Based on dynamics, the research on how the financial distress happens and its prediction is conducted. The dynamic connotation and characteristics of financial distress is described. The dynamic development process of financial distress is divided into several periods. The dynamic prediction of financial distress is further improved by establishing a process model and a discriminant model. A general n step ahead forecast algorithm based on Kalman filter is designed in order for prospective prediction. The empirical results prove the accuracy and advance of predicting financial distress using this dynamic method.