<PAGE>

                                  FORM 10-KSB
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
(Mark One)
[X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the Fiscal year ended                August 31, 2000
                                   ---------------------------------------------

[_]       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                      0-20554
                                ------------------------------------------------

                          DYNACO INTERNATIONAL, INC.
          ----------------------------------------------------------------------
                (Name of Small Business Issuer in its charter)

<TABLE>
<CAPTION>
                                     NEVADA                                                     76-0375477
          -------------------------------------------------------------        -------------------------------------------------
          <S>                                                                        <C>
          (state or other jurisdiction of incorporation of organization)             (I.R.S. Employer Identification No.)

          1030 INTERSTATE 10 EAST, SUITE 369
          HOUSTON, TEXAS                                                                           77069
          --------------------------------------------------------------       -------------------------------------------------
          (Address of principal executive officers)                                             (Zip Code)

          Issuer's telephone number, including area code                                       713-673-6432
                                                                               -------------------------------------------------
 </TABLE>

       Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:

                        Common Stock - $.001 Par Value
                        ------------------------------
                               (Title of Class)

     Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period than 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 ______.

     Check if there is no disclosure of delinquent filers in response to Item
405 fo Regulation S-B contained in this form, and no such disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     The issuer's gross revenues for the most recent fiscal year:  $26,032,441

     As of August 31, 2000 there were 7,658,856 shares of the registrant's
common stock, .001 par value, issued and outstanding 2,033,464 of which having
an aggregate market value of approximately $21,859,738 (based on the last trade
price of $10.75 as of November 28, 2000) were held by non-affiliates of the
registrant. In determining the number of shares held by non-affiliates, shares
held by officers, directors, and the Company's majority shareholder were
excluded.

     DOCUMENTS INCORPORATED BY REFERENCE.  None

     Transitional Small Business Format.  Yes _______.   No    x    .
                                                            --------
<PAGE>

                                  FORM 10-KSB

                          DYNACQ INTERNATIONAL, INC.

                               TABLE OF CONTENTS

<TABLE>
<S>                                                                              <C>
PART I..........................................................................    1
      ITEM 1.  Description of Business..........................................    1
      ITEM 2.  Description of Property..........................................    8
      ITEM 3.  Legal Processings................................................   10
      ITEM 4.  Submission of Matters to a Vote of Security Holders..............   10

PART II.........................................................................   10
      ITEM 5.  Market for Common Equity and Related Stockholder Matters.........   10
      ITEM 6.  Management's Discussion and Analysis or Plan of Operation........   12
      ITEM 7.  Financial Statements.............................................   16
      ITEM 8.  Changes in and Disagreements with Accountants
               on Accounting and Financial Disclosure...........................   16

PART III........................................................................   17
      ITEM 9.  Directors, Executive Officers, Promoters and Control Persons;
               Compliance with Section 16(a) of the Exchange Act................   17
      ITEM 10. Executive Compensation...........................................   18
      ITEM 11. Security Ownership of Certain Beneficial Owners
               and Management...................................................   23
      ITEM 12. Certain Relationships and Related Transactions...................   23
      ITEM 13. Exhibits and Reports on Form 8-K.................................
</TABLE>
<PAGE>

                                    PART I

     ITEM 1.   Description of Business

     General

     Dynacq International, Inc., a Nevada corporation incorporated on June 16,
1989 (the "Company"), is engaged in  (i) the operation of an outpatient surgical
facility, (ii)  the business of providing home infusion healthcare services and
supplies to patients in their homes, (iii) the operation of a medical office
complex, (iv) the management of physician practices, all located in the Houston
metropolitan area, and (v) the ownership and management of an acute care
hospital. In May 1998, the Company organized Vista Community Medical Center,
L.L.C., a Texas limited liability company which is 70% owned by a subsidiary of
the Company ("Vista Medical"), for the purpose of operating a General Acute Care
Hospital located adjacent to the "Vista Facility" (defined below), which was
completed and opened in May 1999 (the "Hospital").  Unless otherwise indicated,
all references to the Company herein include its subsidiaries.  See Note 1.B. of
Notes to Consolidated Financial Statements.

     Effective August 1, 1992, the Company commenced operations as a provider of
healthcare services and supplies to patients in their homes specializing in home
infusion therapy.  Home infusion therapy is the administration to a patient of
nutrients, antibiotics or other medications whether intravenously or through a
feeding tube, usually as a continuation of treatment initiated in a hospital.
The Company's home infusion therapy business was its core operation for several
years before it diversified its healthcare operations. The Company's
diversification effort includes (i) the acquisition of Vista Healthcare, Inc., a
Texas corporation ("Vista") described below in August 1994 which then owned and
operated a 15,000 square foot outpatient surgical facility located in Pasadena,
Texas (the "Vista Facility"), (ii) the formation of Doctors Practice Management,
Inc., a Texas corporation ("DPMI") in March 1994, to manage physician practices,
(iii) the construction and operation of a professional medical building
completed in May 1995, and (iv) the construction and operation of the Hospital
completed in May 1999.The Company transferred its home infusion therapy business
to Ambulatory Infusion Therapy Specialists, Inc., a Texas corporation ("AITS")
in December 1999 in exchange for 100% of the common stock of AITS.  The reason
for this transfer was an attempt by the Company to reduce the operating exposure
to the Company of the possible liabilities arising from the operations the
business in view of its declining significance to the Company's operations
overall.

     In September 1993, the Company's Common Stock commenced trading on the
NASDAQ Small Cap System under the symbol DYII.  In February 1998, the Company
amended its Articles of Incorporation to effectuate a four (4) to one (1)
reverse stock split in order to increase the price of its Common Stock to, among
other things, maintain the listing of the Common Stock on the NASDAQ Small Cap
System and to attempt to enhance the acceptability and marketability of the
Common Stock.  In fiscal 2000 the Board of Directors of the Company deemed it to
be in the best interests of the Company and its shareholders and approved as of
December 30, 1999 a stock split effected in the form of a 100% stock dividend on
all issued shares of its common stock, $.001 par value (the "Common Stock")
effective as of 5:00 p.m. on January 10, 2000.  On April 11, 2000, the Company's
request for listing of its securities on The Nasdaq National Market System was
approved by NASDAQ and its Common Stock started trading on the Nasdaq National
Market System under the same trading symbol DYII on April 14, 2000.

     In 1994, the Company completed the acquisition of approximately 65% of the
outstanding common stock of Vista in exchange for approximately 5% of the
Company's then outstanding Common Stock which was issued to 30 shareholders of
Vista in exchange for their shares of Vista common stock pursuant to an Exchange
Agreement. Subsequent to the initial exchange, the Company has reacquired
additional Vista shares increasing its ownership of Vista to approximately 96%.
Vista operated the Vista Facility, which provides a variety of surgeries,
medical treatments and laboratory services on an outpatient basis.  Under the
Company's control, Vista continues to utilize its facilities and equipment in
the same manner, however, the Company expanded the services offered and
purchased

                                       1
<PAGE>

new equipment. Revenues from the Vista Facility substantially increased in the
last three years and it has become the Company's largest revenue producer and
profit center, exceeding the combined revenues from the Company's home infusion
therapy business and revenues from the Company's management of physician
practices. The Company's Hospital has become the Company's second largest profit
center and revenue producer behind Vista.

     The Company completed construction of a 35,900 square foot medical office
building adjacent to the Vista Facility in 1995 at a total cost of approximately
$1,937,000 (the "Office Building").  Several of the offices in the Office
Building are currently utilized by physicians with whom the Company has
management contracts through its wholly-owned subsidiary DPMI.  Offices are also
leased to other physician practices that are not subject to management
agreements with DPMI.  In March 1994, the Company formed DPMI for the purpose of
providing (i) fee-based management services to physicians' groups, and (ii)
assistance in consolidating medical providers into integrated delivery systems.
DPMI began managing Vista in January 1996.  It currently has agreements to
manage three (3) physician practices and it has a Management Agreement to manage
the Vista Facility and the Hospital.

     In fiscal 2000 the Company undertook several steps to reduce the company's
operational risks and liability exposure with respect to its various healthcare
operations.  As discussed above, it transferred its home therapy infusion
business to AITS.  It also formed Vista Land and Equipment, L.L.C., a Texas
limited liability company 100% owned by the Company ("VLE") to hold
substantially all of the operational assets of the Company and its subsidiaries
which will be leased back to the various entities by VLE.

     In addition it is intended that DPMI or other entities to be formed, will
serve as the manager or operator of the Company's different businesses
including, to date, the operations of Vista, the Hospital, the home infusion
therapy operations and the management of physician practices. To date the
Company has not incurred material liabilities or lawsuits from its various
operations and believes that its operations are adequately insured.  Its
restructuring of asset ownership and operational control to subsidiaries is
intended to provide additional protection to the Company's consolidated
operations and assets overall such that liabilities in one operational area may
be contained to the maximum extent permitted by state laws limiting entity
liabilities from their owners.

The Home Infusion Healthcare Market.

     As previously discussed, all operations and assets of the Company's home
infusion healthcare business were transferred to AITS.  AITS is solely
responsible for operating this business utilizing its own employees, pharmacists
and consulting nurses.  The Company's only involvement will be to perform
certain general administrative services for AITS as part of its consolidated
operations.

     The Company's home infusion healthcare business principally involves the
administration of physician-prescribed nutrients, antibiotics or other
medications to patients in their homes, usually as a continuation of a treatment
program initiated in a hospital and is generally comprised of Parenteral
Nutrition Therapy and Antibiotic Therapy services described below.  Throughout
the course of treatment, a company licensed pharmacist compounds or supervises
the preparation of all prescribed drugs, solutions and related supplies and
answers questions concerning the prescribed therapy and the Company's services.
In certain cases where the patient is incapable of self-administering the
therapy, a nurse is also present at each administration of the therapy.  Company
nurses visit patients periodically to review training, catheter placement and
compliance with the patient care plan.  The Company's personnel are available to
respond to patient needs 24 hours a day, seven days a week.  Due to increasing
competition and decreasing reimbursable charges paid by third parties, the
Company is not emphasizing home infusion therapy services in its business growth
strategy.  See "Management's Discussion and Analysis" hereinafter referred to as
"MD&A."

                                       2
<PAGE>

Parenteral Nutrition Therapy

     Parenteral nutrition therapy is prescribed for individuals unable to eat or
digest food due to a failure of their gastrointestinal tracts.  Parenteral
nutrition is typically administered through central vein catheters that are
surgically implanted during hospitalization.  The Company formulates, compounds
and dispenses solutions pursuant to a physician's order.  Solutions used in this
therapy typically contain amino acids (protein), dextrose (carbohydrate), lipids
(fat), electrolytes, vitamins and trace minerals.  Some patients requiring this
type of therapy periodically require routine re-hospitalization throughout their
treatment.  Some patients may require therapy for the remainder of their life.

Antibiotic Therapy

     Antibiotic and anti-infection therapies are used to treat a variety of
infections, including osteomyelitis (bone infections), bacterial endocarditis
(heart valve infections), septicemia (blood infections), wound infections, bone
and joint infections and infections associated with cystic fibrosis and
diabetes.  By intravenously administering antibiotics into the bloodstream (as
opposed to ingesting them orally), the effectiveness of the medication is
generally increased. Antibiotic therapy is also a significant therapy for
treating individuals suffering from Acquired Immune Deficiency Syndrome
("AIDS").  Because of the gradual destruction of the immune system by the AIDS
virus, orally administered drugs typically become less effective against
opportunistic infections, and consequently antibiotics must be introduced
intravenously.

Physicians' Practice Management

     During fiscal 2000, DPMI had agreements to manage the medical practices of
three (3) physician-group practices and the Vista Facility and the Hospital.
Each physician practice management agreement is called a "Full Service Facility
and Management Agreement" (the Management Agreement").  The Management
Agreements generally require DPMI, at its expense, to:  (i) act as the sole and
exclusive agent of the physician or physician group for the management and
administration of business functions and services related to the physicians'
medical practice; (ii) undertake marketing, billing, record keeping, collection,
clerical staffing and support services; (iii) provide physical office space,
facilities and equipment necessary for the physician's practice, including the
repair and maintenance thereof and all utilities and supplies related thereto
including licenses and permits; (iv) undertake the hiring, firing, selection,
training and supervision of all non-medical personnel; (v) prepare and maintain
accounting and financial records and patient files; and (vi) undertake other
management and administrative functions related to the foregoing.  In
consideration of its services, DPMI receives a management fee ranging from 35%
to 65% of revenues generated by the physicians.  DPMI attempts to negotiate
long-term (5 years or longer) noncancellable Management Agreements due to its
large initial costs in setting up and equipping fully staffed and functional
facilities for physicians.  The Management Agreements may be terminated by the
non-defaulting party in the event of a breach by the defaulting party.  DPMI and
the physicians each agree to indemnify the other  for claims which may arise in
connection with the performance of their respective obligations.  Pursuant to
the Management Agreements, DPMI is entitled to a fixed percentage of collections
from the physicians' practice and is obligated to pay certain fixed categories
of expenses which obligation is not limited in amount.  To the extent DPMI's
share of collections is not sufficient to cover its expense obligations under
the Management Agreements, DPMI is obligated to pay the excess expenses and is
subject to losses under the Management Agreements.  The Company is not pursuing
additional physician Management Agreements at this time and is concentrating its
resources on the operations of the Vista Facility and the Hospital.

                                       3
<PAGE>

Outpatient Surgical Facility, Office Building and Hospital

     The Company's Vista Facility, consisting of approximately 15,000 square
feet, provides outpatient surgical facilities, x-ray diagnostic services and
full service laboratory testing to physicians and their patients.  The Vista
Facility, Office Building and Hospital are located adjacent to each other.
Effective October 1, 1998, DPMI entered into a one (1) year Management Agreement
renewable for two (2) additional years for the Vista Facility which entitles
DPMI to 60% of the revenues generated by the facility in exchange for
comprehensive management services provided by DPMI. The Management Agreement for
the Vista Facility is similar in scope and nature to the ones entered into by
DPMI to manage physician practices and was renewed for one (1) year in October
1999 and again in October 2000.  The Office Building, consisting of
approximately 35,900 square feet, is utilized by DPMI for the location of
physician practices under Management Agreements and for leasing space to
physician practices which are not under management with DPMI.  The Hospital was
completed in May 1999 and has two (2) surgical suites and 42 beds.  See "Item 2.
Description of Property."

Business Growth Strategy

     Beginning in late fiscal 1994 and during fiscal 1995, the Company commenced
implementation of a new business strategy of diversifying from an almost
exclusively home infusion service provider into an integrated medical/healthcare
services Company.  The foundation of this strategy was the acquisition of a
majority interest in Vista in August 1994 and the completion of the Office
Building adjacent to the Vista Facility in April 1995.  The Company also formed
DPMI to provide management services to medical practices.  DPMI provides office
space and fee-based management services to certain client physicians located in
the Office Building.  Vista provides outpatient surgical facilities, x-ray
diagnostic services and third-party laboratory testing to physicians and their
patients in the Vista Facility. In fiscal 1998, the Company decided to build a
42-bed hospital adjacent to its Vista Facility (the outpatient surgical center)
and its Office Building which was completed in May 1999.  With the addition of
the Hospital, the Company has expanded the range of medical services it can
provide including major surgical cases which require hospitalization.

     The Company intends to grow as a provider of healthcare services by (i)
expanding the business of its existing operations locally, (ii) acquiring
established healthcare facilities, and (iii) opening new branch facilities in
selected local markets.   The Company will periodically evaluate possible
acquisitions and suitable locations for new facilities.  The Company's growth
strategy is dependent in a large part on the ability of the Company to attract
and retain key management, marketing and operating personnel at the local
facility level.  Such persons are in high demand and are often subject to
competing offers from other healthcare service companies and related businesses.
The Company primarily will target growth opportunities in the ambulatory
surgical center business where it has established the greatest operating
success.

     The Company's target markets are areas with major industrial companies and
middle class blue-collar workers, generally with strong union ties and with
superior insurance coverage.  This population group has proven to be very open
to the type of healthcare center concept offered by the Company.  The Company's
operations are in Pasadena, Texas, a petrochemical industry hub which provides a
stable patient base of insured patients.  The Company anticipates growth within
a targeted area by purchasing or constructing an outpatient surgical center and,
if it is successful, adding a professional building or a hospital at the same
location or nearby.  It is anticipated that each hub area will consist of a
central core of outpatient surgical, diagnostic and laboratory centers, infusion
therapy facilities and specialized practices serving outlying clusters of
general practitioners.  Subsequent alliances of physicians, specialists and
clinics are feasible in other areas around Houston, such as Clear Lake, La
Porte, Baytown, Deer Park, and other industrial/petrochemical centers wherever
located.

                                       4
<PAGE>

Competition

     The Company is one of many in the greater Houston metropolitan area that
provide medical practice management, outpatient surgical facilities,
professional buildings, hospitals or home infusion therapy.  Several major
hospital organizations with greater financial resources are planning to or have
entered the Pasadena area (the Company's principal market) which will directly
compete with the Company's operations.  Such competition could be particularly
acute with respect to the Company's outpatient surgical facility and the
Hospital and have an adverse effect on the ability of the Company to attract and
retain physician practices in the Office Building.

     The home infusion healthcare therapy market is highly competitive and
management anticipates that competition, particularly for patient referrals,
will intensify in all metropolitan areas.  The industry has been subject to
market consolidation in recent years and the Company believes that this trend
will continue.  The Company currently competes with other home infusion therapy
companies, hospitals, physician groups and other healthcare organizations, many
of which operate on a regional or national basis and are larger and have
significantly greater resources than the Company.  In the past three years, the
Company has experienced substantial pressure from insurance companies with
respect to the need for and the cost of home infusion therapy treatments.  This
pressure has resulted in a declining patient base and reimbursable charges per
patient resulting in substantially lower revenues to the Company from home
infusion operations.

     Presently, the Company operates only in the greater Houston metropolitan
area.  However, the Company would expand its operations into other markets
through acquisitions if suitable acquisition properties or businesses are
identified and the acquisition terms are acceptable to the Company.

     With respect to the Company's healthcare operations, the primary
competitive factors are (i) quality of care, including responsiveness of service
and quality of professional personnel, (ii) the ability to establish and
maintain relationships with referring physicians, hospitals, health maintenance
organizations, clinics and nursing agencies, (iii) price, (iv) breadth of
services offered, and (v) general reputation with physicians, other referral
sources and potential patients.  Management believes that the Company competes
successfully in all of these areas.

Marketing and Sales

     With respect to the Company's home infusion business and its outpatient
surgical facility, the Company relies primarily on patient referrals from
physicians, including those officing in the Office Building.  With respect to
home infusion therapy, these referral sources tend to be concentrated among a
limited number of physician specialists, allowing the Company to conduct a
directed selling effort.  Primarily due to escalating pressures to contain
healthcare costs, insurance companies and other third-party payers are
participating to a greater extent in decisions regarding healthcare
alternatives.  Consequently, management believes that such third-party payers
will be increasingly important in marketing the Company's services in the
future.  In connection with the opening of the Hospital, the Company utilized
traditional billboard and newspaper advertising.

Healthcare Regulation

     The federal government and the state of Texas regulate various aspects of
the Company's business.  The Company's Vista Facility is licensed as a pharmacy
and is subject to federal and state laws and regulations governing pharmacies.
Federal laws require, among other things, that the Company's facilities comply
with rules relating to controlled substances.  These rules include an obligation
to register with the Drug Enforcement Administration of the United States
Department of Justice and to meet certain requirements concerning security,
record keeping, inventory controls, prescription forms, order forms and
labeling.  The Company's pharmacists and nurses also are subject to state
licensing requirements and laws regarding standards of professional conduct.
Each nurse and pharmacist used

                                       5
<PAGE>

by the Company must have a valid license. Management believes that the Company's
operations comply in all material respects with applicable pharmacy licensing
requirements.

     The healthcare industry is highly regulated at the federal and state
levels.  The Company believes its business is in material compliance with
applicable law.  The various relationships between the Company and its
affiliated physician groups, however, are varying and in some respects unique,
and many aspects of these relationships have not been the subject of judicial or
regulatory interpretation.  There can be no assurance that a review of the
Company's business by courts or by healthcare, tax, labor or other regulatory
authorities would not result in determinations that could adversely affect the
Company's operations or that the healthcare regulatory environment will not
change so as to restrict the Company's existing operations or potential for
expansion.

     A federal statute (the "federal anti-kickback statute") prohibits the offer
or payment of remuneration, or the solicitation or receipt of remuneration, to
induce either (i) the purchase of any item or service reimbursable in whole or
in part by Medicare or certain state healthcare programs (including Medicaid);
or (ii) the referral of an individual for the furnishing of any item or service
reimbursable in whole or in part by Medicare or certain state healthcare
programs. Both criminal and civil penalties can be imposed for violations of the
federal-kickback statute, including exclusion from participation in the Medicare
and Medicaid programs.  The Department of Health and Human Services and law
enforcement authorities are increasingly scrutinizing arrangements between
healthcare providers and referring physicians to ensure that those arrangements
do not constitute mechanisms for paying for referrals.  In addition, a number of
states have adopted similar legislation that applies to patients not covered by
Medicare or Medicaid programs. The Company does not believe that its business
operations violate federal or state anti-kickback statutes.  Medicare and state
healthcare programs do not reimburse medical practices for management fees paid
to the Company, and the Company does not refer patients to the medical
practices.  Nevertheless, because of the breadth of federal and state anti-
kickback statutes and the absence of court decisions interpreting their
application to arrangements such as those entered into by the Company, there can
be no assurance that the Company's activities will not be challenged by
regulatory authorities or that the Company's position will prevail if
challenged.

     Numerous legislative proposals have been introduced or proposed in the U.S.
Congress and in some state legislatures that would effect major changes in the
U.S. healthcare system nationally or at the state level.  It is not clear at
this time what proposals, if any, will be adopted or, if adopted, what effect,
if any, such proposals would have on the Company's business.  Certain proposals,
such as reducing Medicare and Medicaid, could adversely affect the Company.
There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have a material adverse effect on the
Company.

     General business corporations (as opposed to professional corporations
which are wholly-owned by physicians) are generally not allowed to render
medical care.  While the Company structures its operations to comply with
applicable laws concerning the corporate practice of medicine, there can be no
assurance that, given varying and uncertain interpretations of such laws, the
Company would be found to be in compliance with such laws.  A determination that
the Company is in violation of applicable restrictions on the practice of
medicine could have a material adverse effect on the Company if the Company were
unable to restructure its operations to comply with applicable state
requirements.

Risks Inherent in Provision of Medical Services

     The Company's operations involve the delivery of healthcare services to the
public and the Company is exposed to the risk of negligence and other liability
claims relating to personal injuries or even wrongful death.  Claims of this
nature, if successful, could result in damage awards to the claimants in excess
of the limits of any applicable insurance coverage maintained by the Company or
healthcare providers utilized by the Company or those who utilize the Company's
facilities, equipment and services.   Insurance against losses related to claims
of this type

                                       6
<PAGE>

can be expensive and varies widely from state to state. The Company or its
affiliated physician groups and professional service providers are required to
maintain liability insurance in amounts and coverages believed to be usual and
customary. Nevertheless, successful malpractice or other liability claims
asserted against the medical care providers or the Company could have a material
adverse effect on the Company.

Reductions in Third-Party Reimbursements

     Healthcare providers typically bill various third-party payers, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the healthcare services provided to their patients.
These third-party payers are increasingly negotiating the prices charged for
medical services, pharmaceuticals and other supplies, with the goal of lowering
reimbursement and utilization rates.  Third-party payers can also deny
reimbursement for medical services, pharmaceuticals and other supplies if they
determine that a treatment was not performed in accordance with treatment
protocols established by such payers or for other reasons.  Loss of revenues to
the Company caused by cost containment efforts could have a material adverse
effect on the Company.  Although the Company does not have any contracts to
provide healthcare services on a capitated or other risk sharing basis, the
Company anticipates that it may offer its services to payers in the future on a
capitated or other risk sharing basis.  To the extent that patients or enrollees
covered by a contract require more frequent or extensive care than is
anticipated by the Company, the revenue to the Company derived from such
contracts may be insufficient to cover the costs of the services provided.
Insufficient revenue under capitated or other risk sharing contracts could have
a material adverse effect on the Company.

Insurance

     In recent years, physicians, hospitals and other participants in the
healthcare market have become subject to an increasing number of lawsuits
alleging malpractice, product liability or related legal theories, many of which
involve large claims and significant defense costs.  With respect to its home
infusion healthcare business, the Company does not carry liability insurance for
any employee or contract representative.  The Company requires that all
healthcare professionals, including registered nurses with whom the Company
contracts, carry personal professional liability insurance.  However, the
Company does not require continuing proof of insurance, mandate policy limits or
deductibles or require that the Company be named as an additional insured.
Should one of the Company's agents or contracting healthcare professionals
commit a negligent or other liability producing act or omission in the Company's
home infusion operations, the patient could have a direct claim against the
Company which would be uninsured.  Mr. Chiu Chan has in force personal
professional liability insurance with coverage limits of $1 million per
incident.  He has not experienced difficulty in obtaining insurance in the past
and believes the current insurance coverage is adequate to provide for any
claims that may arise and related settlements, if any, involving him personally.
As the pharmacist in charge of home infusion therapy, any claims would probably
involve Mr. Chiu Chan and AITS or the Company and Mr. Chan's insurance may apply
to the extent the loss is related to his pharmacy services.  The Company or AITS
may, however, be exposed to the extent Mr. Chiu Chan's insurance does not apply
or is insufficient to cover any losses for which AITS may be jointly liable.
Management believes the Company has reasonable and customary insurance coverage
with respect to the remainder of its business operations although the Company
cannot provide any assurance that its insurance would cover all losses to which
the Company may be subject.

Employees

     The Company and its subsidiaries employed approximately 125 full-time
employees as of August 31, 2000 and additionally employs part-time employees
(25-50) when needed.

                                       7
<PAGE>

Hospital Operations

     The Company had no previous experience with respect to the ownership and
operation of a hospital prior to opening its Hospital in May 1999.  The Hospital
is owned by the Company and managed by DPMI. The Company leases the Hospital to
Vista Medical pursuant to a five (5) year long-term lease for $57,500 per month.
Vista Medical is owned 70% by DPMI and 30% by Halcyon, L.L.C.  The Company
funded the costs to equip and construct the Hospital of approximately $5,000,000
from its cash flow and cash on hand.  The Company cannot provide any assurances
that the operations of the Hospital will be successful in the long-term or
short-term.  In the long-term, the Company's ability to manage the Hospital and
competition will be key factors in the success of the Hospital.  The operations
of the Hospital were profitable in fiscal 2000 and exceeded the Company's
expectations.

Employee Benefit Plans

In August 1995, the Board of Directors approved a 1995 Non-Qualified Stock
Option Plan for consultants and non-employee directors.  Under the terms of the
Plan, the Company may grant stock options to  consultants and non-employee
directors of the Company and its subsidiaries.  The options granted under the
Plan are not intended to qualify as "incentive stock options" as that term is
defined under Section 422A of the Internal Revenue Code and, as such, the
nonstatutory options granted under the Plan are not entitled to special
treatment under Section 422 of the Code.  In addition, in August 1995, the
Company's shareholders approved a 1995 Incentive Stock Option Plan.  The 1995
Incentive Stock Option Plan was recommended by the Board of Directors because of
its belief that the Plan will advance the interests of the Company by providing
key employees, who have substantial responsibility for the direction and
management of the Company, with additional incentive for them to promote the
success of the Company by increasing their proprietary interest in the success
of the Company.  It is intended that options issued under the Plan will qualify
as Incentive Stock Options under Section 422A of the Internal Revenue Code.

     In fiscal 2000, The Board of Directors recommended that the shareholders of
the Company approve The Year 2000 Stock Incentive Plan on August 29, 2000, at
the Annual Meeting of Shareholders.  The Year 2000 Stock Incentive Plan was
approved and provides for: (i) incentive stock options, (ii) non-qualified stock
options, (iii) rights to receive all or some portion of the increase in the
value of the Common Stock ("Stock Appreciation Rights"), (iv) the right to
receive all or some portion of cash dividends with respect to the Common Stock,
(v) rights to receive cash and/or Common Stock contingent upon the attainment of
defined performance goals, and (vi) shares of Common Stock subject to
temporary restrictions on transfer. The Year 2000 Stock Incentive Plan includes
as "Eligible Individuals" employees, officers, and directors of the Company or a
subsidiary of the Company or consultants or advisors receiving cash compensation
from the Company or a subsidiary of the Company.  The maximum number of shares
subject to awards under the Plan is 2,500,000.  The Year 2000 Stock Incentive
Plan was recommended by the Board of Directors for a number of reasons including
the fact that a majority of shares subject to award under the former plans had
been previously awarded or were subject to the exercise of outstanding options
and the former plans only provided for option awards as compared to the various
types of awards permitted by The Year 2000 Stock Incentive Plan.  The Company
believes its compensation paid to employees and its compensatory plans are
sufficient to attract and retain qualified employees.

ITEM 2.   Description of Property

     The Company's office space for its headquarters at 10304 Interstate 10
East, Suite 369 consisting of approximately 1,000 square feet is leased on a
month-to-month basis for $1,286.00 per month.  The lessor of the office space is
Capital Bank.  One of the Company's directors is a director of Capital Bank.
Management believes that the lease rate being paid is consistent with other
commercial rates available in the East Houston area.

                                       8
<PAGE>

     In August 1994, the Company consummated the acquisition of 65% of the
outstanding common stock of Vista, which owned the Vista Facility, an outpatient
surgical center in Pasadena, Texas consisting of a one story building containing
approximately 15,000 square feet.  The Vista Facility serves as collateral for a
note payable to G.E. Capital. Vista is the Maker of the Note which bears a fixed
interest rate of 9.65%, requires monthly installment payments of $19,533, and
has a maturity date of September 1, 2002.  The note is guaranteed by the
Company.  As of August 31, 2000, the balance was $440,772.  Management believes
the facility is adequately covered by insurance.  Depreciation on the Vista
Facility is computed using the straight line method over thirty-nine years,
furniture and fixtures are depreciated over seven years, and equipment is
depreciated over five years.  The property tax rate is about 3% of appraised
value and the annual real and personal property taxes are about $80,000.  The
Vista Facility is 100% utilized as an outpatient surgical center and to provide
laboratory and diagnostic testing services. Due to high utilization of the three
(3) surgical suites at the Vista Facility the Company intends to add an
additional surgical suite during fiscal 2001.  On September 1, 1998, Vista sold
the Vista Facility building and the land on which the Vista Facility, the Office
Building and Hospital are located to the Company for a total purchase price of
$1,670,000 payable pursuant to two (2) promissory notes bearing interest at 8.5%
per annum and payable in eighty-four monthly installments of $26,446.93 in the
aggregate. Subsequently, as part of its asset protection restructuring plan, the
Company transferred the Vista Facility and the land on which the Vista Facility,
the Office Building and Hospital are located, as well as the Office Building,
Hospital and all furniture fixtures and equipment of all of the foregoing
facilities to VLE which will serve as an asset holding and leasing company to
the various operating entities. VLE is 100% owned by the Company.

     In September 1994, the Company commenced construction of the Office
Building (adjacent to the existing Vista Facility described above) which was
completed in 1995.  The total cost of the Office Building was approximately
$1,937,000, and was financed from working capital.  The Office Building was
constructed as a professional office building for physician practices.  There is
competition from several professional buildings in the surrounding area.
Management believes the Office Building is adequately covered by insurance.  The
Office Building is comprised of two stories and contains approximately 35,900
square feet of space all of which is leased or otherwise utilized by the Company
for its operations as described below.  In addition, the Company has invested
approximately $700,000 for new equipment and furnishings for the Office
Building.  All depreciation is calculated on the straight line method, with the
building being depreciated over thirty-nine years, furniture and fixtures over
seven years, and equipment over five years. The property tax rate is
approximately 3% of appraised value and the annual real and personal property
taxes are about $80,000.  As of August 31, 2000, there were three (3) physician
practices under management with DPMI which are located in the Office Building.
Pursuant to the Management Agreements which provide DPMI with a percentage of
revenues from each physician's practice, DPMI agrees to provide fully-equipped
office space and other services. Approximately 10% of the space in the Office
Building is utilized by DPMI for physician practices under its management.  Four
(4) physician groups and other independent physicians (not under DPMI's
management) collectively lease approximately 65% of the Office Building space.
The Company (and its subsidiaries) collectively utilize approximately 35% of the
office space.  The Office Building is fully leased or otherwise utilized by the
Company. Due to increased demand for medical office space in the Pasadena area,
the Company does not believe the loss or cancellation of any lease would be
material.

     On July 1, 1996, DPMI leased approximately 3,000 square feet of office
space from the City of Pasadena pursuant to a five (5) year lease (containing an
option for an additional five (5) years) which requires lease payments of $7,200
annually.  The property is located at 1001 East Shaw, Pasadena, Texas.  DPMI
leased the property for the location of a medical practice under a Management
Agreement which relocated to the Office Building.

     The Hospital is located next to the Vista Facility and the Office Building
in Pasadena, Texas.  It has 42 beds, two surgical suites, an emergency room, an
intensive care area, nurse station, kitchen and other facilities necessary to
operate as a complete hospital.  The Hospital was completed in May 1999 at a
total cost of approximately $5,000,000 which includes furniture, fixtures and
equipment of approximately $1,579,000.  The Company funded the foregoing cost
from internally generated funds and cash-on-hand. The Hospital and its
associated equipment are depreciated on the same basis as the Company's Vista
Facility and Office Building. Depreciation and taxes on the Hospital are
calculated and incurred on the same basis as described for the Vista Facility
and Office Building above. The Company is working to increase utilization of its
surgical suites and room occupancy. However, due to high utilization of its
surgical suites at the Hospital, the Company intends to add two (2) additional
surgical suites at the Hospital.

                                       9
<PAGE>

     The Company's Office Building is owned by the Company free of any liens or
encumbrances owed to third parties.  The remainder of the Company's real estate
holdings, including the Vista Facility and the Hospital, are subject to a first
lien deed of trust to secure the remaining indebtedness owed to G.E. Capital of
approximately $440,772 as of August 31, 2000.  Additionally, the Vista Facility
is subject to a deed of trust and second lien to secure the Company's purchase
money notes in the aggregate principal amount of $1,670,000 payable to Vista
Healthcare, Inc. which is now approximately 96% owned by the Company. The Vista
Facility was transferred to the Company in fiscal 1999 in exchange for the
Company's payment of the book value of the property in the amount of $1,670,000.

ITEM 3.   Legal Proceedings

     The Company is not a party to any material litigation.


ITEM 4.   Submission of Matters to a Vote of Security Holders

     On August 29, 2000, the following matters were submitted to a vote of the
Company's shareholders at the Company's Annual Meeting of Shareholders, with the
votes for and against each proposal listed above.

     Proposal 1.  ELECTION OF DIRECTORS

<TABLE>
<CAPTION>
     NAME OF EACH DIRECTOR ELECTED                       FOR          AGAINST
                                                         ---          -------
     AND WHOSE TERM OF OFFICE CONTINUED
     ----------------------------------
     <S>                                               <C>            <C>
          Chiu Moon Chan                               4,698,561           0

          Philip Chan                                  4,698,561           0

          Stephen L. Huber                             4,698,561           0

          Earl R. Votaw                                4,698,561           0


     Proposal 2.  APPROVAL OF THE COMPANY'S              FOR          AGAINST
                                                         ---          -------
                  YEAR 2000 STOCK INCENTIVE PLAN
                  ------------------------------

                                                       4,686,094      12,467

     Proposal 3.  TO RATIFY APPOINTMENT OF THE
                  COMPANY'S AUDITORS FOR FISCAL 2000     FOR          AGAINST
                  ----------------------------------     ---          -------

                                                       4,686,561           0
</TABLE>

                                   PART II.

ITEM 5.   Market for Common Equity and Related Stockholder Matters

     In September 1993, the Company's Common Stock began trading on NASDAQ's
Small Capitalization Market under the symbol DYII.  Prior to obtaining the
NASDAQ listing, the Company's Common Stock had traded in the over-the-counter
market on the pink sheets and on the NASD Electronic Bulletin Board.  On April
11, 2000, the

                                       10
<PAGE>

Company's request for listing its securities on The NASDAQ NATIONAL MARKET was
approved and the Company shares began trading on THE NASDAQ NATIONAL under the
symbol DYII on April 14, 2000.

     The following table sets forth the high and low closing bid prices for the
Company's Common Stock during each of the last eight fiscal quarters as reported
by published market reports from investor services.

<TABLE>
<CAPTION>
                                      High      Low
                                      ----      ---
<S>                                  <C>      <C>
2000 Fiscal Year - Quarter Ended:

     November 30, 1999               $15.25   $ 12.00

     February 28, 2000                 8.75      8.25

     May 31, 2000                     7.125     6.875

     August 31, 2000                   9.15    8.9375

1999 Fiscal Year - Quarter Ended:

     November 30, 1998               $ 2.62   $  2.37

     February 28, 1999                 4.75      2.37

     May 31, 1999                      4.75      3.81

     August 31, 1999                   8.50      4.71
</TABLE>

     These quotations reflect inter-dealer prices, without retail markup, mark-
down or commission and may  not represent actual transactions and are adjusted
to reflect the Company's four (4) to one (1) reverse stock split effective
February 1998 and the Company's stock split effected in the form of a 100%
dividend effective as of January 10, 2000.

     As of August 31, 2000, the Company had approximately 325 shareholders of
record.  This number does not include shareholders who hold the Company's
securities in nominee accounts with broker-dealer firms or depository
institutions. Including the beneficial owners of shares held in nominee accounts
or depository institutions, the Company believes it has in excess of 650
beneficial owners of its Common Stock.

     The Company has not paid any cash dividends on its Common Stock and intends
to retain all earnings for operations and expansion of its business.  The
Company does not anticipate paying cash dividends in the foreseeable future.
Any future determination as to the payment of cash dividends will depend upon
the Company's results of operations, financial condition and capital
requirements, as well as such other factors as the Company's Board of Directors
may consider.  There are no contractual or other restrictions which limit the
Company's right to declare and pay dividends should the Board of Directors elect
to do so.  As stated above, the Company effectuated a stock split in the form of
100% stock dividend effective on January 10, 2000, and, the Board of Directors
intends to consider future stock dividends depending on the price of the
Company's stock, trading volumes and such other factors as it may deem to be in
the best interests of the Company and its shareholders.

                                       11
<PAGE>

     In fiscal 2000, the Company effectuated an exchange of its Common Stock for
the common stock held by certain Vista minority shareholders and increased its
ownership in Vista to approximately 96% pursuant to the share exchange or direct
purchases.  The exchange was undertaken pursuant to private placement exemptions
under Section 4(2) of the Act and applicable state laws.

ITEM 6.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations

Analysis of Operations

     The following discussion provides an analysis of the Company's results of
operations and reasons for material changes therein for the three years ended
August 31, 2000.

August 31, 2000 August 31, 1999

     The Company recorded consolidated net income of $5,858,406 for the year
ended August 31, 2000, as compared to consolidated net income of $2,663,832 in
fiscal 1999 and a net income of $945,843 in 1998. There were no significant,
unusual or non-recurring items of income or expense during the three years ended
August 31, 2000. The Company does not expect to record further significant
writeoffs due to uncollectible loans in future years.

     As a result of a significant increase in the Company's revenues and
expenses during fiscal 2000 relating to the Company's Vista Facility and the
Hospital operations, it is difficult to meaningfully compare revenues and
expenses on a year-to-year basis.

     According to the American Institute of Certified Public Accountants (AICPA)
health care industry guide, revenues reported in the consolidated statements of
income should be net revenues which is gross revenues minus contractual
adjustments instead of gross revenues that have been reported in the prior
periods.

     During the year ended August 31, 2000, the Company determined that a major
portion of the consolidated provision for uncollectible accounts consisted of
contractual adjustments. As a result, the contractual adjustments that were
previously included as a component of consolidated costs and expenses are
reflected as a component of consolidated net revenues. Amounts reported for the
year ended August 31, 1999 have been reclassified to conform to the current
presentation and result in the reduction of consolidated costs and expenses and
consolidated net revenues by $4,083,765. Before the reclassification, the gross
revenue for fiscal 2000 and fiscal 1999 were $39,165,582 and $22,415,531,
respectively. After the reclassification the net revenue for fiscal 2000 and
fiscal 1999 were $26,032,441 and $16,212,656, respectively.

     Therefore effective fiscal 2000, net revenues net of contractual
adjustments are reported and fiscal 1999 gross revenues that were previously
reported are restated to subtract contractual adjustments as net revenues for
comparison purposes.

     For the fiscal year ended August 31, 2000 total consolidated net revenues
net of contractual adjustments increased by $9,819,785 to $26,032,441, a 61%
increase.  Of this amount, net revenues of $1,870,216 were recorded by DPMI in
fiscal 2000 compared to $1,934,224 in fiscal 1999 as a result of the Company's
decision to limit its expansion in the management of physician practices during
fiscal 2000.  The Company expects physician management net revenues (and
corresponding expenses) to further decrease in fiscal 2001 as it reduces its
business in the area of physician management practice.  The Company records net
revenues from the management of physician practices on a combined or
consolidated basis and reflects as net revenues all patient billings of the
respective practices and expenses payments to physicians and other physician
practice costs.

     Net revenues attributable to operations of the Vista Facility were
$15,394,954 in fiscal 2000, compared to $12,357,894 in fiscal 1999, an increase
of 25%.  Net revenues from home infusion therapy were $1,356,650 in fiscal

                                       12
<PAGE>

2000 compared to $1,120,300 in fiscal 1999, an increase of 21%, primarily as a
result of higher recoverable charges per day per patient and a slightly larger
patient load. Net revenues from the Hospital increased by $6,610,383 or 826% to
$7,410,621 in fiscal 2000 when compared to $800,238 which represented
approximately four months of operation in fiscal 1999.

     Expenses for compensation and benefits to employees increased by 37% to
$4,344,977 as a result of more employees needed by the Company to service the
increased activities of Vista and the new business associated with the
management of the Hospital by DPMI.  The number of employees employed by the
Company and its subsidiaries increased from approximately 100 in fiscal 1999 to
approximately 125 as of August 31, 2000.  The Company's provision for
uncollectible trade accounts increased from $37,097 in fiscal 1999 to $60,585 in
fiscal 2000 primarily as a result of increased trade revenues resulting in
corresponding increases for uncollectible trade accounts.  As a percentage of
revenues, the hospital and Vista's provision for uncollectible trade accounts
for both fiscal 1999  and fiscal 2000 were both at approximately 1%.  The
Company expects its uncollectible trade accounts as a percentage of revenues for
both the hospital and Vista to remain relatively constant in the future.  The
Company recorded no writeoffs for uncollectible loans in both fiscal 2000 and
1999.  Expenses for medical supplies increased 45% to $3,960,863 associated with
the increased revenues and business from the Hospital and Vista operations.

     General and administrative expenses increased 20% to $4,830,564 primarily
as a result of increased operational activities at the Vista Facility and the
addition of the Hospital operations for twelve months.  Rent and other income
increased from $336,744 in fiscal 1999 to $388,299 in fiscal 2000 primarily as a
result of additional rental income received from outside physicians not under
DPMI management.  Rent and occupancy expense increased by $66,535 or 76% to
$153,940 in fiscal 2000 primarily due to the new hospital building.

     The Company's physician management practice (exclusive of the Vista
Facility Management Agreement) and its home infusion division did not
significantly contribute to the Company's operating profit.  DPMI's net income
of $2,373,360 was primarily derived from the operations of the Vista
outpatient surgery clinic, through the Vista Facility Management Agreement. The
future success of the Company is largely dependent on successful operations at
the Vista Facility and the Hospital.

     The Company faces certain general business risks with respect to all of its
operations.  In addition to regulatory concerns and increasing competition with
respect to all of its operations, the Company's home infusion therapy operations
are subject to substantial risks because the Company serves a relatively small
number of patients.  The Company's home infusion healthcare revenues decreased
from $ 2,730,753 in fiscal 1995 to $1,356,650 in fiscal 2000 as a result of a
significant decrease in the number of full-time patients from approximately ten
(10) in fiscal 1995 to an average of three (3) full-time patients in fiscal
2000.  The Company does not intend to aggressively market its home infusion
therapy services at this time primarily because of reduced recoverable patient
day rates being paid by third-party payers.  The Company will not continue to
accept home infusion patients if rates continue to decline.  In the past four
(4) years, the Company has faced increasing pressure from insurance companies to
justify the need for continued home infusion therapy in some cases and the
Company's charges therefore. The Company expects these pressures to continue and
to increase. With respect to its physician's practice management services, the
Company has yet to establish a consistently successful operating history,
particularly in view of the writeoffs for uncollectible notes recorded in fiscal
1997. The Company does not intend to pursue additional management agreements for
physician practices at this time. Revenues from the Vista Facility increased
significantly during fiscal 1999 due to increased patient referrals. The Company
expects, and will aggressively pursue, increased patient referrals for the Vista
Facility during fiscal 2000 and expects to maintain revenue and operating
profit. The Company has no operating history for the Hospital although the
Company expects the operations of the Hospital to have a material effect on the
Company's consolidated operating results. While the Company believes the
operating results of the Hospital will be successful in the long-term, it can
provide no assurance at this time to its shareholders. In the short-term,
expected operating

                                       13
<PAGE>

results from the Hospital could be negatively impacted by low patient
utilization (particularly in the first year), which could have a material
adverse effect on the Company's liquidity and capital resources. In the long-
term, the skill and experience of the Hospital's management team and competition
will play critical roles.

     August 31, 1999 August 31, 1998

     The Company recorded consolidated net income of $2,663,832 for the year
ended August 31, 1999, as compared to consolidated net income of $945,843 in
fiscal 1998 and a net loss of $1,059,195 in 1997.  There were no significant,
unusual or non-recurring items of income or expense during the three years ended
August 31, 1999, except for writeoffs in fiscal 1997 of uncollectible notes in
the amount of $776,922 and the writeoff of $371,736 in uncollectible advances to
a subsidiary.  As discussed below, the Company's loss for fiscal 1997 includes
the writeoff of loans previously made by the Company to various physician
groups.  The Company does not expect to record further significant writeoffs due
to uncollectible loans in future years.

     As a result of a significant increase in the Company's revenues and
expenses during fiscal 1999 relating to the Company's Vista Facility and the
Hospital operations, it is difficult to meaningfully compare revenues and
expenses on a year-to-year basis.

     For the fiscal year ended August 31, 1999 total consolidated revenues
increased by $7,598,344 to $16,212,656, a 88% increase.  Of this amount,
revenues of $1,939,224 were recorded by DPMI in fiscal 1999 compared to
$2,049,588 in fiscal 1998 as a result of the Company's decision to limit its
expansion in the management of physician practices during fiscal 1999.  The
Company expects physician management revenues (and corresponding expenses) to
further decrease in fiscal 2000 as it reduces its business in the area of
physician management practice.  The Company records revenues from the management
of physician practices on a combined or consolidated basis and reflects as
revenues all patient billings of the respective practices and expenses payments
to physicians and other physician practice costs.

     Revenues attributable to operations of the Vista Facility were $12,357,894
in fiscal 1999, compared to $5,323,792 in fiscal 1998, an increase of 132%.
Revenues from home infusion therapy were $1,120,300 in fiscal 1999 compared to
$1,240,932 in fiscal 1998, a decrease of 10%, primarily as a result of lower
recoverable charges per day per patient and a smaller patient load.  Revenues
from the Hospital for the first four months of operation were approximately
$800,238 in fiscal 1999.

     Expenses for compensation and benefits to employees increased by 72% to
$3,165,407 as a result of more employees needed by the Company to service the
increased activities of Vista and the new business associated with the
management of the Hospital by DPMI. The number of employees employed by the
Company and its subsidiaries increased from approximately 53 in fiscal 1998 to
approximately 100 as of August 31, 1999. The Company's provision for
uncollectible trade accounts increased from $23,900 in fiscal 1998 to $37,097 in
fiscal 1999 primarily as a result of increased trade revenues resulting in
corresponding increases for uncollectible trade accounts. As a percentage of
revenues, the Company's provision for uncollectible trade accounts for both
fiscal 1998 and fiscal 1999 remained unchanged at approximately 1%. The Company
expects its uncollectible trade accounts as a percentage of revenues to remain
relatively constant in the future at approximately 1%. The Company recorded
writeoffs for uncollectible loans in fiscal 1999 of $0 as compared to $149,698
in fiscal 1998. The Company does not expect to incur similar recurring writeoffs
of notes receivable in fiscal 2000 and does not intend to fund advances or loans
to physician groups in the future in connection with its management of physician
practices. Expenses for medical supplies increased 159% to $2,724,407 associated
with the increased revenues and business from the Hospital and Vista operations.

                                       14
<PAGE>

     General and administrative expenses increased 141% to $4,027,931 primarily
as a result of increased operational activities at the Vista Facility and the
addition of the Hospital operations for about four months.  Rent and other
income increased from $195,359 in fiscal 1998 to $336,744 in fiscal 1999
primarily as a result of additional rental income received from outside
physicians not under DPMI management.

     The Company's physician management practice (exclusive of the Vista
Facility Management Agreement) and its home infusion division did not
significantly contribute to the Company's operating profit.  DPMI's net income
of $2,182,592 was primarily derived from the operations of the Vista outpatient
surgery clinic, through the Vista Facility Management Agreement.  The future
success of the Company is largely dependent on successful operations at the
Vista Facility and the Hospital.

     The Company faces certain general business risks with respect to all of its
operations.  In addition to regulatory concerns and increasing competition with
respect to all of its operations, the Company's home infusion therapy operations
are subject to substantial risks because the Company serves a relatively small
number of patients.  The Company's home infusion healthcare revenues decreased
from $ 2,730,753 in fiscal 1995 to $1,120,300 in fiscal 1999 as a result of a
significant decrease in the number of full-time patients from approximately ten
(10) in fiscal 1995 to an average of two (2) full-time patients in fiscal 1999.
The Company does not intend to aggressively market its home infusion therapy
services at this time primarily because of reduced recoverable patient day rates
being paid by third-party payers.  The Company will not continue to accept home
infusion patients if rates continue to decline.  In the past three (3) years,
the Company has faced increasing pressure from insurance companies to justify
the need for continued home infusion therapy in some cases and the Company's
charges therefore.  The Company expects these pressures to continue and to
increase.  With respect to its physician's practice management services, the
Company has yet to establish a consistently successful operating history,
particularly in view of the writeoffs for uncollectible notes recorded in fiscal
1997.  The Company does not intend to pursue additional management agreements
for physician practices at this time. Revenues from the Vista Facility increased
significantly during fiscal 1999 due to increased patient referrals.  The
Company expects, and will aggressively pursue, increased patient referrals for
the Vista Facility during fiscal 2000 and expects to maintain revenue and
operating profit.  The Company has no operating history for the Hospital
although the Company expects the operations of the Hospital to have a material
effect on the Company's consolidated operating results.  While the Company
believes the operating results of the Hospital will be successful in the long-
term, it can provide no assurance at this time to its shareholders.  In the
short-term, expected operating results from the Hospital could be negatively
impacted by low patient utilization (particularly in the first year), which
could have a material adverse effect on the Company's liquidity and capital
resources.  The Company believes it obtained breakeven cash flow with respect to
Hospital operations in the sixth month.  In the long-term, the skill and
experience of the Hospital's management team and competition will play critical
roles.

     Liquidity and Capital Resources

     The Company maintained sufficient liquidity in fiscal 2000 and 1999 to meet
its business needs. The Company had working capital of $7,437,687 as of August
31, 2000 and $2,510,981 as of August 31, 1999. The Company had net cash provided
by operating activities of $5,459,904 for fiscal 2000 as opposed to $3,211,402
for fiscal 1999. As of August 31, 2000, the Company maintained a liquid position
evidenced by a current ratio of 2.32 to 1 and a total debt to equity ratio of
0.50 to 1. The Company expects to have positive cash flow from operations for
fiscal 2001.

     The Company is actively targeting opportunities to expand in the outpatient
surgical clinic markets by acquisition of existing facilities or the
construction of new facilities.  The Company has funded approximately

                                       15
<PAGE>

$5,000,000 to equip and construct the Hospital. The Company believes it has the
ability to borrow funds if necessary to meet its capital needs. However, there
can be no assurance that the Company will have sufficient funds available to
meet all of its capital needs.

     Management believes that available cash funds and funds generated from
operations will be sufficient for the Company to finance working capital
requirements for the foreseeable future and to meet its future payment
obligations on its long-term third-party indebtedness of $685,587 as of August
31, 2000 and long-term indebtedness owed to its affiliate Vista Healthcare of
approximately $2,029,308.

     The Company expects the operations of the Hospital to have a material
effect on the Company's consolidated operating results.  While the Company
believes the operating results of the Hospital will be successful in the long-
term, it can provide no such assurance at this time to its Shareholders.  In the
short-term, expected operating results from the Hospital could be negatively
impacted by problems including staffing and equipment, low patient utilization
(particularly in the first year), licensing or regulatory delays or other
problems, which could have a material adverse effect on the Company's liquidity
and capital resources.  In the long-term, the skill and experience of the
Hospital's management team and competition will play critical roles.

     Inflation.  Inflation has not significantly impacted the Company's
financial position or operations.

     Forward-Looking Information.  Information in this Annual Report on Form
10-K contains forward-looking statements and information relating to the Company
that are based on the beliefs of the Company's management, as well as
assumptions made by, and information currently available to the Company's
management.  When used in this Annual Report on Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," and similar
expressions, as they relate to the Company or the Company's management, identify
forward-looking statements.  Such  statements reflect the current views of the
Company with respect to future events, and are subject to certain risks,
uncertainties, and assumptions relating to the operations and results of
operations of the Company, competitive factors and pricing pressures, costs of
products and services, general economic conditions, and the acts of third
parties, as well as other factors described in this Annual Report on Form 10-K,
and, from time to time, in the Company's periodic earnings releases and other
reports filed with the Securities and Exchange Commission.  Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results or outcomes may vary materially from those
described herein as anticipated, believed, estimated, expected, or intended, or
the like.

ITEM 7.   Financial Statements

     The information required by this item is included in a separate section of
this Annual Report on Form 10-K beginning on Page F-1 and is incorporated herein
by reference.

ITEM 8.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

     Not Applicable.

                                       16
<PAGE>

                                   PART III.

ITEM 9.   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with Section 16(a) of the Exchange Act

     The following table (and accompanying text) sets forth the names and ages
of all the directors and executive officers of the Company during the last
fiscal year, all positions and offices with the Company held by each person,
each such person's term of office as a director and business experience for the
past five years.

NAME                AGE  POSITION

Chiu Moon Chan      48   Chairman of the Board of Directors, Chief Executive
                         Officer, President and Secretary (July 1992-Present)

Philip Chan         49   Vice President - Finance and Treasurer/Director
                         (July 1992-Present)

Stephen L. Huber    50   Director  (July 1992-Present)

Earl R. Votaw       74   Director  (July 1992-Present)

Glenn Rodriguez     54   CEO, Vista Healthcare, Inc.
                          (November 1995-October 2000)

                      ----------------------------------

     Chiu Moon Chan has served as a director and as the Company's President,
Secretary and Chief Executive Officer since July 1992.  Mr. Chan is a registered
pharmacist and since May 1978, was employed by various healthcare service
organizations in Houston, Texas prior to his affiliation with the Company.  Mr.
Chan earned a Bachelor of Science degree in Pharmacy from the University of
Houston.

     Philip Chan has served as a director and as the Company's Vice President of
Finance, CFO and Treasurer since July 1992.  Mr. Chan earned advanced accounting
degrees from the University of Houston and is a CPA in the State of Texas.  Mr.
Chan has previous corporate and outside accounting experience.  He is not
related to Chiu Moon Chan.

     Stephen L. Huber is a registered pharmacist and earned a Bachelor of
Science degree in Pharmacy from the University of Houston.  Since December 1991,
Mr. Huber served as the Deputy Division Head for patient care services at the
University of Texas M.D. Anderson Cancer Center.  Mr. Huber joined M.D. Anderson
in 1984 as Assistant Director of Operations.  In 1999, Mr. Huber joined Cortex
Communications, Inc., a medical education company, as President and Chief
Operating Officer.  Mr. Huber remains a research consultant at M.D. Anderson.
Mr. Huber has served as director of the Company since 1992 and currently serves
on the Company's Audit and Compensation committees.

     Earl R. Votaw retired in December 1993.  He earned a Bachelor of Arts
degree from the University of the Americas in Mexico City and a certificate of
graduation from the Graduate School of Mortgage Banking from Northwestern
University of Chicago.  Prior to his retirement, Mr. Votaw served as a director
and as the President and Chief Executive Officer of Capital Bank, a Texas
chartered bank located in Houston, Texas.  Mr. Votaw has served as a director of
the Company since 1992 and currently serves on the Company's Audit and
Compensation committees.

                                       17
<PAGE>

     Glenn Rodriguez, age 52, earned a B.B.A. in Accounting from Florida
International University in Miami, Florida, graduating in 1976.  Mr. Rodriguez
has served as the CEO of Vista Healthcare, Inc., a majority-owned subsidiary of
the Company since March 1997, and prior to that served as CEO of Surgical Care
Center of Texas, an outpatient surgical facility in Pasadena, Texas.  Mr.
Rodriguez is not a director of the Company.

     *Glenn Rodriguez resigned from the Company and signed a Separation
Agreement with the Company on November 28, 2000 which pays him $300,000 in
twelve equal monthly payments of $25,000 each as full and final compensation for
the non-compete covenant for 2 years effective November 28, 2000 and expires on
November 30, 2002. Glenn Rodriguez also signed a Consulting Agreement with the
Company on November 28, 2000 which pays him $5,000 a month for twelve months
beginning on December 1, 2000 and ending November 30, 2001 for 2 years
consulting services to the Company until November 30, 2002.

     Each director holds office until the earlier of the election of his
successor at the next annual meeting of stockholders or his resignation or
removal.

Compliance with Section 16(a) of the Exchange Act

     Based solely upon the Company's review of Forms 3, 4, and 5 filed by the
Company's officers and directors and persons who beneficially own 10% or more of
the Company's Common Stock and the written representations of such persons, the
Company is not aware that any of such persons failed to timely file the
foregoing forms during the last fiscal year.


ITEM 10.  Executive Compensation

     The Summary Compensation Table sets forth in summary form the compensation
received during each of the Company's last three completed fiscal years by the
named executive officers.  In addition, the remaining tables show the options
granted to the Company's named executive officers in fiscal 2000 and the value
of exercised and unexercised options, respectively.

                                       18
<PAGE>

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                       Annual Compensation                Long-Term Compensation
                               -------------------------------------------------------------------------
                                                                             Awards            Payouts
    Name and            Year    Salary       Bonus       Other
                                                                   -------------------------------------------------
Principal Position               ($)          ($)       Annual      Restricted    Securities      LTIP    All other
                                                       Compens-        Stock      Underlying     Payout    Compen-
                                                        ation        Award(s)      Options/       ($)      sation
                                                         ($)            ($)          SARs                   ($)
                                                                                      (#)
--------------------------------------------------------------------------------------------------------------------
<S>                    <C>      <C>          <C>       <C>         <C>            <C>           <C>      <C>
   Chiu Chan, CEO         2000    152,507     50,000          -0-          -0-            -0-       -0-         -0-
                       ---------------------------------------------------------------------------------------------
                          1999     80,000    100,000          -0-          -0-            -0-       -0-         -0-
                       ---------------------------------------------------------------------------------------------
                          1998     80,000        -0-          -0-          -0-            -0-       -0-         -0-
--------------------------------------------------------------------------------------------------------------------
  Glenn Rodriqez,         2000    145,323        -0-**        -0-          -0-            -0-       -0-         -0-
  President - Vista    ---------------------------------------------------------------------------------------------
  Healthcare, Inc.        1999     79,000    200,000          -0-          -0-        60,000*       -0-         -0-
                       ---------------------------------------------------------------------------------------------
                          1998     60,000        -0-          -0-          -0-        45,000*       -0-         -0-
--------------------------------------------------------------------------------------------------------------------
  Philip Chan, CFO        2000     97,607     11,000          -0-          -0-            -0-       -0-         -0-
                       ---------------------------------------------------------------------------------------------
                          1999     53,300        -0-          -0-          -0-            -0-       -0-         -0-
                       ---------------------------------------------------------------------------------------------
                          1998     53,300        -0-          -0-          -0-        48,000*       -0-         -0-
                       ---------------------------------------------------------------------------------------------
                          1997     53,300        -0-          -0-          -0-        40,000*       -0-         -0-
                       ---------------------------------------------------------------------------------------------
                          1996     53,300        -0-          -0-          -0-        78,803*       -0-         -0-
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       19
<PAGE>

     * Reflects a 100% stock dividend effected as a 2 for 1 stock split
effective January 10, 2000.

     ** Glenn Rodriguez resigned from the Company in October, 2000 and signed a
Separation agreement which pays him $300,000 in twelve equal monthly payments of
$25,000 each as full and final compensation for the non-compete covenant for two
years effective November 28, 2000, expiring November 30, 2002. Glenn Rodriguez
also signed a Consulting Agreement which pays Glenn Rodriguez $5,000 a month for
twelve months beginning on December 1, 2000 and ending November 30, 2001. Glenn
Rodriguez shall perform no fewer than thirty (30) hours of services for the
Company each week. The covenant not to compete is for a period of two years
ending November 30, 2002, and covers an area within a 50 mile radius from the
city limits of Pasadena, Harris County, Texas. Glenn Rodriguez may not compete
in any manner with the business of Dynacq or any subsidiary of Dynacq within the
covered area.

                    OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                 Number of           Percent of
                             Securities         Total Options/
        Name                    Underlying         SAR's Granted     Exercise Price    Expiration Date
        ----                                                         --------------    ---------------
                          Options/SAR's            to
                                  Granted          Employees in
                                  -------          ------------
                                                Fiscal Year
                                                -----------
<S>                       <C>                   <C>                  <C>               <C>

    Chiu Chan,                        0                N/A                 N/A                N/A
CEO

      Glenn D.                    60,000*               34%             $1.1875           1/3/2004
Rodriguez, President
- Vista Healthcare,
Inc.
</TABLE>

     * Reflects a 100% stock dividend effected as a 2 for 1 stock split
effective January 10, 2000.

                                       20
<PAGE>

             AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
                         AND FY-END OPTIONS/SAR VALUES



                                                     Number of
                                                    Unexcercised      Value of
                                                     Securities     Unexercised
                         Shares                      Underlying     In-The-Money
                        Acquired                    Options/SARs    Options/SARs
                           on                      at FY-End (#)   at FY-End ($)
                       Exercise    Value Realized   Exercisable/    Exercisable/
        Name              (#)           ($)        Unexercisable   Unexercisable
        ----              ---           ---        -------------   -------------

Chiu Chan, CEO             0            N/A             N/A             N/A

Glenn D. Rodriguez    45,000        419,063              -0-             -0-
President - Vista
Healthcare, Inc.

Philip Chan               -0-            -0-        166,803       1,435,774

                                       21
<PAGE>

     No other officer, director or employee of the Company or its subsidiaries
received total compensation in excess of $100,000 during the last three fiscal
years. The Company has no employment agreements with its executives. Mr. Chiu
Chan, Philip Chan, and Glenn Rodriguez prior to his resignation, devoted 100% of
their time to the Company.

     Pursuant to the Company's 1995 Incentive Stock Option Plan, options to
purchase 137,764 shares were granted on May 14, 1996, which number includes
78,804 options granted to Mr. Philip Chan. The remaining options were granted to
approximately ten (10) non-executive employees fo the Company and its
subsidiaries. These options are exercisable at $1.875 per share and expire May
14, 2001. Options were granted to two (2) consultants during fiscal 1996, with
one option to purchase 25,000 shares exerciable at $3.25 per share expiring on
September 4, 2005; the other option to purchase 62,500 shares at $2.50 per share
and expires on September 11, 2005. In addition, in December 1997, the Company
granted ten (10) employees options to purchase 212,500 shares in the aggregate
at an exercise price of $0.69 per share which expire December 17, 2002,
including options for 40,000 shares issued to Philip Chan and 45,000 to Glenn
Rodriquez. In January 1999, the Company granted seven (7) employees options to
purchase 176,000 shares in the aggregate at an exercise price of $1.1875 per
share which expire January 3, 2004, including options to purchase 48,000 shares
issued to Philip Chan and options to purchase 60,000 shares issued to Glen
Rodriquez. In February 1998, the Company granted one (1) consultant options to
purchase 25,000 shares at an exercise price of $1.00 per share which were
exercised in November 1999. In September 1999, the Company granted two (2)
consultants options to purchase 50,000 shares each for a total of 100,000 shares
at an exercised price of $4.00 per share which expire January 3, 2004. One (1)
consultant exercised 10,000 shares at $4.00 per share on April 5, 2000, one (1)
consultant exercised 20,000 shares at $4.00 on June 30, 2000. One (1) consultant
exercised non-plan options to purchase 50,000 shares at $1.50 per share on
February 1, 2000 which were granted in fiscal 1999.

     Directors of the Company do not receive any mandatory compensation for
their services as directors, although directors will be reimbursed for expenses
incurred in attending board meetings.

ITEM 11.  Security Ownership of Certain Beneficial Ownersand Management

     The following sets forth certain information with respect to the beneficial
ownership of shares held by directors, executive officers and persons known to
management to own more than 5% of the outstanding Common Stock of the Company as
of November 29, 1999.

                                       22
<PAGE>

<TABLE>
<CAPTION>
                        Name and Address            Number of Shares and
   Title of Class     of Beneficial Owner      Nature of Beneficial Ownership   Percent of Class
   --------------     -------------------      ------------------------------   ----------------
  <S>                 <C>                        <C>                              <C>
  Common Stock        Chiu Moon Chan                      4,529,044/1/                     65.88%
                      323 Wood Loop
                      Houston, Texas  77015

  Common Stock        Ella Chan                           4,529,044/1/                     65.88%
                      323 Wood Loop
                      Houston, Texas  77015

  Common Stock        Philip Chan                           190,554/2/                      2.77%
                      7930 Millbrook Drive
                      Houston, Texas  77095

  Common Stock        Earl R. Votaw                             -0-                          0.0%
                      10304 I10 East, Suite 369
                      Houston, Texas  77029

  Common Stock        Stephen L. Hubes                          -0-                          0.0%
                      10304 I10 East, Suite 369
                      Houston, Texas  77029

  Common Stock        Glenn Rodriguez                       111,500/3/                      1.62%
                      10304 I10 East, Suite 369
                      Houston, Texas  77029

  Common Stock        Officers and Directors              4,831,000                        70.27%
                      as a group (6)
</TABLE>

                      ----------------------------------

ITEM 12.  Certain Relationships and Related Transactions

     None.

ITEM 13.  Exhibits and Reports on Form 8-K

     A.   Exhibits. The exhibits required by Item 601 of Regulation S-B are
     --   --------
          included in this report commencing on page E-1 hereof which contains a
          list of such exhibits. The list of exhibits and the exhibits contained
          herein are incorporated into this part by reference.
     B.
     C.   Reports on Form 8-K.  No reports on Form 8-K were filed by the Company
     --   -------------------
          during the fourth quarter of fiscal 2000.


                                  SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

DYNACQ INTERNATIONAL, INC.

By:   /s/ Chiu Moon Chan                                Date:  November 29, 2000
     --------------------
     Chiu Moon Chan, Chairman of the Board
     Chief Executive Officer, President and Secretary


     In accordance with the Exchange Act, this report has been signed below
by the following persons, on behalf of the Registrant and in the capacities and
on the dates indicated.

                                       23
<PAGE>

                NAME                   TITLE                       DATE
                ----                   -----                       ----

  /s/ Chiu Moon Chan           Chairman of the Board,        November 29, 2000
--------------------           Chief Executive Officer,
Chiu Moon Chan                 President and Secretary

  /s/  Philip S. Chan          Vice President,               November 29, 2000
---------------------          Chief Financial Officer,
Philip S. Chan                 Controller, and Director

  /s/ Stephen L. Huber         Director                      November 29, 2000
----------------------
Stephen L. Huber

  /s/  Earl R. Votaw           Director                      November 29, 2000
--------------------
Earl R. Votaw

     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS.

                                Not Applicable.

                                       24
<PAGE>

                           DYNACQ INTERNATIONAL, INC.

                       CONSOLIDATED FINANCIAL STATEMENTS

                          Years Ended August 31, 2000
                              and August 31, 1999
<PAGE>

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


                                     INDEX

<TABLE>
<CAPTION>
A.   Financial Statements                                                 Page
     --------------------                                                 ----
<S>                                                                       <C>
     Report of Independent Public Accountants                              F-2

     Consolidated Balance Sheet as of August 31, 2000                      F-3

     Consolidated Statements of Income for the Years Ended                 F-4
       August 31, 2000 and 1999

     Consolidated Statements of Changes in Stockholders' Equity for the    F-5
       Years Ended August 31, 2000 and 1999

     Consolidated Statements of Cash Flows for the Years Ended             F-6
       August 31, 2000 and 1999

     Notes to Consolidated Financial Statements                            F-8
</TABLE>

                                      F-1
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders and Board of Directors
Dynacq International, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheet of Dynacq
International, Inc. and its subsidiaries (the "Company") as of August 31, 2000,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years ended August 31, 2000 and 1999.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
August 31, 2000, and the results of its operations and its cash flows for the
years ended August 31, 2000 and 1999 in conformity with generally accepted
accounting principles.


Sugar Land, Texas                                    KenWood & Associates, P.C.
November 27, 2000

                                      F-2
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                                      Consolidated Balance Sheet
                                                                 August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S>                                                                                         <C>
ASSETS
  Current assets:

    Cash and cash equivalents                                                               $      4,301,523
    Accounts receivable, net of allowance for doubtful accounts of $134,536                        8,419,608
    Inventories                                                                                      346,969
                                                                                            -----------------

      Total current assets                                                                        13,068,100

  Property and equipment, net                                                                      9,493,028

  Other assets, net                                                                                  485,113
                                                                                            -----------------

      Total assets                                                                          $     23,046,241
                                                                                            =================


LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
    Current maturities of long-term debt                                                    $        297,522
    Accounts payable                                                                               1,126,070
    Accrued liabilities                                                                              681,515
    Income taxes payable                                                                           3,380,306
    Deferred income taxes payable                                                                    145,000
                                                                                            -----------------

      Total current liabilities                                                                    5,630,413

  Noncurrent liabilities:
    Long-term debt, net of current maturities                                                        387,965
    Negative goodwill, net                                                                           549,683
    Deferred income taxes                                                                            671,000
                                                                                            -----------------

      Total noncurrent liabilities                                                                 1,608,648

  Commitments and contingencies                                                                            -

  Minority interests                                                                               1,238,671

  Stockholders' equity:
    Preferred stock, $.01 par value, 5,000,000 shares authorized;
      none issued or outstanding                                                                           -
    Common stock, $.001 par value, 300,000,000 shares authorized;
      7,658,856 shares issued                                                                          7,659
    Additional paid-in capital                                                                     4,309,813
    Retained earnings                                                                             11,392,583
    Less treasury stock; 794,392 shares at cost                                                   (1,141,546)
                                                                                            -----------------

         Total stockholders' equity                                                               14,568,509
                                                                                            -----------------

         Total liabilities and stockholders' equity                                         $     23,046,241
                                                                                            =================
</TABLE>

    The accompanying notes are integral part of the consolidated financial
                                  statements.

                                      F-3
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                               Consolidated Statements of Income
                                    For the Years Ended August 31, 2000 and 1999

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                        2000                     1999
                                                                                        ----                     ----
<S>                                                                             <C>                      <C>
Revenues:
    Net patient service revenue:
      Clinic and outpatient surgical                                            $     15,394,954         $      12,357,894
      Emergency and inpatient surgical                                                 7,410,621                   800,238
      Infusion therapy                                                                 1,356,650                 1,120,300
                                                                                ----------------         -----------------
        Total net patient service revenue                                             24,162,225                14,278,432
    Physician practice management                                                      1,870,216                 1,934,224
                                                                                ----------------         -----------------

        Total revenues                                                                26,032,441                16,212,656

Costs and expenses:
    Compensation and benefits                                                          4,344,977                 3,165,407
    Medical supplies                                                                   3,960,863                 2,724,407
    Contract payments to physicians                                                    1,225,980                 1,361,021
    Depreciation and amortization                                                        780,890                   566,254
    Direct costs of infusion therapy revenues                                            520,624                   316,889
    Rent and occupancy                                                                   153,940                    87,405
    Provision for uncollectible accounts                                                  60,585                    37,097
    Other general and administrative expenses                                          4,830,564                 4,027,931
                                                                                ----------------         -----------------

        Total costs and expenses                                                      15,878,423                12,286,411
                                                                                ----------------         -----------------

Income from operations                                                                10,154,018                 3,926,245
                                                                                ----------------         -----------------

Other income:
    Rent and other income                                                                388,299                   336,744
    Interest income                                                                      111,042                    75,516
    Interest expense                                                                    (126,501)                 (118,165)
                                                                                ----------------         -----------------

        Total other income                                                               372,840                   294,095
                                                                                ----------------         -----------------

Income before income taxes and minority interests                                     10,526,858                 4,220,340

Provision for income taxes                                                             3,861,000                 1,410,000
                                                                                ----------------         -----------------

Net income before minority interests                                                   6,665,858                 2,810,340

Minority interests in earnings                                                          (807,452)                 (146,508)
                                                                                ----------------         -----------------

Net income                                                                      $      5,858,406         $       2,663,832
                                                                                ================         =================

Basic earnings per common share                                                 $           0.87         $            0.41
                                                                                ================         =================

Diluted earnings per common share                                               $           0.82         $            0.39
                                                                                ================         =================

Weighted average common shares-basic                                                   6,744,793                 6,486,721
                                                                                ================         =================

Weighted average common shares-diluted                                                 7,134,195                 6,894,397
                                                                                ================         =================
</TABLE>

                                      F-4
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                      Consolidated Statements of Changes in Stockholders' Equity
                                    For the Years Ended August 31, 2000 and 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                   Treasury Stock,
                                        Common Stock                  at Cost             Additional
                                        ------------                  -------               Paid-In      Retained
                                    Shares        Amount        Shares        Amount        Capital      Earnings       Total
                                    ------        ------        ------        ------        -------      ---------      -----
<S>                                 <C>        <C>              <C>           <C>        <C>           <C>          <C>
Balance, August 31, 1998            3,606,628  $      3,607       326,039  $   (625,899) $  3,552,761  $ 2,874,049  $  5,804,518

Treasury stock acquired, net                -             -        44,978      (103,948)            -            -      (103,948)

Net income                                  -             -             -             -             -    2,663,832     2,663,832
                                 ------------   -----------   -----------   -----------   -----------   ----------   -----------
Balance, August 31, 1999            3,606,628         3,607       371,017      (729,847)    3,552,761    5,537,881     8,364,402

Restricted stock issued
   for services                        47,500            47             -             -       189,953            -       190,000

Restricted stock issued
   for compensation                    37,600            38                                   150,362                    150,400

Restricted stock issued
   on exercise of options             263,000           263             -             -       416,737            -       417,000

Stock dividend                      3,704,128         3,704       375,184             -             -       (3,704)            -

Treasury stock acquired                     -             -        48,191      (411,699)            -            -      (411,699)

Net income                                  -             -             -             -             -    5,858,406     5,858,406
                                 ------------   -----------   -----------   -----------   -----------   ----------   -----------
Balance, August 31, 2000            7,658,856  $      7,659       794,392  $ (1,141,546) $  4,309,813 $ 11,392,583  $ 14,568,509
                                 ============   ===========   ===========   ===========   ===========   ==========   ===========
</TABLE>

              The accompanying notes are an integral part of the
                       consolidated financial statements

                                      F-5
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                           Consolidated Statements of Cash Flows
                                    For the Years Ended August 31, 2000 and 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                     2000                   1999
                                                                                     ----                   ----
<S>                                                                           <C>                    <C>
Cash flows from operating activities:
Net income                                                                    $      5,858,406       $      2,663,832
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                                                      780,890                566,254
    Bad debt expense                                                                    60,585                 37,097
    Expense related to stock issued for compensation                                   150,400                      -
    Loss on retirement of property and equipment                                             -                 32,914
    Deferred income taxes, net                                                         (13,000)               510,000
    Minority interests                                                                 807,452                146,508
    Changes in operating assets and liabilities:
      Accounts receivable                                                           (4,074,699)            (2,777,242)
      Inventories                                                                     (315,100)                (2,261)
      Due from related party                                                            32,625                (16,769)
      Accounts payable                                                                 294,575                643,678
      Accrued liabilities                                                             (465,230)               835,391
      Income taxes payable                                                           2,343,000                572,000
                                                                                --------------         --------------

      Net cash provided by operating activities                                      5,459,904              3,211,402
                                                                                --------------         --------------

Cash flows from investing activities:
    Purchases of property and equipment                                             (1,326,679)            (4,345,026)
    Issuance of notes receivable                                                             -                (75,000)
    Repayment of notes receivable                                                       75,000                      -
    Due from related party                                                            (410,000)                     -
    Redemption of short-term investments                                                     -                 30,000
    (Increase) decrease in other assets                                                 (2,953)                   474
                                                                                --------------         --------------

      Net cash used in investing activities                                         (1,664,632)            (4,389,552)
                                                                                --------------         --------------

Cash flows from financing activities:
    Principal payments on long-term debt                                              (268,657)              (242,612)
    Repayment of notes payable                                                        (250,000)                     -
    Proceeds from common stock issuance                                                190,000                      -
    Proceeds from exercise of stock options                                            417,000                      -
    Acquisition of treasury stock, net                                                (411,699)              (103,948)
    Contributions from minority interests                                                    -                360,000
    Purchase of minority interests                                                    (333,928)               (85,012)
                                                                                --------------         --------------

      Net cash used in financing activities                                           (657,284)               (71,572)
                                                                                --------------         --------------

      Net increase (decrease) in cash and cash equivalents                           3,137,988             (1,249,722)

Cash and cash equivalents at beginning of year                                       1,163,535              2,413,257
                                                                                --------------         --------------

Cash and cash equivalents at end of year                                      $      4,301,523       $      1,163,535
                                                                                ==============         ==============
</TABLE>
  The accompanying notes are an integral part of the consolidated financial
                                  statements.


                                      F-6
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                           Consolidated Statements of Cash Flows
                                    For the Years Ended August 31, 2000 and 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                     2000                   1999
                                                                                     ----                   ----
<S>                                                                          <C>                     <C>
Supplemental cash flow disclosures:
    Cash paid during year for:
      Interest                                                                $     169,117            $   111,436
      Income taxes                                                            $   1,521,000            $   328,000
    Noncash investing and financing activities:
      Property and equipment included in accounts payable                     $           -            $   600,619
      Stock dividend issued                                                   $       3,704            $         -
      Fair value of minority interests purchased
        in excess of cash paid                                                $     773,654            $         -
</TABLE>

  The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                      F-7
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Business and Organization

   Dynacq International, Inc. (the "Company") is engaged in the business of
   providing home infusion health care services and supplies to patients in
   their homes, the operation of an outpatient surgical center, the operation of
   a medical office complex, the management of physician practices, and the
   operation of a general acute hospital, all located in the Houston
   metropolitan area.

   The Company was incorporated under the laws of the State of Utah on September
   16, 1983, as Rujo, Inc. On January 14, 1987, the shareholders of the Company
   approved the change of name of the Company to Jackson Brothers Industries,
   Inc. The Company merged into a Nevada corporation of the same name on June
   16, 1989, pursuant to a share-for-share exchange of stock. On January 12,
   1992, the shareholders of the Company again approved a change of corporate
   name to Dynacq International, Inc., elected directors of the Company and
   approved a plan of recapitalization whereby authorized capital was increased
   to an aggregate of 55,000,000 shares of stock, comprised of 50,000,000 Common
   Shares and 5,000,000 Preferred Shares.

   On July 28, 1992, the Company completed the sale of 5,625,000 shares of its
   "restricted" common stock to several investors for a total purchase price of
   $2 million. As part of this recapitalization of the Company, the authorized
   number of common shares was increased from 50 to 300 million and three
   holders of "restricted" stock returned a total of 618,750 shares to the
   Company's treasury.

   In February 1993, the Company became the beneficial owners of all of the
   outstanding common stock of Lucky China International Limited, a Hong Kong-
   chartered corporation, whose corporation name has since been changed to
   Dynacq (Asia), Limited ("Asia"). There are two shares outstanding. One share
   is held in the name of the Company and the other share is held in the name of
   Mr. Kwong Chung Wai, as a nominee for the Company. On April 13, 1995, Mr. Wai
   accepted an appointment as Director of Asia. During 1995, Asia disposed of
   substantially all of its assets and ceased its operations.

   Effective March 8, 1993, the Company's shareholders approved a reverse split
   of the outstanding shares of the Company's common stock on the basis of one
   share for every eight shares outstanding, with the par value of each share
   remaining at $.001. The reverse split was recommended by the Board of
   Directors because of its belief that the pre-split per share price level
   adversely affected the marketability of the Company's common stock and that
   an increase in the per share price was important to qualify for a listing on
   the National Association of Securities Dealer, Inc. Automated Quotation
   System (NASDAQ). In September 1993, the Company's common stock received its
   listing and began trading on the NASDAQ Small Cap system under the symbol
   DYII. On April 11, 2000, the Company's common stock began trading on the
   NASDAQ National Market.

   In August 1994, the Company consummated the acquisition of approximately 65%
   of the outstanding stock of Vista Healthcare, Inc. ("Vista"), which operates
   a medical clinic and outpatient surgical center in Pasadena, Texas. The
   Company issued 358,186 shares of its common stock in a transaction valued at
   $1,289,461. This acquisition, which was accounted for as a purchase, resulted
   in the recording of excess costs over net assets acquired totaling $230,717.
   In 1994, the Company commenced construction of a new medical office building
   (adjacent to the Vista facility) which was completed in 1995 at a total cost
   of approximately $1,925,000. Several of the existing physician-minority
   shareholders of Vista relocated their offices to the new facility.

   In September 1994, the Company formed Doctors Practice Management, Inc.
   ("DPMI") to provide fee based practice management services to physicians and
   to assist in consolidating medical providers into integrated delivery
   systems.

                                      F-8
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (continued)

   In November 1997, Aso Medical, Inc. ("ASO") was formed as a wholly owned
   subsidiary of DPMI to provide billing and related services to physicians. ASO
   had no operations during 2000 and 1999.

   Effective January 15, 1998, the Company's shareholders approved a reverse
   split of the outstanding shares of the Company's Common Stock on the basis of
   one share for every four shares outstanding, with the par value of each share
   remaining at $.001.  The reverse split was recommended by the Board of
   Directors because of its belief that the post-split per share price would
   enhance the acceptability and marketability of the Company's common stock by
   the financial community and investing public.  Additionally, management
   believed that the reverse split would result in the Company's common stock
   having a minimum bid price in excess of $1.00 per share and would, therefore,
   enable the Company to maintain the listing of its common stock on the Nasdaq
   Small Cap Market.

   In May 1998, DPMI organized Vista Community Medical Center, L.L.C. ("Vista
   Medical"), a Texas limited liability company, for the purpose of operating a
   General Acute Hospital (the "Hospital").  The Hospital is located adjacent to
   the Vista medical clinic and outpatient surgical center in Pasadena, Texas.
   In 1998, the Company commenced construction of the new Hospital which was
   completed and opened in 1999 at a total cost, including furnishings, of
   approximately $4,960,000.  DPMI has a 70% membership interest in Vista
   Medical.

   In December 1999, the Company purchased for a nominal fee, Ambulatory
   Infusion Therapy Specialists, Inc. ("AITS"), a Texas Corporation. AITS is a
   wholly owned subsidiary of the Company whose business principally involves
   the administration of physician prescribed nutrients, antibiotics or other
   medicines to cancer patients in their home. Prior to its acquisition, AITS
   had no operations.

   As of December 30, 1999, the Company's Board of Directors approved a 100%
   stock dividend of the Company's Common Stock to shareholders of record as of
   that date.  The stock dividend was issued effective January 10, 2000.  All
   references to number of shares, except shares authorized, weighted average
   shares outstanding, per share amounts, option shares, and exercise prices
   included in the accompanying consolidated financial statements and related
   footnotes reflect the stock dividend and its retroactive effect.

   On February 11, 2000, Texas Gulf Coast Surgical Care Center, L.L.C. ("Gulf
   Coast") was renamed Vista Land and Equipment, L.L.C. ("Vista Land"), a Texas
   limited liability company. Gulf Coast was organized by the Company in October
   1998. The Company has a 100% membership interest in Vista Land which holds
   the majority of the Company's property and equipment.

B. Consolidated Statements

   The accompanying financial statements present the consolidated accounts of
   Dynacq International, Inc., a Nevada corporation, and its wholly owned and
   majority owned subsidiaries. Accordingly, the consolidated financial
   statements include all of the assets, liabilities, income, expenses, and cash
   flows for these companies. All significant intercompany transactions and
   balances have been eliminated.

                                      F-9
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (continued)

C. Revenue Recognition

   Patient service revenue is reported at the estimated net realizable amounts
   from patients, third-party payers and others for services rendered.
   Substantially all of the Company's revenues are derived from claims filed
   under major medical policies, workers' compensation policies, Medicare or
   Medicaid, or personal injury claims. Allowances for discounts on services or
   adjustments for non-covered costs and expenses are recognized in the period
   in which the related revenues are provided. Allowances for doubtful accounts
   are determined by management based upon historical experience and an
   assessment of the circumstances applicable to individual accounts.

D. Stock-Based Compensation

   The Company accounts for employee stock options under the provisions of APB
   Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and has
   adopted the "disclosure only" alternative described in Statement of Financial
   Accounting Standards No. 123, "Accounting for the Stock-Based Compensation"
   ("SFAS 123"), which requires proforma disclosure of compensation expense
   using fair value based method of accounting for stock-based compensation
   plans.

E. Cash and Cash Equivalents

   The Company considers all highly liquid investments with maturity of three
   months or less as cash equivalents. At August 31, 2000, cash equivalents were
   composed primarily of investments in money market funds.

F. Inventories

   Inventories are valued at the lower of cost or market with substantially all
   stated at the first-in, first-out (FIFO) method.

G. Property and Equipment

   Land, buildings and improvements, furniture, fixtures and equipment are
   stated at cost. Ordinary maintenance and repairs are charged to income as
   incurred. Expenditures which extend the physical or economic life of the
   assets are capitalized and depreciated. Gains or losses on the disposition of
   assets sold are recognized in income and the related asset and accumulated
   depreciation accounts are adjusted accordingly.

   Depreciation is computed using the straight-line method over the estimated
   useful lives of the assets ranging from 3 to 39 years. The Company provides
   tax depreciation using various accelerated methods in conformity with the
   provisions of applicable tax law.

H. Other Non-Current Assets

   Loan origination fees are amortized on the straight-line basis over the terms
   of the related debt.

                                      F-10
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (continued)

I. Impairment of Long-Lived Assets

   The Company reviews its property and equipment and unamortized intangible
   assets whenever events or changes in circumstances indicate that the carrying
   amount may not be recoverable. The Company estimates the future cash flows
   expected to result from operations and if the sum of the expected
   undiscounted future cash flows is less than the carrying amount of the long-
   lived asset, the Company recognizes an impairment loss by reducing the
   unamortized cost of the long-lived asset to its estimated fair value. To date
   the Company has not recognized any significant impairment on long-lived
   assets.

J. Negative Goodwill

   Net assets acquired in excess of costs incurred from the Vista acquisition
   and subsequent purchases of minority interests are amortized on the straight-
   line basis over a period of 14 years. The amortization of negative goodwill
   is included in the consolidated statements of income as a reduction in
   consolidated depreciation and amortization.

K. Advertising Costs

   The Company expenses advertising costs as incurred. Amounts expended for the
   years ended August 31, 2000 and 1999, were approximately $127,403 and
   $82,083, respectively.

L. Income Taxes

   The Company utilizes Statement of Financial Accounting Standards No. 109,
   "Accounting for Income Taxes" ("SFAS 109"), which requires that deferred tax
   liabilities or assets be recognized for differences between the income tax
   basis and the financial reporting basis of assets and liabilities and are
   measured using the enacted marginal tax rates currently in effect when the
   differences reverse. The deferred tax assets and liabilities represent the
   future tax return consequences of those differences, which will either be
   taxable or deductible when the assets and liabilities are recovered or
   settled. Deferred taxes also are recognized for operating losses that are
   available to offset future taxable income.

M. Earnings Per Common Share

   Earnings per common share for the years ended August 31, 2000 and 1999, are
   presented in accordance with the provisions of Statement of Financial
   Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128
   replaced the presentation of primary and fully diluted earnings per share
   (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128,
   basic EPS excludes dilution for common stock equivalents and is computed by
   dividing income or loss available to common shareholders by the weighted
   average number of common shares outstanding during the period. Diluted EPS
   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 years ended August 31, 2000 and 1999, diluted common and
   common equivalent shares outstanding includes 475,766 and 638,766,
   respectively, of common share equivalents, consisting of stock options,
   determined under the treasury stock method.

                                      F-11
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (continued)

N. Segments

   For the year ended August 31, 1999, the Company adopted Statement of
   Financial Accounting Standards No. 131, "Disclosures about Segments of an
   Enterprise and Related Information" (SFAS 131) which establishes standards
   for the way public business enterprises report information about operating
   segments in annual financial statements. Also established were standards for
   related disclosures about products, services, geographical areas, and major
   customers. The adoption of SFAS 131 did not have an effect on the Company's
   primary financial statements.

O. Estimates

   In preparing financial statements in conformity with generally accepted
   accounting principles, management is required to make estimates and
   assumptions that effect the reported amounts of assets and liabilities and
   the disclosure of contingent assets and liabilities at the date of the
   balance sheet. Actual results could differ from those estimates.

   Accounts receivable and revenues in the health care industry are subject to
   possible third party payor adjustments. Management periodically reviews such
   estimates and it is reasonably possible that management's assessment of
   recoverability of accounts receivable may change based on actual results and
   other factors.

P. Reclassifications

   Certain accounts in the prior-year consolidated financial statements have
   been reclassified for comparative purposes to conform with the presentation
   in the current-year consolidated financial statements. During the year ended
   August 31, 2000, the Company determined that a major portion of the
   consolidated provision for uncollectible accounts consisted of contractual
   adjustments. As a result, the contractual adjustments that were previously
   included as a component of consolidated costs and expenses are reflected as a
   component of consolidated net revenues. Amounts reported for the year ended
   August 31, 1999 have been reclassified to conform to the current presentation
   and result in the reduction of consolidated costs and expenses and
   consolidated net revenues by $4,083,765.

NOTE 2. VISTA HEALTHCARE, INC.

On August 25, 1994, the Company completed the acquisition of approximately 65%
of the common stock of Vista in a transaction accounted for as a purchase.
Accordingly, the accompanying financial statements reflect the results of
operations of Vista for the period subsequent to August 25, 1994.  During 1995,
the Company sold a portion of its investment in Vista to certain affiliates for
$80,000 cash.  During 1996, Vista repurchased a portion of its common stock from
certain affiliates for $134,958 and resold $20,000 of this stock to an
affiliated physician.  During 1997, the remaining treasury stock was sold to the
Company at Vista's cost of $114,958.  During the years ended 1998, 1999 and
2000, the Company purchased 1.45%, 2.56%, and 21.09% respectively of the common
stock of Vista for cash of $11,600, $37,000 and $333,929.  Consideration paid
for the common stock in 1998 and 1999 was approximately the fair value of the
interests acquired.  The fair value of the minority interests purchased in 2000
was $773,654 in excess of the cash paid.  As of August 31, 2000, the Company
owned approximately 91% of the outstanding common stock of Vista.

                                      F-12
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 3. PROPERTY AND EQUIPMENT

At August 31, 2000, property and equipment consisted of the following:

          Land                                         $   497,109
          Buildings and improvements                     7,523,848
          Furniture and fixtures                           471,364
          Equipment                                      4,237,754
          Automobile                                        24,125
                                                       -----------
                                                        12,754,200

          Less, accumulated depreciation                (3,261,172)
                                                       -----------

          Net property and equipment                   $ 9,493,028
                                                       ===========

Vista's existing physical facility is pledged as collateral on a long-term
mortgage to a financing company in the amount of $440,772 as of August 31, 2000.
In connection with its 1994 acquisition of approximately 65% interest in Vista,
the Company has guaranteed 65% of the outstanding balance of this long-term
mortgage.

For the years ended August 31, 2000 and 1999, depreciation expense was $812,239
and $546,365, respectively.

NOTE 4. NEGATIVE GOODWILL

Subsequent purchases from minority interests have resulted in the fair value
acquired being $773,654 in excess of the cash consideration paid.  Goodwill
associated with the original Vista acquisition of $230,717 and the negative
goodwill related to subsequent purchases from the minority interest of $773,654
are being amortized over a period of fourteen years on the straight-line basis.
For the years ended August 31, 2000 and 1999, amortization expense was ($35,924)
and $16,480 respectively.

NOTE 5. LONG-TERM DEBT

At August 31, 2000, long-term debt consisted of the following:

          Note payable to a former shareholder, payable
          in monthly installments of $10,007, including
          interest at 11.50%, through December 2002,
          uncollateralized.                                 $ 244,715

          Note payable to a financing company payable
          in monthly installments of $19,533, including
          interest at 9.65%, through September 2002,
          collateralized by land and guaranteed by
          certain minority stockholders of Vista.             440,772
                                                            ---------
                                                              685,487

          Less, current maturities                           (297,522)
                                                            ---------

                                                            $ 387,965
                                                            =========

                                      F-13
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 5. LONG-TERM DEBT (continued)

The aggregate principal payments on long-term debt subsequent to August 31,
2000, are as follows:


               Year ending August 31,
                       2001                     $  297,522
                       2002                        329,512
                       2003                         58,453
                                                ----------

               Total                            $  685,487
                                                ==========

NOTE 6. INCOME TAXES

The provision for income tax expense consisted of the following at August 31:

                                                     2000           1999
                                                  ----------     ----------
          Current tax expense:
                Federal                           $3,599,000     $1,087,000
                State                                275,000         93,000
                                                  ----------     ----------
                Total current                      3,874,000      1,180,000
          Deferred tax expense:
                Federal (benefit)                    (12,000)       212,000
                State                                 (1,000)        18,000
                                                  ----------     ----------
          Total deferred                             (13,000)       230,000
                                                  ----------     ----------

          Total                                   $3,861,000     $1,410,000
                                                  ==========     ==========

For the year ended August 31, 2000, the Company and its subsidiaries converted
from the cash method of accounting to the accrual method of accounting for the
preparation of their respective individual tax returns. Deferred taxes arise
primarily due to the use of the cash basis for tax reporting and the related
conversion to the accrual basis, the use of the specific charge-off method for
tax reporting, and accelerated methods of computing depreciation for tax
purposes. The components of the provision for deferred income taxes, at August
31, were as follows:

                                                         2000         1999
                                                      ---------     --------
Applicable to:
--------------
Cash basis of accounting for federal
income tax purposes.                                  $(159,000)    $210,000


Use of reserve for bad debts for
financial reporting and specific charge-
off method for tax reporting.                           (22,000)     (14,000)

Special allocation of interest in
partnership  operations.                                163,000            -


Difference in methods of computing
depreciation for  tax and financial                       5,000       34,000
reporting purposes and other.                         ---------     --------

                                                      $ (13,000)    $230,000
                                                      =========     ========

                                      F-14
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 6. INCOME TAXES (continued)

Significant components of the Company's deferred tax liabilities and assets, at
August 31, 2000, were as follows:


                                                     Current        Noncurrent
                                                     -------        ----------
     Deferred tax liabilities:
      Basis in property and equipment             $        -        $(217,000)
      Cash basis of accounting for federal
      income tax purposes, net                      (194,000)        (291,000)
      Special allocation of interest in
      partnership operations                                         (163,000)
     Deferred tax assets
      Reserve for bad debts                           49,000                -
                                                  ----------        ---------

     Net liability                                $ (145,000)       $(671,000)
                                                  ==========        =========

The following table reconciles the Federal statutory income tax rate and the
Company's effective income tax rate:


                                                        2000            1999
                                                        ----            ----
     Provision for income taxes at federal
      statutory rate                                    34.0%           34.0%
     State tax provision, net of federal
      benefits                                           3.0             3.0
     Minority interest in loss of partnership
      on which tax benefit was not
      recorded                                           (.1)           (3.3)
     Other differences                                   (.2)           (0.3)
                                                    --------       ---------

     Effective tax rate                                 36.7%           33.4%
                                                    ========       =========

NOTE 7. RELATED PARTY TRANSACTIONS

The Company leases to its President his personal residence at a monthly rate of
$1,400.  Total rent income for the years ended August 31, 2000 and 1999, was
$16,800 for each year.

During 2000, the Company advanced $410,000 to the minority member of Vista
Medical.  The advances which are included in other assets in the accompanying
consolidated balance sheet will be repaid from future earnings of the Hospital.

Due to the legislative requirements concerning the practice of medicine in the
state of Texas, the Company has entered into agreements with various
Professional Associations and individual doctors (the "Physicians") for the
services of physicians.  The Physicians provide services to third parties and
after covering the costs associated with the Physicians, remit proceeds to the
Company for management services.  The structure of the agreements between the
Company for its clinic and the Physicians require that all income be paid to the
Company for management services or to the physicians for compensation.  The
accompanying financial statements reflect transactions with the Physicians on a
basis as if the Company and Physicians were "combined" or "consolidated" as
revenues reflect all clinic revenues billed to patients and expenses reflect
compensation incurred to the Physicians.

                                      F-15
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 8.  CAPITAL STOCK

Pursuant to an Asset Purchase Agreement dated October 22, 1997, the Company
issued 90,000 shares of restricted common stock valued at $90,000. This issuance
was valued at fair market value based upon management's estimation of the open
market closing price. In exchange for the restricted common stock, the Company
assumed liabilities of $63,300 and received tangible and intangible property
with a fair value of $153,300. In addition to the restricted common shares, the
Company granted a two-year option to purchase an additional 75,000 restricted
shares of common stock at $1.00 per share. In October 1998, the Company filed a
civil lawsuit claiming breach of contract of the Asset Purchase Agreement. On
October 29, 1998, a Compromise, Settlement and Mutual Release Agreement was
entered into whereby the Company agreed to pay $118,000 in exchange for the
return of the 90,000 shares of restricted common stock, the cancellation of the
option to acquire 75,000 restricted shares of common stock and the transfer of
approximately $57,849 of the original $63,300 of liabilities assumed.

During 2000, the Company issued 95,000 shares of restricted common stock to a
vendor as settlement of a $190,000 liability. Additionally, the Company issued
37,600 shares of restricted common stock with a fair market value of $150,400 as
employee bonuses.

Stock Options

The Company has various stockholder-approved stock option plans which provide
for the grant of options to directors, officers, key employees and consultants
to purchase Common Stock at a price determined by the Board of Directors which
may not be less than 100% of the fair market value as of the date of grant. The
Board of Directors administers the stock option plans. Options may be granted as
incentive stock options or as non-qualified stock options. Incentive stock
options vest 100% annually, upon completion of one year of employment subsequent
to the date of grant. The non-qualified stock options are subject to vesting
schedules determined by the Board of Directors at the date of grant subject to a
minimum six month vesting provision. The options expire at dates ranging from
five to ten years from the date of grant.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning
after December 15, 1995 and allows for the option of continuing to account for
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations, or selecting the fair value method of expense recognition as
described in SFAS 123. The Company has elected to follow APB 25 in accounting
for its stock option plans. The total compensation expense associated with stock
options granted in 2000 and 1999 was $379,847 and $295,164, respectively. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.

Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2000 and 1999,
respectively: risk-free interest rates of 6.07% and 5.19%; dividend yield of
zero as the Company has not paid and does not anticipate paying any dividends in
the future; volatility factors of the expected market price of the Company's
common stock of 1.64 and 1.69; and a weighted-average expected life of the
options of three years.

                                      F-16
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 8.  CAPITAL STOCK (continued)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.

The Company's pro forma information follows:

                                                           2000         1999
                                                           ----         ----

     Net income available for common stock as reported  $5,858,406   $2,663,832
     SFAS No. 123 effect                                  (675,011)    (200,760)
                                                        ----------   ----------

     Pro forma net income available for common stock    $5,183,395   $2,463,072
                                                        ==========   ==========

     Pro forma basic earnings per share                 $     0.77   $     0.38
     Pro forma diluted earnings per share               $     0.73   $     0.36

The following is a summary of the Company's stock option activity and related
information for the years ended August 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                              Weighted Average Price
                                                        Number of Shares     Date of Grant or Exercise
                                                        ----------------     -------------------------
<S>                                                     <C>                  <C>
     Outstanding at August 31, 1998                         412,766                $1.46
      Options Granted                                       226,000                 1.26
      Options Exercised                                           -                    -
      Options Canceled                                            -                    -
                                                          ---------                -----
     Outstanding at August 31, 1999                         638,766                 1.39
      Options Granted                                       100,000                 4.00
      Options Exercised                                    (263,000)                1.59
      Options Canceled                                            -                    -
                                                          ---------                -----
     Outstanding at August 31, 2000                         475,766                $1.83
                                                          =========                =====

     Options exercisable at year-end                        475,766                $1.83

     Weighted-average fair value of options granted
      during the year                                     $    4.00
</TABLE>

                                      F-17
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 8. CAPITAL STOCK (continued)

The following table summarizes information about the Company's stock options at
August 31, 2000:


                      Options Outstanding and Exercisable
     ------------------------------------------------------------------------
                                  Weighted-Average
        Range of                     Remaining        Weighted-Average
     Exercise Prices    Number    Contractual Life     Exercise Price
     ---------------    ------    ----------------     --------------

       $ 1 - 2          380,766        2.61                $1.34
       $ 3 - 5           95,000        4.38                $3.80
                        -------
       $ 1 - 5          475,766        2.96                $1.83
                        =======

NOTE 9. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain of its facilities and equipment under operating
leases with net aggregate future lease payments of $6,000 at August 31, 2000,
payable as follows:


                     Year ending August 31,
                              2001                 $6,000
                                                   ======

Rent expense related to its facilities and equipment leases, for the years ended
August 31, 2000 and 1999, was $97,243 and $35,444, respectively.

The Company also leases corporate office space under an operating lease on a
month-to-month basis. Rent expense for its corporate lease was $15,432 and
$16,372 for each of the years ended August 31, 2000 and 1999.

In addition, the Company pays certain operating leases on behalf of the
physicians being managed by Doctors Practice Management, Inc. For the years
ended August 31, 2000 and 1999, total physicians' operating lease expenses were
$41,265 and $35,589, respectively.

Total rent expenses, including those physicians' operating leases paid by the
Company, for the years ended August 31, 2000 and 1999, was approximately
$153,940 and $87,405, respectively.

Other Risks

The Company maintains insurance for worker's compensation, automobile, general
liability, property loss, and medical malpractice claims. Management does not
believe the Company's exposure to medical malpractice is significant, and is not
aware of any pending or potential claims against the Company.

                                      F-18
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

NOTE 10. SUPPLEMENTARY INFORMATION

At August 31, 2000, the detail of certain balance sheet accounts was as follows:

          Accounts receivable:
            Trade                                             $ 8,551,060
            Other                                                   3,084
                                                              -----------
                                                                8,554,144

          Less, allowance for doubtful accounts                  (134,536)
                                                              -----------

                                                              $ 8,419,608
                                                              ===========

          Other assets:
            Due from related party                            $   410,000
            Other                                                  75,113
                                                              -----------

                                                              $   485,113
                                                              ===========

          Accrued liabilities:
            Compensation to Physicians                        $   312,971
            Interest expense                                       14,595
            Wages and payroll taxes                               192,409
            Property taxes                                        160,000
            Other                                                   1,540
                                                              -----------

                                                              $   681,515
                                                              ===========

NOTE 11. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has financial instruments which are exposed to concentrations of
credit risk; they consist primarily of cash investments and trade accounts
receivable.  The Company routinely maintains cash and temporary cash investments
at certain financial institutions in amounts substantially in excess of FDIC
insurance limits; however, management believes that these financial institutions
are of high quality and the risk of loss is minimal.  As is customary in the
health care business, the Company has trade accounts receivable from various
private insurers, and the balance due from a particular insurer at any point in
time may be in excess of the allowance for doubtful accounts.  The Company does
not request collateral from its customers and continually monitors its exposure
for credit losses and maintains allowances for anticipated losses.  The trade
receivables from private insurers is normally in excess of 90% of the total
trade receivables at any point in time.

The carrying amounts of cash and cash equivalents, short-term investments,
receivables, notes payable and accounts payable approximate fair value due to
the short-term maturities of these instruments.  The carrying amounts of the
Company's long-term borrowings, at August 31, 2000, approximate their fair
value.

                                      F-19
<PAGE>

                                                     DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

-------------------------------------------------------------------------------

NOTE 12.  SEGMENT AND RELATED INFORMATION

The Company adopted Statement of Financial Accounting Standards No. 131 during
the fiscal year ended August 31, 1999.  The Company has five reportable segments
(four in 1999): infusion therapy, physician practice management, emergency and
inpatient surgical center, clinic and outpatient surgical center, and property
and equipment holding, which was added in 2000.  The infusion therapy segment's
business principally involves the administration of physician-prescribed
nutrients, antibiotics or other medicines to cancer patients in their homes.
The physician practice management segment provides office space and fee-based
management services to physicians.  The emergency and inpatient surgical center
segment is comprised of a forty-two bed hospital which provides a wide range of
medical services including major surgical cases which require hospitalization.
The clinic and outpatient surgical center segment provides outpatient surgical
facilities, X-ray diagnostic services and full service laboratory testing.  The
property and equipment holding segment has acquired all of the fixed assets of
the emergency and inpatient surgical center segment and the clinic and
outpatient surgical center segment.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.  The Company evaluates performance
based on profit or loss from operations before income taxes not including
nonrecurring gains and losses.

The Company accounts for intersegment sales and expenses as if the sales or
transfers were to third parties, that is, at current market prices.

The Company's reportable segments are business units that offer different
services.  They are managed separately because each business requires different
technology and marketing strategies.

Summarized financial information concerning the Company's reportable segments is
shown in the following table.

<TABLE>
<CAPTION>
                                                    Physician    Emergency and      Clinic and     Property and
                                       Infusion     Practice       Inpatient        Outpatient      Equipment
                                       Therapy     Management   Surgical Center   Surgical Center    Holding       Totals
                                       -------     ----------   ---------------   ---------------    -------       ------
<S>                                  <C>           <C>          <C>               <C>              <C>           <C>
            2000
            ----
Revenues from external customers     $ 1,397,006   $ 2,172,055       $7,410,621       $15,396,058    $   45,000  $26,420,740
Intersegment revenues                    795,000    13,871,519                -                 -       960,000   15,626,519
Interest revenue                          15,527        60,269           20,907           134,500            64      231,267
Interest expense                         157,276        37,099                -            52,351             -      246,726
Depreciation and amortization            192,133        57,042                -            61,151       470,564      780,890
Income tax expense                        75,000     1,654,000          709,000         1,413,000        10,000    3,861,000
Segment assets                           563,902     8,316,646        5,103,347        10,263,699     9,539,521   33,787,115
Expenditures for segment assets                -         8,926          555,849            84,770       677,134    1,326,679
Segment profit                           172,906     2,854,360        1,223,010         2,397,412        18,170    6,665,858
            1999
            ----
Revenues from external customers     $ 1,145,266   $ 2,244,257       $  800,238       $12,359,639             -  $16,549,400
Intersegment revenues                    970,000    10,703,955                -                 -             -   11,673,955
Interest revenue                          21,478        33,133            8,979           136,230             -      199,820
Interest expense                         173,573             -                -            68,895             -      242,468
Depreciation and amortization            366,854        53,870                -           145,530             -      566,254
Income tax expense (benefit)             (90,000)    1,060,000         (414,000)          854,000             -    1,410,000
Segment assets                        10,511,929     3,974,496        2,333,942         7,003,964             -   23,824,331
Expenditures for segment assets        4,047,964       124,664                -           172,398             -    4,345,026
Segment profit/(loss)                   (179,870)    2,112,592         (824,607)        1,702,225             -    2,810,340
</TABLE>

                                      F-20
<PAGE>

                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------


NOTE 12. SEGMENT AND RELATED INFORMATION (continued)

The following table provides a reconciliation of the reportable segments'
revenues, profit/(loss), assets, and other significant items to the consolidated
totals.

<TABLE>
<CAPTION>
                                                                                           2000                      1999
                                                                                           ----                      ----
          REVENUES:
          ---------
          <S>                                                                           <C>                       <C>
          Total revenues for reportable segments                                        $  26,420,740             $ 16,549,400
          Elimination of rent and other income                                               (388,299)                (336,744)
                                                                                         ------------              -----------
            Consolidated total revenues                                                 $  26,032,441             $ 16,212,656
                                                                                         ============              ===========


          PROFIT/(LOSS):
          --------------
          Total profit/(loss) for reportable segments                                   $   6,665,858             $  2,810,340
          Elimination of minority interests                                                  (807,452)                (146,508)
                                                                                         ------------              -----------
            Consolidated net income                                                     $   5,858,406             $  2,663,832
                                                                                         ============              ===========


          ASSETS:
          -------
          Total assets for reportable segments                                          $  33,787,115             $ 23,824,331
          Elimination of intercompany accounts and other                                  (10,740,874)              (8,311,819)
                                                                                         ------------              -----------
            Consolidated total assets                                                   $  23,046,241             $ 15,512,512
                                                                                         ============              ===========


          OTHER SIGNIFICANT ITEMS:
          ------------------------
          Interest income                                                               $     231,267             $    199,820
          Elimination of intersegment income                                                 (120,225)                (124,303)
                                                                                         ------------              -----------
            Consolidated interest income                                                $     111,042             $     75,517
                                                                                         ============              ===========

          Interest expense                                                              $     246,726             $    242,468
          Elimination of intersegment expense                                                (120,225)                (124,303)
                                                                                         ------------              -----------
            Consolidated interest expense                                               $     126,501             $    118,165
                                                                                         ============              ===========
</TABLE>

The Company's revenues and long-lived assets are derived and domiciled from a
customer base located solely in the United States.

                                      F-21
<PAGE>

                               INDEX TO EXHIBITS

All Exhibits listed below are incorporated by reference from prior filings
except for those denoted by an asterisk which are filed herewith.

(2.1.)    Stock Sale Agreement, dated July 21, 1992, pertaining to a change in
          control of Dynacq International, Inc. (the "Company") which was
          previously filed in and is incorporated herein by this reference to,
          the Company's Registration Statement on Form 10, No. 0-20554.

(2.2.)    Exchange Agreement by and among the Company, Vista Healthcare, Inc.
          ("Vista") and certain Vista shareholders which was previously filed
          in, and is incorporated by this reference to, the Company's Current
          Report on Form 8-K, dated August 4, 1994.

(3.0)     Articles of Incorporation, filed June 16, 1989, which were previously
          filed in, and are hereby incorporated by reference to the Company's
          Registration Statement on Form 10, No. 0-20554.

(3.1.)    Amendment to Articles of Incorporation, filed February 12, 1992, which
          was previously filed in, and is hereby incorporated by reference to,
          the Company's Registration Statement on Form 10, No. 0-20554.

(3.2.)    Amendment to Articles of Incorporation, filed July 20, 1992, which was
          previously filed in, and is hereby incorporated by reference to, the
          Company's Registration Statement on Form 10, No. 0-20554.

(3.3.)    Amendment to Articles of Incorporation filed February 10, 1998.

(3.4.)    Bylaws (amended August 1, 1995) which were previously filed in and are
          hereby incorporated by reference to the Company's Amended Form 10-K
          for fiscal 1995 dated May 1, 1996, File No. 0-20554.

(10.1.)   Pledge-Security Agreement between the Company and Capital Bank dated
          July 20, 1994, which was previously filed in and incorporated by this
          reference to, the Company's current Report on Form 8-K, dated August
          4, 1994, No. 0-20554.

(10.2.)   Guaranty Agreement between the Company and Metlife Capital Corporation
          dated July, 1994, which was previously filed in and is hereby
          incorporated by reference to, the Company's Annual Report on Form 10-K
          for the fiscal year ended August 31, 1993. Comission File No. 0-20564.

(10.3.)   Security Agreement dated July 18, 1996, between Vista and Capital
          Bank, filed with the Company's Annual Report on Form 10-K for the
          fiscal year ended August 31, 1996, Commission File No. 0-20554.

(10.4.)   1995 Incentive Stock Option Plan for Employees and Employee Directors,
          filed with the Company's Annual Report on Form 10-K for the fiscal
          year ended August 31, 1996, Commission File No. 0-20554.

(10.5.)   1995 Non-Qualified Stock Option Plan for Consultants and Non-Employee
          Directors, filed with the Company's Annual Report on Form 10-K for the
          fiscal year ended August 31, 1996, Commission File No. 0-20554.


                                      E-1
<PAGE>

(10.6.)   1995 Stock Option Agreement between the Company and Philip S. Chan,
          filed with the Company's Annual Report on Form 10-K for the fiscal
          year ended August 31, 1996, Commission File No. 0-20554.

(10.7.)   Full Service Facility and Management Agreement between DPMI and JCW
          Medical Associates, P.A. dated May 1, 1996, filed with the Company's
          Annual Report on Form 10-K for the fiscal year ended August 31, 1996,
          Commission File No. 0-20554.

(10.8.)   Full Service Management Agreement between DPMI and Ping S. Chu, M.D.,
          dated March 1, 1996, filed with the Company's Annual Report on Form
          10-K for the fiscal year ended August 31, 1996, Commission File No. 0-
          20554.

(10.9.)   Promissory Note dated November 15, 1996, from JCW Medical Associates,
          P.A. payable to the Company in the principal amount of $666,922.22,
          bearing interest at 8% per annum and payable in 180 monthly
          installments, filed with the Company's Annual Report on Form 10-K for
          the fiscal year ended August 31, 1996, Commission File No. 0-20554.

(10.10.)  Security Agreement dated May 1, 1996, by JCW Medical Associates, P.A.
          to DPMI, filed with the Company,s Annual Report on Form 10-K for the
          fiscal year ended August 31, 1996, Commission File No. 0-20554.

(10.11.)  Credit Agreement dated May 1, 1996, between JCW Medical Associates,
          P.A. and DPMI, filed with the Company's Annual Report on Form 10-K for
          the fiscal year ended August 31, 1996, Commission File No. 0-20554.

(10.12.)  Revolving Credit Note from JCW Medical Associates, P.A. to DPMI dated
          April 1, 1996 for $675,000, filed with the Company's Annual Report on
          Form 10-K for the fiscal year ended August 31, 1996, Commission File
          No. 0-20554.

(10.13.)  Credit Agreement dated April 1, 1996, between R.S. Arora, M.D., as
          Borrower, to DPMI as Lender, for advances up to $100,000, filed with
          the Company's Annual Report on Form 10-K for the fiscal year ended
          August 31, 1996, Commission File No. 0-20554.

(10.14.)  Security Agreement dated April 1, 1996, by R.S. Arora M.D. as Grantor
          to DPMI as Lender, filed with the Company's Annual Report on Form 10-K
          for the fiscal year ended August 31, 1996, Commission File No. 0-
          20554.

(10.15.)  Revolving Credit Note dated April 1, 1996, in the principal amount of
          $100,000 from R.S. Arora, M.D. to DPMI, filed with the Company=s
          Annual Report on Form 10-K for the fiscal year ended August 31, 1996,
          Commission File No. 0-20554.

(10.16.)  $100,000 Revolving Credit Note dated July 1, 1996, from Houston
          Physical Medicine Associates, M.D., P.A. to DPMI, filed with the
          Company's Annual Report on Form 10-K for the fiscal year ended August
          31, 1996, Commission File No. 0-20554.

(10.17.)  Credit Agreement dated July 1, 1996, between Houston Physical Medicine
          Associates, M.D., P.A. and DPMI, filed with the Company's Annual
          Report on Form 10-K for the fiscal year ended August 31, 1996,
          Commission File No. 0-20554.

(10.18.)  Full Service Facility and Management Agreement dated October 1, 1996
          by and between Milton Kirkwood, D.O. and DPMI, filed with the
          Company's Annual Report on Form 10-K for the fiscal year ended August
          31, 1997, Commission File No. 0-20554.

                                      E-2
<PAGE>

(10.19.)  Asset Purchase Agreement and Bill of Sale dated October 22, 1997 by
          and between Medtek Management, Inc. and DPMI, filed with the Company's
          Annual Report on Form 10-K for the fiscal year ended August 31, 1997,
          Commission File No. 0-20554.

(10.20.)  Asset Purchase Agreement dated November 13, 1997 by and among DPMI,
          Kirkwood Medical Associates, P.A., Milton E. Kirkwood, D.O., Ron
          Kirkwood, D.O., and John Kirkwood, D.O., filed with the Company's
          Annual Report on Form 10-K for the fiscal year ended August 31, 1997,
          Commission File No. 0-20554.

(10.21.)  Lease Agreement effective July 1, 1996 by and between DPMI as Tenant
          and the City of Pasadena as Landlord relating to 3,000 square feet of
          office space in Pasadena, Texas, filed with the Company's Annual
          Report on Form 10-K for the fiscal year ended August 31, 1997,
          Commission File No. 0-20554.

(10.22.)  Lease Agreement dated November 1, 1997 by and between DPMI as Landlord
          and Kirkwood Medical Associates as Tenant relating to approximately
          9,200 square feet of office space located at 4301A Vista Road,
          Pasadena, Texas, filed with the Company's Annual Report on Form 10-K
          for the fiscal year ended August 31, 1997, Commission File No. 0-
          20554.

(10.23.)  Amendment No. 1 effective September 1, 1996 to the Full Service
          Management Agreement between DPMI and Ping S. Chu, M.D. dated March 1,
          1996, filed with the Company's Annual Report on Form 10-K for the
          fiscal year ended August 31, 1997, Commission File No. 0-20554.

(10.24.)  Amendment No. 1 effective September 1, 1996 to Full Service Facility
          and Management Agreement between DPMI and JCW Medical Associates, P.A.
          dated May 1, 1996, filed with the Company's Annual Report on Form 10-K
          for the fiscal year ended August 31, 1997, Commission File No. 0-
          20554.

(10.25.)  $60,000.00 Promissory Note dated November 30, 1996, of the Company,
          payable to JCW Medical Associates, P.A., filed with the Company's
          Annual Report on Form 10-K for the fiscal year ended August 31, 1997,
          Commission File No. 0-20554.

(10.26.)  $190,000.00 Promissory Note dated January 31, 1997, of DPMI, payable
          to JCW Medical Associates, P.A., filed with the Company's Annual
          Report on Form 10-K for the fiscal year ended August 31, 1997,
          Commission File No. 0-20554.

(10.27.)  Stock Option Agreement for Philip Chan dated effective December 18,
          1997, filed with the Company's Annual Report on Form 10-K for the
          fiscal year ended August 31, 1998, Commission File No. 0-20554.

(10.28.)  Stock Option Agreement for Glenn Rodriguez dated effective December
          18, 1997, filed with the Company's Annual Report on Form 10-K for the
          fiscal year ended August 31, 1998, Commission File No. 0-20554.

(10.29.)  Letter Agreement regarding pharmaceutical services between Vista and
          the Company dated effective September 1, 1998, filed with the
          Company's Annual Report on Form 10-K for the fiscal year ended August
          31, 1998, Commission File No. 0-20554.

(10.30.)  Office/Surgical Care Center Lease Agreement dated September 1, 1998,
          between the Company as Landlord and Vista as Tenant, filed with the
          Company's Annual Report on Form 10-K for the fiscal year ended August
          31, 1998, Commission File No. 0-20554.


                                      E-3
<PAGE>

(10.31.)  Management Support and Marketing Agreement dated October 1, 1998, by
          and between DPMI and Ultramed, L.C., filed with the Company's Annual
          Report on Form 10-K for the fiscal year ended August 31, 1998,
          Commission File No. 0-20554.

(10.32.)  Full Service Management Agreement dated October 1, 1998, by and
          between DPMI and Vista, filed with the Company's Annual Report on Form
          10-K for the fiscal year ended August 31, 1998, Commission File No. 0-
          20554.

(10.33.)  Real Estate Lien Note dated September 1, 1998, in the principal amount
          of $1,400,000.00 from the Company to Vista, filed with the Company's
          Annual Report on Form 10-K for the fiscal year ended August 31, 1998,
          Commission File No. 0-20554.

(10.34.)  Warranty Deed with Vendor's Lien from Vista to the Company dated
          September 1, 1998, relating to 4.5799 acres of land in Pasadena,
          Texas, filed with the Company's Annual Report on Form 10-K for the
          fiscal year ended August 31, 1998, Commission File No. 0-20554.

(10.35.)  Deed of Trust dated September 1, 1998 from the Company regarding
          4.5799 acres of land in Pasadena, Texas, filed with the Company's
          Annual Report on Form 10-K for the fiscal year ended August 31, 1998,
          Commission File No. 0-20554.

(10.36.)  AIA Construction Contract dated April 13, 1998, by and between the
          Company and Beck-Ford Construction, Inc. for construction of the
          Hospital for approximately $2,500,000, filed with the Company's Annual
          Report on Form 10-K for the fiscal year ended August 31, 1998,
          Commission File No. 0-20554.

(10.37)   Stock Option Agreement for Philip Chan dated January 4, 1999, relating
          to options to purchase $24,000 shares at $2.375, filed with the
          Company's Annual Report on Form 10-K for the fiscal year ended August
          31, 1999. Commission File No. 0-20554.

(10.38)   Stock Option Agreement for Glenn Rodriguez dated January 4, 1999,
          relating to options to purchase 30,000 shares at $2.375, filed with
          the Company's Annual Report on Form 10-K for the fiscal year ended
          August 31, 1999. Commission File No. 0-20554.

(10.39)   Hospital Lease Agreement from Dynacq to Vista Community Medical
          Center, L.L.C. for 23,000 square with annual retails of $57,500 per
          month for through January 31, 2004, filed with the Company's Annual
          Report on Form 10-K for the fiscal year ended August 31, 1999.
          Commission File No. 0-20554.


(10.40)   The Company's Real Estate Lien Note dated September 1, 1998 in the
          principal amount of $270,000 payable to Vista Healthcare, Inc., filed
          with the Company's Annual Report on Form 10-K for the fiscal year
          ended August 31, 1999. Commission File No. 0-20554.

(10.41)   Deed of Trust dated September 1, 1998, from the Company with respect
          to its real estate properties in Pasadena, Texas, filed with the
          Company's Annual Report on Form 10-K for the fiscal year ended August
          31, 1999. Commission File No. 0-20554.

(10.42)   Regulations of Vista Community Medical Center, L.L.C., filed with the
          Company's Annual Report on Form 10-K for the fiscal year ended August
          31, 1999. Commission File No. 0-20554.



                                      E-4
<PAGE>

(10.43)   The Company's Year 2000 Stock Incentive Plan adopted on August 29,
          2000, and incorporated by reference as Appendix B from the Company's
          Definitive Proxy Statement for its Annual Meeting dated August 9, 2000
          and filed with the Commission on or about that date. Commission File
          No. 0-20554.

(10.44)*  Separation Agreement and Consulting Agreement entered into by and
          among Dynacq International, Inc., Vista Health Care, Inc. and Glenn D.
          Rodriguez on or about November 28, 2000.

(21.0)*   Listing of subsidiaries of the Company, filed herewith.

(27.)*    Financial Data Schedule.

__________________________________

*    Filed herewith.


                                      E-5