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, 2011. 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, 2011.

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 three months ended May 31, 2012. 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, 2011.

Results of Operations



                                            Thee Months Ended May 31, 2012                           Three Months Ended May 31, 2011
                                   U.S. Division        Corporate           Total          U.S. Division        Corporate            Total
Net patient service revenue       $       920,662      $         -       $    920,662      $   (8,472,172 )    $         -       $  (8,472,172 )

Costs and expenses:
Compensation and benefits               1,115,666         1,184,527         2,300,193           1,055,127           699,799          1,754,926
Medical services and supplies             460,642                -            460,642             366,479                -             366,479
Other operating expenses                  716,837           392,900         1,109,737             963,624           713,940          1,677,564
Depreciation and amortization             115,248            45,069           160,317                  -             37,456             37,456

Total costs and expenses                2,408,393         1,622,496         4,030,889           2,385,230         1,451,195          3,836,425

Operating loss                         (1,487,731 )      (1,622,496 )      (3,110,227 )       (10,857,402 )      (1,451,195 )      (12,308,597 )

Other income (expense):
Rent and other income                       8,980          (295,050 )        (286,070 )            16,571           318,968            335,539
Interest income                                -            349,032           349,032                  -            377,314            377,314
Interest expense                         (141,073 )          (3,061 )        (144,134 )        (1,628,557 )          (2,857 )       (1,631,414 )

Total other income (expense),
net                                      (132,093 )          50,921           (81,172 )        (1,611,986 )         693,425           (918,561 )

Loss before income taxes from
continuing operations             $    (1,619,824 )    $ (1,571,575 )      (3,191,399 )    $  (12,469,388 )    $   (757,770 )      (13,227,158 )

Benefit for income taxes                                                           -                                                 4,601,332

Loss from continuing operations                                            (3,191,399 )                                             (8,625,826 )
Discontinued operations, net of
income taxes                                                                 (388,641 )                                             (1,400,360 )
Loss on disposal of
discontinued operations, net of
income taxes                                                                       -                                                        -

Net loss                                                                   (3,580,040 )                                            (10,026,186 )
Less: Net loss attributable to
noncontrolling interest                                                        49,767                                                    1,531

Net loss attributable to Dynacq
Healthcare, Inc.                                                         $ (3,530,273 )                                          $ (10,024,655 )

Operational statistics (Number
of medical procedures) for
Pasadena facility:
Inpatient:
Bariatric                                      20                                                      17
Orthopedic                                      7                                                       3
Other                                           6                                                       3

Total inpatient procedures                     33                                                      23

Outpatient:
Orthopedic                                     17                                                      19
Other                                         129                                                     152

Total outpatient procedures                   146                                                     171

Total procedures                              179                                                     194

Results of Operations (continued)



                                             Nine Months Ended May 31, 2012                              Nine Months Ended May 31, 2011
                                   U.S. Division         Corporate            Total           U.S. Division         Corporate             Total
Net patient service revenue       $     3,732,351       $         -        $  3,732,351       $   (4,333,544 )     $         -        $  (4,333,544 )

Costs and expenses:
Compensation and benefits               3,045,092          2,951,782          5,996,874            3,261,216          2,097,553           5,358,769
Medical services and supplies           1,027,268                 -           1,027,268            1,150,499                 -            1,150,499
Other operating expenses                2,520,356          1,261,506          3,781,862            2,650,589          2,381,163           5,031,752
Depreciation and amortization             339,886            130,529            470,415                   -             128,410             128,410

Total costs and expenses                6,932,602          4,343,817         11,276,419            7,062,304          4,607,126          11,669,430

Operating loss                         (3,200,251 )       (4,343,817 )       (7,544,068 )        (11,395,848 )       (4,607,126 )       (16,002,974 )

Other income (expense):
Rent and other income                      20,791            953,581            974,372               55,569          1,257,236           1,312,805
Interest income                                -             955,235            955,235                   -           1,117,767           1,117,767
Interest expense                         (429,891 )           (8,832 )         (438,723 )         (1,642,502 )           (9,212 )        (1,651,714 )

Total other income (expense),
net                                      (409,100 )        1,899,984          1,490,884           (1,586,933 )        2,365,791             778,858

Loss before income taxes from
continuing operations             $    (3,609,351 )     $ (2,443,833 )       (6,053,184 )     $  (12,982,781 )     $ (2,241,335 )       (15,224,116 )

Benefit for income taxes                                                             -                                                    5,268,011

Loss from continuing
operations                                                                   (6,053,184 )                                                (9,956,105 )
Discontinued operations, net
of income taxes                                                              (1,120,854 )                                                (2,785,269 )
Loss on disposal of
discontinued operations, net
of income taxes                                                                (229,201 )                                                  (121,577 )

Net loss                                                                     (7,403,239 )                                               (12,862,951 )
Less: Net loss attributable to
noncontrolling interest                                                         133,287                                                       4,294

Net loss attributable to
Dynacq Healthcare, Inc.                                                    $ (7,269,952 )                                             $ (12,858,657 )

Operational statistics (Number
of medical procedures) for
Pasadena facility:
Inpatient:
Bariatric                                      50                                                         53
Orthopedic                                      8                                                         17
Other                                          51                                                         11

Total inpatient procedures                    109                                                         81

Outpatient:
Orthopedic                                     70                                                         62
Other                                         302                                                        414

Total outpatient procedures                   372                                                        476

Total procedures                              481                                                        557

Three Months Ended May 31, 2012 Compared to the Three Months Ended May 31, 2011

U.S. Division

Through May 31, 2012, 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 claims. 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. Our request that the TDWC Commissioner enforce the awards which were not voluntarily paid by the carriers was refused in approximately 130 cases. Motions filed seeking a refund in some cases in which the awards were voluntarily paid have been granted and the Company has been ordered to refund approximately $3.7 million, including prejudgment interest, pending remand for a case-by-case determination of whether the services provided were unusually costly and unusually extensive. In September and October 2011, the Company deposited these amounts as cash deposits into the registry of the court in order to stay execution of the judgments ordering refunds. We anticipate that similar motions requesting remand and a refund for awards voluntarily paid will be filed and will likely be granted by the 345th Judicial District Court of Travis County, Texas. If and when these additional motions are granted, the Company will be ordered to refund an additional $7.7 million, not including prejudgment interest. The Company has appealed the judgments requiring a refund to the carriers. The appeal of the refund judgments will progress simultaneously to the adjudication of those cases remanded for determinations of whether the services provided were unusually costly and unusually extensive. Voluntary payments made pursuant to the Decisions and Orders are premature payments by the carriers and will likely be ordered to be refunded. Once the Company is given the opportunity to present its evidence regarding whether the services provided were unusually costly and unusually extensive, the Company anticipates that it will prevail in the underlying stop-loss fee disputes and that voluntary payments refunded to the carriers will be recaptured.

Due to the uncertainties associated with these stop-loss fee dispute cases, in fiscal year 2011, the Company recognized an increase of $10,254,990 in the contractual allowance at our Pasadena facility (and an additional amount of $779,583 in the contractual allowance at our Garland facility, which is classified as discontinued operations), and $1,751,478 in interest expense at our Pasadena facility (and an additional interest expense of $132,339 at our Garland facility).

Excluding the above mentioned stop-loss contractual allowance of $10,254,990, net patient service revenue decreased by $862,156, or 48%, from $1,782,818 to $920,662, and total surgical cases decreased by 8% from 194 cases for the three months ended May 31, 2011 to 179 cases for the three months ended May 31, 2012. While the number of cases decreased by 8%, net patient service revenue decreased by 48%. The change in percentage decrease in net patient service revenue compared to the decrease in the number of cases is primarily due to a change in the surgical mix of cases. Decreases in net patient revenues and number of cases are generally attributable to the loss of physicians from our medical staff. Subsequent to the period ended May 31, 2012, a physician from our medical staff, who accounted for 30% and 14% of total gross billed charges for three months ended May 31, 2012 and 2011, respectively, is unable to continue his practice due to personal reasons. The Company is making efforts to find a replacement for this physician at the present time; however, there can be no assurance given that we will succeed in this process.

Total costs and expenses increased by $23,163, or 1%, from $2,385,230 for the three months ended May 31, 2011 to $2,408,393 for the three months ended May 31, 2012. The following discusses the various changes in costs and expenses:

• Compensation and benefits increased by $60,539, or 6%, primarily due to increase in the Company's self-funded health care costs of its employees, partially offset by a reduction in workforce due to lower net patient service revenues.

• Medical services and supplies expenses increased by $94,163, or 26%, while the number of surgery cases decreased 8%. The increase in medical services and supplies was due to a change in the surgical mix of cases, and also due to write off of obsolete supplies.

• Depreciation and amortization expenses increased by $115,248 in 2012 compared to 2011. The Company had ceased depreciating property and equipment for its Pasadena facility in the prior year since it was classified as discontinued operations, and was being measured at the lower of its carrying amount or fair value less cost to sell. However, in the current year, the Pasadena facility's operations are classified as continuing operations, and thus its property and equipment are being depreciated.

Other expense for the three months ended May 31, 2012 and 2011 of $132,093 and $1,611,986, respectively, includes interest expense associated with the stop-loss cases discussed above.

Corporate Division

Compensation and benefits includes all corporate personnel compensation and benefits, and it increased by $484,728, or 69%, in 2012, compared to 2011. The increase in compensation and benefits was due to the following reasons: (1) the Company retained the services of Dr. Eric Chan, as its chief executive officer starting January 10, 2012, and (2) the Compensation Committee approved a bonus of $300,000 payable to the chief financial officer of the Company for his role in winding down the operations in Hong Kong; the Committee recognized that he has been working above and beyond the norm to revive the Company's business including actively working on marketing and several special projects and that he has also been instrumental in providing continuity in management during the transition of the Company's new chief executive officer, and (3) the Company continues to make efforts to increase its net patient service revenues and has hired additional marketing personnel during the three months ended May 31, 2012.

Other operating expenses include primarily administrative expenses for managing various projects the Company was undertaking in China and Hong Kong, related marketing expenses and rent for an apartment for our chief executive officer in Hong Kong. The Company has made the decision to not pursue any new line of business and/or projects, and has also terminated the apartment lease. Other operating expenses also includes all the corporate general and administrative expenses in the U.S., including other professional fees such as legal expenses and audit expenses. Other operating expenses decreased by $321,040, from $713,940 for the three months ended May 31, 2011 to $392,900 for the three months ended May 31, 2012. For the three months ended May 31, 2011, the Company's subsidiary in Hong Kong incurred the following costs: (1) marketing fees of $150,000, (2) rent of $49,672 for an apartment for the Company's chief executive officer in Hong Kong, and (3) other administrative support services fees. These expenses were not incurred for the three months ended May 31, 2012. The Company also incurred lower professional fees and other miscellaneous expenses primarily associated with lower net revenues.

Rent and other income (expense) decreased by $614,018, from $318,968 other income, net, for the three months ended May 31, 2011 to $(295,050) other expense, net, for the three months ended May 31, 2012. Rent and other income for the three months ended May 31, 2012 includes (1) foreign currency losses of $178,597, primarily on investments in Euro bonds, and (2) a loss of $149,625 on short-term investments in trading securities in Hong Kong. Rent and other income for the three months ended May 31, 2011 includes (1) foreign currency exchange gains of $178,877, primarily on investments in Euro bonds, (2) a gain of $48,499 on short-term investments in trading securities in Hong Kong, and (3) other miscellaneous income primarily related to its Baton Rouge facility, which was sold in 2007.

Interest income of $349,032 and $377,314 for the three months ended May 31, 2012 and 2011, respectively, are primarily related to the Company's investments in bonds.

Investments in securities

The Company has invested in various bonds. These investments are classified as available-for-sale securities, and are carried at fair value as of May 31, 2012, based on the quoted market prices as of that date. As of May 31, 2012, these securities are valued at approximately $15.5 million. Unrealized gains in these investments of $4.6 million are included in accumulated other comprehensive income in the Consolidated Balance Sheet as at May 31, 2012, net of taxes of $2.5 million. The Company intends to hold these for a minimum period of an additional 12 months. During the three months ended May 31, 2012 and 2011, the Company also traded in initial public offerings

of equity securities on the Hong Kong Stock Exchange and had gains (losses) of $(149,625) and $48,499, respectively. The Company, through a subsidiary in Hong Kong, has expanded its investments in debt and equity securities in Europe and Asia and has engaged the services of an investment banker to recommend such investment opportunities. The Company's primary investment focus will be on growth companies from mainland China. The Company anticipates making short-term investments in these entities through initial public offerings (held mostly through the Hong Kong Stock Exchange) and pre-initial public offerings.

For the three months ended May 31, 2012, the Company did not recognize any tax benefits applicable to the operating loss. The balance sheet reflects an increase in the deferred tax asset of $1,529,856 due to a reduction in deferred tax liability related to the foreign currency exchange gain realized and a decline in value of the available-for-sale securities.

Discontinued Operations

Garland Facility (discontinued operations)

Due to the uncertainties associated with the stop-loss fee dispute cases discussed above, in fiscal year 2011, the Company recognized an increase of $779,583 in the contractual allowance, and an additional interest expense of $132,339, at our Garland facility.

The Company closed the Garland facility on September 30, 2011, and accordingly its operations for the fiscal years 2011 and 2012 continue to be classified as discontinued operations. The Company plans to either sell the Garland facility or pursue converting it into an ambulatory surgical center, if and when the Company can identify and generate a steady referral source for outpatient cases.

Total costs and expenses decreased by $1,052,413, from $1,401,850 for the three months ended May 31, 2011 to $349,437 for the three months ended May 31, 2012, due to the closure of the facility on September 30, 2011.

Corporate (discontinued operations)

The Corporate Division revenue includes net patient service revenues from Second People's Hospital in Rui An, China. Due to continued losses at the Second People's Hospital, the Company made the decision to terminate the management agreement as of February 28, 2011 with the Rui An City Department of Health, and is currently in negotiation with them to finalize the terms, including the effective date of termination.

The Corporate Division also includes other operating expenses the Company incurred at certain of its subsidiaries in China while pursuing various projects. All of the Company's foreign subsidiaries, except for Dynacq-Huai Bei and Sino Bond, have been reclassified as discontinued operations. The Company incurred $-0- and $224,430 in total costs and expenses at these subsidiaries during the three months ended May 31, 2012 and 2011, respectively. Loss before income taxes in these subsidiaries was $-0- and $175,528 for the three months ended May 31, 2012 and 2011, respectively.

Nine Months Ended May 31, 2012 Compared to the Nine Months Ended May 31, 2011

U.S. Division

Through May 31, 2012, 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 claims. 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. Our request that the TDWC Commissioner enforce the awards which were not voluntarily paid by the carriers was refused in approximately 130 cases. Motions filed seeking a refund in some cases in which the awards were voluntarily paid have been granted and the Company has been ordered to refund approximately $3.7 million, including prejudgment interest, pending remand for a case-by-case determination of whether the services provided were unusually costly and unusually extensive. In September and October 2011, the Company deposited these amounts as cash deposits into the registry of the court in order to stay execution of the judgments ordering refunds. We anticipate that similar motions requesting remand and a refund for awards voluntarily paid will be filed and will likely be granted by the 345th Judicial District Court of Travis County, Texas.

If and when these additional motions are granted, the Company will be ordered to refund an additional $7.7 million, not including prejudgment interest. The Company has appealed the judgments requiring a refund to the carriers. The appeal of the refund judgments will progress simultaneously to the adjudication of those cases remanded for determinations of whether the services provided were unusually costly and unusually extensive. Voluntary payments made pursuant to the Decisions and Orders are premature payments by the carriers and will likely be ordered to be refunded. Once the Company is given the opportunity to present its evidence regarding whether the services provided were unusually costly and unusually extensive, the Company anticipates that it will prevail in the underlying stop-loss fee disputes and that voluntary payments refunded to the carriers will be recaptured.

Due to the uncertainties associated with these stop-loss fee dispute cases, in fiscal year 2011, the Company recognized an increase of $10,254,990 in the contractual allowance at our Pasadena facility (and an additional amount of $779,583 in the contractual allowance at our Garland facility, which is classified as discontinued operations), and $1,751,478 in interest expense at our Pasadena facility (and an additional interest expense of $132,339 at our Garland facility).

Excluding the above mentioned stop-loss contractual allowance of $10,254,990, net patient service revenue decreased by $2,189,095, or 37%, from $5,921,446 to $3,732,351, and total surgical cases decreased by 14% from 557 cases for the nine months ended May 31, 2011 to 481 cases for the nine months ended May 31, 2012. While the number of cases decreased by 14%, net patient service revenue decreased by 37%. The change in percentage decrease in net patient service revenue compared to the decrease in the number of cases is primarily due to a change in the surgical mix of cases. Decreases in net patient revenues and number of cases are generally attributable to the loss of physicians from our medical staff. Subsequent to the period ended May 31, 2012, a physician from our medical staff, who accounted for 25% and 5% of total gross billed charges for nine months ended May 31, 2012 and 2011, respectively, is unable to continue his practice due to personal reasons. The Company is making efforts to find a replacement for this physician at the present time; however, there can be no assurance given that we will succeed in this process.

Total costs and expenses decreased by $129,702, or 2%, from $7,062,304 for the nine months ended May 31, 2011 to $6,932,602 for the nine months ended May 31, 2012. The following discusses the various changes in costs and expenses:

• Compensation and benefits decreased by $216,124, or 7%, primarily associated with reduction in workforce due to lower net patient service revenues.

• Medical services and supplies expenses decreased by $123,231, or 11%, while the number of surgery cases decreased 14%. The percentage decrease in medical services and supplies was lower than the percentage decrease in the number of surgery cases due to a change in the surgical mix of cases.

• Other operating expenses decreased by $130,233, or 5%, primarily associated with lower net patient service revenues.

• Depreciation and amortization expenses increased by $339,886 in 2012 . . .