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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 February 28, 2010



| ̈ | 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 (§ 232.405 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 April 6, 2010, the number of shares outstanding of the registrants common stock, par value $.001 per share, was 14,207,115.



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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 February 28, 2010 and August 31, 2009.                             |  | 4   
|                                                         |  |                                                                                                     
|                                                         |  | Consolidated Statements of Operations for the three and six months ended February 28, 2010 and 2009. |  | 6   
|                                                         |  |                                                                                                     
|                                                         |  | Consolidated Statements of Cash Flows for the six months ended February 28, 2010 and 2009.           |  | 7   
|                                                         |  |                                                                                                     
|                                                         |  | Notes to Consolidated Financial Statements.                                                          |  | 9   
|                                                         |  |                                                                                                     
|Item 2.                                                  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.               |  | 18  
|                                                         |  |                                                                                                     
|Item 3.                                                  |  | Quantitative and Qualitative Disclosures About Market Risk.                                          |  | 24  
|                                                         |  |                                                                                                     
|Item 4T.                                                 |  | Controls and Procedures.                                                                             |  | 24  
|                                                         | 
|PART IIOTHER INFORMATION                                |  | 25                                                                                                  
|                                                         |  |                                                                                                     
|Item 1.                                                  |  | Legal Proceedings.                                                                                   |  | 25  
|                                                         |  |                                                                                                     
|Item 1A.                                                 |  | Risk Factors.                                                                                        |  | 25  
|                                                         |  |                                                                                                     
|Item 2.                                                  |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                         |  | 25  
|                                                         |  |                                                                                                     
|Item 3.                                                  |  | Defaults Upon Senior Securities.                                                                     |  | 25  
|                                                         |  |                                                                                                     
|Item 4.                                                  |  | (Removed and Reserved).                                                                              |  | 26  
|                                                         |  |                                                                                                     
|Item 5.                                                  |  | Other Information.                                                                                   |  | 26  
|                                                         |  |                                                                                                     
|Item 6.                                                  |  | Exhibits.                                                                                            |  | 26  
|                                                         | 
|Signatures                                               |  | 27                                                                                                  
|                                                         | 
|Index of Exhibits                                        |  | 28                                                                                                  



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 February 28, 2010, and the related consolidated statements of operations and cash flows for the three-month and six-month periods ended February 28,
2010 and 2009. 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, 2009, 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 23,
2009, 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, 2009, 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

April 14, 2010



3



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PART I-FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

Dynacq Healthcare, Inc.

Consolidated Balance Sheets



|                                                                                                                                                         |  |                   |            |                 |   |           
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | --------------- | - | ----------
|                                                                                                                                                         |  | February 28, 2010 |            | August 31, 2009
|                                                                                                                                                         |  | (Reviewed)        |            | (Audited)      
|Assets                                                                                                                                                   |  |                   |            |                 |   |           
|Current assets:                                                                                                                                          |  |                   |            |                 |   |           
|Cash and cash equivalents                                                                                                                                |  | $                 | 31,617,182 |                 | $ | 39,112,965
|Accounts receivable, net of contractual allowances of approximately $245,095,000 and $236,996,000 at February 28, 2010 and
August 31, 2009, respectively |  |                   | 4,912,583  |                 |   | 8,671,389 
|Inventories                                                                                                                                              |  |                   | 1,495,515  |                 |   | 1,518,815 
|Interest receivable                                                                                                                                      |  |                   | 259,221    |                 |   | 270,374   
|Prepaid expenses                                                                                                                                         |  |                   | 746,629    |                 |   | 373,949   
|Income taxes receivable                                                                                                                                  |  |                   | 2,447,151  |                 |   |          
|Deferred tax assets                                                                                                                                      |  |                   | 592,932    |                 |   | 770,400   
|                                                                                                                                                         |  |                   |            |                 |   |           
|Total current assets                                                                                                                                     |  |                   | 42,071,213 |                 |   | 50,717,892
|Investments available-for-sale                                                                                                                           |  |                   | 21,010,833 |                 |   | 18,572,169
|Property and equipment, net                                                                                                                              |  |                   | 14,662,659 |                 |   | 14,858,207
|Income tax receivable                                                                                                                                    |  |                   | 868,249    |                 |   | 868,249   
|Other assets                                                                                                                                             |  |                   | 247,099    |                 |   | 250,664   
|                                                                                                                                                         |  |                   |            |                 |   |           
|Total assets                                                                                                                                             |  | $                 | 78,860,053 |                 | $ | 85,267,181
|                                                                                                                                                         |  |                   |            |                 |   |           

See accompanying notes.



4



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##### Table of Contents

Dynacq Healthcare, Inc.

Consolidated Balance Sheets (continued)



|                                                                                                                                                             |  |                   |            |   |                 |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ---------- | - | --------------- | - | ---------- | -
|                                                                                                                                                             |  | February 28, 2010 |            |   | August 31, 2009 |  
|                                                                                                                                                             |  | (Reviewed)        |            |   | (Audited)       |  
|Liabilities and stockholders equity                                                                                                                         |  |                   |            |   |                 |   |            |  
|Current liabilities:                                                                                                                                         |  |                   |            |   |                 |   |            |  
|Accounts payable                                                                                                                                             |  | $                 | 3,349,111  |   |                 | $ | 3,395,053  |  
|Accrued liabilities                                                                                                                                          |  |                   | 5,340,081  |   |                 |   | 6,244,978  |  
|Notes payable                                                                                                                                                |  |                   |           |   |                 |   | 251,131    |  
|Current portion of capital lease obligations                                                                                                                 |  |                   | 75,570     |   |                 |   | 80,627     |  
|Current taxes payable                                                                                                                                        |  |                   | 83,000     |   |                 |   | 128,420    |  
|                                                                                                                                                             |  |                   |            |   |                 |   |            |  
|Total current liabilities                                                                                                                                    |  |                   | 8,847,762  |   |                 |   | 10,100,209 |  
|Non-current liabilities:                                                                                                                                     |  |                   |            |   |                 |   |            |  
|Long-term portion of capital lease obligations                                                                                                               |  |                   | 298,289    |   |                 |   | 335,582    |  
|Deferred tax liabilities                                                                                                                                     |  |                   | 3,562,889  |   |                 |   | 2,751,619  |  
|                                                                                                                                                             |  |                   |            |   |                 |   |            |  
|Total liabilities                                                                                                                                            |  |                   | 12,708,940 |   |                 |   | 13,187,410 |  
|                                                                                                                                                             |  |                   |            |   |                 |   |            |  
|Commitments and contingencies                                                                                                                                |  |                   |            |   |                 |   |            |  
|Equity:                                                                                                                                                      |  |                   |            |   |                 |   |            |  
|Dynacq 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, 15,395,802 and 15,815,120 shares issued at February 28, 2010
and August 31, 2009, respectively |  |                   | 15,396     |   |                 |   | 15,815     |  
|Treasury stock, 1,175,138 and 489,672 shares at February 28, 2010 and August 31, 2009, respectively, at
cost                                                 |  |                   | (3,801,470 | ) |                 |   | (2,429,465 | )
|Additional paid-in capital                                                                                                                                   |  |                   | 12,815,029 |   |                 |   | 14,800,062 |  
|Accumulated other comprehensive income                                                                                                                       |  |                   | 7,954,797  |   |                 |   | 6,297,908  |  
|Retained earnings                                                                                                                                            |  |                   | 48,980,123 |   |                 |   | 53,151,206 |  
|                                                                                                                                                             |  |                   |            |   |                 |   |            |  
|Total Dynacq stockholders equity                                                                                                                            |  |                   | 65,963,875 |   |                 |   | 71,835,526 |  
|                                                                                                                                                             |  |                   |            |   |                 |   |            |  
|Non-controlling interest                                                                                                                                     |  |                   | 187,238    |   |                 |   | 244,245    |  
|                                                                                                                                                             |  |                   |            |   |                 |   |            |  
|Total equity                                                                                                                                                 |  |                   | 66,151,113 |   |                 |   | 72,079,771 |  
|                                                                                                                                                             |  |                   |            |   |                 |   |            |  
|Total liabilities and equity                                                                                                                                 |  | $                 | 78,860,053 |   |                 | $ | 85,267,181 |  
|                                                                                                                                                             |  |                   |            |   |                 |   |            |  

See accompanying notes.



5



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Dynacq Healthcare, Inc.

Consolidated Statements of Operations

(Reviewed)



|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                       |  | Three months ended February 28, |            |   | Six months ended February 28, |  
|                                                                       |  | 2010                            |            |   | 2009                          |   |            | 2010 |  |   | 2009       |  
|Net patient service revenue                                            |  | $                               | 6,189,394  |   |                               | $ | 12,787,320 |      |  | $ | 15,174,005 |   |  | $ | 23,666,558 |  
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Costs and expenses:                                                    |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Compensation and benefits                                              |  |                                 | 4,027,753  |   |                               |   | 3,902,678  |      |  |   | 8,109,660  |   |  |   | 7,584,218  |  
|Medical services and supplies                                          |  |                                 | 2,312,647  |   |                               |   | 2,971,716  |      |  |   | 5,032,150  |   |  |   | 6,261,536  |  
|Other operating expenses                                               |  |                                 | 4,219,851  |   |                               |   | 5,242,342  |      |  |   | 8,903,661  |   |  |   | 9,877,888  |  
|Depreciation and amortization                                          |  |                                 | 264,616    |   |                               |   | 383,007    |      |  |   | 530,595    |   |  |   | 777,231    |  
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total costs and expenses                                               |  |                                 | 10,824,867 |   |                               |   | 12,499,743 |      |  |   | 22,576,066 |   |  |   | 24,500,873 |  
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Operating income (loss)                                                |  |                                 | (4,635,473 | ) |                               |   | 287,577    |      |  |   | (7,402,061 | ) |  |   | (834,315   | )
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Other income (expense):                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Rent and other income (expense)                                        |  |                                 | (113,452   | ) |                               |   | 34,855     |      |  |   | 236,166    |   |  |   | 106,533    |  
|Interest income                                                        |  |                                 | 411,686    |   |                               |   | 314,527    |      |  |   | 866,581    |   |  |   | 470,368    |  
|Interest expense                                                       |  |                                 | (9,482     | ) |                               |   | (20,661    | )    |  |   | (20,875    | ) |  |   | (31,658    | )
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total other income, net                                                |  |                                 | 288,752    |   |                               |   | 328,721    |      |  |   | 1,081,872  |   |  |   | 545,243    |  
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                                      |  |                                 | (4,346,721 | ) |                               |   | 616,298    |      |  |   | (6,320,189 | ) |  |   | (289,072   | )
|Benefit (provision) for income taxes                                   |  |                                 | 1,437,703  |   |                               |   | (325,866   | )    |  |   | 2,059,599  |   |  |   | (64,402    | )
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                      |  |                                 | (2,909,018 | ) |                               |   | 290,432    |      |  |   | (4,260,590 | ) |  |   | (353,474   | )
|Less: Net (income) loss attributable to the noncontrolling interest    |  |                                 | 70,038     |   |                               |   | (23        | )    |  |   | 89,507     |   |  |   | 1,331      |  
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) attributable to Dynacq Healthcare, Inc.              |  | $                               | (2,838,980 | ) |                               | $ | 290,409    |      |  | $ | (4,171,083 | ) |  | $ | (352,143   | )
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic income (loss) per common share:                                  |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) attributable to Dynacq Healthcare, Inc. stockholders |  | $                               | (0.19      | ) |                               | $ | 0.02       |      |  | $ | (0.28      | ) |  | $ | (0.02      | )
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Diluted income (loss) per common share:                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) attributable to Dynacq Healthcare, Inc. stockholders |  | $                               | (0.19      | ) |                               | $ | 0.02       |      |  | $ | (0.28      | ) |  | $ | (0.02      | )
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic average common shares outstanding                                |  |                                 | 14,725,039 |   |                               |   | 15,546,516 |      |  |   | 14,964,060 |   |  |   | 15,550,465 |  
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Diluted average common shares outstanding                              |  |                                 | 14,725,039 |   |                               |   | 15,546,516 |      |  |   | 14,964,060 |   |  |   | 15,550,465 |  
|                                                                       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes.



6



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##### Table of Contents

Dynacq Healthcare, Inc.

Consolidated Statements of Cash Flows

(Reviewed)



|                                                                                          |  |                               |            |   |      |   |            |  
|----------------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                          |  | Six months ended February 28, |           
|                                                                                          |  | 2010                          |            |   | 2009 |  
|Cash flows from operating activities                                                      |  |                               |            |   |      |   |            |  
|Net loss                                                                                  |  | $                             | (4,171,083 | ) |      | $ | (352,143   | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                               |            |   |      |   |            |  
|Depreciation and amortization                                                             |  |                               | 530,595    |   |      |   | 777,231    |  
|Deferred income taxes                                                                     |  |                               | 96,567     |   |      |   | 29,923     |  
|Noncontrolling interest                                                                   |  |                               | (89,507    | ) |      |   | (1,331     | )
|Charge for stock options to employees                                                     |  |                               | 225,758    |   |      |   | 243,511    |  
|Foreign currency exchange loss                                                            |  |                               | 127,516    |   |      |   |           |  
|Changes in operating assets and liabilities:                                              |  |                               |            |   |      |   |            |  
|Accounts receivable                                                                       |  |                               | 3,811,599  |   |      |   | 8,627,028  |  
|Interest receivable                                                                       |  |                               | 11,153     |   |      |   |           |  
|Inventories                                                                               |  |                               | 23,375     |   |      |   | (14,251    | )
|Prepaid expenses                                                                          |  |                               | (372,679   | ) |      |   | 117,226    |  
|Income taxes receivable                                                                   |  |                               | (2,438,151 | ) |      |   | (2,915,249 | )
|Other assets                                                                              |  |                               | 5,249      |   |      |   | (60,996    | )
|Accounts payable                                                                          |  |                               | (46,195    | ) |      |   | (103,606   | )
|Accrued liabilities                                                                       |  |                               | (927,147   | ) |      |   | (1,900,281 | )
|Income taxes payable                                                                      |  |                               | (45,420    | ) |      |   | (4,193,216 | )
|                                                                                          |  |                               |            |   |      |   |            |  
|Net cash provided by (used in) operating activities                                       |  |                               | (3,258,370 | ) |      |   | 253,846    |  
|                                                                                          |  |                               |            |   |      |   |            |  
|                                                                                          |  |                              
|Cash flows from investing activities                                                      |  |                               |            |   |      |   |            |  
|Purchase of equipment                                                                     |  |                               | (389,193   | ) |      |   | (180,678   | )
|Purchase of management rights                                                             |  |                               |           |   |      |   | (2,628,198 | )
|Investment in available-for-sale securities                                               |  |                               |           |   |      |   | (3,906,000 | )
|                                                                                          |  |                               |            |   |      |   |            |  
|Net cash used in investing activities                                                     |  |                               | (389,193   | ) |      |   | (6,714,876 | )
|                                                                                          |  |                               |            |   |      |   |            |  
|                                                                                          |  |                              
|Cash flows from financing activities                                                      |  |                               |            |   |      |   |            |  
|Principal payments on notes payable                                                       |  |                               | (175,561   | ) |      |   | (236,541   | )
|Contributions from, and distributions to, noncontrolling interest, net                    |  |                               | 32,500     |   |      |   |           |  
|Payments on capital lease                                                                 |  |                               | (117,791   | ) |      |   | (5,023     | )
|Purchase of treasury shares                                                               |  |                               | (3,681,903 | ) |      |   | (69,377    | )
|Proceeds from exercise of stock options                                                   |  |                               | 89,688     |   |      |   |           |  
|                                                                                          |  |                               |            |   |      |   |            |  
|Net cash used in financing activities                                                     |  |                               | (3,853,067 | ) |      |   | (310,941   | )
|                                                                                          |  |                               |            |   |      |   |            |  
|Effect of exchange rate changes on cash                                                   |  |                               | 4,847      |   |      |   | (5,199     | )
|                                                                                          |  |                               |            |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                               | (7,495,783 | ) |      |   | (6,777,170 | )
|Cash at beginning of period                                                               |  |                               | 39,112,965 |   |      |   | 45,099,800 |  
|                                                                                          |  |                               |            |   |      |   |            |  
|Cash at end of period                                                                     |  | $                             | 31,617,182 |   |      | $ | 38,322,630 |  
|                                                                                          |  |                               |            |   |      |   |            |  

Continued.



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##### Table of Contents

Dynacq Healthcare, Inc.

Consolidated Statements of Cash Flows (continued)



|                                                    |  |                               |            |   |      |   |            |  
|--------------------------------------------------- |  | ----------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                    |  | Six months ended February 28, |           
|                                                    |  | 2010                          |            |   | 2009 |  
|Supplemental cash flow disclosures                  |  |                               |            |   |      |   |            |  
|Cash paid during the period for:                    |  |                               |            |   |      |   |            |  
|Interest                                            |  | $                             | 20,875     |   |      | $ | 27,837     |  
|                                                    |  |                               |            |   |      |   |            |  
|Income taxes                                        |  | $                             | 327,405    |   |      | $ | 7,142,944  |  
|                                                    |  |                               |            |   |      |   |            |  
|                                                    |  |                              
|Non cash investing and financing activities:        |  |                               |            |   |      |   |            |  
|Increase (decrease) in value of investment in bonds |  | $                             | 2,566,180  |   |      | $ | (1,318,602 | )
|Accumulated other comprehensive income              |  |                               | (1,674,009 | ) |      |   | 1,318,602  |  
|Deferred tax liabilities                            |  |                               | (892,171   | ) |      |   |           |  
|Common stock                                        |  |                               | (455       | ) |      |   |           |  
|Additional paid-in capital                          |  |                               | (2,309,443 | ) |      |   |           |  
|Treasury stock                                      |  |                               | 2,309,898  |   |      |   |           |  
|Accounts receivable                                 |  |                               | 52,622     |   |      |   |           |  
|Property and equipment                              |  |                               | (52,622    | ) |      |   |           |  
|Equipment from capital lease                        |  |                               |           |   |      |   | (435,498   | )
|Capital lease obligation                            |  |                               |           |   |      |   | 435,498    |  

See accompanying
notes.



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##### Table of Contents

Dynacq Healthcare, Inc.

Notes to Consolidated Financial Statements

February 28, 2010

(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 $2.4 million and $3.0 million for the quarters ended February 28, 2010 and 2009, respectively, and $5.5 million and $5.7 million for the six months ended February 28, 2010 and 2009, respectively. These reviewed financial
statements should be read in conjunction with the audited financial statements at August 31, 2009. Operating results for the quarter ended February 28, 2010 are not necessarily indicative of the results that may be expected for the year
ending August 31, 2010.

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 has invested in various bonds. These investments are classified as available-for-sale securities, and are carried at fair
value as of February 28, 2010, based on the quoted market prices as of that date. These investments are subject to default risk. The Company intends to hold these for a minimum period of an additional 12 months. Unrealized gains in the fair
value are 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 February 28, 2010, 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. On March 1, 2009, Dynacq-Huai Bei began managing Second Peoples Hospital in Rui An, China, and included operating results since November 25, 2008.

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.



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Subsequent Events

The Company has evaluated subsequent events that have occurred through April 14, 2010, which is the date of issuance of these
financial statements, and has accounted for and disclosed material subsequent events in these condensed consolidated financial statements as appropriate.

Net Income (Loss) 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 (loss) per common and common equivalent share:



|                                                     |  |                                 |  |                               |  |            |  |           
|---------------------------------------------------- |  | ------------------------------- |  | ----------------------------- |  | ---------- |  | ----------
|                                                     |  | Three months ended February 28, |  | Six months ended February 28,
|                                                     |  | 2010                            |  | 2009                          |  | 2010       |  | 2009      
|Number of weighted average common shares outstanding |  | 14,725,039                      |  | 15,546,516                    |  | 14,964,060 |  | 15,550,465
|Assumed exercise of stock options                    |  |                                |  |                              |  |           |  |          
|                                                     |  |                                 |  |                               |  |            |  |           
|Average diluted shares outstanding                   |  | 14,725,039                      |  | 15,546,516                    |  | 14,964,060 |  | 15,550,465
|                                                     |  |                                 |  |                               |  |            |  |           

Basic net income (loss) per share is computed by
dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted net income (loss) 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 (loss) 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 (loss) per share. Stock options with exercise prices exceeding current
market prices that were excluded from the computation of net income (loss) per share amounted to approximately 572,000 shares and 601,000 shares for the quarters ended February 28, 2010 and 2009, 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 February 28, 2010, there remain
1,424,654 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 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.



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##### Table of Contents

For the quarter ended February 28, 2010, 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 six
months ended February 28, 2010 (share amounts in thousands):



|                               |  |        |   |  |                                             |      |                                              |   |                            |   |  |   |         |  | 
|------------------------------ |  | ------ | - |  | ------------------------------------------- | ---- | -------------------------------------------- | - | -------------------------- | - |  | - | ------- |  | 
|                               |  | Shares |   |  | WeightedAverageOptionExercisePrice
PerShare |      | WeightedAverageGrant DateFairValue 
PerShare |   | AggregateIntrinsicValue(1)
|Outstanding, August 31, 2009   |  | 1,376  |   |  | $                                           | 3.47 |                                              |  |                            |   |  | $ | 713,300
|Granted                        |  |       |   |  |                                             |     |                                              |   |                            |  |  | 
|Exercised                      |  | (36    | ) |  |                                             | 2.50 |                                              |  |                            |   |  |   | 57,259 
|Expired or canceled            |  | (18    | ) |  |                                             | 2.90 |                                              |  |                            | 
|                               |  |        |   |  |                                             |      |                                              |   |                            |   |  |   |         |  | 
|Outstanding, February 28, 2010 |  | 1,322  |   |  | $                                           | 3.50 |                                              |  |                            |   |  | $ | 335,780
|                               |  |        |   |  |                                             |      |                                              |   |                            |   |  |   |         |  | 



|(1) | These amounts represent the difference between the exercise price and $2.98, the closing price of Dynacq common stock on February 28, 2010 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 six months ended February 28, 2010 and 2009, the Company received $89,688 and $-0-,
respectively, for stock options exercised. Total tax benefit realized for the tax deductions from stock options exercised was $9,000 and $-0- for the six months ended February 28, 2010 and 2009, respectively.

The following summarizes information related to stock options outstanding at February 28, 2010, 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            |  | 751                          |  | 3.3                                             |  | $                            | 2.53 |        | 338 |                              |  |  | $ | 2.54
|$ 4.44  5.10            |  | 571                          |  | 3.3                                             |  |                              | 4.78 |        | 496 |                              |  |  |   | 4.73
|                         |  |                              |  |                                                 |  |                              |      |        |     |                              |  |  |   |     
|Total                    |  | 1,322                        |  | 3.3                                             |  | $                            | 3.50 |        | 834 |                              |  |  | $ | 3.84
|                         |  |                              |  |                                                 |  |                              |      |        |     |                              |  |  |   |     

The above tables for stock option activities and stock
options outstanding does 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 February 28, 2010 and August 31, 2009 is as follows (in thousands):



|                                                                                    |  |                   |  |                
|----------------------------------------------------------------------------------- |  | ----------------- |  | ---------------
|                                                                                    |  | February 28, 2010 |  | August 31, 2009
|Options exercisable                                                                 |  | 834               |  | 881            
|Options available for grant and reserved common stock shares for stock option plans |  | 1,425             |  | 1,407          



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##### Table of Contents

For the three and six month periods ended February 28, 2010, stock-based compensation
expense associated with the Companys stock options was $112,879 and $225,758, respectively. The total unrecognized compensation expense for outstanding stock options as of February 28, 2010 was $670,000, and will be recognized, in
general, over 1.6 years. The weighted average number of years to recognize the compensation expense is 0.9 year.

Fair Value of Financial
Instruments

On September 1, 2008, the Company adopted ASC Topic 825-10-25, Financial Instruments
(formerly referred to as SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (SFAS 159)), which permits entities to choose to measure certain financial assets and liabilities at fair value. The adoption of ASC
Topic 825-10-25 had no impact on the consolidated financial statements because the Company did not elect the fair value option for any financial assets or financial liabilities that were not already recorded at fair value.

On September 1, 2008, the Company adopted ASC Topic 820, Fair Value Measurements and Disclosures (formerly referred to
as SFAS 157) for our financial assets and liabilities. Management uses the fair value hierarchy of ASC Topic 820, 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. ASC Topic 820 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, ASC Topic 820 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 at fair value on a recurring basis as of February 28,
2010, segregated among the appropriate levels within the fair value hierarchy:



|                               |  |                                              |  |                                    |            |                         |  
|------------------------------ |  | -------------------------------------------- |  | ---------------------------------- | ---------- | ----------------------- | -
|                               |  | Fair Value Measurements at February 28, 2010
|                               |  | Quoted prices in activemarkets for identical |  | Significant otherobservable inputs |            | Significantunobservable
|                               |  | (Level 1)                                    |  | (Level 2)                          |            | (Level 3)              
|Assets                         |  |                                              |  |                                    |            |                         |  
|Investments available-for-sale |  |                                             |  | $                                  | 21,010,833 |                         | 

All of
the Companys investments in securities are in perpetual bonds traded on the European markets. The cost of these securities is $9,135,146.

Foreign Currency Translation

The functional currency of the Company as a whole is the U.S. Dollar. The Company has designated the Chinese Yuan Renminbi as the
functional currency for its subsidiaries in mainland China, and the U.S. Dollar for Sino Bond Inc. Limited in Hong Kong. Assets and liabilities are translated into U.S. dollars using current exchange rates as of the balance sheet date. Income
and expense are translated at average exchange rates prevailing during the period. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income within stockholders equity.



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##### Table of Contents

Revenue Recognition

U.S. Division

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.

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 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.

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, up to 30 days after the end of the period, 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 six months ended February 28, 2010 and 2009:



|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------- |  | ------------------------------- | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                 |  | Three months ended February 28, |            |   | Six months ended February 28, |  
|                                 |  | 2010                            |            |   | 2009                          |   |            | 2010 |  |   | 2009       |  
|Gross billed charges             |  | $                               | 23,730,510 |   |                               | $ | 38,249,185 |      |  | $ | 51,714,896 |   |  | $ | 76,669,648 |  
|Contractual allowance            |  |                                 | 17,972,510 |   |                               |   | 25,461,865 |      |  |   | 37,571,667 |   |  |   | 53,003,090 |  
|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net revenue                      |  | $                               | 5,758,000  |   |                               | $ | 12,787,320 |      |  | $ | 14,143,229 |   |  | $ | 23,666,558 |  
|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Contractual allowance percentage |  |                                 | 76         | % |                               |   | 67         | %    |  |   | 73         | % |  |   | 69         | %
|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  

Except for emergency room patients, surgeries at our facilities are typically pre-certified or
pre-authorized by the insurance carriers. A majority of the surgeries are either covered by workers compensation insurance or by commercial insurers on an out-of-network health plan basis. We currently participate in a small number of managed
care contracts.

A significant amount of our net revenue results from Texas workers compensation claims, which are
governed by the rules and regulations of the Texas Department 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.



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##### Table of Contents

Based on these 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 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 medical
dispute resolution (MDR) process at the TDWC to request proper reimbursement for services. From January 2007 to November 2008, 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 on November 13, 2008 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. As a result of the Third Court of Appeals opinion, any stop-loss cases pending at SOAH have been remanded to the TDWC since these cases have not been reviewed or decided by the two-prong standard decided by the Third Court of Appeals.
The SOAH Administrative Law judges determined that the most appropriate location for these cases is the TDWC, pending a final, non-appealable decision.

A petition asking the Texas Supreme Court to review the Third Court of Appeals decision is still pending. If the Texas Supreme Court
declines a review of or affirms the Third Court of Appeals opinion, final adjudication in these pending stop-loss cases will depend on the uncertain outcome of a very lengthy process. We anticipate further, lengthy litigation at the Travis County
District Courts and the Texas Courts of Appeals to establish the legal definition of unusually costly or unusually extensive services. 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 2010 fiscal year.

Through February 2010, 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. Probability of collection in these cases is marginal and depends on the rulings of the Third Court of Appeals.

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, the amount of reimbursement due to us, and
the data used to determine usual and customary market rates for medical services in specific geographic regions.



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##### Table of Contents

Due to the uncertainties regarding the accounts receivable in the MDR process, the 2008
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.
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 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.

China Division

Revenue Recognition
Policy

In China, the local government Department of Health establishes billing rates for a hospitals sale of
prescription medication and medical services. A majority of the services provided by Second Peoples Hospital is to cash pay patients, who pay for the services in advance. For services provided under the local governments social
healthcare insurance program, we are generally paid at approximately 95% of billed charges two to three months after the date of service. For the current year, however, receipt of these payments has been delayed due to our acquisition of the
management of Second Peoples Hospital from its prior managers in March 2009. The remaining 5% of billed charges is evaluated by the local government Department of Health on a semi-annual basis and may be paid to the hospital after that
evaluation is complete. The Company had bad debt expenses of $8,892 and $9,997 for the three and six months ended February 28, 2010, respectively, related to denials under the social healthcare insurance program, which is less than 1% of the
revenues of the China division for the same period. Since the amount of bad debt expense is minimal, it has been included with other operating expenses in the income statement.

Noncontrolling Interest

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 noncontrolling interest. Noncontrolling interest reported in the consolidated income statements reflects the respective
interests in the income or loss of the limited partnerships or limited liability companies attributable to the minority investors (equity interest ranged from 1.75% to 2.35% at February 28, 2010).

Comprehensive Income (Loss) and Accumulated Other Comprehensive Income

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)
represents certain components of revenues, expenses, gains and losses that are included in comprehensive income (loss), but are excluded from net income (loss). Other comprehensive income (loss) amounts are recorded directly as an adjustment to
stockholders equity, net of tax, and for the three and six months ended February 28, 2010 and 2009 were as follows:



|                                                                                                                                  |  |                                 |            |   |                               |   |          |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ----------------------------- | - | -------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                  |  | Three months ended February 28, |            |   | Six months ended February 28, |  
|                                                                                                                                  |  | 2010                            |            |   | 2009                          |   |          | 2010 |  |   | 2009       |  
|Net income (loss)                                                                                                                 |  | $                               | (2,838,980 | ) |                               | $ | 290,409  |      |  | $ | (4,171,083 | ) |  | $ | (352,143   | )
|Other comprehensive income (loss), net of taxes:                                                                                  |  |                                 |            |   |                               |   |          |      |  |   |            |   |  |   |            |  
|Foreign currency translation adjustment, net of taxes of $(13,936), $(9,800), $(5,992) and $(1,800), respectively                 |  |                                 | (25,880    | ) |                               |   | (18,375  | )    |  |   | (11,127    | ) |  |   | (3,400     | )
|Change in valuation of investment available-for-sale, net of taxes of $262,267, $(364,200), $898,163 and $(461,500), respectively |  |                                 | 487,067    |   |                               |   | (676,402 | )    |  |   | 1,668,017  |   |  |   | (857,102   | )
|                                                                                                                                  |  |                                 |            |   |                               |   |          |      |  |   |            |   |  |   |            |  
|Total other comprehensive loss, net of taxes                                                                                      |  |                                 | (2,377,793 | ) |                               |   | (404,368 | )    |  |   | (2,514,193 | ) |  |   | (1,212,645 | )
|Comprehensive loss attributable to the noncontrolling interest                                                                    |  |                                 |           |   |                               |   |         |      |  |   |           |   |  |   |           |  
|                                                                                                                                  |  |                                 |            |   |                               |   |          |      |  |   |            |   |  |   |            |  
|Comprehensive loss attributable to Dynacq Healthcare, Inc.                                                                        |  | $                               | (2,377,793 | ) |                               | $ | (404,368 | )    |  | $ | (2,514,193 | ) |  | $ | (1,212,645 | )
|                                                                                                                                  |  |                                 |            |   |                               |   |          |      |  |   |            |   |  |   |            |  



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The components of accumulated other comprehensive income were as follows:



|                                                                                                              |  |                   |           |                 |   |          
|------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | --------------- | - | ---------
|                                                                                                              |  | February 28, 2010 |           | August 31, 2009
|Foreign currency translation adjustment, net of taxes of $186,317 and $192,309, respectively                  |  | $                 | 336,399   |                 | $ | 347,527  
|Change in valuation of investment available-for-sale, net of taxes of $4,102,214 and $3,204,051, respectively |  |                   | 7,618,398 |                 |   | 5,950,381
|                                                                                                              |  |                   |           |                 |   |          
|Total accumulated other comprehensive income, net of taxes of $4,288,531 and $3,396,360, respectively         |  | $                 | 7,954,797 |                 | $ | 6,297,908
|                                                                                                              |  |                   |           |                 |   |          

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 management
agreement for the Second Peoples Hospital requires that 1% of the drug income, and drug income in excess of 40% of total sales, of the hospital be paid to the government. This requirement was designed to control the cost of drugs by
discouraging the sale by the hospital of drugs purchased from other than approved drug vendors. However, the local government has not published a list of approved drug vendors and therefore has not enforced the payment provision since the inception
of the original management agreement. The Company has been advised by a local attorney that enforcement of that provision is remote, so it has not accrued the amount that would be payable to the local government if this provision were enforced. If
the government were to enforce this provision, Dynacq-Huai Bei could potentially owe approximately $1.2 million to the government for the period of time since inception of the original management contract on the hospital.

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  U.S. Division  Texas Workers Compensation Systems in our Form 10-K for the fiscal year ended August 31, 2009, 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.



16



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##### Table of Contents

Industry Segments and Geographic Information

We manage our operations through two operating segments, based on our geographic areas: U.S. and China, and have a general corporate
division.

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. It includes results of operations for managing Second
Peoples Hospital in Rui An, China, since November 25, 2008.

In 2010 Dynacq-Huai Bei will manage the Third
Peoples Hospital in Rui An upon completion of construction of that hospital.

The Company has organized Sino Bond Inc.
Limited, a Hong Kong corporation (Sino Bond), to hold and manage investments in Hong Kong. Sino Bond 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.

In August 2009 the Company organized Hu GangJing (Hang Zhou) Technology Co.
Ltd. (Hang Zhou Tech) under the laws of the Peoples Republic of China for the purpose of forming joint ventures to invest in companies in China engaged in businesses such as energy production, life sciences and pharmaceuticals.

Corporate Division

The Company has invested in available-for-sale securities which will be held until the Company is able to identify and fund attractive
opportunities to acquire or manage operating companies in China and Southeast Asia. Corporate division includes interest and other income related to these investments in available-for-sale securities, corporate personnel compensation expenses, and
general and administrative expenses. Such expenses and income are not allocated to our operating divisions, as they relate to our general corporate activities.

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.

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



|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------- |  | ------------------------------- | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                 |  | Three months ended February 28, |            |   | Six months ended February 28, |  
|                                 |  | 2010                            |            |   | 2009                          |   |            | 2010 |  |   | 2009       |  
|Revenues from external customers |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net patient service revenues     |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|U.S. Division                    |  | $                               | 5,758,000  |   |                               | $ | 12,787,320 |      |  | $ | 14,143,229 |   |  | $ | 23,666,558 |  
|China Division                   |  |                                 | 431,394    |   |                               |   |           |      |  |   | 1,030,776  |   |  |   |           |  
|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Consolidated                     |  | $                               | 6,189,394  |   |                               | $ | 12,787,320 |      |  | $ | 15,174,005 |   |  | $ | 23,666,558 |  
|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before taxes       |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|U.S. Division                    |  | $                               | (2,764,712 | ) |                               | $ | 2,227,753  |      |  | $ | (3,424,374 | ) |  | $ | 2,691,763  |  
|China Division                   |  |                                 | (1,040,575 | ) |                               |   | (489,832   | )    |  |   | (1,465,648 | ) |  |   | (989,980   | )
|Corporate                        |  |                                 | (541,434   | ) |                               |   | (1,121,623 | )    |  |   | (1,430,167 | ) |  |   | (1,990,855 | )
|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Consolidated                     |  | $                               | (4,346,721 | ) |                               | $ | 616,298    |      |  | $ | (6,320,189 | ) |  | $ | (289,072   | )
|                                 |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  



17



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##### Table of Contents

|               |  |              |            |      |   |           
|-------------- |  | ------------ | ---------- | ---- | - | ----------
|               |  | February 28,
|               |  | 2010         |            | 2009
|Total Assets   |  |              |            |      |   |           
|U.S. Division  |  | $            | 35,083,260 |      | $ | 43,361,095
|China Division |  |              | 22,506,739 |      |   | 28,867,417
|Corporate      |  |              | 21,270,054 |      |   | 2,621,231 
|               |  |              |            |      |   |           
|Consolidated   |  | $            | 78,860,053 |      | $ | 74,849,743
|               |  |              |            |      |   |           



|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,
2009. 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, 2009.

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 February 28, 2010. 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, 2009.



18



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##### Table of Contents

Results of Operations



|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|------------------------------------------------------------------------ |  | ------------------------------------ | ---------- | - | ------------------------------------ | --- | -- | --------- | - | ---------- | ----- |  | ---- | ------------- |  | - | -------------- | - |  | --------- | ---------- | - | ----- | --- | -- |  | - | ---------- | - |  | --- | - |  | - | -------- | - |  | - | ---------- | - |  | - | ---------- | - |  | --- | -
|                                                                         |  | Three Months Ended February 28, 2010 |            |   | Three Months Ended February 28, 2009 |    
|                                                                         |  | U.S. Division                        |            |   | China Division                       |     |    | Corporate |   |            | Total |  |      | U.S. Division |  |   | China Division |   |  | Corporate |            |   | Total |    
|Net patient service revenue                                              |  | $                                    | 5,758,000  |   |                                      | 100 | %  |           | $ | 431,394    |       |  | 100  | %             |  | $ |               |   |  | $         | 6,189,394  |   |       | 100 | %  |  | $ | 12,787,320 |   |  | 100 | % |  | $ |         |   |  | $ |           |   |  | $ | 12,787,320 |   |  | 100 | %
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Costs and expenses:                                                      |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Compensation and benefits                                                |  |                                      | 3,075,492  |   |                                      | 53  |    |           |   | 345,901    |       |  | 80   |               |  |   | 606,360        |   |  |           | 4,027,753  |   |       | 65  |    |  |   | 3,145,915  |   |  | 25  |   |  |   | 37,500   |   |  |   | 719,263    |   |  |   | 3,902,678  |   |  | 31  |  
|Medical services and supplies                                            |  |                                      | 2,096,721  |   |                                      | 36  |    |           |   | 215,926    |       |  | 50   |               |  |   |               |   |  |           | 2,312,647  |   |       | 37  |    |  |   | 2,971,716  |   |  | 23  |   |  |   |         |   |  |   |           |   |  |   | 2,971,716  |   |  | 23  |  
|Other operating expenses                                                 |  |                                      | 3,179,143  |   |                                      | 55  |    |           |   | 718,942    |       |  | 167  |               |  |   | 321,766        |   |  |           | 4,219,851  |   |       | 68  |    |  |   | 4,119,118  |   |  | 32  |   |  |   | 617,031  |   |  |   | 506,193    |   |  |   | 5,242,342  |   |  | 41  |  
|Depreciation and amortization                                            |  |                                      | 233,811    |   |                                      | 4   |    |           |   | 30,805     |       |  | 7    |               |  |   |               |   |  |           | 264,616    |   |       | 4   |    |  |   | 365,437    |   |  | 3   |   |  |   | 17,570   |   |  |   |           |   |  |   | 383,007    |   |  | 3   |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Total costs and expenses                                                 |  |                                      | 8,585,167  |   |                                      | 149 |    |           |   | 1,311,574  |       |  | 304  |               |  |   | 928,126        |   |  |           | 10,824,867 |   |       | 175 |    |  |   | 10,602,186 |   |  | 83  |   |  |   | 672,101  |   |  |   | 1,225,456  |   |  |   | 12,499,743 |   |  | 98  |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Operating income (loss)                                                  |  |                                      | (2,827,167 | ) |                                      | (49 | )  |           |   | (880,180   | )     |  | (204 | )             |  |   | (928,126       | ) |  |           | (4,635,473 | ) |       | (75 | )  |  |   | 2,185,134  |   |  | 17  |   |  |   | (672,101 | ) |  |   | (1,225,456 | ) |  |   | 287,577    |   |  | 2   |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Other income (expense):                                                  |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Rent and other income (expense)                                          |  |                                      | 60,545     |   |                                      | 1   |    |           |   | (173,997   | )     |  | (40  | )             |  |   |               |   |  |           | (113,452   | ) |       | (2  | )  |  |   | 34,855     |   |  |    |   |  |   |         |   |  |   |           |   |  |   | 34,855     |   |  |    |  
|Interest income                                                          |  |                                      | 11,392     |   |                                      |    |    |           |   | 13,602     |       |  | 3    |               |  |   | 386,692        |   |  |           | 411,686    |   |       | 7   |    |  |   | 28,425     |   |  |    |   |  |   | 182,269  |   |  |   | 103,833    |   |  |   | 314,527    |   |  | 2   |  
|Interest expense                                                         |  |                                      | (9,482     | ) |                                      |    |    |           |   |           |       |  |     |               |  |   |               |   |  |           | (9,482     | ) |       |    |    |  |   | (20,661    | ) |  |    |   |  |   |         |   |  |   |           |   |  |   | (20,661    | ) |  |    |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Total other income (expense), net                                        |  |                                      | 62,455     |   |                                      | 1   |    |           |   | (160,395   | )     |  | (37  | )             |  |   | 386,692        |   |  |           | 288,752    |   |       | 5   |    |  |   | 42,619     |   |  |    |   |  |   | 182,269  |   |  |   | 103,833    |   |  |   | 328,721    |   |  | 3   |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Income (loss) before income taxes                                        |  |                                      | (2,764,712 | ) |                                      | (48 | )% |           |   | (1,040,575 | )     |  | (241 | )%            |  |   | (541,434       | ) |  |           | (4,346,721 | ) |       | (70 | )  |  |   | 2,227,753  |   |  | 17  | % |  |   | (489,832 | ) |  |   | (1,121,623 | ) |  |   | 616,298    |   |  | 5   |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Benefit (provision) for income taxes                                     |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           | 1,437,703  |   |       | 23  |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   | (325,866   | ) |  | (3  | )
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Net income (loss)                                                        |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           | (2,909,018 | ) |       | (47 | )  |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   | 290,432    |   |  | 2   |  
|Less: Net loss (income) attributable to the noncontrolling interest      |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           | 70,038     |   |       | 1   |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   | (23        | ) |  |    |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Net income (loss) attributable to Dynacq Healthcare, Inc.                |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  | $         | (2,838,980 | ) |       | (46 | )% |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  | $ | 290,409    |   |  | 2   | %
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Operational statistics (Number of medical procedures) for U.S. Division: |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Inpatient:                                                               |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Bariatrics                                                               |  |                                      | 54         |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 136        |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Orthopedics                                                              |  |                                      | 87         |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 67         |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Other                                                                    |  |                                      | 20         |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 33         |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Total inpatient procedures                                               |  |                                      | 161        |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 236        |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Outpatient:                                                              |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Orthopedics                                                              |  |                                      | 126        |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 171        |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Other                                                                    |  |                                      | 256        |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 354        |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Total outpatient procedures                                              |  |                                      | 382        |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 525        |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|Total procedures                                                         |  |                                      | 543        |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 761        |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  
|                                                                         |  |                                      |            |   |                                      |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |          |   |  |   |            |   |  |   |            |   |  |     |  



19



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##### Table of Contents

Results of Operations (continued)



|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|------------------------------------------------------------------------ |  | ---------------------------------- | ---------- | - | ---------------------------------- | --- | -- | --------- | - | ---------- | ----- |  | ---- | ------------- |  | - | -------------- | - |  | --------- | ---------- | - | ----- | --- | -- |  | - | ---------- | - |  | --- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | - |  | --- | --
|                                                                         |  | Six Months Ended February 28, 2010 |            |   | Six Months Ended February 28, 2009 |    
|                                                                         |  | U.S. Division                      |            |   | China Division                     |     |    | Corporate |   |            | Total |  |      | U.S. Division |  |   | China Division |   |  | Corporate |            |   | Total |    
|Net patient service revenue                                              |  | $                                  | 14,143,229 |   |                                    | 100 | %  |           | $ | 1,030,776  |       |  | 100  | %             |  | $ |               |   |  | $         | 15,174,005 |   |       | 100 | %  |  | $ | 23,666,558 |   |  | 100 | % |  | $ |           |   |  | $ |           |   |  | $ | 23,666,558 |   |  | 100 | % 
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Costs and expenses:                                                      |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Compensation and benefits                                                |  |                                    | 6,273,705  |   |                                    | 44  |    |           |   | 644,722    |       |  | 63   |               |  |   | 1,191,233      |   |  |           | 8,109,660  |   |       | 53  |    |  |   | 6,406,027  |   |  | 27  |   |  |   | 75,000     |   |  |   | 1,103,191  |   |  |   | 7,584,218  |   |  | 32  |   
|Medical services and supplies                                            |  |                                    | 4,511,355  |   |                                    | 32  |    |           |   | 520,795    |       |  | 51   |               |  |   |               |   |  |           | 5,032,150  |   |       | 33  |    |  |   | 6,261,536  |   |  | 26  |   |  |   |           |   |  |   |           |   |  |   | 6,261,536  |   |  | 26  |   
|Other operating expenses                                                 |  |                                    | 6,471,539  |   |                                    | 46  |    |           |   | 1,406,452  |       |  | 136  |               |  |   | 1,025,670      |   |  |           | 8,903,661  |   |       | 59  |    |  |   | 7,742,583  |   |  | 33  |   |  |   | 1,108,808  |   |  |   | 1,026,497  |   |  |   | 9,877,888  |   |  | 42  |   
|Depreciation and amortization                                            |  |                                    | 469,396    |   |                                    | 3   |    |           |   | 61,199     |       |  | 6    |               |  |   |               |   |  |           | 530,595    |   |       | 3   |    |  |   | 742,092    |   |  | 3   |   |  |   | 35,139     |   |  |   |           |   |  |   | 777,231    |   |  | 3   |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Total costs and expenses                                                 |  |                                    | 17,725,995 |   |                                    | 125 |    |           |   | 2,633,168  |       |  | 255  |               |  |   | 2,216,903      |   |  |           | 22,576,066 |   |       | 149 |    |  |   | 21,152,238 |   |  | 89  |   |  |   | 1,218,947  |   |  |   | 2,129,688  |   |  |   | 24,500,873 |   |  | 104 |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Operating income (loss)                                                  |  |                                    | (3,582,766 | ) |                                    | (25 | )  |           |   | (1,602,392 | )     |  | (155 | )             |  |   | (2,216,903     | ) |  |           | (7,402,061 | ) |       | (49 | )  |  |   | 2,514,320  |   |  | 11  |   |  |   | (1,218,947 | ) |  |   | (2,129,688 | ) |  |   | (834,315   | ) |  | (4  | ) 
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Other income (expense):                                                  |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Rent and other income                                                    |  |                                    | 151,178    |   |                                    | 1   |    |           |   | 84,988     |       |  | 8    |               |  |   |               |   |  |           | 236,166    |   |       | 2   |    |  |   | 106,533    |   |  |    |   |  |   |           |   |  |   |           |   |  |   | 106,533    |   |  |    |   
|Interest income                                                          |  |                                    | 28,089     |   |                                    |    |    |           |   | 51,756     |       |  | 5    |               |  |   | 786,736        |   |  |           | 866,581    |   |       | 6   |    |  |   | 102,568    |   |  |    |   |  |   | 228,967    |   |  |   | 138,833    |   |  |   | 470,368    |   |  | 2   |   
|Interest expense                                                         |  |                                    | (20,875    | ) |                                    |    |    |           |   |           |       |  |     |               |  |   |               |   |  |           | (20,875    | ) |       |    |    |  |   | (31,658    | ) |  |    |   |  |   |           |   |  |   |           |   |  |   | (31,658    | ) |  |    |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Total other income, net                                                  |  |                                    | 158,392    |   |                                    | 1   |    |           |   | 136,744    |       |  | 13   |               |  |   | 786,736        |   |  |           | 1,081,872  |   |       | 7   |    |  |   | 177,443    |   |  | 1   |   |  |   | 228,967    |   |  |   | 138,833    |   |  |   | 545,243    |   |  | 2   |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Income (loss) before income taxes                                        |  |                                    | (3,424,374 | ) |                                    | (24 | )% |           |   | (1,465,648 | )     |  | (142 | )%            |  |   | (1,430,167     | ) |  |           | (6,320,189 | ) |       | (42 | )  |  |   | 2,691,763  |   |  | 11  | % |  |   | (989,980   | ) |  |   | (1,990,855 | ) |  |   | (289,072   | ) |  | (1  | ) 
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Benefit (provision) for income taxes                                     |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           | 2,059,599  |   |       | 14  |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   | (64,402    | ) |  |    |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Net loss                                                                 |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           | (4,260,590 | ) |       | (28 | )  |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   | (353,474   | ) |  | (1  | ) 
|Less: Net loss attributable to the noncontrolling interest               |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           | 89,507     |   |       | 1   |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   | 1,331      |   |  |    |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Net loss attributable to Dynacq Healthcare, Inc.                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  | $         | (4,171,083 | ) |       | (27 | )% |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  | $ | (352,143   | ) |  | (1  | )%
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Operational statistics (Number of medical procedures) for U.S. Division: |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Inpatient:                                                               |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Bariatrics                                                               |  |                                    | 93         |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 293        |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Orthopedics                                                              |  |                                    | 176        |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 128        |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Other                                                                    |  |                                    | 57         |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 77         |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Total inpatient procedures                                               |  |                                    | 326        |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 498        |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Outpatient:                                                              |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Orthopedics                                                              |  |                                    | 278        |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 346        |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Other                                                                    |  |                                    | 579        |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 725        |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Total outpatient procedures                                              |  |                                    | 857        |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 1,071      |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|Total procedures                                                         |  |                                    | 1,183      |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   | 1,569      |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   
|                                                                         |  |                                    |            |   |                                    |     |    |           |   |            |       |  |      |               |  |   |                |   |  |           |            |   |       |     |    |  |   |            |   |  |     |   |  |   |            |   |  |   |            |   |  |   |            |   |  |     |   



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##### Table of Contents

Three Months Ended February 28, 2010 Compared to the Three Months Ended February 28, 2009

U.S. Division

Net patient service revenue decreased by $7,029,320, or 55%, from $12,787,320 to $5,758,000, and total surgical cases decreased by 29%
from 761 cases in 2009 to 543 cases in 2010. Following are the percentage changes in net patient service revenues and number of cases at the hospital facilities:



|         |  |                                       |    |  |       |   
|-------- |  | ------------------------------------- | -- |  | ----- | --
|         |  | Percentage decreasefrom 
2009 to 2010 |   
|Facility |  | Net patient revenue                   |    |  | Cases |   
|Pasadena |  | (51                                   | )% |  | (20   | )%
|Garland  |  | (58                                   | )  |  | (37   | ) 
|Overall  |  | (55                                   | )  |  | (29   | ) 

The decrease
in net patient service revenue was due to an overall decrease in number of cases by 29% in 2010 compared to 2009. There was a significant decrease of 32% in inpatient cases, which typically have higher average reimbursement per case compared to
outpatient cases. While the number of cases and the gross billed charges decreased by 29% and 38%, respectively, net patient service revenue decreased 55% due to an increase in the contractual allowance as a percentage of gross billed charges. The
contractual allowance increased from 67%of gross billed charges for the quarter ended February 28, 2009 to 76% of gross billed charges for the quarter ended February 28, 2010, due to lower reimbursements, primarily on workers
compensation cases.

Total costs and expenses decreased by $2,017,019 or 19%, from $10,602,186 in 2009 to $8,585,167 in 2010.
The following describes the various changes in costs and expenses:



| |  |  | Compensation and benefits decreased marginally by $70,423, or 2%, primarily due to lower net patient service revenues.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Medical services and supplies expenses decreased by $874,995, or 29%, and the number of surgery cases also decreased 29%.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Other operating expenses decreased by $939,975, or 23%. Marketing expenses, included in other operating expenses, decreased by $300,000 from $1,500,000
in 2009 to $1,200,000 in 2010. Other operating expenses, excluding marketing expenses, as a percentage of gross billed charges were 8.3% and 6.9% for 2010 and 2009, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

China Division

For the
quarter ended February 28, 2010, Second Peoples Hospital had net patient service revenues of $431,394, with no such corresponding revenues in the prior period. The contract to manage the Second Peoples Hospital in Rui An, China was
executed in March 2009, and included operating results since November 25, 2008.

Total costs and expenses for the China
Division increased by $639,473, from $672,101 in 2009 to $1,311,574 in 2010. In 2010, total costs and expenses includes the operations associated with Second Peoples Hospital in Rui An, China.

Corporate Division

The
Corporate division includes interest and other income related to the investments in available-for-sale securities, corporate personnel compensation expenses and general and administrative expenses. Such expenses and income are not allocated to our
operating divisions, as they relate to our general corporate activities. Corporate costs and expenses decreased by $297,330 from $1,225,456 in 2009 to $928,126 in 2010, due to decreases in overall patient revenues. Interest income of $386,692 in
2010 and $103,833 in 2009 relates to the investments in available-for-sale securities, which were purchased at a cost of $9,135,146 and have appreciated in fair value to $21,010,833 as at February 28, 2010. Unrealized gains in these investments
of $11,720,612 are included in accumulated other comprehensive income in the Consolidated Balance Sheet, net of taxes of $4,102,214.



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##### Table of Contents

Six Months Ended February 28, 2010 Compared to the Six Months Ended February 28, 2009

U.S. Division

Net patient service revenue decreased by $9,523,329, or 40%, from $23,666,558 to $14,143,229, and total surgical cases decreased by 25%
from 1,569 cases in 2009 to 1,183 cases in 2010. Following are the percentage changes in net patient service revenues and number of cases at the hospital facilities:



|         |  |                                      |    |  |       |  
|-------- |  | ------------------------------------ | -- |  | ----- | -
|         |  | Percentage decreasefrom 2009 to 2010 |   
|Facility |  | Net patient revenue                  |    |  | Cases |  
|Pasadena |  | (10                                  | )% |  |      | %
|Garland  |  | (57                                  | )  |  | (44   | )
|Overall  |  | (40                                  | )  |  | (25   | )

The decrease
in net patient service revenue was due to an overall decrease in number of cases by 25% in 2010 compared to 2009. There was a significant decrease of 35% in inpatient cases, which typically have higher average reimbursement per case compared to
outpatient cases. While the number of cases and the gross billed charges decreased by 25% and 33%, respectively, net patient service revenue decreased 40% due to an increase in the contractual allowance as a percentage of gross billed charges. The
contractual allowance increased from 69% of gross billed charges for the six months period ended February 28, 2009 to 73% of gross billed charges for the six months period ended February 28, 2010, due to lower reimbursements, primarily on
workers compensation cases.

Total costs and expenses decreased by $3,426,243 or 16%, from $21,152,238 in 2009 to
$17,725,995 in 2010. The following describes the various changes in costs and expenses:



| |  |  | Compensation and benefits decreased marginally by $132,322, or 2%, primarily due to lower net patient service revenues.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Medical services and supplies expenses decreased by $1,750,181, or 28%, and the number of surgery cases decreased 25%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Other operating expenses decreased by $1,271,044, or 16%. Marketing expenses, included in other operating expenses, decreased by $331,000 from
$3,031,000 in 2009 to $2,700,000 in 2010. Other operating expenses, excluding marketing expenses, as a percentage of gross billed charges were 7.3% and 6.2% for 2010 and 2009, respectively.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

China Division

For the
six months period ended February 28, 2010, Second Peoples Hospital had net patient service revenues of $1,030,776, with no such corresponding revenues in the prior period. The contract to manage the Second Peoples Hospital in Rui
An, China was executed in March 2009, and included operating results since November 25, 2008.

Total costs and expenses
for the China Division increased by $1,414,221, from $1,218,947 in 2009 to $2,633,168 in 2010. In 2010, total costs and expenses includes the operations associated with Second Peoples Hospital in Rui An, China.



22



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##### Table of Contents

Corporate Division

The Corporate division includes interest and other income related to the investments in available-for-sale securities, corporate personnel
compensation expenses and general and administrative expenses. Such expenses and income are not allocated to our operating divisions, as they relate to our general corporate activities. Corporate costs and expenses increased marginally by $87,215
from $2,129,688 in 2009 to $2,216,903 in 2010. Interest income of $786,736 in 2010 and $138,833 in 2009 relates to the investments in available-for-sale securities, which were purchased at a cost of $9,135,146 and have appreciated in fair value to
$21,010,833 as at February 28, 2010. Unrealized gains in these investments of $11,720,612 are included in accumulated other comprehensive income in the Consolidated Balance Sheet, net of taxes of $4,102,214.

Liquidity and Capital Resources

Our 2009 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.

Cash flow from
operating activities

Total cash flow used in operating activities was $3,258,370 during the period ended February 28, 2010, primarily
due to a loss of $4,171,083, decreases in accounts payable and accrued liabilities of $973,342, changes in income tax related accounts of $2,387,004, partially offset by decreases in accounts receivable of $3,811,599 and depreciation and
amortization of $530,595.

Cash flow from investing activities

Total cash flow used in investing activities was $389,193 for purchase of equipment.

Cash flow from financing activities

Total cash flow used in financing activities was $3,853,067 primarily related to treasury stock purchases of $3,681,903 and $175,561
payments on the note payable for class action lawsuit settlement.

The Company had working capital of $33,223,451 as of
February 28, 2010, and maintained a liquid position by a current ratio of approximately 4.8 to 1.

We believe we will be
able to meet our ongoing liquidity and cash needs for fiscal year 2010 through the combination of available cash and cash flow from operations.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board issued Accounting Standards Codification (ASC)
Topic 805-10, Business Combinations (formerly referred to as SFAS No. 141 (revised 2007)) and ASC Topic 810-10, Consolidation (formerly referred to as SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements). 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.

ASC Topic
805-10 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.



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ASC Topic 810-10 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.

The Company adopted the provisions of both ASC Topic 805-10 and ASC Topic 810-10
effective September 1, 2009, and its adoption did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued ASC Topic 820-10, Fair Value Measurements & Disclosures (formerly referred to as 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 ASC Topic 320-10, Investments
 Debt and Equity Securities (formerly referred to as FASB Staff Position No. 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments). These two ASC Topics 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 ASC Topic 825-10-65, Financial Instruments (formerly referred to as 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 ASC Topics were adopted in the fourth quarter of fiscal year ended August 31, 2009.

In May 2009, the FASB issued ASC Topic 855-10, Subsequent Events (formerly referred to as 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. The adoption in the fourth quarter of fiscal year 2009 did not have
any material impact on the Companys consolidated financial statements. For the quarter ended February 28, 2010, the Company evaluated subsequent events through April 14, 2010, the date the consolidated financial statements were
issued.

In June 2009, the FASB issued ASC Topic 105-10, Generally Accepted Accounting Principles, (formerly
referred to as SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles). ASC Topic 105-10 establishes the ASC as the source of authoritative non-governmental generally
accepted accounting principles (GAAP). The Company adopted the provisions of this statement effective September 1, 2009, and its adoption did not have a material impact on the Companys consolidated financial statements, though
it changed references of accounting literature disclosed in the notes to the consolidated financial statements.

In September
2009, the FASB issued Accounting Standards Update (ASU) 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities. ASU 2009-06 provides additional
implementation guidance on accounting for uncertainty in income taxes and eliminates the disclosures required by paragraph ASC Topic 740-10-50-15(a) through (b) for nonpublic entities. The Company adopted the provisions of ASU 2009-09, and its
adoption did not have a material impact on its consolidated financial statements.



|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 February 28, 2010, our internal disclosure controls and procedures were effective.



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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, as well as Business  Government Regulation  U.S. Division Texas Workers Compensation
Systems and Managements Discussion and Analysis of Financial Condition in our Form 10-K for the fiscal year ended August 31, 2009, 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, 2009 have not changed.



|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 February 28, 2010 pursuant to our repurchase program include the following:



|                      |  |                                 |     |  |                       |      |                                                                              |        |                                                                                              |          
|--------------------- |  | ------------------------------- | --- |  | --------------------- | ---- | ---------------------------------------------------------------------------- | ------ | -------------------------------------------------------------------------------------------- | ---------
|Period                |  | Total Number ofShares Purchased |     |  | AveragePrice perShare |      | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans
orPrograms |        | Maximum Number of Sharesthat
May Yet bePurchased Underthe
PubliclyAnnounced Plans orPrograms
|December 1  31, 2009 |  | 14,091                          |     |  | $                     | 3.52 |                                                                              | 14,091 |                                                                                              | 1,422,358
|January 1  31, 2010  |  | 1,005,606                       | (1) |  |                       | 3.20 |                                                                              | 5,520  |                                                                                              | 1,416,838
|February 1  28, 2010 |  | 13,282                          |     |  |                       | 2.96 |                                                                              | 13,282 |                                                                                              | 1,403,556
|                      |  |                                 |     |  |                       |      |                                                                              |        |                                                                                              |          
|Total                 |  | 1,032,979                       |     |  | $                     | 3.20 |                                                                              | 32,893 |                                                                                              | 1,403,556
|                      |  |                                 |     |  |                       |      |                                                                              |        |                                                                                              |          



|(1) | This includes 1,000,086 shares of common stock of the Company purchased as treasury stock in a privately negotiated purchase from three individual
shareholders. Two of those individual shareholders served as independent contractors to the Company under the General Manager of the China Division in 2009; one of those individuals continues to serve in that capacity to the Company.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

None.



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##### Table of Contents

|Item 4. | (Removed and Reserved).
|------- | -----------------------



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

Election of
Directors and Ratification of Engagement of Independent Auditors

Prior to the Annual Meeting of Shareholders held on
February 15, 2010, the Board of Directors reduced the size of the Board to six persons and decided not to fill the vacancy in the Board created by the death shortly prior to the delivery of the proxy statements of one of its directors who had
been nominated for re-election at the annual meeting. Each of our directors was reelected to serve until our next annual meeting of shareholders or until his or her respective successor is elected and qualified. The following table sets forth the
results of the voting for the election of directors:



|                 |  |           |  |          |  |                                 
|---------------- |  | --------- |  | -------- |  | --------------------------------
|Nominee          |  | For       |  | Withheld |  | Abstentions and Broker Non-votes
|Chiu M. Chan     |  | 9,190,274 |  | 331,859  |  |                                
|Philip S. Chan   |  | 9,174,204 |  | 347,929  |  |                                
|Stephen L. Huber |  | 9,514,434 |  | 7,699    |  |                                
|Ping S. Chu      |  | 9,515,403 |  | 6,730    |  |                                
|James G. Gerace  |  | 9,515,037 |  | 7,096    |  |                                
|Xiao H. Li       |  | 9,221,667 |  | 300,466  |  |                                

The
stockholders also ratified the engagement of Killman, Murrell & Company, P.C. as the independent auditors for the fiscal year ending August 31, 2010.The proposal to ratify received 11,089,944 affirmative votes and 2,893
negative votes, with 100 votes abstaining.



|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: April 14, 2010 |  |  |  | By:                     |  | /s/ Chiu M. Chan                            
|                     |  |  |  |                         |  | Chiu M. Chan                                
|                     |  |  |  |                         |  | Chief Executive Officer                     
|                     |  |  |  |                         |  | (duly authorized officer)                   
|                     |  |  | 
|Date: April 14, 2010 |  |  |  | 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.



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