10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 30, 2008

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

For the transition period from              to             

Commission File Number: 000-21574

DYNACQ HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

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

10304 Interstate 10 East, Suite 369 Houston, Texas	77029
(Address of principal executive offices)	(Zip Code)

(713) 378-2000

(Registrant’s telephone number, including area code)

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

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

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

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

As of January 7, 2009, the number of shares outstanding of the registrant’s common stock, par value $.001 per share, was 15,547,507.

Table of Contents

		Page
Report of Independent Registered Public Accounting Firm.		3
PART I - FINANCIAL INFORMATION		4
Item 1.	Financial Statements.	4
	Consolidated Balance Sheets as of November 30, 2008 and August 31, 2008.	4
	Consolidated Statements of Operations for the three months ended November 30, 2008 and 2007.	6
	Consolidated Statements of Cash Flows for the three months ended November 30, 2008 and 2007.	7
	Notes to Consolidated Financial Statements.	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	20
Item 4T.	Controls and Procedures.	20
PART II - OTHER INFORMATION		21
Item 1.	Legal Proceedings.	21
Item 1A.	Risk Factors.	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	21
Item 3.	Defaults Upon Senior Securities.	21
Item 4.	Submission of Matters to a Vote of Security Holders.	21
Item 5.	Other Information.	21
Item 6.	Exhibits.	21
Signatures		22
Index of Exhibits		23

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To: The Stockholders and Board of Directors

Dynacq Healthcare, Inc.

Houston, Texas

We have reviewed the accompanying consolidated balance sheet of Dynacq Healthcare, Inc., as of November 30, 2008, and the related consolidated statements of operations and cash flows for the three-month periods ended November 30, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.

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

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

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

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

Killman, Murrell & Company, P.C.

Houston, Texas

January 9, 2009

3

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

Dynacq Healthcare, Inc.

Consolidated Balance Sheets

	November 30, 2008		August 31, 2008
	(Reviewed)		(Audited)
Assets
Current assets:
Cash and cash equivalents	$	38,371,316	$	45,099,800
Investments		3,628,000		—
Accounts receivable, net of contractual allowances of approximately $235,153,000 and $226,355,000 at November 30, 2008 and August 31, 2008, respectively		11,048,714		18,018,673
Inventories		1,280,712		1,469,775
Prepaid expenses		546,884		475,251
Deferred tax assets		813,844		859,255
Income taxes receivable		4,058,819		868,249
Total current assets		59,748,289		66,791,003
Property and equipment, net		15,329,865		15,228,887
Other assets		263,918		228,672
Total assets	$	75,342,072	$	82,248,562

See accompanying notes.

4

Dynacq Healthcare, Inc.

Consolidated Balance Sheets (continued)

	November 30, 2008			August 31, 2008
	(Reviewed)			(Audited)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,494,154		$	3,816,585
Accrued liabilities		4,031,858			5,887,353
Notes payable		487,509			480,269
Current portion of capital lease obligations		58,143			16,534
Current taxes payable		194,119			4,417,334
Total current liabilities		8,265,783			14,618,075
Non-current liabilities:
Long-term portion of note payable		126,505			251,131
Long-term portion of capital lease obligations		400,492			11,673
Deferred tax liabilities		230,574			355,808
Total liabilities		9,023,354			15,236,687
Minority interests		83,572			84,926
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued or outstanding		—			—
Common stock, $.001 par value; 100,000,000 shares authorized, 16,010,924 shares issued at November 30, 2008 and at August 31, 2008		16,011			16,011
Treasury stock, 455,193 shares at November 30, 2008 and at August 31, 2008, at cost		(2,309,898	)		(2,309,898	)
Additional paid-in capital		15,140,401			15,023,927
Accumulated other comprehensive income		395,546			561,271
Retained earnings		52,993,086			53,635,638
Total stockholders’ equity		66,235,146			66,926,949
Total liabilities and stockholders’ equity	$	75,342,072		$	82,248,562

See accompanying notes.

5

Dynacq Healthcare, Inc.

Consolidated Statements of Operations

(Reviewed)

	Three months ended November 30,
	2008			2007
Net patient service revenue	$	10,879,238		$	13,842,318
Costs and expenses:
Compensation and benefits		3,681,540			3,356,310
Medical services and supplies		3,289,820			2,716,391
Other operating expenses		4,635,546			3,701,409
Depreciation and amortization		394,224			536,795
Total costs and expenses		12,001,130			10,310,905
Operating income (loss)		(1,121,892	)		3,531,413
Other income:
Rent and other income		71,678			126,394
Interest income		155,841			7,064
Interest expense		(10,997	)		(72,194	)
Total other income, net		216,522			61,264
Income (loss) before income taxes and minority interests		(905,370	)		3,592,677
Minority interest in loss (earnings)		1,354			(35,363	)
Income (loss) before income taxes		(904,016	)		3,557,314
Benefit (provision) for income taxes		261,464			(1,377,428	)
Income (loss) from continuing operations		(642,552	)		2,179,886
Income from discontinued operations, net of income taxes		—			253,944
Net income (loss)	$	(642,552	)	$	2,433,830
Basic earnings (loss) per common share:
Income (loss) from continuing operations	$	(0.04	)	$	0.14
Income (loss) from discontinued operations, net of income taxes		—			0.01
Net income (loss)	$	(0.04	)	$	0.15
Diluted earnings (loss) per common share:
Income (loss) from continuing operations	$	(0.04	)	$	0.13
Income (loss) from discontinued operations, net of income taxes		—			0.01
Net income (loss)	$	(0.04	)	$	0.14
Basic average common shares outstanding		15,555,731			15,871,807
Diluted average common shares outstanding		15,555,731			16,674,017

See accompanying notes.

6

Dynacq Healthcare, Inc.

Consolidated Statements of Cash Flows

(Reviewed)

	Three months ended November 30,
	2008			2007
Cash flows from operating activities
Net income (loss)	$	(642,552	)	$	2,433,830
Less income from discontinued operations, net of income taxes		—			(253,944	)
Net income (loss) before discontinued operations		(642,552	)		2,179,886
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		394,224			536,795
Gain on sale of assets		—			(28,455	)
Deferred income taxes		9,377			447,404
Minority interests		(1,354	)		35,363
Charge for stock options to employees		116,474			124,425
Income tax benefit for employees’ exercise of incentive stock options		—			46,300
Changes in operating assets and liabilities:
Accounts receivable		6,969,959			(1,528,979	)
Inventories		189,063			(152,564	)
Prepaid expenses		(71,633	)		112,100
Income taxes receivable		(3,190,570	)		26,069
Other assets		(35,246	)		30,701
Accounts payable		(322,431	)		(443,788	)
Accrued liabilities		(1,855,495	)		76,574
Income taxes payable		(4,223,215	)		640,666
Cash provided by (used in) continuing activities		(2,663,399	)		2,102,497
Cash provided by discontinued activities		—			253,944
Net cash provided by (used in) operating activities		(2,663,399	)		2,356,441
Cash flows from investing activities
Purchase of property and equipment		(59,787	)		(107,486	)
Investment available-for-sale securities		(3,906,000	)		—
Proceeds from sale of assets		—			1,788,317
Cash provided by (used in) continuing activities		(3,965,787	)		1,680,831
Cash used in discontinued activities		—			(23,414	)
Net cash provided by (used in) investing activities		(3,965,787	)		1,657,417
Cash flows from financing activities
Principal payments on notes payable		(117,386	)		(2,337,604	)
Purchase of minority interest		—			(62,525	)
Payments on capital lease		(5,070	)		(2,341	)
Proceeds from exercise of stock options		—			267,050
Net cash used in financing activities		(122,456	)		(2,135,420	)
Effect of exchange rate changes on cash		23,158			5,912
Net increase (decrease) in cash and cash equivalents		(6,728,484	)		1,884,350
Cash at beginning of period		45,099,800			5,436,787
Cash at end of period	$	38,371,316		$	7,321,137

Continued.

7

Supplemental cash flow disclosures
Cash paid during the period for:
Interest	$	9,959		$	117,999
Income taxes	$	7,142,944		$	400,000
Non cash investing and financing activities:
Equipment from capital lease	$	(435,498	)	$	—
Capital lease obligation		435,498			—
Decrease in value of investment in bonds		(278,000	)		—
Accumulated other comprehensive income		278,000			—
Land cost from foreign currency gains		—			(83,656	)
Foreign currency gains		—			83,656

See accompanying notes.

8

Dynacq Healthcare, Inc.

Notes to Consolidated Financial Statements

November 30, 2008

(reviewed)

Basis of Presentation

The accompanying reviewed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal and recurring nature. The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as general and administrative by the Company would include the corporate office costs, including advertising and marketing expenses, which were approximately $2.7 million and $1.5 million for the quarters ended November 30, 2008 and 2007, respectively. These reviewed financial statements should be read in conjunction with the audited financial statements at August 31, 2008. Operating results for the quarter ended November 30, 2008 are not necessarily indicative of the results that may be expected for the year ending August 31, 2009.

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

Cash and Cash Equivalents

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

Investments

The Company accounts for its investments, which are available-for-sale securities, under the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Securities.” These investments are subject to default risk.

During the quarter ended November 30, 2008, the Company purchased $6,000,000 in principal amount of 7.0% Noncumulative Trust Preferred Securities of CA Preferred Funding Trust for $3,906,000. The Trust Preferred Securities are perpetual securities. This investment is classified as available-for-sale securities, and is carried at fair value of $3,628,000 as of November 30, 2008, based on the latest quoted market prices. Unrealized depreciation in the fair value of $180,700 is reported in accumulated other comprehensive income, which is net of related income tax effect of $97,300. The Company monitors its investment portfolio for any decline in fair value that is other than temporary and records any such impairment as an impairment loss.

Inventories

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

General

As of November 30, 2008, the Company operated one facility each in the Houston metropolitan area (Pasadena facility) and in the Dallas-Fort Worth area (Garland facility) and owned 100% of the equity interest in Dynacq Huai Bei Healthcare, Inc. (“Dynacq-Huai Bei”), a Chinese corporation formed to provide healthcare management services in China.

9

Use of Estimates

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

Net Income (Loss) per Share

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

	Three months ended November 30,
	2008	2007
Number of weighted average common shares outstanding	15,555,731	15,871,807
Assumed exercise of stock options	—	802,210
Average diluted shares outstanding	15,555,731	16,674,017

Basic net income (loss) per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income (loss) per share, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. However, if it is anti-dilutive, the dilutive effect of the stock options is not included in the calculation of diluted net income (loss) per share. Stock options with exercise prices exceeding current market prices that were excluded from the computation of net income (loss) per share amounted to approximately 630,000 shares and 272,000 shares for the quarters ended November 30, 2008 and 2007, respectively.

Stock Based Compensation

The Company’s 2000 Incentive Plan (the “Plan”) provides for options and other stock-based awards that may be granted to eligible employees, officers, consultants and non-employee directors of the Company or its subsidiaries. The Company had reserved 5,000,000 shares of common stock for future issuance under the Plan. As of November 30, 2008, there remain 1,360,979 shares which can be issued under the Plan, after giving effect to stock splits and shares issued under the Plan. The Plan permits stock awards, stock appreciation rights, performance units, and other stock-based awards, all of which may or may not be subject to the achievement of one or more performance objectives.

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

The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”). The Committee has the power to determine which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price of stock options (which may not be less than market value on the date of grant), the number of shares, and all of the terms of the awards. The Company may at any time amend or terminate the Plan. However, no amendment that would impair the rights of any participant with respect to outstanding grants can be made without the participant’s prior consent. Stockholder approval of an amendment to the Plan is necessary only when required by applicable law or stock exchange rules.

10

For the quarter ended November 30, 2008, there were no equity-based compensation awards granted. Generally, options granted become exercisable in annual installments of 25 percent beginning on the first anniversary date, and expire after five to ten years. The following table summarizes the stock option activities for the quarter ended November 30, 2008 (share amounts in thousands):

	Shares		Weighted Average Option Exercise Price Per Share		Weighted Average Grant Date Fair Value Per Share	Aggregate Intrinsic Value(1)
Outstanding, August 31, 2008	1,571		$	3.52	—	$	2,139,450
Granted	—			—	—		—
Exercised	—			—	—		—
Expired or canceled	(141	)		4.42	—		—
Outstanding, November 30, 2008	1,430		$	3.43	—	$	82,968

⁽¹⁾ These amounts represent the difference between the exercise price and $2.61, the closing price of Dynacq common stock on November 30, 2008 as reported on the NASDAQ stock market, for all in-the-money options outstanding. For exercised options, intrinsic value represents the difference between the exercise price and the closing price of Dynacq common stock on the date of exercise.

For the quarter ended November 30, 2008 and 2007, the Company received $-0- and $267,050, respectively, for stock options exercised. Total tax benefit realized for the tax deductions from stock options exercised was $-0- and $46,300 for the quarter ended November 30, 2008 and 2007, respectively.

The following summarizes information related to stock options outstanding at November 30, 2008, and related weighted average price and life information:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
	(Share Amounts In Thousands)
$ 2.50 – 2.75	854	4.6	$	2.53	189	$	2.53
$ 4.44 – 5.10	576	4.5		4.78	476		4.71
Total	1,430	4.6	$	3.43	665	$	4.09

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

Additional information relating to the Plan at November 30, 2008 and August 31, 2008 is as follows (in thousands):

	November 30, 2008	August 31, 2008
Options exercisable	665	838
Options available for grant and reserved common stock shares for stock option plans	1,361	1,220

For the quarter ended November 30, 2008 and 2007, stock-based compensation expense associated with the Company’s stock options was $116,474 and $124,425, respectively. The total unrecognized compensation expense for outstanding stock options as of November 30, 2008 was $1.3 million, and will be recognized, in general, over 3.1 years. The weighted average number of years to recognize the compensation expense is 1.6 years.

11

Subsequent to the fiscal quarter ended November 30, 2008, the Company has repurchased 8,224 shares at an average cost of $3.21 per share.

Revenue Recognition

Background

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

Revenue Recognition Policy

The Company has established billing rates for its medical services which it bills as gross revenue as services are delivered. Gross billed revenues are then reduced by the Company’s estimate of the discount (contractual allowance) to arrive at net patient service revenues. Net patient service revenues are based on historical cash collections as discussed below and may not represent amounts ultimately collected. At such time as the Company can determine that ultimate collections have exceeded or have been less than the revenue recorded on a group of accounts, additional revenue or reduction in revenue is recorded as a change in estimate during the current period. The Company does adjust current period revenue for actual differences in estimated revenue recorded in prior periods and actual cash collections. As the Company is able to identify specific closed blocks of business, the Company compares the actual cash collections on gross billed charges to the estimated collections that were recorded in revenue. The Company records additional revenue or a reduction in revenue in the current period equal to the difference in the estimate recorded and the actual cash collected.

The Company has recorded additional revenue of $682,000 during the quarter ended November 30, 2007 related to amounts collected on accounts receivable, which were fully reserved, with dates of service prior to May 1, 2002.

Contractual Allowance

Starting March 1, 2008, the Company computes its contractual allowance based on the estimated collections on its gross billed charges. The Company computes its estimate by taking into account collections received for the services performed and also estimating amounts collectible within the next six months. Prior to March 1, 2008, the contractual allowance was calculated based on the ratio of the Company’s historical cash collections during the trailing twelve months on a case-by-case basis by operating facility. This ratio of cash collections to billed services was then applied to the gross billed services by operating facility. The following table shows gross revenues and contractual allowances for the three months ended November 30, 2008 and 2007:

	2008			2007
Gross billed charges	$	38,420,463		$	30,031,187
Contractual allowance		27,541,225			16,188,869
Net revenue	$	10,879,238		$	13,842,318
Contractual allowance percentage		72	%		54	%

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

12

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

Based on these new Guidelines, the reimbursement due the Company for workers’ compensation cases is lower than we previously experienced. The Company has continued accepting Texas workers’ compensation cases, and has not made any substantial changes in its focus towards such cases. Our net patient service revenue for Texas workers’ compensation cases as a percentage of gross billings has decreased primarily as a result of lower reimbursement rates for workers’ compensation procedures still being performed.

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

Through November 2008, insurance carriers have voluntarily paid the awards in the decisions and orders issued by SOAH, plus interest, in approximately 180 cases, involving approximately $11 million. In most of these cases, the carriers have requested refunds of the payments made in the event that the SOAH decisions and orders are reversed on appeal. We believe the likelihood that the Company will be obligated to refund the payments is remote. Our request that the TDWC Commissioner enforce the awards which have not been voluntarily paid by the carriers has been refused in approximately 130 cases.

Claims regarding payment for hospital outpatient services remain pending at the TDWC. It is expected that these claims will be adjudicated at SOAH and ultimately in the Texas district and appellate courts. The basis for reimbursement for these services made the subject of these pending cases is the determination of “fair and reasonable” charges. In 2007, we received unfavorable rulings from SOAH in all of our appeals of unfavorable decisions related to services provided in 2001 and 2002. The 179 cases which have been appealed to the Travis County district courts challenge the constitutionality of the relevant statutory language. A lead case has been selected and is scheduled to be heard in March 2009. Although we would appeal any negative ruling handed down in this lead case, such ruling will impact cases in which a fee guideline was not applicable, specifically all pending cases involving ambulatory surgical services provided in 2001 and 2002 as well as all pending cases involving hospital outpatient services provided prior to March 1, 2008. Successful collection of material amounts in these cases is unlikely.

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

13

Due to the uncertainties regarding the accounts receivable in the MDR process, the recent Third Court of Appeals’ opinion and our legal counsel’s advice that settlements with insurance carriers have virtually stopped, the Company has fully reserved all accounts receivable related to the MDR process as of August 31, 2008 and November 30, 2008. Any monies collected for these MDR accounts receivable will be recorded as current period’s net patient service revenues.

Accounts Receivable

Accounts receivable represent net receivables for services provided by the Company. Due to reasons discussed above for writing down all MDR accounts receivable, the Company does not have any long term receivables since August 31, 2008, and expects to collect the net receivables within twelve months from the end of the current period. At each balance sheet date management reviews the accounts receivable for collectibility.

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

Discontinued Operations

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

Net patient service revenue	$	3,576,591
Costs and expenses		(3,166,721	)
Other income		1,898
Income before income taxes		411,768
Provision for income taxes		(157,824	)
Income from discontinued operations, net of income taxes	$	253,944

Minority Interests

The equity of minority investors (minority investors are generally physician groups and other healthcare providers that perform surgeries at the Company’s facilities) in certain subsidiaries of the Company is reported on the consolidated balance sheets as minority interests. Minority interests reported in the consolidated income statements reflect the respective interests in the income or loss of the limited partnerships or limited liability companies attributable to the minority investors (equity interest was 0.1% at November 30, 2008 at the Pasadena facility).

Comprehensive Income (Loss)

Comprehensive income (loss) for the three months ended November 30, 2008 and 2007 is as follows:

	2008			2007
Net income (loss)	$	(642,552	)	$	2,433,830
Foreign currency translation adjustment, net of taxes of $8,100 and $35,050, respectively		14,975			57,369
Change in valuation of investment available-for-sale, net of taxes of $(97,300) and $-0-, respectively		(180,700	)		—
Comprehensive income (loss)	$	(808,277	)	$	2,491,199

14

Contingencies

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

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

Industry Segments and Geographic Information

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

U.S. Division

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

China Division

Our China Division is set up to provide healthcare management services in China. In the fiscal quarter ended November 30, 2008 and 2007, there have been no revenues in China.

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

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

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

15

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

	Three Months Ended November 30,
	2008			2007
Revenues from external customers
Net patient service revenues
U.S. Division	$	10,879,238		$	13,842,318
China Division		—			—
Consolidated	$	10,879,238		$	13,842,318
Income (loss) before taxes and discontinued operations
U.S. Division	$	(438,867	)	$	3,919,590
China Division		(465,149	)		(362,276	)
Consolidated	$	(904,016	)	$	3,557,314
	November 30,
	2008			2007
Total Assets
U.S. Division	$	42,800,667		$	75,484,447
China Division		32,541,405			4,683,698
Consolidated	$	75,342,072		$	80,168,145

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Update on Critical Accounting Policies and Estimates

There have been no changes to the critical accounting policies used in our reporting of results of operations and financial position for the quarter ended November 30, 2008. For a discussion of our critical accounting policies see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended August 31, 2008.

16

Results of Operations

	Three months ended November 30,
	2008			Percentage		2007			Percentage
Net patient service revenue	$	10,879,238		100	%	$	13,842,318		100	%
Costs and expenses:
Compensation and benefits		3,681,540		34			3,356,310		24
Medical services and supplies		3,289,820		30			2,716,391		20
Other operating expenses		4,635,546		43			3,701,409		27
Depreciation and amortization		394,224		4			536,795		4
Total costs and expenses		12,001,130		110			10,310,905		74
Operating income (loss)		(1,121,892	)	(10	)		3,531,413		26
Other income, net		216,522		2			61,264		—
Minority interest in loss (earnings)		1,354		—			(35,363	)	—
Income (loss) before income taxes		(904,016	)	(8	)		3,557,314		26
Benefit (provision) for income taxes		261,464		2			(1,377,428	)	(10	)
Income (loss) from continuing operations		(642,552	)	(6	)		2,179,886		16
Income from discontinued operations, net of income taxes		—		—			253,944		2
Net income (loss)	$	(642,552	)	(6	)%	$	2,433,830		18	%
Operational statistics (Number of medical procedures):
Inpatient:
Bariatrics		157					157
Orthopedics		61					66
Other		44					35
Total inpatient procedures		262					258
Outpatient:
Orthopedics		175					102
Other		371					354
Total outpatient procedures		546					456
Total procedures		808					714

Three Months Ended November 30, 2008 Compared to the Three Months Ended November 30, 2007

Since the China Division has had no revenues during the quarters ended November 30, 2008 and 2007, all net patient service revenue of the Company for these periods is from the U.S. Division. The China Division incurred costs and expenses during these periods, which are discussed below.

Net patient service revenue decreased by $2,963,080, or 21%, from $13,842,318 to $10,879,238, and total surgical cases increased by 13% from 714 cases to 808 cases for the quarters ended November 30, 2007 and 2008, respectively. Even though the number of cases and the gross billed charges increased by 13% and 28%, respectively, the decrease in net patient service revenue is due to an increase in the contractual allowance as a percentage of gross billed charges. The contractual allowance increased from 54% for the quarter ended November 30, 2007 to 72% of gross billed charges for the quarter ended November 30, 2008, due to lower reimbursements, primarily on workers’ compensation cases. Gross billed charges and net patient service revenues were also negatively impacted by Hurricane Ike in the month of September 2008 for our Pasadena Facility, which was not in full operations for about three weeks. Following are the percentage changes in net patient service revenues and number of cases at the hospital facilities:

	Percentage increase/(decrease) from 2007 to 2008
Facility	Net patient service revenue		Cases
Pasadena	(40	)%	9	%
Garland	(10	)	16
Overall	(21	)	13

The increase in the number of cases is primarily in outpatient cases, which typically have lower average reimbursement per case compared to inpatient cases.

17

According to the Company’s revenue recognition policy, the Company has recorded additional revenue of $682,000 during the quarter ended November 30, 2007 related to amounts collected on accounts receivable, which were fully reserved, with dates of service prior to May 1, 2002.

In compliance with this revenue recognition policy, the Company’s contractual allowance as a percentage of gross patient revenue increased from 54% in 2007 to 72% in 2008.

Total costs and expenses increased by $1,690,225, or 16%, from $10,310,905 in 2007 to $12,001,130 in 2008. The following discusses the various changes in costs and expenses:

• Compensation and benefits increased by $325,230, or 10%, primarily due to an increase in number of cases. Compensation and benefits for the U.S. Division increased by $287,730 and the increase for the China Division was $37,500.

• Medical services and supplies expenses increased by $573,429, or 21%, while the number of surgery cases increased 13%. Medical services and supplies expenses as a percentage of gross billed charges is consistent at 9% for both the quarters ended November 30, 2008 and 2007.

Since the China Division had no revenues for the quarters ended November 30, 2008 and 2007, it did not have any medical service and supplies expenses.

• Other operating expenses increased by $934,137, or 25%.

U.S. Division

Other operating expenses for the U.S. Division increased by $786,838, or 23%, from $3,356,931 in 2007 to $4,143,769 in 2008. The increase is primarily due to marketing expenses. Other operating expenses as a percentage of gross billed charges is consistent at 11% for both the quarters ended November 30, 2008 and 2007.

China Division

Other operating expenses for the China Division increased by $147,299, or 43%, from $344,478 in 2007 to $491,777 in 2008. In 2007, development costs were incurred for the construction of a hospital in Shanghai. However, in 2008, the Company sold its interest in the property owned by that joint venture.

The increase in other operating expenses in 2008 is primarily for growth and development of the China Division. The Company has entered into a management agreement with the Rui An City Department of Health to oversee the construction of the Rui An Hospital in Rui An, China, and then manage that hospital upon its completion in October 2009. Sino Bond has entered into a marketing agreement to market the services of Dynacq in China and Southeast Asia. Dynacq is seeking to expand its operations into China to achieve geographic diversity and take advantage of a high growth market in the provision of healthcare services in that country. The management arrangement will allow Dynacq to minimize its expenditure of capital to purchase assets, but still have the potential for an attractive return in its efficient management of the hospital facility.

The income from discontinued operations in 2007 represents the income at our Baton Rouge Facility, which was sold in December 2007.

Liquidity and Capital Resources

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

Cash flow from operating activities

Total cash flow used in operating activities was $2,663,399 during the period ended November 30, 2008, primarily due to a net loss of $642,552, decreases in accounts payable and accrued liabilities of $2,177,926, payment of income taxes of $7,142,944, partially offset by decreases in accounts receivable of $6,969,959 and depreciation and amortization of $394,224.

18

Cash flow from investing activities

Total cash flow used in investing activities was $3,965,787 primarily due to investment in securities of $3,906,000.

Cash flow from financing activities

Total cash flow used in financing activities was $122,456 primarily related to payments on the note payable for class action lawsuit settlement.

The Company had working capital of $51,482,506 as of November 30, 2008, and maintained a liquid position by a current ratio of approximately 7.23 to 1.

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

Recent Accounting Pronouncements

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

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

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

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

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (“GAAP”). As a result of SFAS 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. The Company’s adoption of SFAS 157 in the first quarter of fiscal year 2009 did not have a material impact on its consolidated financial statements.

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4T. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation to assess the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15(e). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of August 31, 2008, our internal disclosure controls and procedures were effective. However, issues related to the problem with disclosure controls and procedures reported in our Form 10-K for the fiscal year ended August 31, 2008 have been identified in the first quarter of this fiscal year which, if not addressed promptly, may indicate a material weakness in disclosure controls and procedures for the fiscal year ended August 31, 2009. Those issues were (i) an agreement was entered into by Dynacq-Huai Bei with an entity in China without prior Board approval and was not translated into English and provided to the chief financial officer in a timely manner for evaluation of its materiality for purposes of disclosure on Form 8-K, and (ii) documentation for an investment made in November 2008 was not received by the Company’s chief accounting officer prior to the end of the fiscal quarter in order for a timely accounting of it to be made.

The Disclosure Committee of the Board of Directors of the Company has addressed the first issue by requesting that the chief executive officer provide more regular and timely information regarding the progress of the business of Dynacq-Huai Bei and that the Board of Directors have the opportunity to review and approve all definitive agreements into which Dynacq-Huai Bei enters. The executive officers of the Company have agreed to comply with those requests of the Disclosure Committee and to provide all documentation relating to investments in China and English translations of all agreements entered into by Dynacq-Huai Bei, promptly to the appropriate Company officers.

Changes in Internal Controls over Financial Reporting

A change was made in our internal controls over financial reporting during the most recently completed fiscal quarter to respond to the material weakness in internal controls identified in our Form 10-K for the fiscal year ended August 31, 2008. That weakness was that the Company created a new entity in China during the first fiscal quarter of 2008 and had activity in its cash accounts early in the second fiscal quarter of 2008 but lacked general ledgers for its China operations. In the most recently completed fiscal quarter, the Company has prepared general ledgers for its three separate China entities. However, the executive officers determined that further changes in internal controls over financial reporting need to be made in light of the failure to receive on a timely basis the documentation relating to investments in China and the agreements entered into by Dynacq-Huai Bei described above.

The chief executive officer and chief financial officer have evaluated these deficiencies in internal controls and determined to implement the following course of action to address the problems and avoid the determination of a material weakness in internal controls over financial reporting for fiscal 2009: (i) the chief executive officer would provide more regular and timely reports to the financial and accounting officers regarding his activities on behalf of Dynacq-Huai Bei in China; (ii) the chief financial officer would travel to China more frequently to educate the officers of Dynacq-Huai Bei regarding the importance of financial reporting and disclosure controls and their responsibilities for financial disclosure; and (iii) a new assistant would be hired in the offices of Dynacq-Huai Bei to dedicate more time and effort to financial reporting to the parent company.

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

20

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

21

SIGNATURES

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

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

22

INDEX OF EXHIBITS

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

23

EX-15.1

Exhibit 15.1

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

AWARENESS LETTER

Securities and Exchange Commission

Washington, D.C. 20549

We are aware that our report dated January 9, 2009 on our review of the interim consolidated financial statements of Dynacq Healthcare, Inc. as of and for the three month periods ended November 30, 2008 and 2007 and included in this Form 10-Q for the quarter ended November 30, 2008 is incorporated by reference in the Company’s Registration Statement No. 333-72756. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered as part of the Registration Statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act.

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

Killman, Murrell & Company, P.C.

Houston, Texas

January 14, 2009

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation of our review report dated January 9, 2009 with respect to the consolidated financial statements of Dynacq Healthcare, Inc. included in the Quarterly Report (Form 10-Q) for the quarter ended November 30, 2008.

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

Killman, Murrell & Company, P.C.

Houston, Texas

January 14, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Chiu M. Chan, Chief Executive Officer of Dynacq Healthcare, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ending November 30, 2008 of Dynacq Healthcare, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Chiu M. Chan

Chiu M. Chan

Chief Executive Officer

(principal executive officer)

Date: January 14, 2009

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Philip S. Chan, Chief Financial Officer of Dynacq Healthcare, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ending November 30, 2008 of Dynacq Healthcare, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Philip S. Chan

Philip S. Chan

Chief Financial Officer

(principal financial and accounting officer)

Date: January 14, 2009

EX-32.1

Exhibit 32.1

CERTIFICATION OF PERIODIC REPORT

In connection with the Quarterly Report of Dynacq Healthcare, Inc. (the “Company”) on Form 10-Q for the quarterly period ended November 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Chiu M. Chan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

January 14, 2009

/s/ Chiu M. Chan

Chiu M. Chan

Chief Executive Officer

This certification is made solely pursuant to the requirement of Section 1350 of 18 U.S.C., and is not for any other purpose.

EX-32.2

Exhibit 32.2

CERTIFICATION OF PERIODIC REPORT

In connection with the Quarterly Report of Dynacq Healthcare, Inc. (the “Company”) on Form 10-Q for the quarterly period ended November 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip S. Chan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

January 14, 2009

/s/ Philip S. Chan

Philip S. Chan

Chief Financial Officer

This certification is made solely pursuant to the requirement of Section 1350 of 18 U.S.C., and is not for any other purpose.