to encourage the sense of proprietorship of such persons and to stimulate the active interest of
such persons in the development and financial success of the Company and its subsidiaries.

The Plan is administered by the Compensation
Committee of the Board of Directors (the Committee). The Committee has the power to determine which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price of stock options (which may
not be less than market value on the date of grant), the number of shares, and all of the terms of the awards. The Company may at any time amend or terminate



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the Plan. However, no amendment that would impair the rights of any participant with respect to outstanding grants can be made without the participants
prior consent. Stockholder approval of an amendment to the Plan is necessary only when required by applicable law or stock exchange rules.

For the quarter ended May 31, 2009, there were no equity-based compensation awards granted. Generally, options granted become exercisable in annual installments of 25 percent beginning on the first anniversary date, and expire after
five to ten years. The following table summarizes the stock option activities for the nine months ended May 31, 2009 (share amounts in thousands):



|                             |  |        |   |  |                                             |      |                                             |   |                            |   |          
|---------------------------- |  | ------ | - |  | ------------------------------------------- | ---- | ------------------------------------------- | - | -------------------------- | - | ---------
|                             |  | Shares |   |  | WeightedAverageOptionExercisePrice PerShare |      | WeightedAverageGrant DateFairValue PerShare |   | AggregateIntrinsicValue(1)
|Outstanding, August 31, 2008 |  | 1,571  |   |  | $                                           | 3.52 |                                             |  |                            | $ | 2,139,450
|Granted                      |  |       |   |  |                                             |     |                                             |  |                            |   |         
|Exercised                    |  | (2     | ) |  |                                             | 2.50 |                                             |  |                            |   | 1,755    
|Expired or canceled          |  | (182   | ) |  |                                             | 2.64 |                                             |  |                            |   |         
|                             |  |        |   |  |                                             |      |                                             |   |                            |   |          
|Outstanding, May 31, 2009    |  | 1,387  |   |  | $                                           | 3.46 |                                             |  |                            | $ | 934,930  
|                             |  |        |   |  |                                             |      |                                             |   |                            |   |          



|(1) | These amounts represent the difference between the exercise price and $3.68, the closing price of Dynacq common stock on May 31, 2009 as reported on the NASDAQ
stock market, for all in-the-money options outstanding. For exercised options, intrinsic value represents the difference between the exercise price and the closing price of Dynacq common stock on the date of exercise.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the three and nine month periods ended May 31, 2009, the Company received $3,750 for stock options exercised. Total tax benefit realized for
the tax deductions from stock options exercised was $-0- for the three and nine month periods ended May 31, 2009. For the three and nine month periods ended May 31, 2008, the Company received $264,277 and $571,546, respectively, for stock
options exercised. Total tax benefit realized for the tax deductions from stock options exercised was $24,500 and $70,800 for the three and nine month periods ended May 31, 2008, respectively.

The following summarizes information related to stock options outstanding at May 31, 2009, and related weighted average price and life information:



|                         |  |                              |  |                                                 |  |                              |      |        |     |                              |  |  |   |     
|------------------------ |  | ---------------------------- |  | ----------------------------------------------- |  | ---------------------------- | ---- | ------ | --- | ---------------------------- |  |  | - | ----
|                         |  | Options Outstanding          |  | Options Exercisable                            
|Range of Exercise Prices |  | Shares                       |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |      | Shares |     | WeightedAverageExercisePrice
|                         |  | (Share Amounts In Thousands)
|$ 2.50  2.75            |  | 813                          |  | 4.1                                             |  | $                            | 2.53 |        | 181 |                              |  |  | $ | 2.53
|$ 4.44  5.10            |  | 574                          |  | 4.0                                             |  |                              | 4.78 |        | 474 |                              |  |  |   | 4.71
|                         |  |                              |  |                                                 |  |                              |      |        |     |                              |  |  |   |     
|Total                    |  | 1,387                        |  | 4.1                                             |  | $                            | 3.46 |        | 655 |                              |  |  | $ | 4.11
|                         |  |                              |  |                                                 |  |                              |      |        |     |                              |  |  |   |     

The above tables for stock option activities and stock options outstanding do not include a
performance share award granted on July 25, 2008 by the Compensation Committee to an employee whereby the employee can earn up to 1 million shares of the Companys common stock if certain operating performance criteria are met,
beginning in fiscal 2010. The number of shares that are issuable each year is to be determined by quantifying the performance criteria and dividing the quantified amount by $3.74, which was the market price of the Companys stock on the date of
grant of the award. The performance period extends for ten years or until such time as the 1 million shares of common stock have been awarded.

Additional information relating to the Plan at May 31, 2009 and August 31, 2008 is as follows (in thousands):



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##### Table of Contents

|                                                                                    |  |              |  |                
|----------------------------------------------------------------------------------- |  | ------------ |  | ---------------
|                                                                                    |  | May 31, 2009 |  | August 31, 2008
|Options exercisable                                                                 |  | 655          |  | 838            
|Options available for grant and reserved common stock shares for stock option plans |  | 1,402        |  | 1,220          

For the three and nine month periods ended May 31, 2009, stock-based compensation expense
associated with the Companys stock options was $121,001 and $364,512, respectively. The total unrecognized compensation expense for outstanding stock options as of May 31, 2009 was $1.1 million, and will be recognized, in general, over
2.3 years. The weighted average number of years to recognize the compensation expense is 1.2 years.

Fair Value of Financial Instruments

Effective September 1, 2008, the Company adopted SFAS No. 157 for our financial assets and liabilities. Management uses the fair value
hierarchy of SFAS No. 157, Fair-Value Measurements, which gives the highest priority to quoted prices in active markets. The fair value of financial instruments is estimated based on market trading information, where available.
Absent published market values for an instrument or other assets, management uses observable market data to arrive at its estimates of fair value. Management believes that the carrying amount of cash and cash equivalents, accounts receivable and
accrued liabilities approximate fair value. SFAS No. 157 defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS
No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:



|        |  |                                                                                                                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Quoted prices in active markets for identical assets or liabilities.                                                                                                                                                                                                                                                         
|        | 
|Level 2 |  | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted price for identical or similar assets and
liabilities in markets that are not active; or other input that are observable or can be corroborated by observable market data.
|        | 
|Level 3 |  | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use significant unobservable inputs.                                    

The following table summarizes our financial assets and liabilities measured and reported in the
Companys statement of financial position at fair value on a recurring basis as of May 31, 2009, segregated among the appropriate levels within the fair value hierarchy:



|                               |  |                                              |           |                                    |   |                         |  
|------------------------------ |  | -------------------------------------------- | --------- | ---------------------------------- | - | ----------------------- | -
|                               |  | Fair Value Measurements at May 31, 2009     
|                               |  | Quoted prices in activemarkets for identical |           | Significant otherobservable inputs |   | Significantunobservable
|                               |  | (Level 1)                                    |           | (Level 2)                          |   | (Level 3)              
|Assets                         |  |                                              |           |                                    |   |                         |  
|Investments available-for-sale |  | $                                            | 8,699,864 |                                    |  |                         | 

Revenue Recognition

Background

The Companys revenue recognition policy is significant because net patient service revenue is a primary
component of its results of operations. Revenue is recognized as services are delivered. The determination of the amount of revenue to be recognized in connection with the Companys services is subject to significant judgments and estimates,
which are discussed below.



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Revenue Recognition Policy

The Company has established billing rates for its medical services which it bills as gross revenue as services are delivered. Gross billed revenues are then reduced by the Companys estimate of the discount
(contractual allowance) to arrive at net patient service revenues. Net patient service revenues are based on historical cash collections as discussed below and may not represent amounts ultimately collected. The Company does adjust current period
revenue for actual differences in estimated revenue recorded in prior periods and actual cash collections.

The Company has recorded
additional revenue of $1,324,000 and $5,841,000 during the three and nine months ended May 31, 2008 related to amounts collected on Medical Dispute Resolution (MDR) accounts receivable. The Company settled various MDR claims for our
Pasadena and Garland facilities and collected a total of $20,194,000 through May 31, 2008, for dates of service ranging from 2001 to 2005. This amount represents payments received initially at the time of filing of the claim, additional monies
received upon filing the MDR claim and the settlement amount. On these closed MDR accounts receivable, the Company had recognized approximately $14,353,000 as net revenue during the relevant fiscal years when the service was performed. Gross
billings on this block of receivables were $27,453,000. Since the Company actually collected $5,841,000 more on this block of receivables, additional revenue of $682,000, $3,835,000 and $1,324,000 was recorded in the first, second and third quarters
of the prior fiscal year.

Contractual Allowance

Starting March 1, 2008, the Company computes its contractual allowance based on the estimated collections on its gross billed charges. The Company computes its estimate by taking into account collections received
for the services performed and also estimating amounts collectible within the next six months. Prior to March 1, 2008, the contractual allowance was calculated based on the ratio of the Companys historical cash collections during the
trailing twelve months on a case-by-case basis by operating facility. This ratio of cash collections to billed services was then applied to the gross billed services by operating facility. The following table shows gross revenues and contractual
allowances for the three and nine months ended May 31, 2009 and 2008:



|                                 |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|-------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                 |  | Three months ended May 31, |            |   | Nine months ended May 31, |  
|                                 |  | 2009                       |            |   | 2008(1)                   |   |            | 2009 |  |   | 2008(1)     |  
|Gross billed charges             |  | $                          | 28,559,053 |   |                           | $ | 36,213,048 |      |  | $ | 105,228,701 |   |  | $ | 100,068,247 |  
|Contractual allowance            |  |                            | 15,554,717 |   |                           |   | 22,037,151 |      |  |   | 68,557,807  |   |  |   | 50,970,167  |  
|                                 |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Net revenue                      |  | $                          | 13,004,336 |   |                           | $ | 14,175,897 |      |  | $ | 36,670,894  |   |  | $ | 49,098,080  |  
|                                 |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  
|Contractual allowance percentage |  |                            | 54         | % |                           |   | 61         | %    |  |   | 65          | % |  |   | 51          | %
|                                 |  |                            |            |   |                           |   |            |      |  |   |             |   |  |   |             |  



|(1) | The contractual allowance percentage without the additional revenue discussed above under Revenue Recognition Policy would be 65% and 57% respectively
for the three and nine month periods ended May 31, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A significant amount of our net revenue results from Texas
workers compensation claims, which are governed by the rules and regulations of the Texas Division of Workers Compensation (TDWC) and the workers compensation healthcare networks. If one of our hospitals chooses to
participate in a network, the amount of revenue that will be generated from workers compensation claims will be governed by the network contract.

For claims arising prior to the implementation of workers compensation networks and out of network claims, inpatient and outpatient surgical services are either reimbursed pursuant to the Acute Care In-Patient
Hospital Fee Guideline or at a fair and reasonable rate for services in which the fee guideline is not applicable. Starting March 1, 2008, the Texas Workers Compensation 2008 Acute Care Hospital Outpatient and Inpatient
Facility Fee Guidelines (the Guidelines) became effective. Under these Guidelines, the reimbursement amounts are determined by applying the most recently adopted and effective Medicare reimbursement formula and factors; however, if the
maximum allowable reimbursement for the procedure performed cannot be calculated using these Guidelines, then reimbursement is determined on a fair and reasonable basis.

Based on these new Guidelines, the reimbursement due the Company for workers compensation cases is lower than we previously experienced. The Company has continued accepting Texas workers compensation
cases, and



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has not made any substantial changes in its focus towards such cases. Our net patient service revenue for Texas workers compensation cases as a
percentage of gross billings has decreased primarily as a result of lower reimbursement rates for workers compensation procedures still being performed.

Should our facility disagree with the amount of reimbursement provided by a third-party payer, we are required to pursue the MDR process at the TDWC to request proper reimbursement for services. In the past, the
Company had been successful in its pursuit of collections regarding the stop-loss cases pending before the State Office of Administrative Hearings (SOAH), receiving positive rulings in over 90% of its claims presented for administrative
determination. The 2007 district court decision upholding our interpretation of the statute as applied to the stop-loss claims was appealed by certain insurance carriers, and the Third Court of Appeals determined that in order for a hospital to be
reimbursed at 75% of its usual and customary audited charges for an inpatient admission, the hospital must not only bill at least $40,000, but also show that the admission involved unusually costly and unusually extensive services. Procedurally, the
decision means that each case where a carrier raised an issue regarding whether the services provided were unusually costly or unusually extensive would be remanded to either SOAH or MDR for a case-by-case determination of whether the services
provided meet these standards, once the definitions of those standards are determined. A request for rehearing of the Third Court of Appeals decision was denied. A petition asking the Texas Supreme Court to review the Third Court of Appeals decision
was filed on March 30, 2009 and on May 22, 2009, the Texas Supreme Court requested that the respondents file a response to the petition for review. The respondents filed a response on June 22, 2009. We anticipate further, lengthy
litigation at the Travis County District Courts and the Texas Courts of Appeal to establish the legal definition for these standards. Because of this lengthy process and the uncertainty of recovery in these cases, collection of a material amount of
funds in these pending stop-loss cases is not anticipated during the 2009 fiscal year.

Through May 2009, insurance carriers have
voluntarily paid the awards in the decisions and orders issued by SOAH, plus interest, in approximately 180 cases, involving approximately $11 million. In most of these cases, the carriers have requested refunds of the payments made in the event
that the SOAH decisions and orders are reversed on appeal. We believe the likelihood that the Company will be obligated to refund the payments is remote. Our request that the TDWC Commissioner enforce the awards which have not been voluntarily paid
by the carriers has been refused in approximately 130 cases.

Claims regarding payment for hospital outpatient services remain pending at
the TDWC. It is expected that these claims will be adjudicated at SOAH and ultimately in the Texas district and appellate courts. The basis for reimbursement for these services made the subject of these pending cases is the determination of
fair and reasonable charges. In 2007, we received unfavorable rulings from SOAH in all of our appeals of unfavorable decisions related to services provided in 2001 and 2002. The 179 cases, which have been appealed to the Travis County
district courts, challenge the constitutionality of the relevant statutory language. The Company received an unfavorable ruling in its lead case in March 2009, which ruling has been appealed to the Third Court of Appeals. If upheld by the Texas
Court of Appeal, this ruling will impact cases in which a fee guideline was not applicable, specifically all pending cases involving ambulatory surgical services provided in 2001 and 2002 as well as all pending cases involving hospital outpatient
services provided prior to March 1, 2008. Successful collection of material amounts in these cases is unlikely.

We are currently
pursuing claims against two healthcare agents relating to contracts with certain of our facilities which set out reimbursement guidelines by several workers compensation carriers at a minimum of 70% of the facilitys charges. Discovery is
continuing on these claims to determine which carriers are involved and the amount of reimbursement due to us.

Due to the uncertainties
regarding the accounts receivable in the MDR process, the recent request for review of the Third Court of Appeals opinion and our legal counsels advice that settlements with insurance carriers have virtually stopped, the Company has
fully reserved all accounts receivable related to the MDR process as of August 31, 2008 and May 31, 2009. Any monies collected for these MDR accounts receivable will be recorded as current periods net patient service revenues.

Accounts Receivable

Accounts
receivable represent net receivables for services provided by the Company. Due to reasons discussed above for writing down all MDR accounts receivable, the Company does not have any long term receivables since



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August 31, 2008, and expects to collect the net receivables within twelve months from the end of the current period. At each balance sheet date
management reviews the accounts receivable for collectibility.

The contractual allowance stated as a percentage of gross receivables at
the balance sheet dates is larger than the contractual allowance percentage used to reduce gross billed charges due to the application of partial cash collections to the outstanding gross receivable balances, without any adjustment being made to the
contractual allowance. The contractual allowance amounts netted against gross receivables are not adjusted until such time as the final collections on an individual receivable are recognized.

Discontinued Operations

The Company sold its land in
The Woodlands, Texas in the quarter ended November 30, 2007. The Company sold its Baton Rouge facility in the quarter ended February 29, 2008, and has accounted for its operations as discontinued operations. A summary of financial
information related to the Companys discontinued operations for the three and nine months ended May 31, 2008 is as follows:



|                                                               |  |                                |       |   |                               |   |            |  
|-------------------------------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | - | ---------- | -
|                                                               |  | Three months endedMay 31, 2008 |       |   | Nine months endedMay 31, 2008 |  
|Net patient service revenue                                    |  | $                              |      |   |                               | $ | 3,796,025  |  
|Costs and expenses                                             |  |                                | 6,219 |   |                               |   | (3,949,998 | )
|Other income (expense)                                         |  |                                | (70   | ) |                               |   | 112,797    |  
|                                                               |  |                                |       |   |                               |   |            |  
|Income (loss) before income taxes                              |  |                                | 6,149 |   |                               |   | (41,176    | )
|Benefit for income taxes                                       |  |                                |      |   |                               |   | 16,800     |  
|                                                               |  |                                |       |   |                               |   |            |  
|Income (loss) from discontinued operation, net of income taxes |  |                                | 6,149 |   |                               |   | (24,376    | )
|                                                               |  |                                |       |   |                               |   |            |  
|Gain on sale of discontinued operations                        |  |                                |      |   |                               |   | 4,448,184  |  
|Provision for income taxes                                     |  |                                |      |   |                               |   | (1,687,000 | )
|                                                               |  |                                |       |   |                               |   |            |  
|Gain on sale of discontinued operations, net of income taxes   |  |                                |      |   |                               |   | 2,761,184  |  
|                                                               |  |                                |       |   |                               |   |            |  
|Total income from discontinued operations, net of income taxes |  | $                              | 6,149 |   |                               | $ | 2,736,808  |  
|                                                               |  |                                |       |   |                               |   |            |  

Minority Interests

The equity of minority investors (minority investors are generally physician groups and other healthcare providers that perform surgeries at the Companys facilities) in certain subsidiaries of the Company is
reported on the consolidated balance sheets as minority interests. Minority interests reported in the consolidated income statements reflect the respective interests in the income or loss of the limited partnerships or limited liability companies
attributable to the minority investors (equity interests ranged from 0.1% to 1.75% at May 31, 2009).

Comprehensive Income

Comprehensive income for the three and nine month periods ended May 31, 2009 and 2008 is as follows:



|                                                                                                                        |  |                            |           |      |                           |           |      |  |   |          |   |  |   |           
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | --------- | ---- | ------------------------- | --------- | ---- |  | - | -------- | - |  | - | ----------
|                                                                                                                        |  | Three months ended May 31, |           |      | Nine months ended May 31,
|                                                                                                                        |  | 2009                       |           | 2008 |                           |           | 2009 |  |   | 2008    
|Net income                                                                                                              |  | $                          | 1,004,415 |      | $                         | 1,028,559 |      |  | $ | 652,272  |   |  | $ | 10,824,069
|Foreign currency translation adjustment, net of taxes of $93,400, $(23,094), $91,600 and $73,606, respectively          |  |                            | 173,546   |      |                           | (42,892   | )    |  |   | 170,146  |   |  |   | 127,034   
|Change in valuation of investment available-for-sale, net of taxes of $230,500, $-0-, $(231,000) and $-0-, respectively |  |                            | 428,102   |      |                           |          |      |  |   | (429,000 | ) |  |   |          
|                                                                                                                        |  |                            |           |      |                           |           |      |  |   |          |   |  |   |           
|Comprehensive income                                                                                                    |  | $                          | 1,606,063 |      | $                         | 985,667   |      |  | $ | 393,418  |   |  | $ | 10,951,103
|                                                                                                                        |  |                            |           |      |                           |           |      |  |   |          |   |  |   |           



14



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##### Table of Contents

Contingencies

The Company maintains various insurance policies that cover each of its facilities; including occurrence medical malpractice coverage. In addition, all physicians granted privileges at the Companys facilities are required to maintain
medical malpractice insurance coverage. The Company also maintains general liability and property insurance coverage for each facility, including flood coverage. The Company does not currently maintain workers compensation coverage in Texas.
In regard to the Employee Health Insurance Plan, the Company is self-insured with specific and aggregate re-insurance with stop-loss levels appropriate for the Companys group size. Coverage is maintained in amounts management deems adequate.

The Company is routinely involved in litigation and administrative proceedings that are incidental to its business. Specifically, all
judicial review of unsatisfactory determinations of reimbursement amounts due us for our Texas facilities fees must be made in the district courts of Travis County, Texas in what can often be a lengthy procedure. Please refer to Revenue
Recognition, as well as Business  Government Regulation  Texas Workers Compensation Systems and Managements Discussion and Analysis of Financial Condition and Results of Operations  Revenue Recognition in our Form 10-K
for the fiscal year ended August 31, 2008, for a detailed description of the MDR process and our accounts receivable. The Company cannot predict whether any litigation or administrative proceeding to which it is currently a party will have a
material adverse effect on the Companys results of operations, cash flows or financial condition.

Industry Segments and Geographic Information

We manage our operations through two operating segments, based on our geographic areas: U.S. and China.

U.S. Division

The U.S. Division owns two hospitals,
which are the Pasadena facility and the Garland facility. Our U.S. Division develops and operates general acute care hospitals designed to handle specialized surgeries such as bariatric, orthopedic and neuro-spine surgeries. Both of these facilities
also provide pain management services, as well as minor emergency treatment services. The Pasadena facility also provides sleep laboratory services.

China Division

Our China Division is set up to provide healthcare management services in China. Effective March 1,
2009, Dynacq-Huai Bei is managing the Second Peoples Hospital in Rui An, China. Dynacq-Huai Bei is ultimately responsible for funding any operating deficits, and is to be rewarded with any operating profits, of that hospital during the
management period. For the quarter ended May 31, 2009, Second Peoples Hospital had net patient service revenues of approximately $1.2 million.

In April 2008, the Company formed Dynacq-Huai Bei, to provide healthcare management services to hospitals in China. Dynacq-Huai Bei has entered into an Agreement to Assign Management with Rui An City Department of
Health assigning to Dynacq-Huai Bei the right to manage the operations, human resources and financials of the Third Peoples Hospital in Rui An beginning October 2009, when the new hospital currently under construction is completed and
operational. Dynacq-Huai Bei is currently overseeing the construction of that hospital until it is completed.

The Company has also
organized Sino Bond Inc. Limited, a Hong Kong corporation (Sino Bond), to hold investments in Hong Kong. Sino Bond has no operations to date but has entered into a three-year marketing contract effective October 1, 2008 for
marketing of healthcare services to be provided by Dynacq subsidiaries in China and Southeast Asia.

We generally evaluate performance
based on profit or loss from operations before income taxes and non-recurring charges and other criteria. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. There are
no transfers between segments.



15



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##### Table of Contents

Summarized financial information concerning the business segments from continuing operations is as
follows:



|                                                       |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------ |  | -------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                       |  | Three months ended May 31, |            |   | Nine months ended May 31, |  
|                                                       |  | 2009                       |            |   | 2008                      |   |            | 2009 |  |   | 2008       |  
|Revenues from external customers                       |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net patient service revenues                           |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|U.S. Division                                          |  | $                          | 11,827,058 |   |                           | $ | 14,175,897 |      |  | $ | 35,493,616 |   |  | $ | 49,098,080 |  
|China Division                                         |  |                            | 1,177,278  |   |                           |   |           |      |  |   | 1,177,278  |   |  |   |           |  
|                                                       |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Consolidated                                           |  | $                          | 13,004,336 |   |                           | $ | 14,175,897 |      |  | $ | 36,670,894 |   |  | $ | 49,098,080 |  
|                                                       |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before taxes and discontinued operations |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|U.S. Division                                          |  | $                          | 1,744,169  |   |                           | $ | 2,103,163  |      |  | $ | 2,307,575  |   |  | $ | 14,327,459 |  
|China Division                                         |  |                            | (109,672   | ) |                           |   | (339,026   | )    |  |   | (960,819   | ) |  |   | (971,899   | )
|                                                       |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Consolidated                                           |  | $                          | 1,634,497  |   |                           | $ | 1,764,137  |      |  | $ | 1,346,756  |   |  | $ | 13,355,560 |  
|                                                       |  |                            |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



|               |  |              |            |              |   |           
|-------------- |  | ------------ | ---------- | ------------ | - | ----------
|               |  | May 31, 2009 |            | May 31, 2008
|Total Assets   |  |              |            |              |   |           
|U.S. Division  |  | $            | 44,429,772 |              | $ | 68,146,190
|China Division |  |              | 32,671,225 |              |   | 16,646,349
|               |  |              |            |              |   |           
|Consolidated   |  | $            | 77,100,997 |              | $ | 84,792,539
|               |  |              |            |              |   |           



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

This quarterly report on Form 10-Q contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as
may, will, should, expects, intends, plans, anticipates, believes, estimates, predicts, potential, or the negative of
these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Such forward-looking statements relate to future events or future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause our Companys actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by the forward-looking statements, including the risks and uncertainties described in Risk Factors in our annual report on Form 10-K for the fiscal year ended August 31, 2008. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You must read the following discussion of the results of our business and our operations and financial
condition in conjunction with our reviewed consolidated financial statements, including the notes, included in this quarterly report on Form 10-Q and our audited consolidated financial statements, including the notes, included in our Annual Report
on Form 10-K for the fiscal year ended August 31, 2008.

Update on Critical Accounting Policies and Estimates

There have been no changes to the critical accounting policies used in our reporting of results of operations and financial position for the quarter ended
May 31, 2009. For a discussion of our critical accounting policies see Managements Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended August 31, 2008.



16



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##### Table of Contents

Results of Operations



|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|----------------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------- | --- | - | ---- | - | ---------- | ---- |  | --- | - |  | - | ---------- | - |  | --- | - |  | - | ---------- | - |  | --- | -
|                                                                        |  | Three months ended May 31, |            |   | Nine months ended May 31, |    
|                                                                        |  | 2009                       |            |   | 2008                      |     |   | 2009 |   |            | 2008 | 
|Net patient service revenue:                                            |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|U.S. Division                                                           |  | $                          | 11,827,058 |   |                           | 91  | % |      | $ | 14,175,897 |      |  | 100 | % |  | $ | 35,493,616 |   |  | 97  | % |  | $ | 49,098,080 |   |  | 100 | %
|China Division                                                          |  |                            | 1,177,278  |   |                           | 9   |   |      |   |           |      |  |    |   |  |   | 1,177,278  |   |  | 3   |   |  |   |           |   |  |    |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Total                                                                   |  |                            | 13,004,336 |   |                           | 100 |   |      |   | 14,175,897 |      |  | 100 |   |  |   | 36,670,894 |   |  | 100 |   |  |   | 49,098,080 |   |  | 100 |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Costs and expenses:                                                     |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|U.S. Division:                                                          |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Compensation and benefits                                               |  |                            | 3,999,337  |   |                           | 31  |   |      |   | 3,798,519  |      |  | 27  |   |  |   | 11,508,555 |   |  | 31  |   |  |   | 11,751,322 |   |  | 24  |  
|Medical services and supplies                                           |  |                            | 2,293,773  |   |                           | 18  |   |      |   | 4,367,174  |      |  | 31  |   |  |   | 8,555,309  |   |  | 23  |   |  |   | 10,749,871 |   |  | 22  |  
|Other operating expenses                                                |  |                            | 3,640,548  |   |                           | 28  |   |      |   | 3,445,250  |      |  | 24  |   |  |   | 12,409,628 |   |  | 34  |   |  |   | 10,852,606 |   |  | 22  |  
|Depreciation and amortization                                           |  |                            | 269,695    |   |                           | 2   |   |      |   | 496,201    |      |  | 4   |   |  |   | 1,011,787  |   |  | 3   |   |  |   | 1,522,681  |   |  | 3   |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|                                                                        |  |                            | 10,203,353 |   |                           | 78  |   |      |   | 12,107,144 |      |  | 85  |   |  |   | 33,485,279 |   |  | 91  |   |  |   | 34,876,480 |   |  | 71  |  
|China Division                                                          |  |                            | 1,804,929  |   |                           | 14  |   |      |   | 355,893    |      |  | 3   |   |  |   | 3,023,876  |   |  | 8   |   |  |   | 1,003,406  |   |  | 2   |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Total                                                                   |  |                            | 12,008,282 |   |                           | 92  |   |      |   | 12,463,037 |      |  | 88  |   |  |   | 36,509,155 |   |  | 100 |   |  |   | 35,879,886 |   |  | 73  |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Operating income                                                        |  |                            | 996,054    |   |                           | 8   |   |      |   | 1,712,860  |      |  | 12  |   |  |   | 161,739    |   |  |    |   |  |   | 13,218,194 |   |  | 27  |  
|Other income, net                                                       |  |                            | 649,493    |   |                           | 5   |   |      |   | 66,581     |      |  |    |   |  |   | 1,194,736  |   |  | 3   |   |  |   | 234,412    |   |  |    |  
|Minority interest in earnings                                           |  |                            | (11,050    | ) |                           |    |   |      |   | (15,304    | )    |  |    |   |  |   | (9,719     | ) |  |    |   |  |   | (97,046    | ) |  |    |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Income before income taxes                                              |  |                            | 1,634,497  |   |                           | 13  |   |      |   | 1,764,137  |      |  | 12  |   |  |   | 1,346,756  |   |  | 4   |   |  |   | 13,355,560 |   |  | 27  |  
|Provision for income taxes                                              |  |                            | (630,082   | ) |                           | (5  | ) |      |   | (741,727   | )    |  | (5  | ) |  |   | (694,484   | ) |  | (2  | ) |  |   | (5,349,664 | ) |  | (11 | )
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Income from continuing operations                                       |  |                            | 1,004,415  |   |                           | 8   |   |      |   | 1,022,410  |      |  | 7   |   |  |   | 652,272    |   |  | 2   |   |  |   | 8,005,896  |   |  | 16  |  
|Income (loss) from discontinued operations, net of income taxes         |  |                            |           |   |                           |    |   |      |   | 6,149      |      |  |    |   |  |   |           |   |  |    |   |  |   | (24,376    | ) |  |    |  
|Gain on sale of discontinued operations, net of income taxes            |  |                            |           |   |                           |    |   |      |   |           |      |  |    |   |  |   |           |   |  |     |   |  |   | 2,761,184  |   |  | 6   |  
|Extraordinary gain, net of income taxes                                 |  |                            |           |   |                           |    |   |      |   |           |      |  |    |   |  |   |           |   |  |    |   |  |   | 81,365     |   |  |    |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Net income                                                              |  | $                          | 1,004,415  |   |                           | 8   | % |      | $ | 1,028,559  |      |  | 7   | % |  | $ | 652,272    |   |  | 2   | % |  | $ | 10,824,069 |   |  | 22  | %
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Operational statistics (Number of medical procedures) for U.S. Division |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Inpatient:                                                              |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Bariatrics                                                              |  |                            | 48         |   |                           |     |   |      |   | 240        |      |  |     |   |  |   | 341        |   |  |     |   |  |   | 633        |   |  |     |  
|Orthopedics                                                             |  |                            | 67         |   |                           |     |   |      |   | 78         |      |  |     |   |  |   | 195        |   |  |     |   |  |   | 219        |   |  |     |  
|Other                                                                   |  |                            | 17         |   |                           |     |   |      |   | 84         |      |  |     |   |  |   | 94         |   |  |     |   |  |   | 162        |   |  |     |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Total inpatient procedures                                              |  |                            | 132        |   |                           |     |   |      |   | 402        |      |  |     |   |  |   | 630        |   |  |     |   |  |   | 1,014      |   |  |     |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Outpatient:                                                             |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Orthopedics                                                             |  |                            | 169        |   |                           |     |   |      |   | 170        |      |  |     |   |  |   | 515        |   |  |     |   |  |   | 398        |   |  |     |  
|Other                                                                   |  |                            | 339        |   |                           |     |   |      |   | 317        |      |  |     |   |  |   | 1,064      |   |  |     |   |  |   | 993        |   |  |     |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Total outpatient procedures                                             |  |                            | 508        |   |                           |     |   |      |   | 487        |      |  |     |   |  |   | 1,579      |   |  |     |   |  |   | 1,391      |   |  |     |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  
|Total procedures                                                        |  |                            | 640        |   |                           |     |   |      |   | 889        |      |  |     |   |  |   | 2,209      |   |  |     |   |  |   | 2,405      |   |  |     |  
|                                                                        |  |                            |            |   |                           |     |   |      |   |            |      |  |     |   |  |   |            |   |  |     |   |  |   |            |   |  |     |  

Three Months Ended May 31, 2009 Compared to the Three Months Ended May 31, 2008

U.S. Division

Net patient service revenue decreased
by $2,348,839, or 17%, from $14,175,897 to $11,827,058, and total surgical cases decreased by 28% from 889 cases to 640 cases for the quarter ended May 31, 2009 from the quarter



17



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##### Table of Contents

ended May 31, 2008. The decrease in net patient service revenue was due to additional revenues of $1,324,000 recorded in the third quarter ended
May 31, 2008 related to amounts collected on MDR accounts receivable, as discussed under Revenue Recognition Policy and also due to an overall decrease in number of cases by 28% in 2009 compared to 2008. There was a significant
decrease of 67% in inpatient cases, which typically have higher average reimbursement per case compared to outpatient cases. These decreases in net patient service revenue were partially offset by a decrease in the contractual allowance as a
percentage of gross billed charges. The contractual allowance decreased from 61% of gross billed charges for the quarter ended May 31, 2008 to 54% of gross billed charges for the quarter ended May 31, 2009.

Following are the percentage changes in net patient service revenues and number of cases at the hospital facilities:



|         |  |                                                 |   |  |       |  
|-------- |  | ----------------------------------------------- | - |  | ----- | -
|         |  | Percentage increase/(decrease)from 2008 to 2009 |  
|Facility |  | Net patientservice revenue                      |   |  | Cases |  
|Pasadena |  | 3                                               | % |  | 15    | %
|Garland  |  | (31                                             | ) |  | (55   | )
|Overall  |  | (17                                             | ) |  | (28   | )

Total costs and expenses decreased by $1,903,791, or 16%, from $12,107,144 in 2008 to $10,203,353
in 2009. The following discusses the various changes in costs and expenses:



| |  |  | Compensation and benefits increased by $200,818, or 5%, primarily due to normal increases in salaries and benefits, and also due to a marginal increase in the
number of full time equivalent employees.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Medical services and supplies expenses decreased by $2,073,401, or 47%, while the number of surgery cases decreased 28%, primarily due to a 67% decrease in
inpatient cases, which typically require more medical services and supplies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other operating expenses increased by $195,298, or 6%. Other operating expenses as a percentage of gross billed charges was 13.3% and 9.5% for the quarters ended
May 31, 2009 and 2008, respectively. The increase was primarily due to marketing expenses. Other operating expenses, excluding marketing expenses, as a percentage of gross billed charges was consistent at 7.8% and 7.4% for the quarters ended
May 31, 2009 and 2008, respectively.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

China Division

Effective March 1, 2009, Dynacq-Huai Bei is managing the Second Peoples Hospital in Rui An, China. Dynacq-Huai Bei is ultimately responsible
for funding any operating deficits, and is to be rewarded with any operating profits, of that hospital during the management period. For the quarter ended May 31, 2009, Second Peoples Hospital had net patient service revenues of
$1,177,278.

Total costs and expenses for the China Division increased by $1,449,036, from $355,893 in 2008 to $1,804,929 in 2009. In 2008,
development costs were incurred for the construction of a hospital in Shanghai. However, in the fourth quarter of fiscal year 2008, the Company sold its interest in the property owned by that joint venture. In 2009, total costs and expenses includes
the operations associated with Second Peoples Hospital in Rui An, China and marketing expenses of approximately $300,000 incurred by Sino Bond.

Total other income, net increased by $582,912, from $66,581 in 2008 to $649,493 in 2009, primarily due to interest income associated with the bonds purchased in the first and third quarters of the current fiscal year.

Nine Months Ended May 31, 2009 Compared to the Nine Months Ended May 31, 2008

U.S. Division

Net patient service revenue decreased
by $13,604,464, or 28%, from $49,098,080 to $35,493,616, and total surgical cases decreased by 8% from 2,405 cases to 2,209 cases for the nine months ended May 31, 2009 from the nine months ended May 31, 2008. The decrease in net patient
service revenue was due to additional revenues of



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$5,841,000 recorded in the nine months ended May 31, 2008 related to amounts collected on MDR accounts receivable, as discussed under Revenue
Recognition Policy and also due to an overall decrease in number of cases by 8% in 2009 compared to 2008. There was a significant decrease of 38% in inpatient cases, which typically have higher average reimbursement per case compared to
outpatient cases. Gross billed charges and net patient service revenues were also negatively impacted by Hurricane Ike in the month of September 2008 for our Pasadena facility, which was not in full operations for about three weeks. The
decreases in net patient service revenue were also attributable to an increase in the contractual allowance as a percentage of gross billed charges from 51% for the nine months ended May 31, 2008 to 66% for the nine months ended May 31,
2009.

Following are the percentage changes in net patient service revenues and number of cases at the hospital facilities:



|         |  |                                                 |    |  |       |  
|-------- |  | ----------------------------------------------- | -- |  | ----- | -
|         |  | Percentage increase/(decrease)from 2008 to 2009 |   
|Facility |  | Net patientservice revenue                      |    |  | Cases |  
|Pasadena |  | (32                                             | )% |  | 14    | %
|Garland  |  | (25                                             | )  |  | (22   | )
|Overall  |  | (28                                             | )  |  | (8    | )

Total costs and expenses decreased by $1,391,201, or 4%, from $34,876,480 in 2008 to $33,485,279
in 2009. The following discusses the various changes in costs and expenses:



| |  |  | Compensation and benefits decreased marginally by $242,767, or 2%, primarily due to cash incentive bonuses of approximately $1,053,000 paid to employees during the
nine months ended May 31, 2008, with no such corresponding expense during the nine months ended May 31, 2009. This decrease was partially offset by normal increases in salaries and benefits and a marginal increase in the number of full
time equivalent employees.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Medical services and supplies expenses decreased by $2,194,562, or 20%, while the number of surgery cases decreased 8%, primarily due to a 38% decrease in inpatient
cases, which typically require more medical services and supplies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other operating expenses increased by $1,557,022, or 14%. Other operating expenses as a percentage of gross billed charges was 11.9% and 10.8% for the nine months
ended May 31, 2009 and 2008, respectively. The increase was primarily due to marketing expenses. Other operating expenses, excluding marketing expenses, as a percentage of gross billed charges was consistent at 7.6% and 8.9% for the nine months
ended May 31, 2009 and 2008, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

China Division

Effective March 1, 2009, Dynacq-Huai Bei is managing the Second Peoples Hospital in Rui An, China. Dynacq-Huai Bei is ultimately responsible
for funding any operating deficits, and is to be rewarded with any operating profits, of that hospital during the management period. For the nine months ended May 31, 2009, Second Peoples Hospital had net patient service revenues of
$1,177,278.

Total costs and expenses for the China Division increased by $2,020,470, from $1,003,406 in 2008 to $3,023,876 in 2009. In
2008, development costs were incurred for the construction of a hospital in Shanghai. However, in the fourth quarter of fiscal year 2008, the Company sold its interest in the property owned by that joint venture. In 2009, total costs and expenses
includes the operations associated with Second Peoples Hospital in Rui An, China and marketing expenses of approximately $800,000 incurred by Sino Bond.

Total other income, net increased by $960,324, from $234,412 in 2008 to $1,194,736 in 2009, primarily due to interest income associated with the bonds purchased in the first and third quarters of the current fiscal
year.

Liquidity and Capital Resources

Our 2008 Annual Report on Form 10-K includes a detailed discussion of our liquidity, contractual obligations and commitments. The information presented below updates and should be read in conjunction with the information disclosed in that
Form 10-K.



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Cash flow from operating activities

Total cash flow provided by operating activities was $6,247,908 during the period ended May 31, 2009, primarily due to net income of $652,272, decreases in accounts receivable of $10,345,773 and depreciation and
amortization of $1,126,514, partially offset by decreases in accounts payable and accrued liabilities of $1,994,907 and net payment of income taxes of $4,408,393.

Cash flow from investing activities

Total cash flow used in investing activities was $12,037,886 primarily due to
investment in available-for-sale securities of $9,134,660, and payments of $2,631,601 for management rights in China.

Cash flow from financing
activities

Total cash flow used in financing activities was $474,444 primarily related to payments on the note payable for class action
lawsuit settlement.

The Company had working capital of $49,624,061 as of May 31, 2009, and maintained a liquid position by a current
ratio of approximately 6.6 to 1.

We believe we will be able to meet our ongoing liquidity and cash needs for fiscal year 2009 through the
combination of available cash and cash flow from operations.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)) and SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements (SFAS No. 160). These new standards represent the outcome of the FASBs joint project with the International
Accounting Standards Board and are intended to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements.

SFAS No. 141(R) replaces SFAS No. 141, Business Combinations, however, it retains the fundamental requirements of the former
Statement that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business. This Statement defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. The new standard requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.

SFAS
No. 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
This Statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement changes the way the consolidated
income statement is presented by requiring net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and to disclose those amounts on the face of the income statement. It also
aligns the reporting of noncontrolling interest in subsidiaries with the requirements in International Accounting Standard 27.

Both SFAS
No. 141(R) and SFAS No. 160 are effective beginning in our fiscal 2010. SFAS No. 141(R) will be applied to business combinations that are consummated beginning in fiscal 2010, and SFAS No. 160 will be applied prospectively to all
noncontrolling interests, including any that arose before fiscal 2010. We are currently evaluating these Statements and have not yet determined their effect on our consolidated financial statements.



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In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions That Are Not Orderly and FASB Staff Position No. 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments. These two Staff Positions were issued to provide additional guidance about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed transactions, and
(2) recording impairment charges on investments in debt instruments. Additionally, the FASB issued FASB Staff Position No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments to require
disclosures of fair value of certain financial instruments in interim financial statements. All of these Staff Positions are effective for financial statements issued for interim and annual reporting periods ending after June 15,
2009. The Company does not anticipate the adoption of these Staff Positions, other than requirements limited to the form and content of disclosures, will have a material impact on the Companys consolidated financial position, results of
operations or cash flows.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, (SFAS 165), which
establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for financial statements issued for
interim and annual reporting periods ending after June 15, 2009. The Company does not anticipate that the adoption of SFAS 165 will have an impact on the Companys consolidated financial position, results of operations or cash flows.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

Not required.



|Item 4T. | Controls and Procedures.
|-------- | ------------------------

Under the supervision and
with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation to assess the effectiveness of our disclosure controls and procedures as of the end of the period covered by this
report, pursuant to Exchange Act Rule 13a-15(e). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of May 31, 2009, our internal disclosure controls and procedures were effective.

There have been no significant changes in our internal control over financial reporting during the most recently completed fiscal quarter or in other
factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

The Company is routinely
involved in litigation and administrative proceedings that are incidental to its business. Specifically, all judicial review of unsatisfactory determinations of reimbursement amounts due us for our Texas facilities fees must be made in the
district courts of Travis County, Texas in what can often be a lengthy procedure. Please refer to Revenue Recognition in the Notes to Consolidated Financial Statements of this Form 10-Q, as well as Business  Government Regulation  Texas
Workers Compensation Systems and Managements Discussion and Analysis of Financial Condition and Results of Operations  Revenue Recognition in our Form 10-K for the fiscal year ended August 31, 2008, for a detailed description
of the MDR process and our accounts receivable. The Company cannot predict whether any litigation or administrative proceeding to which it is currently a party will have a material adverse effect on the Companys results of operations, cash
flows or financial condition.



|Item 1A. | Risk Factors.
|-------- | -------------

The Companys Risk Factors as
disclosed in its Form 10-K for the year ended August 31, 2008 have not changed.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

Purchases of Equity Securities by the Company

On February 29, 2008 the Companys Board of Directors
authorized a program of repurchasing up to 2 million of its outstanding securities from time to time in open market transactions at prevailing prices on NASDAQ. Shares repurchased during the quarter ended May 31, 2009 pursuant to our
repurchase program are as follows:



|                   |  |                                                                              |  |                       |      |                                                                                                |          
|------------------ |  | ---------------------------------------------------------------------------- |  | --------------------- | ---- | ---------------------------------------------------------------------------------------------- | ---------
|Period             |  | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |  | AveragePrice perShare |      | MaximumNumber of Sharesthat May Yet bePurchased Underthe PubliclyAnnounced Plansor Programs(1)
|March 1  31, 2009 |  | 11,297                                                                       |  | $                     | 3.16 |                                                                                                | 1,523,098
|April 1  30, 2009 |  | 8,555                                                                        |  |                       | 3.54 |                                                                                                | 1,514,543
|May 1  31, 2009   |  | 8,820                                                                        |  |                       | 3.48 |                                                                                                | 1,505,723
|                   |  |                                                                              |  |                       |      |                                                                                                |          
|Total              |  | 28,672                                                                       |  | $                     | 3.37 |                                                                                                | 1,505,723
|                   |  |                                                                              |  |                       |      |                                                                                                |          



|(1) | Subsequent to the quarter ended May 31,
2009 and through July 10, 2009, the Company has repurchased 34,796 shares of common stock as part of this program at an average cost of $3.41 per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

None.



|Item 5. | Other Information.
|------- | ------------------

None.



|Item 6. | Exhibits.
|------- | ---------



|             |  |                                                                                                                                                   
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO.  |  | IDENTIFICATION OF EXHIBIT                                                                                                                         
|Exhibit 15.1 |  | Awareness Letter of Killman, Murrell & Company, P.C.                                                                                              
|             | 
|Exhibit 23.1 |  | Consent of Killman, Murrell and Company, P.C.                                                                                                     
|             | 
|Exhibit 31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|             | 
|Exhibit 32.1 |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|             | 
|Exhibit 32.2 |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                    |  |  |  |                         |  |                                                                                    
|------------------- |  |  |  | ----------------------- |  | -----------------------------------------------------------------------------------
|                    |  |  |  | DYNACQ HEALTHCARE, INC.
|                    |  |  | 
|Date: July 14, 2009 |  |  |  | By:                     |  | /s/ Chiu M. Chan                                                                   
|                    |  |  |  |                         |  | Chiu M. Chan Chief Executive Officer (duly authorized officer)                     
|                    |  |  | 
|Date: July 14, 2009 |  |  |  | By:                     |  | /s/ Philip S. Chan                                                                 
|                    |  |  |  |                         |  | Philip S. Chan Chief Financial Officer (principal financial and accounting officer)



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INDEX OF EXHIBITS



|             |  |                                                                                                                                                   
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO.  |  | IDENTIFICATION OF EXHIBIT                                                                                                                         
|Exhibit 15.1 |  | Awareness Letter of Killman, Murrell and Company, P.C.                                                                                            
|             | 
|Exhibit 23.1 |  | Consent of Killman, Murrell and Company, P.C.                                                                                                     
|             | 
|Exhibit 31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|             | 
|Exhibit 32.1 |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|             | 
|Exhibit 32.2 |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



24