<PAGE>   1
                                   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, 1996

/ /      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

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

            NEVADA                                       76-0375477
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation of organization)

  10304 INTERSTATE 10 EAST, SUITE 369                       77029
            HOUSTON, TEXAS                                (Zip Code)
(Address of principal executive offices)

Issuer's telephone number, including area code         (713) 673-6432

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

     Title of each class               Name of each exchange on which registered
            None                                           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 that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. 
Yes _X_ . No ____.

         Check if there is no disclosure of delinquent filers in response to
Item 405 of 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:
$7,418,710.

         As of November 29, 1996, there were 14,235,136 shares of the
registrant's common stock, $.001 par value, issued and outstanding, 2,669,384 of
which having an aggregate market value of approximately $ 2,669,384 (based on
the closing bid price of $ 1.00 as of such date) were held by non-affiliates of
the registrant. In determining the number of shares held by non-affiliates,
shares held by officers, directors and persons holding more than 5% of the
registrant's common stock were excluded.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

        Transitional Small Business Disclosure Format. Yes ___. No _X_.
<PAGE>   2
                                   FORM 10-KSB

                           DYNACQ INTERNATIONAL, INC.

                                TABLE OF CONTENTS

PART I....................................................................     1
    ITEM 1.  DESCRIPTION OF BUSINESS......................................     1
    ITEM 2.  DESCRIPTION OF PROPERTY......................................     8
    ITEM 3.  LEGAL PROCEEDINGS............................................     9
    ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........     9
PART II...................................................................     9
    ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....     9
    ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....    10
    ITEM 7.  FINANCIAL STATEMENTS.........................................    12
    ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
             ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................    12
PART III..................................................................    13
    ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............    13
    ITEM 10. EXECUTIVE COMPENSATION.......................................    14
    ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
             AND MANAGEMENT...............................................    15
    ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............    15
    ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.............................    15
<PAGE>   3
                                     PART I


ITEM 1.           DESCRIPTION OF BUSINESS

GENERAL

         The Company was incorporated under the laws of the State of Utah in
September 1983, as Rujo, Inc., to seek mining and oil and gas opportunities for
investment and completed a public offering of its securities on that basis in
1984. Recognizing that such opportunities were limited because of the general
decline in those industries, the Company expanded its search by exploring
business opportunities outside the mining and oil and gas industries. In January
1987, the shareholders of the Company approved the change of the name of the
Company to Jackson Brother Industries, Inc. The Company merged into a Nevada
corporation of the same name in June 1989, pursuant to a share-for-share
exchange of stock. In January 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.

         In July, 1992, the Company increased the number of its authorized
shares of common stock, $.001 par value (the "Common Stock") to 300,000,000
shares and sold 90,000,000 shares of common stock in a private placement to
several investors, including the Company's current chief executive officer, for
a total purchase price of $2,000,000. As a result of the change in control of
the Company, previous management, which separately sold a majority of their
shares of Common Stock of the Company as part of the transaction, resigned and
the current management team was installed.

         Effective August 1, 1992, the Company commenced operations as a
provider of health care 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 services include training
patients and their care givers, compounding prescriptions and conducting other
pharmacy operations, delivering supplies, providing certain nursing services,
monitoring patient compliance with the prescribed plan of care, monitoring
patient outcome, maintaining patient records, consulting with attending
physicians, maintaining equipment and processing reimbursement claims. While the
Company's core business is infusion therapy, the Company has taken several steps
during the past three fiscal years to diversify its operations and use of
assets, including the acquisition of Vista Healthcare, Inc. described below in
August 1994.

         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. Prior to the reverse split, there were 108,150,000 shares
outstanding. Following the reverse split the number of outstanding shares was
reduced to 13,518,766. 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 Dealers, 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 August 25, 1994, the Company completed the acquisition of
approximately 65% of the outstanding common stock of Vista Healthcare, Inc., a
Texas corporation ("Vista"), in exchange for newly issued shares of the
Company's Common Stock. The Company issued a total of 716,370 shares of its
Common Stock (or approximately 5% of the shares then outstanding) to 30
shareholders of Vista (the "Vista Shareholders") in exchange for an aggregate of
128,947 shares of Vista common stock held by the Vista Shareholders. The Common
Stock was issued pursuant to an Exchange Agreement, dated July 15, 1994 (the
"Exchange Agreement"), entered into by and among the Company, Vista and the
Vista Shareholders. The terms of the Exchange Agreement were the result of
negotiations between the management of the Company and Vista and certain of the
Vista Shareholders.

         Vista owns and operates a medical clinic and outpatient surgical center
in Pasadena, Texas (the "Vista Facility"). Vista 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 new equipment.


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         In a separate but related transaction to the Vista acquisition
described above, fifteen of the Vista Shareholders who were issued shares of the
Company's Common Stock pledged their shares to Capital Bank, located in Houston,
Texas, as collateral for loans made to each of the Vista Shareholders. Pursuant
to this arrangement, a total of 415,279 shares of the Company's Common Stock
were pledged to collateralize loans to the Vista Shareholders totaling $730,000.
All but one of the transactions involved a loan of $50,000. All of the loan
proceeds were contributed to Vista as capital by the Vista Shareholders.

         In connection with the loans to the Vista Shareholders, the Company
entered into a Pledge-Security Agreement (the "Security Agreement") with Capital
Bank on August 25, 1994, wherein the Company granted a security interest in and
pledged certain funds contained in a Company account at Capital Bank to
collateralize the repayment of the loans. The Company's liability to Capital
Bank for repayment of each of the loans is limited to the shortfall, if any,
calculated by taking the difference between (i) 130% of the dollar amount of the
outstanding loan balance (including principal and interest) attributed to a
Vista shareholder, and (ii) the value of the Company shares pledged by the Vista
shareholder, which is based on the quoted value of shares of the Company's
Common Stock as published by NASDAQ. The amount of Capital Bank's security
interest in the Company's funds is adjusted upward or downward every 90 days.

         As of November 15, 1996, the value of the Company's stock subject to
the pledge discussed above was approximately $113,120 less than 130% of the
aggregate loans to the Vista Shareholders. To the best of management's knowledge
all of the individual loans are current and the bank has not advised the Company
that any of the loans are in default. In the event of payment default by one of
the Vista Shareholders, Capital Bank has the option to exercise a right of
offset with respect to the funds on deposit, but only to the extent, if any, of
a shortfall as described above. In connection with the Vista acquisition, the
Company entered into a Guaranty Agreement with the lienholder on the Vista
Facility whereby the Company guaranteed 65% of the outstanding balance of the
mortgage loan collateralized by the Vista Facility. The outstanding loan balance
on the Vista Facility was approximately $ 1,075,366 as of August 31, 1996.

         In September, 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 (the "Office Building"). Most of the
offices in the Office Building are currently utilized by physicians with whom
the Company has management contracts through its wholly-owned subsidiary Doctors
Practice Management, Inc., a Texas corporation ("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. These systems are intended to build
a concentrated critical mass of primary care physicians, specialty physicians,
clinics and outpatient surgical centers. DPMI plans to offer participating
medical providers health care contracts, management systems that include
standards to better manage costs, shared administrative and clinical services
and individual or shared office facilities.

         Since most physicians' current revenue streams of fee-for-service will
be replaced by managed care and capitated forms of revenue in the next few
years, controlling expenditures will become more crucial than ever to improve
the bottom line for physicians running their practices in a highly managed care
setting of reduced revenues. An obvious solution to produce efficiencies and
savings is for physicians to integrate and consolidate in order to share
administrative and clinical services. Much of the integration and increased
efficiencies in health care delivery are being spurred by the economic climate.
DPMI should fit well in this integrated environment, where it can provide
coordinated business management practices, which are needed by many physicians'
groups, in return for management fees and incentive performance bonuses. During
the next few years, management believes there will be a reallocation of health
care profit margins in favor of professionally managed integrated delivery
systems. DPMI's goal is to obtain a competitive advantage in competing for
managed health care contracts with insurance companies or in direct contracting
with major employers or consortiums of employers.

         DPMI commenced providing management services for the Premier Health
Care Group, P.L.L.C. ("Premier"), of which the majority of physician members are
also shareholders of Vista. In May 1995, DPMI ceased providing management
services to Premier because of the difficulty of resolving administrative and
management issues with some Premier members. Since May 1995, DPMI has been
aggressively seeking new management opportunities with other physicians. This
effort is showing steady results as DPMI began managing Vista in January of
1996, the practices of three physicians in March of 1996, two physicians in
April of 1996 and one physician in July of 1996.


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<PAGE>   5
THE IN-HOME INFUSION HEALTH CARE MARKET

         In-home infusion health care 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. The market for in-home infusion health care has grown rapidly since
its initial development in the late 1970's. Management believes that the growth
of this market is primarily attributable to (i) increased cost containment
efforts that have encouraged home health care, (ii) medical advances that enable
doctors to treat more illnesses through home health care, and (iii) the desire
of hospitalized patients to be treated in their homes. The growth of the
industry is also the result of improved delivery technology that permits the
treatment of more diseases at home and the growing awareness and acceptance
among physicians and third-party payers of home health care as an alternative to
in-hospital treatment.

         Home health care is favorable for insurance companies because it is
much cheaper to pay for similar patient services performed by home health care
companies than by hospitals. The trend for insurance companies to pressure
hospitals and physicians to release patients to their homes to recover at the
earliest possible time to save cost is substantial. This enhances favorable
market growth for the home health care industry. The Company selects only
referral patients with proper adequate private insurance, with confirmation from
the insurance company of ability to pay, to ensure both profitability and
collectability of performed services and concentrates on two patient service
areas, Total Parenteral Nutrition Therapy and Antibiotic Therapy. Home health
care is not a capital intensive business and does not require high inventory
levels. It is a skilled labor intensive business that provides professional
medical services to patients with personal care.

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 efficacy of the
medication is generally increased. Antibiotic therapy is also becoming 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.

PHYSICIAN PRACTICE MANAGEMENT

         During fiscal 1996, DPMI entered into agreements to manage the medical
practices of six physicians and is currently negotiating additional contracts.
Each "Full Service Facility and Management Agreement" (the "Management
Agreement") typically delegates to and requires 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 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
typically ranging from 20% 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 nondefaulting 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 under the Management Agreements. To facilitate the expansion and
integration of physician practices under DPMI management including the physical
relocation thereof to facilities owned by the Company, DPMI has agreed to make
loans to several of the contracting physicians. The loans (the "Physician
Loans") are usually documented by a credit agreement, a promissory note and a
security agreement which provides DPMI a security interest in certain assets of
the physicians practices including inventory, accounts, equipment and general
intangibles. As of August 31, 1996, DPMI had made three (3) Physician Loans


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in the aggregate principal amount of $ 836,000. Although the Physician Loans
have facilitated the expansion of the physician management business of DPMI, the
Company, as a lender, incurs a risk that the Physician Loans will not be paid or
paid in a timely manner. If the Company or DPMI is forced to foreclose on the
security collateralizing any Physician Loan, there can be no assurance that the
collateral will be sufficient to cover the obligation. All of the Physician
Loans are current as of August 31, 1996. If all or part of the Physician Loans
prove to be uncollectible, there would be a material adverse effect on the
earnings of the Company. Under the Management Agreements, DPMI is entitled to a
fixed percentage of collections from the physicians' practice and DPMI has
agreed 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 will
remain obligated to pay the excess expenses and is subject to losses under the
Management Agreements. To date, DPMI's Management Agreements have been
profitable with one exception.

OUTPATIENT SURGICAL FACILITY

         The Company's Vista Facility provides outpatient surgical facilities,
x-ray diagnostic services and full service laboratory testing to physicians and
their patients. The Vista Facility and the Office Building are located adjacent
to each other. In January 1, 1996, DPMI entered into a five year Management
Agreement for the Vista Facility which entitles DPMI to 28% 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 to the ones entered into by DPMI to manage physician practices.

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 in-home infusion service provider into an integrated
medical/health services Company. The foundation of this strategy was the
acquisition of a majority interest in the Vista outpatient surgical center
located in Pasadena, Texas 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 client physicians located in the
Office Building. Vista provides outpatient surgical facilities, x-ray diagnostic
services and full service laboratory testing to physicians and their patients in
the Vista Facility.

         The Company intends to grow as a provider of health care services by
(i) expanding the business of its existing operations locally, (ii) acquiring
established health care providers, and (iii) opening new branch facilities in
selected markets. The Company is continually evaluating potential acquisition
candidates and suitable locations for new facilities. However, the Company does
not presently have any agreements, arrangements or understandings regarding any
acquisitions or the opening of additional 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 health care service companies and related
businesses.

         The Company's acquisition strategy includes (i) identifying businesses
with stable referral sources that it can acquire at attractive purchase prices,
(ii) minimizing its initial cash investment by employing deferred payment
mechanisms and financing a significant portion of the purchase price with Common
Stock and/or long-term loans, (iii) retaining management and using "earn-outs"
based on revenues and/or profits to provide incentives to such management, and
(iv) using its management expertise and corporate information and control
systems to enhance the growth and profitability of acquired operations.

         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 health care 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
hub area by expanding its core of outlying doctor practices and clinics under
management contracts; broadening the initial lines of specialized practices;
and, in selected new industrial markets, opening additional outpatient surgical
facilities. 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.


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<PAGE>   7
COMPETITION

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

         The in-home infusion health care 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 in-home infusion
therapy companies, hospitals, physician groups and other health care
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
year, the Company has experienced substantial pressure from insurance companies
with respect to the need for and the cost of in-home infusion therapy
treatments. This pressure has resulted in declining charges per patient and
profit margins for the Company in that area.

         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 candidates are identified
and the acquisition terms are acceptable to the Company.

         With respect to the Company's health care 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 in-home infusion business and its
outpatient surgical facility, the Company relies primarily on patient referrals
from physicians. With respect to in-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 health care costs, insurance companies and other
third-party payers are participating to a greater extent in decisions regarding
health care alternatives. Consequently, management believes that such
third-party payers will be increasingly important in marketing the Company's
services in the future.

         The Company's marketing strategy for DPMI is to offer to certain
oncologists, specialists and general practitioners centralized office management
services in exchange for a percentage of the doctor's revenues. The Company will
provide office personnel to perform administrative tasks, and technicians to
perform certain technical functions at the practitioners office. While the
Company expects this aspect of its business to be independently profitable, the
primary reason for pursuing this new strategy is to create a natural source of
referrals of patients needing parenteral nutrition and other therapies.
Management also believes that as oncologists, in particular, become more aware
of the benefits of nutritional therapy to their patients in terms of bettering
their quality of life while cancer treatments are being pursued, many of those
practitioners will be more likely to refer their patients to the Company at a
much earlier stage for the parenteral nutrition treatment.

DELIVERY OF IN-HOME INFUSION PATIENT SERVICES

         The decision to proceed with in-home infusion therapy is made jointly
by the patient, the attending physician and the Company. This decision involves
obtaining and evaluating information about the patient's medical history, home
environment and insurance, as well as discussing the patient's willingness and
ability to participate in the self-administration of home health care. After a
patient is referred to the Company, a pharmacist takes the prescription order
from the attending physician and the Company personnel coordinate the delivery
of patient care tailored to the individual's specific needs.

         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


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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.

HEALTH CARE 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 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 health care industry is highly regulated at the federal and state
levels. The Company believes its business is in material compliance with
applicable law. The relationships between the Company and its affiliated
physician groups, however, are 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 health
care, tax, labor or other regulatory authorities would not result in
determinations that could adversely affect the Company's operations or that the
health care 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 party by Medicare or certain state health care
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 health care 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 health care 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 constitutes a violation of federal or state
anti-kickback statutes. Medicare and state health care 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. health care 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 health care
legislation or other changes in the administration or interpretation of
governmental health care 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 affiliated physician groups and the Vista Facility are
involved in the delivery of health care services to the public and are exposed
to the risk of professional liability claims. Claims of this nature, if
successful, could result in


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damage awards to the claimants in excess of the limits of any applicable
insurance coverage. Insurance against losses related to claims of this type can
be expensive and varies widely from state to state. The Company and its
affiliated physician groups maintain liability insurance in amounts and
coverages believed to be usual and customary. Nevertheless, successful
malpractice claims asserted against the physician groups or the Company could
have a material adverse effect on the Company. See "Business--Insurance."

LIMITED OPERATING HISTORY

         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 in-home infusion therapy
operations are subject to substantial risks because the Company serves a
relatively small number of patients. The Company's in-home infusion health care
revenues have decreased from $2,730,753 in fiscal 1995 to $1,767,751 in fiscal
1996. The Company intends to more aggressively market its in-home infusion
therapy services with the goal of increasing its patient base in fiscal 1997,
however, the Company's revenues and profits will remain relatively vulnerable
unless and until the patient base increases significantly. In the past year, the
Company has faced increasing pressure from insurance companies to justify the
continuation of and need for in-home infusion therapy for patients and the
Company's charges therefor. The Company expects these pressures to continue. In
addition, the Company has not yet established a proven operating history with
respect to its physician practice management. The Company's revenues and profits
from this area will remain vulnerable until the Company has more management
contracts for physician practices and more experience in managing such
contracts. As of August 31, 1996, DPMI had management agreements for six
physician practices. The loss of one or more of these contracts could have a
material adverse effect on the profits and revenues of DPMI. In addition,
Vista's revenues decreased 1% during the last fiscal year due to fewer patient
referrals and increased competition. See "Item 6. - Management's Discussion and
Analysis and Plan of Operation".

REDUCTIONS IN THIRD PARTY REIMBURSEMENT

         Health care providers typically bill various third party payors, such
as governmental programs (e.g., Medicare and Medicaid), private insurance plans
and managed care plans, for the health care services provided to their patients.
These third party payors are increasingly negotiating the prices charged for
medical services, pharmaceuticals and other supplies, with the goal of lowering
reimbursement and utilization rates. Third party payors 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 payors 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 health care services on a capitated or other risk sharing basis, the
Company anticipates that it will eventually offer its services to payors 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
health care 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 in-home
infusion health care business, the Company does not carry liability insurance
for any employee or contract representative. The Company requires that all
health care 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 health care professionals
commit a negligent or other liability producing act or omission in the Company's
in-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
and 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.
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 to.


                                        7
<PAGE>   10
EMPLOYEES

         The Company and its subsidiaries employ approximately 42 full-time
employees and 2 part-time employees. A number of other individuals are utilized
on an as needed contractual basis, with the number being dependent on the
patient load.

EMPLOYEE BENEFIT PLANS

         Effective August 1, 1995, the Board of Directors approved a 1995
Non-Qualified Stock Option Plan for consultants and non-employee directors. The
Board believes that the Plan will advance the long term interests of the Company
(i) by providing consultants and non-employee directors with the opportunity to
obtain an equity interest in the Company, (ii) by furthering the identity of
interests of participants in the plan with those of the shareholders of the
Company through the ownership and performance of the common stock of the
Company, and (iii) by permitting the Company to attract and retain qualified
consultants and non-employee directors. Under the terms of the Plan, the Company
may grant stock options in the Company's Common Stock 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.

         Effective August 31, 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.


ITEM 2.           DESCRIPTION OF PROPERTY

         The Company commenced its health care operations in August 1992 and
leased 1,000 square feet of office space in East Houston for $600 per month. As
of March 1, 1993, the office space was expanded to a total of 1,915 square feet
and, accordingly, the monthly lease rate increased to $1,286. This lease expired
March 1, 1995 and is currently on a month-to-month basis. The lessor of the
office space is Capital Bank, of Houston, Texas. 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.

         In August 1994, the Company consummated the acquisition of 65% of the
outstanding common stock of Vista, which owns and operates the Vista Facility,
an outpatient surgical center in Pasadena, Texas consisting of a one story
building containing approximately 15,000 square feet. The land and building
owned by Vista is subject to and collateralized by a note payable and deed of
trust to Met Life Capital. The note bears a fixed interest rate of 9.65% with a
monthly installment of $19,533, a maturity date of September 1, 2002, and the
balance of which as of August 31, 1996, was $1,075,366. The Company entered
into a Guaranty Agreement with Met Life Capital whereby the Company guaranteed
65% of the outstanding balance of the mortgage loan. Management believes the
facility is adequately covered by insurance. The depreciation on the 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 appraisal value and the annual
real and personal property taxes are about $77,000. The Vista Facility is 100%
utilized by Vista as an outpatient surgical center and to provide laboratory and
diagnostic testing services.

         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
$1,925,000, and was financed from working capital. The new facility 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 of which approximately 70% is utilized by physician
practices under the management of DPMI. The remaining space will be utilized for
additional physician practices, when contracted for, and is currently vacant. A
total of $707,000 has been spent for new equipment and furnishings for the
Office Building. All depreciation is calculated on


                                        8
<PAGE>   11
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 appraisal value and the annual real
and personal property taxes are about $80,000. Currently, there are six
physician practices under management with DPMI which are located in the Office
Building. Each physician practice utilizes more than 10% of the space in the
building and comprises more than 10% of the management fees payable to DPMI
pursuant to the Management Agreements described below. Revenues and income from
the property are derived from the management fees received by DPMI under the
Management Agreements. The Company does not directly lease office space in the
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. Given the limited number of
Management Agreements which provide revenue to DPMI and the Company from the
Office Building, the loss or cancellation of any agreement would be material.

ITEM 3. LEGAL PROCEEDINGS

         Vista is named as a defendant in a lawsuit with a former employee of
Vista. The lawsuit was filed in 1993 in the 80th Judicial District Court of
Harris County, Texas, CA No. 93-57254. The plaintiff is seeking unspecified
damages against Vista and other named defendants for alleged injuries incurred
in connection with a series of anti-hepatitis vaccinations. An interlocutory
order granting Vista's Motion for Summary Judgment was granted on May 5, 1995,
disposing of all of the plaintiff's claims against Vista. The plaintiff has the
right to appeal the order prior to final disposition of the case against the
remaining defendants. Vista intends to vigorously defend the action and contends
that no amounts are due to the plaintiff from the Company. Management believes
any liability resulting from this matter will be covered by Workers Compensation
insurance maintained by Vista. Based upon management's assessment of the
potential for loss and recommendations from the Company's counsel, no amounts
have been accrued in the accompanying financial statements with respect to this
litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable.

                                    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.

         The following table sets forth the high and low closing bid prices for
the Company's Common Stock, as adjusted for the 1 for 8 reverse stock split,
during each of the last eight fiscal quarters as reported by the National
Quotation Bureau, Inc.


<TABLE>
<CAPTION>
                                                   High        Low
                                                   ----        ---
<S>                                               <C>         <C>
1995 Fiscal Year - Quarter Ended:
         November 30, 1994                        $2.25       $2.13
         February 28, 1995                         2.00        1.88
         May 31, 1995                              1.88        0.88
         August 31, 1995                           1.63        1.00
1996 Fiscal Year - Quarter Ended:
         November 30, 1995                         1.3125      1.00
         February 29, 1996                         1.375       0.9375
         May 31, 1996                              1.125       0.6875
         August 31, 1996                           1.25        1.00
</TABLE>


                                        9
<PAGE>   12
         These quotations reflect inter-dealer prices, without retail markup,
mark-down or commission and may not represent actual transactions.

         As of August 31, 1996, the Company had approximately 94 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. Management believes the number of beneficial owners of its Common
Stock to be in excess of 242.

         The Company has not paid any cash dividends on its Common Stock and
intends to retain all earnings for the operation 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.


ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

         The Company did not generate any revenues from inception in 1983
through July 1992. New management and other individuals/entities invested
$2,000,000 and the Company began to generate revenues from home health care
therapy in August 1992, the first month 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, 1996.

         The Company recorded consolidated net income of $559,473 for the year
ended August 31, 1996, as compared to consolidated net income of $936,019 in
1995 and $470,094 in 1994. The Company's net income in 1994 included a $38,000
one-time charge resulting from the change in method of accounting for income
taxes by the adoption of the provisions of Statement of Financial Accounting
Standards No. 109. There were no other significant, unusual or non-recurring
items of income or expense during the three years ended August 31, 1996. As a
result of the expansion of the Company's business operations including the
operations of DPMI in fiscal 1996, and the acquisition of Vista in the last
month of fiscal 1994, as noted below, it is difficult to meaningfully compare
revenues and expenses of the Company for the last three fiscal years.

AUGUST 31, 1996 VS. AUGUST 31, 1995

         For the fiscal year ended August 31, 1996, consolidated total revenues
were $7,418,710 compared to $6,904,586 for the prior year. Notwithstanding this
moderate increase of $514,124 or 7% in consolidated gross revenues, there were a
number of significant increases and decreases in the component revenue
categories. For instance, revenue attributable to in-home infusion therapy
operations decreased $963,002 or 35% from that of the prior year due to lower
patient load as a result of fewer referrals and lower reimbursable insurance
charges per patient. Revenue attributable to Vista operations decreased $33,655
or 1% from that of the prior year due to fewer patient referrals, primarily as a
result of the relocation of a physician group which was located on the premises.
This combined revenues decrease of $996,657 was offset to a large extent by a
revenue increase of $1,512,264 or 123% attributable to DPMI as a result of
DPMI's aggressive efforts in signing up physicians for management. Rental
revenue decreased $299,928 or 71% from that prior year due to new management
agreements with physicians that incorporate rental revenue as part of the
management fee. Interest revenue increased $14,917 or 23% from that of the prior
year due to a larger cash balance being deposited into interest bearing bank
accounts. The Company achieved positive net income with respect to two of its
three areas of operation. Net income (before minority interest) from the
operations of DPMI was $420,689 and $190,202 from the operations of the Vista
Facility. The Company incurred a loss of $51,868 with respect to its in-home
infusion therapy operation.

         There were significant increases in consolidated expense categories
primarily due to increases in management activities of DPMI including a $198,577
or 17.6% increase in compensation and benefits expense, a $690,810 or 73.7%
increase in contract payments to physicians and a $297,740 or 61.2% increase in
medical supplies expense. An increase of


                                       10
<PAGE>   13
$94,349 or 21.1% increase in depreciation and amortization expense was primarily
due to the purchase of new medical equipment by Vista. Although some expense
categories such as rent and occupancy expense and other expenses showed a
significant decrease from that of the prior year, while another expense category
such as other general and administrative expenses showed significant increase
from that of the prior year, the grouping of individual expense accounts under
each of these three expense categories in the current year differed than that of
the prior year and contributed to the significant increase and decrease in each
of these three expense categories.

         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 in-home infusion therapy
operations are subject to substantial risks because the Company serves a
relatively small number of patients. The Company's in-home infusion health care
revenues have decreased from $2,730,753 in fiscal 1995 to $1,767,751 in fiscal
1996. The Company intends to more aggressively market its in-home infusion
therapy services with the goal of increasing its patient base in fiscal 1997,
however, the Company's revenues and profits will remain relatively vulnerable
unless and until the patient base increases significantly. In the past year, the
Company has faced increasing pressure from insurance companies to justify the
continuation of and need for in-home infusion therapy for patients and the
Company's charges therefor. The Company expects these pressures to continue. In
addition, the Company has not yet established a proven operating history with
respect to its physician practice management. The Company's revenues and profits
from this area will remain vulnerable until the Company has more management
contracts for physician practices and more experience in managing such
contracts. As of August 31, 1996, DPMI had management agreements for six
physician practices. The loss of one or more of these contracts could have a
material adverse effect on the profits and revenues of DPMI. Vista's revenues
decreased 1% during the last fiscal year due to fewer patient referrals as
discussed above.

AUGUST 31, 1995 VS. AUGUST 31, 1994

         For the fiscal year ended August 31, 1995, total revenues were
$6,904,586 compared to $2,584,235 for the prior year. This increase of 267%
resulted from the inclusion of Vista revenues for an entire year in fiscal 1995
(fiscal 1994 included only six days of revenues, as Vista was acquired on August
25, 1994), and from DPMI revenues of $1,225,731 which did not exist in 1994. The
Company's revenues from its in-home infusion therapy services were $2,730,753 in
1995, a 6.6% increase over 1994. Vista's revenues for 1995 of $2,946,619
represented a 160% increase over 1994 on a pro-forma basis. Total expenses for
1995 increased 339% over 1994 due to the exclusion of all but six days of
Vista's operations in 1994 and the inclusion of DPMI in 1995. On a pro-forma
basis, Vista's total expenses in 1995 increased 204% compared to 1994. Income
from operations in 1995 increased $703,612 (98%) over 1994. Rent and other
income increased from $23,141 in 1994 to $419,771 in 1995 due primarily to the
rentals received on the new medical facilities completed in 1995 and leased to
Premier. Interest expense increased from $51,048 in 1994 to $162,643 in 1995 due
to the financing costs attributable to the building improvements and equipment
in 1995.

         Significant increases in expense categories included a $627,105 or 125%
increase in compensation and benefits expense, of which $336,540 was attributed
to the inclusion of a full year of Vista operations. The remaining increase of
$290,565 was attributed to the inclusion of DPMI in 1995. Provision for
uncollectible accounts increased $768,267, or 753%. Of this amount, $236,806, or
232%, was attributable to home infusion therapy operations primarily due to
increased third-party payer scrutiny of invoices and reductions in qualifying
payments. The remaining $531,461 increase in provision for uncollectible
accounts was the result of including a full year's operations of Vista in 1995.
Contract payments increased $771,674, or 467%, represented by a $57,566
decrease, or 35%, attributable to the home infusion therapy operations (a
significant part of which was reduction in consultant fees paid), offset by an
increase of $274,702 and $554,538 attributable to Vista and DPMI, respectively,
as a result of including a full year of Vista's operations in 1995 and the
inclusion of DPMI in 1995. Medical supplies increased 98%, or $241,254,
primarily due to the inclusion of a full year of Vista's operations in 1995.
Depreciation and amortization increased $400,689, or 79%; of this amount,
$126,409 was attributable to the home infusion therapy operations and the
completion of the new medical office building in 1995, and $274,280 was
attributable to the inclusion of Vista's operations for a full year in 1995.
Rent and occupancy increased $255,754, or 571%, attributable to an increase of
$55,379 for the home infusion operations resulting from the completion of the
new medical office building in 1995, $184,776 attributable to the inclusion of a
full year of Vista's operations in 1995, and $15,599 attributable to the
inclusion of DPMI in 1995. Other general and administrative expenses increased
489,089, or 130%. Of this, $166,405 represented Vista's operations for a full
year in 1995, and the remaining $322,684 increase was attributed to DPMI due to
its inclusion in 1995.

         The Company's effective Federal income tax rate was 22.7% in 1996 and
38% in 1995.


                                       11
<PAGE>   14
LIQUIDITY AND CAPITAL RESOURCES

         The Company maintained liquidity in fiscal 1995 and 1996. Working
capital of $1,826,002 as of August 31, 1996, increased $447,959 from the prior
year primarily due to an increase in cash of $665,007 from operations, an
increase in accounts receivable of $323,259 and a decrease in other current
assets of $33,717 offset by an increase in accounts payable of $53,204, an
increase in accrued liabilities of $720,386, a decrease in current income taxes
payable of $49,039, a decrease in current deferred income taxes payable of
$198,700 and a decrease in current portion of long term debt of $19,262. As of
August 31, 1996, the Company maintained a liquid position evidenced by a current
ratio of 1.93 to 1 and a total debt to equity ratio of 0.46 to 1.

         The Company is actively targeting opportunities to expand in the
physician management and outpatient surgical clinic markets. Therefore,
internally generated funds may not be sufficient to finance future expansion.
The Company will assess the need and obtain, if necessary, additional equity
capital or debt financing; provided, however, there can be no assurance that the
Company will be able to obtain any necessary financing on the terms, or in the
amounts that are necessary and acceptable to the Company.

         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 payment obligations on
its long-term indebtedness. Inflation has not significantly impacted the
Company's financial position or operations.


ITEM 7.           FINANCIAL STATEMENTS

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


ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE

         Effective September 27, 1996, the Company terminated the accounting
firm of Bateman, Blomstrom & Co. There were no disagreements on any matter of
accounting principles or practices, financial statement presentation or
disclosure, or auditing scope or procedures during the year ended August 31,
1995. The independent accountants' report on the Company's financial statements
for the past two years did not contain an adverse opinion, disclaimer of opinion
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change certifying accountants was recommended and
approved by the Company's Board of Directors. During the Company's two most
recent fiscal years and the subsequent interim period through September 27,
1996, there were no disagreements or "reportable events" with the former
independent accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. Effective
September 27, 1996, the Company engaged the accounting firm of Wood, Harper &
Associates, P.C. as their new principal independent accountants.


                                       12
<PAGE>   15
                                    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, 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      44     Chairman of the Board of Directors, Chief Executive
                           Officer, President and Secretary (July 1992-Present)
Philip Chan         45     Vice President - Finance and Treasurer/Director
                           (July 1992-Present)
Stephen L. Huber    46     Director  (July 1992-Present)
Earl R. Votaw       70     Director  (July 1992-Present)


         CHIU MOON CHAN is a registered pharmacist and since May 1978, has been
employed by health care service organizations in Houston, Texas. From March 1986
to May 1988, Mr. Chan was employed by the M.D. Anderson Cancer Center, Houston,
Texas. From June 1988 through September 1991, Mr. Chan operated his own in-home
health care business in Houston, Texas as a sole proprietorship. From October
1991 through July 1992, Mr. Chan was an executive officer and employee of
E.F.S.M., Inc. located in Houston, Texas, which is in the in-home health care
business, specializing in Medicare and Medicaid patients. Mr. Chan earned a
Bachelor of Science degree in Pharmacy from the University of Houston.

         PHILIP CHAN was self-employed with his own consulting, accounting and
tax firm from September 1990 through 1992. From September 1989 to September
1991, he was the controller for a management corporation, Related Management
Corporations of Florida, located in Miami, Florida. From March 1986 to August
1989, he was in charge of the accounting department for Hamel and Associates, a
Houston, Texas accounting firm. Mr. Chan has earned advanced accounting degrees
from the University of Houston and is a CPA in the State of Texas.

         Mr. Chiu Chan and Mr. Philip Chan are not related.

         STEPHEN L. HUBER is a registered pharmacist and has earned a Bachelor
of Science degree in Hospital Pharmacy from the University of Houston. He served
as director of pharmacy patient care services at the University of Texas M.D.
Anderson Cancer Center from August 1986 to December 1991 when he was promoted to
his current position, Deputy Division Head for patient care services. Mr. Huber
joined M.D. Anderson in 1984 as assistant director of operations. He was a
director of pharmacy from May 1982 through August 1984 for Life Mark Pharmacy
Management.

         EARL R. VOTAW 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. Mr. Votaw
has served as a director since 1981 and as an executive officer since 1985 of
Jacinto City Bancshares, Inc. ("Jacinto"), a Houston-based bank holding company,
which is publicly held. He has also served since 1989 as an executive officer
and a director of JACI, Inc., a Delaware corporation, that is wholly-owned by
Jacinto. Capital Bank, a Texas chartered bank located in Houston, Texas of which
Mr. Votaw has served as president, chief executive officer, and a director since
1979 is wholly owned by JACI, Inc. As of December 31, 1993, Mr. Votaw resigned
all of his positions with Jacinto, JACI, Inc. and Capital Bank, except his
director position with Capital Bank, to pursue retirement plans.

         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.


                                       13
<PAGE>   16
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 following summary compensation table sets forth in summary form the
compensation received during each of the Company's last three completed fiscal
years by the Registrant's Chief Executive Officer.

                           SUMMARY COMPENSATION TABLE

                              ANNUAL COMPENSATION

<TABLE>
<CAPTION>
       NAME/PRINCIPAL POSITION            FISCAL                                                              LONG-TERM
                                           YEAR           SALARY             BONUS            OTHER         COMPENSATION
<S>                                        <C>            <C>                <C>              <C>           <C>
Chiu Chan, CEO                             1996            $ 160,000           $ -0-          $ 6,010            0
                                           1995              160,000           6,667           28,194            0
                                           1994              175,331           9,333           47,181            0
</TABLE>


         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 and Philip Chan devote 100% of their time to the
Company.

         Pursuant to the Company's Incentive Stock Option Plan, options to
purchase 275,527 shares were granted in May 14, 1996, which number includes
157,606 options granted to Mr. Philip Chan as described in the table below. The
remaining options were granted to approximately ten (10) nonexecutive employees
of the Company and its subsidiaries. All options are exercisable at $0.9375 per
share and expire May 14, 2001. The Board of Directors also adopted a
non-qualified stock option plan in August 1996 for non-director employees and
consultants, and a total of 175,000 options were granted to two (2) consultants
during fiscal 1996 under that plan.


                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                   Number of Securities        Percent of Total Options/
                   Underlying Options/SAR's    SAR's Granted to
      Name         Granted                     Employees in Fiscal Year     Exercise Price    Expiration Date
      ----         ------------------------    -------------------------    --------------    ---------------
<S>                <C>                         <C>                          <C>               <C>
Mr. Philip Chan    157,606                     100%                         $0.9375           May 14, 2001
</TABLE>

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


                                       14
<PAGE>   17
ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND 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, 1996.


<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                       9,084,877(1)                   63.82%
                          323 Wood Loop
                          Houston, Texas  77015
Common Stock              Ella Chan                            9,084,877(1)                   63.82%
                          323 Wood Loop
                          Houston, Texas  77015
Common Stock              Philip Chan                           205,106(2)                     1.43%
                          7930 Millbrook Drive
                          Houston, Texas  77095
Common Stock              Hi Lite Development Ltd.             2,433,375                      17.09%
                          First Floor, Wah Sing
                          Building
                          61A Java Road
                          North Point, Hong Kong
Common Stock              Officers and Directors               9,289,983                      64.55%
                          as a group (6)
</TABLE>


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In April, 1995, the Company entered into a note and security agreement
to borrow a total of $125,849 from Capital Bank for the purchase of an
ultrasound machine. The loan was secured by the ultrasound machine and is
payable in 36 monthly installments of $4,003, including interest at 9%, and is
scheduled to mature in April, 1998. The loan had a balance of $77,496 as of
August 31, 1996. Mr. Earl R. Votaw, a director of the Company, is a director of
Capital Bank.


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 listed herein are incorporated into this part
                  by reference.

         B.       Reports on Form 8-K. No reports on Form 8-K were filed by the
                  Company during the fourth quarter of fiscal 1996.

--------

        (1)       Includes (i) 6,782,188 shares held individually by Chiu Moon
                  Chan, (ii) 1,897,125 shares held in the name of Mr. Chan's
                  spouse, and (iii) 202,782 shares held in the name of two of
                  Mr. Chan's minor children. Mr. Chan disclaims any beneficial
                  ownership of the shares held by his spouse and minor children.
                  Mrs. Chan disclaims any beneficial ownership of the shares
                  held by her spouse and minor children.

        (2)       Includes 157,606 shares which may be acquired by Mr. Philip
                  Chan pursuant to options granted to him in May 1996. The
                  options are exercisable at $0.9375 and expire May 14, 2001.


                                       15
<PAGE>   18
                                   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: December 12, 1996
   --------------------------------------------                -----------------
   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.


          NAME                    TITLE                         DATE
          ----                    -----                         ----
   /s/ Chiu Moon Chan      Chairman of the Board,          December 12, 1996
-----------------------    Chief Executive Officer,
Chiu Moon Chan             President and Secretary
                           Vice President,

   /s/  Philip S. Chan     Chief Financial Officer,        December 12, 1996
-----------------------    Controller, and Director
Philip S. Chan

   /s/ Stephen L. Huber    Director                        December 12, 1996
-----------------------
Stephen L. Huber

   /s/  Earl R. Votaw      Director                        December 12, 1996
-----------------------
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.


                                       16
<PAGE>   19
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


                                     INDEX



A. Financial Statements                                                  Page
   Reports of independent public accountants                              F-2
   Consolidated balance sheet as of August 31, 1996                       F-4
   Consolidated statements of income for the years ended August 31,       F-5
     1996 and 1995
   Consolidated statements of changes in stockholders' equity for the     F-6
     years ended August 31, 1996 and 1995
   Consolidated statements of cash flows for the years ended August       F-7
     31, 1996 and 1995
   Notes to consolidated financial statements                             F-8


                                       F-1
<PAGE>   20
                    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, 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides 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, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.



                                           /s/  WOOD, HARPER & ASSOCIATES, P.C.
                                           ------------------------------------
Houston, Texas                                  WOOD, HARPER & ASSOCIATES, P.C.
December 3, 1996


                                       F-2
<PAGE>   21
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We have audited the accompanying consolidated statements of income, changes in
stockholders' equity, and cash flows of Dynacq International, Inc. and its
subsidiaries (the "Company") for the year ended August 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides 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, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.



                                                /s/ BATEMAN, BLOMSTROM & CO.
                                               ------------------------------   
Houston, Texas                                      BATEMAN, BLOMSTROM & CO.
April 5, 1996


                                       F-3
<PAGE>   22
                                                      DYNACQ INTERNATIONAL, INC.
                                                      Consolidated Balance Sheet
                                                                 August 31, 1996

<TABLE>
<S>                                                                                      <C>
ASSETS
   Current assets:
      Cash and cash equivalents                                                          $  1,134,579
      Restricted short-term investments                                                       180,000
      Accounts receivable, net of allowance for doubtful accounts of $1,739,221             2,413,372
      Inventories                                                                              29,347
      Other current assets                                                                     31,120
                                                                                         ------------
         Total current assets                                                               3,788,418

   Property and equipment, net                                                              5,197,107

   Other assets                                                                             1,333,084
                                                                                         ------------
         Total assets                                                                    $ 10,318,609
                                                                                         ============
LIABILITIES AND STOCKHOLDERS' EQUITY 
   Current liabilities:
      Accounts payable                                                                   $    199,452
      Accrued liabilities                                                                     797,021
      Income taxes payable                                                                    252,110
      Deferred income taxes payable                                                           436,000
      Current maturities of long-term debt                                                    277,833
                                                                                         ------------
         Total current liabilities                                                          1,962,416

   Noncurrent liabilities:
      Long-term debt                                                                          969,392
      Deferred income taxes                                                                   134,000
                                                                                         ------------
         Total noncurrent liabilities                                                       1,103,392

   Commitments and contingencies

   Minority interest                                                                          856,357

   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; 14,235,136 shares
         issued                                                                                14,235
      Additional paid-in capital                                                            3,452,130
      Retained earnings                                                                     2,987,401
      Less treasury stock; 71,335 shares at cost                                              (57,322)
                                                                                         ------------
         Total stockholders' equity                                                         6,396,444
                                                                                         ------------
         Total liabilities and stockholders' equity                                      $ 10,318,609
                                                                                         ============
</TABLE>


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


                                       F-4
<PAGE>   23
                                                      DYNACQ INTERNATIONAL, INC.
                                               Consolidated Statements of Income
                                    For the Years Ended August 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                                      1996             1995
                                                                  ------------     ------------
<S>                                                               <C>              <C>
Revenues, net                                                     $  7,418,710     $  6,904,586
                                                                  ------------     ------------
Costs and expenses:
   Direct costs of infusion therapy revenues                           334,522          425,679
   Compensation and benefits                                         1,328,652        1,130,075
   Contract payments to physicians                                   1,665,102          937,040
   Provision for uncollectible accounts                                781,201          870,318
   Medical supplies                                                    784,056          486,316
   Depreciation and amortization                                       540,623          446,274
   Rent and occupancy                                                  119,568          300,530
   Other general and administrative expenses                         1,103,156          864,136
   Other expenses                                                       12,896          322,297
                                                                  ------------     ------------
      Total costs and expenses                                       6,669,776        5,482,665
                                                                  ------------     ------------
      Income from operations                                           748,934        1,421,921
                                                                  ------------     ------------
Other income (expense):
   Rent and other income                                               119,843          419,771
   Interest income                                                      80,259           65,342
   Interest expense                                                   (137,113)        (162,643)
                                                                  ------------     ------------
      Total other income (expense)                                      62,989          322,470
                                                                  ------------     ------------
      Income before income taxes and minority interest                 811,923        1,744,391
                                                                  ------------     ------------
Provision for income taxes                                             184,500          665,000
                                                                  ------------     ------------
      Net income before minority interest                              627,473        1,079,391
Minority interest in earnings                                          (67,950)        (143,372)
                                                                  ------------     ------------
   Net income                                                     $    559,473     $    936,019
                                                                  ============     ============
Earnings per common share                                         $       0.04     $       0.07
                                                                  ============     ============
Weighted average number of common and common equivalent 
  shares outstanding                                                14,242,658       14,235,136
                                                                  ============     ============

</TABLE>

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


                                       F-5
<PAGE>   24
                                                      DYNACQ INTERNATIONAL, INC.
                      Consolidated Statements of Changes in Stockholders' Equity
                                    For the Years Ended August 31, 1996 and 1995


<TABLE>
<CAPTION>
                                 Common Stock      Treasury 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, 1994    14,235,136    $14,235        --    $     --     $3,332,026    $1,491,909    $ 4,838,170
Net Income                          --         --        --          --             --       936,019        936,019
                            ----------    -------    ------    --------     ----------    ----------    -----------
Balance, August 31, 1995    14,235,136     14,235        --          --      3,332,026     2,427,928      5,774,189
Treasury Stock Acquired             --         --    71,335     (57,322)            --            --        (57,322)
Repurchase of Subsidiary            --         --        --          --        120,104            --        120,104
  Stock
Net Income                          --         --        --          --             --       559,473        559,473
                            ----------    -------    ------    --------     ----------    ----------    -----------
Balance, August 31, 1996    14,235,136    $14,235    71,335    $(57,322)    $3,452,130    $2,987,401    $ 6,396,444
                            ==========    =======    ======    ========     ==========    ==========    ===========
</TABLE>

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


                                       F-6
<PAGE>   25
                                                      DYNACQ INTERNATIONAL, INC.
                                           Consolidated Statements of Cash Flows
                                    For the Years Ended August 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                                       1996            1995
<S>                                                               <C>             <C>
Cash flows from operating activities:
Net income                                                        $   559,473     $   936,019
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
     Depreciation and amortization                                    540,623         446,274
     Deferred income taxes                                           (169,100)        227,705
     Minority interest                                                (52,154)        286,160
     (Increase) in accounts receivable                               (946,410)       (838,484)
     Increase in allowance for doubtful accounts                      657,121         632,264
     (Increase) decrease in inventories and other assets               27,949        (376,754)
     (Increase) decrease in due from affiliate                        480,670        (488,327)
     Increase in accounts payable                                      53,204          35,804
     Increase in accrued liabilities                                  720,387          19,612
     Increase (decrease) in income taxes payable                      (49,039)        301,149
     (Increase) in long-term receivable                              (642,928)             --
                                                                  -----------     -----------
        Net cash provided by operating activities                   1,179,796       1,181,422
                                                                  -----------     -----------
Cash flows from investing activities:
     Repurchase of subsidiary stock                                   120,104              --
     Purchases of property and equipment                             (283,558)     (2,662,135)
     Disposition of property and equipment                                 --         188,724
     Purchases of short-term investments                             (180,000)             --
                                                                  -----------     -----------
        Net cash used in investing activities                        (343,454)     (2,473,411)
                                                                  -----------     -----------
Cash flows from financing activities:
     Proceeds from long-term debt                                          --         125,849
     Principal payments on long-term debt                            (294,013)       (257,359)
     Acquisition of treasury stock                                    (57,322)             --
                                                                  -----------     -----------
        Net cash used in financing activities                        (351,335)       (131,510)
                                                                  -----------     -----------
        Net increase (decrease) in cash and cash equivalents          485,007      (1,423,499)
Cash and cash equivalents at beginning of year                        649,572       2,073,071
                                                                  -----------     -----------
Cash and cash equivalents at end of year                          $ 1,134,579     $   649,572
                                                                  ===========     ===========
Supplemental cash flow disclosures: 
     Cash paid during year for:
        Interest                                                  $   137,113     $   162,643
        Income taxes                                              $   338,000     $    10,968
</TABLE>

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


                                       F-7
<PAGE>   26
                                                      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 surgery facility, the
        operation of a medical office complex, and the management of group
        physician practices.

        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 28, 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 90 million 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 9.9
        million shares to the Company's treasury.

        In February 1993, the Company became the beneficial owner 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.

        In August 1994, the Company consummated the acquisition of approximately
        65% of the outstanding stock of Vista Healthcare, Inc. ("Vista"), which
        operates a clinic and outpatient surgical center in Pasadena, Texas. The
        Company issued 716,370 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 have
        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.

B.      CONSOLIDATED STATEMENTS

        The accompanying financial statements present the consolidated accounts
        of Dynacq International, Inc., a Nevada corporation, its two wholly
        owned subsidiaries, Dynacq (Asia), Limited and Doctors Practice
        Management, Inc., and Vista Healthcare, Inc., a Texas corporation, which
        is approximately 65% owned by the Company. 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-8
<PAGE>   27
                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements


C.      REVENUE RECOGNITION

        The Company recognizes revenue from the performance of medical services
        in the period in which such services are provided. 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 earned. Allowances for doubtful
        accounts are determined by management based upon historical experience
        and an assessment of the circumstances applicable to individual
        accounts.

D.      CASH AND CASH EQUIVALENTS

        The Company considers all highly liquid investments with maturity of
        three months or less as cash equivalents. At August 31, 1996, cash
        equivalents were composed primarily of investments in money market funds
        and certificates of deposits.

E.      RESTRICTED SHORT-TERM INVESTMENTS

        In connection with the Company's Pledge-Security Agreement with a
        financial institution (Note 8), the Company has restricted and pledged
        as collateral $180,000 of its highly liquid interest bearing deposits,
        with a maturity of one year. The short-term investment is being held to
        maturity and its carrying value approximates its current value.

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. 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.
        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.

H.      OTHER NON-CURRENT ASSETS

        Excess costs over net assets acquired from the Vista acquisition are
        amortized on a straight-line basis over a period of 14 years.
        Organization costs are amortized on a straight-line basis over the
        estimated useful lives of such costs of 60 months. Loan origination fees
        are amortized on a straight-line basis over the terms of the related
        debt.

        The Company periodically reviews the value of it excess costs over net
        assets acquired to determine if an impairment has occurred. The Company
        measures the potential impairment of recorded excess costs over net
        assets acquired by the undiscounted value of expected future operating
        cash flows in relation to its net capital investment in the subsidiary.
        Based on its review, the Company does not believe that an impairment of
        its excess costs over net assets acquired has occurred.


                                       F-9
<PAGE>   28
                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements


I.      ADVERTISING COSTS

        The Company expenses advertising costs as incurred. Amounts expended
        during the two years ended August 31, 1996 and 1995, were approximately
        $39,500 and $16,500, respectively.

J.      INCOME TAXES

        The Company utilizes Statement of Financial Accounting Standards No.
        109, Accounting for Income Taxes ("FAS 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 Company's
        principal differences giving rise to deferred income taxes are accounts
        receivable, accounts payable, accrued liabilities, accumulated
        depreciation and net operating loss carryovers. 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.

K.      EARNINGS PER COMMON SHARE

        Earnings per common share is calculated by dividing net income by the
        weighted average number of common and common equivalent shares
        outstanding during each year. Fully diluted earnings per share are not
        presented because such amounts would be the same as amounts computed for
        primary earnings per share.

L.      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.

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 $135,000 cash. As of August 31, 1996, the Company owned
approximately 65% of the outstanding common stock of Vista.


                                      F-10
<PAGE>   29
                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements


NOTE 3.        PROPERTY AND EQUIPMENT

At August 31, 1996, property and equipment consisted of the following:


<TABLE>
<S>                                                     <C>
Land                                                    $  252,589
Buildings and improvements                               4,306,156
Furniture and fixtures                                      75,244
Equipment                                                2,142,154
                                                            24,125
                                                         ---------
                                                         6,800,268
Less, accumulated depreciation                           1,603,161
                                                        ----------
Net property and equipment                              $5,197,107
                                                        ==========
</TABLE>

Vista's existing physical facility is pledged as collateral on a long-term
mortgage to a financing company in the amount of $1,075,366, as of August 31,
1996. In connection with its acquisition of approximately 65% interest in Vista,
the Company has guaranteed 65% of the outstanding balance of this long-term
mortgage. In addition, certain equipment of Vista is pledged to collateralize a
long-term bank loan of $97,774, as of August 31, 1996.

For the years ended August 31, 1996 and 1995, depreciation expense was $519,568
and $419,048, respectively.

NOTE 4.        OTHER NON-CURRENT ASSETS

In connection with the acquisition of Vista, excess costs over net assets
acquired totaling $230,717 was incurred. This amount is being amortized over a
period of fourteen years on a straight-line basis beginning August 25, 1994. For
the years ended August 31, 1996 and 1995, amortization expense was $16,480 for
each period.

NOTE 5.        LONG-TERM DEBT

At August 31, 1996, long-term debt consisted of the following:


<TABLE>
<S>                                                                        <C>
         Note payable to a bank, payable in monthly installments of
         $4,003, including interest at 8.25%, through April 1998,
         collateralized by medical equipment                               $   74,085

         Note payable to a bank, payable in monthly installments of
         $12,391, including interest at the bank's base rate plus 1%
         (10.25% at August 31, 1996), through April 1997,
         collateralized by equipment and guaranteed by certain minority
         stockholders of Vista                                                 97,774

         Note payable to a financing company payable in monthly
         installments of $19,533 including interest at 9.65% through
         September 2002. The note is collateralized by land and is
         guaranteed by certain minority stockholders of Vista               1,075,366
                                                                           ----------
                                                                            1,247,225
         Less, current maturities                                             277,833
                                                                           ----------
                                                                           $  969,392
                                                                           ==========
</TABLE>


                                      F-11
<PAGE>   30
                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements


The aggregate principal payments on long-term debt for each of the five years
and thereafter subsequent to August 31, 1996 are as follows:


<TABLE>
<S>                                               <C>
         Year ended August 31:                    $  277,833
         1998                                        180,920
         1999                                        165,502
         2000                                        182,198
         2001                                        200,579
         Thereafter,                                 240,193
                                                  ----------
                                                  $1,247,225
                                                  ==========
</TABLE>


NOTE 6.        INCOME TAXES

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


<TABLE>
<CAPTION>
                                               1996         1995
                                            ---------     --------
<S>                                         <C>           <C>
         Current tax expense:
                 Federal                    $ 325,800     $427,000
                 State                         27,800           --
                                            ---------     --------
                 Total current                353,600      427,000
                                            ---------     --------
         Deferred tax expense (benefit):
                 Federal                     (169,100)     238,000
                                            ---------     --------
                 Total deferred              (169,100)     238,000
                                            ---------     --------
                 Total                      $ 184,500     $665,000
                                            =========     ========
</TABLE>


Deferred taxes arise primarily due to the Company's filing of its income tax
return on a cash basis and the use of accelerated methods of computing
depreciation for tax purposes. The components of the provision (benefit) for
deferred income taxes, at August 31, were as follows:


<TABLE>
<CAPTION>
Applicable to                                      1996          1995
-------------                                   ---------     ---------
<S>                                             <C>           <C>
Cash basis of accounting for federal income
tax purposes                                    $  31,400     $ 393,700

Difference in methods of computing
depreciation for tax and financial reporting
purposes and other                                 22,900        59,300

Use of reserve for bad debts for financial
reporting and specific charge-off method for
tax reporting                                    (223,400)     (215,000)
                                                ---------     ---------
</TABLE>


                                      F-12
<PAGE>   31
                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements



<TABLE>
<S>                                             <C>           <C>
                                                $(169,100)    $ 238,000
                                                =========     =========
</TABLE>

Significant components of the Company's deferred tax liabilities and assets, at
August 31, 1996, were as follows:


<TABLE>
<CAPTION>
                                                   Current       Noncurrent
                                                 -----------     ----------
<S>                                              <C>             <C>
         Deferred tax liabilities:
              Basis in property and equipment    $        --     $(134,000)
              Receivables                         (1,365,900)           --
         Deferred tax assets:
              Payables and other                     338,800            --
              Reserve for bad debts                  591,100            --
                                                 -----------     ---------
         Net Liability                           $  (436,000)    $(134,000)
                                                 ===========     =========
</TABLE>


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


<TABLE>
<CAPTION>
                                                               1996      1995
                                                              -----      ----
<S>                                                           <C>        <C>
         Provision for income taxes at Federal
         statutory rate                                        34.0%     34.0%
         State tax provision, net of federal benefits           2.9%       --
         Effect of utilization of net operating loss carry
         forward                                              (18.5)       --
         Effect of other differences                            4.3%      4.0%
                                                              -----      ----
         Effective tax rate                                    22.7%     38.0%
                                                              =====      ====
</TABLE>


NOTE 7.        RELATED PARTY TRANSACTIONS

The Company leases to its President his personal residence at a monthly rate of
$1,400. Total rent received for the years ended August 31, 1996 and 1995 was
$16,800 and $16,800, respectively.

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


                                      F-13
<PAGE>   32
                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements


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. For the years ended August 31, 1996 and
1995, total revenues billed to third parties and compensation paid associated
with the Physicians were as follows:


<TABLE>
<CAPTION>
                                                1996          1995
                                             ----------    ----------
<S>                                          <C>           <C>
         Revenues billed to third parties    $2,737,993    $1,225,731
         Compensation to Physicians          $1,665,102    $  554,538
</TABLE>


NOTE 8.        COMMITMENTS AND CONTINGENCIES

In connection with the acquisition of Vista on August 25, 1994, the Company
issued 716,370 shares of its common stock in exchange for approximately 65% of
the outstanding common stock of Vista owned by approximately 30 individual
stockholders and/or related entities. Simultaneous with the closing of this
acquisition, fifteen of the Vista stockholders pledged a total of 415,279 shares
of the Company's stock to a local bank as collateral for individual loans
aggregating $730,000. The proceeds from these loans were contributed to the
capital of Vista.

The Company entered into a Pledge-Security Agreement with the lending bank
whereby the Company has granted the bank a limited security interest in, and has
pledged certain cash funds contained in the Company's account at the bank. The
Company's liability is limited to the shortfall, if any, calculated by taking
the difference between (i) 130% of the dollar amount of the outstanding loan
balance (including principal and interest) attributed to a particular Vista
shareholder and (ii) the value of the Company's shares pledged by that Vista
shareholder, such value to be based upon the quoted value of shares of the
Company's common stock as published by NASDAQ. The dollar amount of the bank's
security interest in funds on deposit will be adjusted upward or downward every
90 days.

Upon default by one of the Vista shareholders in payment on his/her loan, the
bank has the option to exercise a right of offset with respect to the funds on
deposit or proceed to foreclose upon its security interest, but only to the
extent, if any, of a shortfall as described above.

As of November 15, 1996, the value of the Company's stock, as defined above, was
approximately $113,120 less than 130% of the aggregate balance of the loans to
the Vista stockholders. To the best of management's knowledge, all of the
individual loans were current and the bank has not advised the Company that any
of the loans were in default.

Vista is contractually committed to purchase, on an annual basis, a minimum of
$50,000 of X-ray film from a supplier in exchange for the use of related medical
equipment without cost through November 1996. In the event Vista does not
achieve the minimum purchase requirement, a penalty will be assessed. Since
inception, Vista has not met the minimum purchase commitment and is potentially
liable for approximately $20,000 in penalties. Management expects the supplier
to waive these penalties based upon new business opportunities which exist
between Vista and the supplier. Accordingly, no amounts have been accrued in the
accompanying financial statements in connection with penalties which may be
assessed under the contract.


                                      F-14
<PAGE>   33
                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements

The Company leases certain of its facilities and equipment under operating
leases with net aggregate future lease payments of $40,400 at August 31, 1996
payable as follows:

<TABLE>
<S>                                <C>
         Year ending August 31,
         1997                      $12,800
         1998                        7,200
         1999                        7,200
         2000                        7,200
         2001                        6,000
                                   -------
         Totals                    $40,400
                                   =======
</TABLE>

Rent expense related to its facilities and equipment leases, for the years ended
August 31, 1996 and 1995, was $13,584 and $12,384, respectively.

The Company also leases corporate office space under an operating lease on a
month-to-month basis. Rent expense for its corporate leases was $15,432 for each
of the years ended August 31, 1996 and 1995.

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, 1996 and 1995, total physicians' operating lease expenses were
$90,586 and $58,927 respectively.

Total rent expense, including those physicians' operating leases paid by the
Company, for the years ended August 31, 1996, and 1995 was approximately
$119,600 and $109,700, respectively.

NOTE 9.        SUPPLEMENTARY INFORMATION

     At August 31, 1996, the detail of certain balance sheet accounts was as
follows:

<TABLE>
<S>                                                            <C>
         Accounts Receivable:
              Trade                                            $4,118,624
              Other                                                33,969
                                                               ----------
                                                                4,152,593
         Less, allowance for doubtful accounts                  1,739,221
                                                               ----------
                                                               $2,413,372
                                                               ==========
         Other assets:
              Excess costs over net assets acquired, net of
                accumulated amortization of $33,231            $  197,486
              Receivables                                       1,014,664
              Other                                               120,934
                                                               ----------
                                                               $1,333,084
                                                               ==========
         Accrued Liabilities:
              Advalorem taxes                                     106,697
              Compensation to Physicians                          667,429
              Other                                                22,895
                                                               ----------
                                                               $  797,021
                                                               ==========
</TABLE>


                                      F-15
<PAGE>   34
                                                      DYNACQ INTERNATIONAL, INC.
                                      Notes to Consolidated Financial Statements


NOTE 10.       CAPITAL STOCK

During fiscal 1996, the Company repurchased 71,335 shares of its common stock
for approximately $57,300. Additionally, during fiscal 1996, the Company's
approximately 65% owned subsidiary, Vista, repurchased 11,807 shares of its
common stock for approximately $135,000.


STOCK OPTIONS

Effective August 1, 1995, the Board of Directors approved and issued 1,000,000
shares of its common stock for 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 in the Company's common stock to consultants and
non-employee directors of the Company and its subsidiaries at no less than the
fair market value of the stock at the date of grant. Under the Plan, the options
become exercisable no earlier than six (6) months from date of grant and expire
on the date of the consultants termination or the non-employee directors'
resignation. As of August 31, 1996, the Company granted 175,000 options, all of
which are exercisable, at exercise prices per share ranging from $1.250 to
$1.625.

Effective August 31, 1995, the Company's shareholders approved a 1995 Incentive
Stock Option Plan. The 1995 Incentive Stock Option Plan reserves 1,000,000
shares of the Company's common stock for option grants to key employees at no
less than the fair market value of the stock at the date of grant. Under the
Plan, the options generally become exercisable cumulatively, beginning one year
after the date granted. As of August 31, 1996, the Company reserved 275,527
shares for option grants at an exercise price of $0.94. The share options
outstanding become exercisable in fiscal 1997 and expire through fiscal 2001.

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
continually monitors this situation and believes that its credit risk exposure
on its trade accounts receivable is limited. 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 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, 1996, approximates their fair value.


                                      F-16
<PAGE>   35
                                INDEX TO EXHIBITS

      All Exhibits listed below are included herewith unless otherwise noted by
      an asterisk next to the Exhibit No.

(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.)*     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.

(10.3.)     Security Agreement dated July 18, 1996, between Vista and Capital
            Bank.

(10.4.)     1995 Incentive Stock Option Plan for Employees and Employee
            Directors

(10.5.)     1995 Non-Qualified Stock Option Plan for Consultants and
            Non-Employee Directors

(10.6.)     1995 Stock Option Agreement between the Company and Philip S. Chan


                                       E-1
<PAGE>   36
(10.7.)     Full Service Management Agreement between Doctors Practice
            Management, Inc. ("DPMI") and Mohammed M. Haq, M.D. dated March 1,
            1996.

(10.8.)     Full Service Facility and Management Agreement effective July 1,
            1996, between Houston Physical Medicine Associates, M.D., P.A. and
            DPMI.

(10.9.)     Full Service Facility and Management Agreement between DPMI and
            Medical Diagnostic Imaging Center dated May 1, 1996.

(10.10.)    Full Service Facility and Management Agreement between DPMI and R.S.
            Arora, M.D. dated May 1, 1996.

(10.11.)    Full Service Facility and Management Agreement between DPMI and JCW
            Medical Associates, P.A. dated May 1, 1996.

(10.12.)    Full Service Management Agreement between DPMI and Ping S. Chu,
            M.D., dated March 1, 1996.

(10.13.)    Full Service Management Agreement effective May 1, 1996, between
            DPMI and William E. Grose, M.D., P.A.

(10.14.)    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.

(10.15.)    Security Agreement dated May 1, 1996, by JCW Medical Associates,
            P.A. to DPMI.

(10.16.)    Credit Agreement dated May 1, 1996, between JCW Medical Associates,
            P.A. and DPMI.

(10.17.)    Revolving Credit Note from JCW Medical Associates, P.A. to DPMI
            dated April 1, 1996 for $675,000.

(10.18.)    Credit Agreement dated April 1, 1996, between R.S. Arora, M.D., as
            Borrower, to DPMI as Lender, for advances up to $100,000.

(10.19.)    Security Agreement dated April 1, 1996, by R.S. Arora M.D. as
            Grantor to DPMI as Lender.

(10.20.)    Revolving Credit Note dated April 1, 1996, in the principal amount
            of $100,000 from R.S. Arora, M.D. to DPMI.

(10.21.)    Promissory Note and Security Agreement from the Company to Capital
            Bank dated April 4, 1995.

(10.22.)    $100,000 Revolving Credit Note dated July 1, 1996, from Houston
            Physical Medicine Associates, M.D., P.A. to DPMI


                                       E-2
<PAGE>   37
(10.23.)    Credit Agreement dated July 1, 1996, between Houston Physical
            Medicine Associates, M.D., P.A. and DPMI

(10.24.)    Full Service Management Agreement dated January 1, 1996, between
            Vista and DPMI

(22.1.)*    Listing of subsidiaries of the Company which was previously filed in
            and is incorporated herein by this reference to the Company's
            Amended Annual Report on Form 10-K for the fiscal year ended August
            31, 1995, No. 0-020554.

(27)        Financial Data Schedule


                                       E-3