UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-K


(Mark
One)


[X]
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the Fiscal Year Ended August 31, 2009





[   ]
            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:  001-32526


BSD
MEDICAL CORPORATION





(Exact
name of registrant as specified in its charter)


Delaware
            75-1590407(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)





2188
      West 2200 South, Salt Lake City, Utah
            84119(Address
      of principal executive office)
            (Zip
      Code)





Registrant's
telephone number, including area code:  (801) 972-5555





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


Title of Each
      Class
            Name of Each Exchange
      on which RegisteredCommon
      Stock, Par Value $0.001
            The
      NASDAQ Stock Market LLC





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes
[  ] No[X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes
[  ] No[X]





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 has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


Yes
[  ] No[  ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [  ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
accelerated filer
[  ]                                                                                                                          
 Accelerated filer [  ]


Non-accelerated filer [  ] (Do not
check if a smaller reporting
company)                                             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]





The
aggregate market value of the common stock held by non-affiliates of the
registrant as of February 29, 2009 was approximately $37,128,000.





As of
November 6, 2009, the registrant had 22,014,970 shares of its common stock, par
value $.001, outstanding.





Documents
Incorporated by Reference:  Portions of the definitive Proxy Statement
to be delivered to shareholders in connection with the 2010 Annual Meeting of
Shareholders, which is expected to be held February 3, 2010, are incorporated by
reference into Part III hereof.





1





BSD
MEDICAL CORPORATION


FORM
10-K





For
the Year Ended August 31, 2009





TABLE
OF CONTENTS








Part IItem
      1.
            Business
            
            3Item
      1A.
            Risk
      Factors
            
            17Item
      1B.
            Unresolved
      Staff Comments
            
            23Item
      2.
            Properties
            
            23Item
      3.
            Legal
      Proceedings
            
            23Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            23Part IIItem
      5.
            Market
      for the Registrant’s Common Equity, Related Stockholder Matters
      andIssuer
      Purchases of Equity Securities
            
            24Item
      6.
            Selected
      Financial Data
            
            26Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results ofOperations
            
            26Item
      7A.
            Quantitative
      and Qualitative Disclosure About Market Risk
            
            37Item
      8.
            Financial
      Statements and Supplementary Data
            
            38Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and FinancialDisclosure
            
            38Item
      9A.
            Controls
      and Procedures
            
            38Item
      9B.
            Other
      Information
            
            39Part IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            
            40Item
      11.
            Executive
      Compensation
            
            40Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and
      RelatedStockholder
      Matters
            
            40Item
      13.
            Certain
      Relationships and Related Transactions, and Director Independence
            
            40Item
      14.
            Principal
      Accountant Fees and Services
            
            40Part IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            
            41Signatures
            
            43




2





PART
I





ITEM
1.   BUSINESS





Overview




BSD
Medical Corporation (the “Company”) was originally incorporated under the laws
of the State of Utah on March 17, 1978.  On July 3, 1986, the Company
was reincorporated in the State of Delaware.




We
develop, manufacture, market and service medical systems that deliver
precision-focused radio frequency (RF) or microwave energy into diseased sites
of the body, heating them to specified temperatures as required by a variety of
medical therapies.  Our business objectives are to commercialize our
products developed for the treatment of cancer and to further expand our systems
to treat other diseases and medical conditions.  Our product line for
cancer therapy has been created to offer hospitals and clinics a complete
solution for thermal treatment of cancer as provided through microwave/RF
systems.




While our
primary developments to date have been cancer treatment systems, we also
pioneered the use of microwave thermal therapy for the treatment of symptoms
associated with enlarged prostate, and we are responsible for technology that
has contributed to a  new medical industry addressing the needs of
men’s health.  In accordance with our strategic plan, we subsequently
sold our interest in TherMatrx, Inc., the company established to commercialize
our technology to treat enlarged prostate symptoms, to provide substantial
funding that we can utilize for commercializing our systems used in the
treatment of cancer and in achieving other business objectives.




In spite
of the advances in cancer treatment technology, nearly 40% of cancer patients
continue to die from the disease in the United States.  Our product
line includes systems that have been strategically designed to offer a range of
thermal treatment systems for the treatment of cancer, including both
hyperthermia and ablation treatment systems. Studies have shown that both
hyperthermia and ablation treatments kill cancer but they have different
clinical applications.




Our
hyperthermia cancer treatment systems are used to treat cancer with heat
(hyperthermia) while boosting the effectiveness of radiation through a number of
biological mechanisms.  Hyperthermia is usually used to increase the
effectiveness of other therapies; e.g., radiation therapy and chemotherapy for
the treatment of locally advanced cancers.  Hyperthermia usually
refers to treatments delivered at temperatures of 40-49°C for one
hour.




Our
microwave ablation system is to be used to ablate (remove or vaporize)soft tissue with heat
alone.  Thermal ablation usually refers to heat treatments delivered
at temperatures above 55°C for short periods of time.  Thermal
ablation is used to destroy local tumors using a short intense focus of heat on
a specific area, which is usually small, similar to surgical removal of the
tumor.




Commercialization
of our systems that are used to treat cancer is our most immediate business
objective.  Current and future cancer treatment sites for our systems
may include cancers of the prostate, breast, head, neck, bladder, cervix,
colon/rectum, ovarian, esophagus, liver, kidney, brain, bone, stomach and
lung.  Our cancer treatment systems have been used to treat thousands
of patients throughout the world and have received many awards, including the
Frost & Sullivan “Technology Innovation of the Year Award” for cancer
therapy devices awarded for the development of the BSD-2000.




Although
we have not entered most of these markets, we also believe that our technology
has application for a number of other medical purposes in addition to
cancer.




On April
22, 2008 we changed the listing of our stock from the American Stock Exchange
(AMEX) to the NASDAQ Stock Market (NASDAQ), and our stock now trades under the
NASDAQ symbol “BSDM.”




3





The Sale of
TherMatrx




One of
our important contributions to the advancement of medical therapy has been our
pioneering work in developing a new treatment for conditions associated with
enlargement of the prostate that afflicts most men as they age.  As
the prostate enlarges it constricts urine flow.  The condition is
known medically as benign prostatic hyperplasia or BPH.  We developed
a technology that allows men to be treated for BPH through an outpatient
procedure as an alternative to surgery or a lengthy regimen of
medication.




We
determined early in our planning that we would treat our development of BPH
therapy as a spin-off business with the intent of providing funding for our
primary business objectives.  We established a new company, TherMatrx,
Inc., and received capital from investors to conduct clinical trials, and, after
obtaining U.S. Food and Drug Administration (“FDA”) approval in July 2001, the
funding to commercialize the development.  We were compensated for
providing manufacturing, regulatory and engineering support to assure the
success of the new company.




On July
15, 2004, TherMatrx, Inc. was sold to American Medical Systems Holdings, Inc.
(AMS).  Our part of the total proceeds from this sale was
approximately 25%.  A portion of the payout from the sale was based on
contingency payments.  We received approximately $33.7 million from
the TherMatrx sale, including an additional $202,223 in April
2007.  We are not currently entitled to or expect any further payments
or proceeds from the sale of TherMatrx.




Our Contributions to Cancer
Therapy




Despite
the massive attention given to cancer prevention and treatment, the American
Cancer Society estimates that 1,500,000 new cancer cases will be diagnosed and
that 562,340 Americans will die from cancer during 2009.  In the
United States the chance of developing cancer during a person’s lifetime is one
in two for men and one in three for women.  Cancer develops when
abnormal cells in a part of the body begin to grow out of control and spread to
other parts of the body.




Our
cancer treatment systems have been developed to both kill cancer directly with
heat and to increase the effectiveness of the primary cancer treatment used in
conjunction with the heat therapy.  The primary cancer therapies
currently used include:




·
            Radiation
      therapy, which is treatment with high-energy rays to kill or shrink cancer
      cells. The radiation may come from outside of the body (external
      radiation) or from radioactive materials placed directly in a tumor
      (internal or implant radiation, sometimes called
      brachytherapy).




·
            Chemotherapy,
      which is treatment with drugs to destroy cancer
  cells.




·
            Surgery,
      which is the resection, or removal, of a tumor or organ of the
      body.




Some
cancers, such as certain cancers of the liver, prostate, kidney, bone metastases
and lung cancer, are treated using heat alone to deliver thermal
ablation.   For these treatments we have developed the
MicroThermX Microwave Ablation System that is used to ablate soft tissues at
high temperatures as a stand-alone therapy.  Over 40,000 solid tumor
ablation procedures were performed in the U.S. last year and approximately
140,000 procedures were performed worldwide.




4





The
treatment of many cancers is generally prescribed with one or more of the
primary cancer therapies noted above. Because cancer remains a leading cause of
death, these three cancer therapies are still inadequate, and there is an
enormous need for better treatment.  We have engineered systems
designed to increase the effectiveness of these cancer treatments through the
use of precision-focused RF/microwave energy to selectively heat cancer,
creating “hyperthermia” in cancerous tumors.  Hyperthermia is an
emerging cancer therapy that both kills cancer cells directly and has been shown
to be a potent additive treatment in making certain of the major existing cancer
therapies more effective for some cancers.





Hyperthermia
therapy has been shown to substantially improve the results from cancer
treatments for a variety of tumors. Completed randomized clinical trials
compared the effectiveness of radiation therapy combined with hyperthermia
therapy against the results of radiation therapy alone in cancer treatment
produced the following results:  For melanoma, after two years, local
control (local regression or disappearance of the tumor) was 28% for the control
group of patients who received radiation therapy alone versus 46% local control
for the patients who received both hyperthermia and radiation
therapy.  For recurrent breast cancer, the complete response rate
(complete disappearance of the tumor) increased from 38% for those receiving
radiation therapy alone to 60% for those patients who received both hyperthermia
and radiation therapy.  For glioblastoma (brain cancer), the two-year
survival rate for patients who received radiation therapy alone was 15%,
compared to 31% survival rate two years after treatment for those who received
both hyperthermia and radiation therapy.  For advanced cervical
cancer, the complete response rate (disappearance of the tumor) rose from 57%
for patients who received radiation treatments alone to 83% for patients
receiving both hyperthermia and radiation therapy.  The cervical
cancer data was based on the condition of patients three years after
treatment.  For high risk soft-tissue sarcomas, patients were 30% more
likely to be alive and cancer free almost three years after starting treatment
if hyperthermia was added to their chemotherapy treatment.  Almost
three years after starting treatment, the sarcoma patients treated with
hyperthermia and chemotherapy were 42% less likely to experience a recurrence of
their cancer at the same site or to die than those who were getting chemotherapy
alone.




Cancerous
tumors are uncontrolled growths of mutated cells that require more energy to
survive than do cells of normal tissue.  As cancer cells grow rapidly,
they tend to outstrip their blood supply, leaving them oxygen-starved, since
there is not enough blood to carry sufficient oxygen to these
cells.  Oxygen-starved cancer cells are resistant to radiation therapy
because the destructive power of radiation therapy depends heavily on tearing
apart the oxygen molecules located in cancer cells.  When oxygen
molecules are torn apart, they form oxygen radicals that can attack cancer cell
DNA.  Blood depletion also makes cancer resistant to chemotherapy,
where blood transport is required to deliver the drug into the
tumor.  Our hyperthermia therapy systems precisely deliver microwave
energy to elevate the temperature of tumors, usually between 40°C and 45°C
(104°F to 113°F).  The elevated temperatures draw blood to the tumor
as the body’s natural response to the stimulus of heat.  The increased
blood supply to the tumor improves delivery of drugs to tumors in
chemotherapy.  It also delivers more oxygen to the tumor, increasing
the effectiveness of radiation therapy.




While
sensitizing tumors for more effective treatment from radiation and/or
chemotherapy, hyperthermia also destroys cancer cells directly through damage to
the plasma membrane, the cytoskeleton and the cell nucleus, and by disrupting
the stability of cellular proteins.  Tumors with poor blood supply
systems lack the natural cooling capacity provided by efficient blood flow in
normal tissues, making them selectively susceptible to the destructive effects
of hyperthermia therapy.




Hyperthermia
has other therapeutic uses.  It can be used to shrink tumors prior to
surgery, potentially making resection easier or even
possible.  Research has shown hyperthermia to be an activator for some
gene therapies by speeding gene production (heat mediated gene
therapy).  Hyperthermia may play a role in the development of new
anti-tumor vaccines that are based on the production of heat shock
proteins.  Research has shown hyperthermia to be an angiogenesis
inhibitor, which means it helps prevent cancer from inducing growth of new blood
vessels to expand its blood supply.  Hyperthermia could also become a
follow-up therapy for other angiogenesis inhibitors, used in the final
destruction of cancer cells depleted of blood by angiogenesis inhibitor
therapy.  Hyperthermia has been shown to improve a patient’s quality
of life.  Even in situations where there is no hope for survival,
hyperthermia may provide benefits through alleviation of some of the side
effects of cancer, including bleeding, pain and infection.




5





Since the
founding of the Company, we have been heavily involved in developing
technological advances to expand the use of hyperthermia therapy for the
treatment of cancer.  Our efforts have included joint work with many
notable cancer research centers in the United States and Europe.  In
past years, funding for our research efforts has been provided by such sources
as the National Institutes of Health in the United States and major European
government agencies.  In recent years, we have focused our efforts in
perfecting the technology required to precisely deliver deep, non-invasive
hyperthermia therapy for the treatment of pelvic and other deep cancers and to
demonstrate effective use of deep hyperthermia through clinical
trials.  We believe that our BSD-2000 system has emerged from this
development effort as the world’s most advanced system for hyperthermia
therapy.




We have
developed various technologies for heating cancerous tumors, depending on their
location in the body.  Through our developments, cancers such as
melanomas or recurrent breast cancer located near the surface of the body can be
treated with superficial cancer treatment applicators and
systems.  Cancers that can be accessed through natural body orifices,
or that are accessible through catheters inserted into the tumor as part of
invasive radiation techniques (which are used to treat prostate cancer or head
and neck cancer) can be treated with small, inserted antennas that we have
developed to deliver focused microwave energy into the cancerous
tissue.  We have also developed systems to non-invasively treat
cancers located deep in the body by focusing electromagnetic energy on the
cancer through a cylindrical applicator that surrounds the body.  This
cylindrical applicator contains an array of multiple antennae that focus radio
frequency energy, and therefore heat, on the tumor.  Temperature
levels for treatments are monitored through small temperature
sensors.  Some of our systems can be interfaced with magnetic
resonance imaging, or MRI, so that the treatment in progress can be observed,
and temperatures can be monitored through images colorized to depict gradation
of temperature levels (thermography).




Our
BSD-500 is used to treat cancers located near the surface of the body, or areas
that can be accessed using inserted antennae.  The BSD-500 comes in
several versions, depending on the customer requirements.  The
BSD-2000 is used to non-invasively treat deep cancers.  This system
also comes in several versions, including models with three dimensional, or 3D,
steering of electromagnetic energy, as well as the ability to be integrated with
MRI.




The
BSD-500 has received FDA approval.  In addition, the system has gone
through an extensive revision, and we have obtained FDA approval of two major
FDA supplements that were necessary for commercialization.




The
BSD-2000 does not currently have FDA approval except as an investigational
device.  On May 18, 2009, we obtained Humanitarian Use Device (HUD)
designation for the BSD-2000 Hyperthermia System for use in conjunction with
radiation therapy for the treatment of cervical carcinoma patients who are
ineligible for chemotherapy, and we subsequently filed a Humanitarian Device
Exemption (HDE) submission with the FDA.  Obtaining the HUD
designation and approval of the HDE are the two steps required to obtain HDE
marketing approval, which requires us to demonstrate the device’s safety and
probable benefit in treating a disease or condition that affects fewer than
4,000 individuals in the United States per year. The HDE is still under review
by the FDA.  We have certified the BSD-2000 for the CE Mark required
for export into certain European and non-European countries.  We
sought and obtained regulatory approval for the sale of the BSD-2000 in the
People’s Republic of China during 2005.




6





Our
MicroThermX-100 thermal ablation system received FDA marketing clearance in
September 2008 for ablation of soft tissue, but following field evaluations of
the original design, we elected to pursue a more advanced Phase II ablation
system before entering the market.  The Phase II, or our
MicroThermX-180 Microwave Ablation System (the “MTX-180”), will provide a wider
range of clinical application, improved ease of use and additional revenue
streams.  We believe the MTX-180 has the potential to be the market
leader in microwave ablation.





Most of
our sales of cancer therapy systems over recent past periods have been to cancer
research institutions for use in conducting clinical trials with our
equipment.  As a company, we continue the marketing of our commercial
version of the BSD-500 and plan to market the MTX-180 in 2010.  We
believe obtaining FDA approval for the BSD-2000 would greatly contribute to our
sales efforts by providing the additional technology required for the treatment
of solid tumors located virtually anywhere in the body.




Our Products and
Services




We have
developed technology and products for thermal ablationand hyperthermia cancer
therapy through multiple techniques, which collectively allow cancer to be
treated virtually anywhere in the body:




·
            Thermal
      ablation ablates (removes or vaporizes) soft tissues at high temperatures
      through focused microwave energy.




·
            Superficial
      hyperthermia non-invasively treats cancerous tumors located within a few
      centimeters of the surface of the body, such as melanoma and recurrent
      breast cancer.




·
            Internal
      or interstitial hyperthermia treats tumors in combination with internal
      radiation therapy by inserting tiny microwave antennae that deliver
      hyperthermic microwave energy to tumors through the same catheters used to
      deliver radioactive materials, or “seeds,” to tumors for radiation
      therapy.  This technique can be employed in treating prostate
      cancer, breast cancer, head and neck cancer and a variety of other cancer
      sites.




·
            Deep
      hyperthermia non-invasively treats tumors located deep within the body,
      including many problematic cancer sites located in the
    pelvis.




MTX-180.  Our
MTX-180 has been developed to employ precision-guided microwave energy to ablate
soft tissue.  The MTX-180 is a compact, mobile system that includes a
state-of-the-art computer, a microwave generator, single-patient-use disposable
applicators and a proprietary thermistor-based temperature monitoring
system.  The delivery of microwave energy is controlled by time and
power parameters set by the operator utilizing an interactive touch-screen
monitor that allows the operator to quickly and easily control the
treatment.  The MTX-180 provides minimally invasive access to the
target tissue and can be used in open surgical as well as in percutaneous
ablation procedures, which will allow the MTX-180 to be used by both surgeons
and interventional radiologists.  The MTX-180 was developed to provide
treatments as a stand-alone therapy, rather than only in combination with other
therapies.




The
MTX-180 represents a major part of our business plan moving
forward.  It introduces into our product line a disposable applicator
used in each treatment, which we believe represents the potential for a
significant ongoing revenue stream after the sale of the system.  Our
sales force is experienced in marketing to interventional radiologists and
surgeons, the users of thermal ablation systems.  Internationally, we
expect sales will be conducted through established and new distributors located
primarily in Europe and Asia.




7





In
September 2008, the FDA granted us a 510(k) clearance to market the Phase I
MTX-100, which authorizes the commercial sale of the device in the United
States.  At the same time that we received the 510(k) clearance for
the MTX-100 System, we had already started design of a more advanced Phase II
ablation system that would provide a wider range of clinical applications and
improved ease of use as well as additional revenue streams.  Since
receipt of FDA clearance to market the MTX-100, we have devoted significant
efforts to optimizing the design of the system to improve its ease of use and
its medical applications.  Following clinical evaluations of Phase I,
we decided to postpone market entry until completion of the optimized Phase II
MTX-180 design.  We believe this will allow us to enter this market
with an optimized system that will have a wider range of clinical applications
and increased revenue streams.





Additional
time will be required to complete the market-ready Phase II design, apply for
applicable regulatory approvals, and finalize the manufacturing processes for
the MTX-180 and the applicators.  Also, final marketing and sales
strategies must be completed prior to market introduction.  We
currently are unable to predict when these efforts will be completed and when
revenues from the sale of the MTX-180 and related applicators will
begin.  We do not believe, however, that these revenues will begin
until at least the first or second quarter of calendar year 2010, and we cannot
be sure that these revenues will be consistent with our expectations.




BSD-500.  Our
BSD-500 systems are used to deliver either superficial hyperthermia therapy,
which is non-invasive and delivered externally using antennae placed over the
tumor, or interstitial hyperthermia therapy, which is delivered using antennae
that are inserted into the tumor, or both.  These systems include a
touch screen display monitor by which the operator controls the hyperthermia
treatment, computer equipment and software that controls the delivery of
microwave energy to the tumor, and a generator that creates the needed microwave
energy for the treatment.  Additionally, the systems include a variety
of applicator (radiating antennae) configurations, depending on the
system.  Various configurations of non-invasive applicators (antennae)
are used for superficial hyperthermia treatments.  For interstitial
hyperthermia treatments, the system may include up to 24 small microwave
heat-delivering antennae that are inserted into catheters used for internal
radiation therapy (called brachytherapy).




Our
primary FDA approval (described as a pre-market approval, or PMA, which is the
standard FDA approval required to market Class III medical devices in the United
States) for the BSD-500 is for the use of hyperthermia and radiation therapy to
treat certain tumors using the BSD-500 Hyperthermia System.  There are
some clinical studies that have been published that show the effectiveness and
safety for the use of hyperthermia and certain chemotherapy drugs for the
treatment of some cancers.  We do not currently have FDA approval for
the use of hyperthermia in conjunction with chemotherapy, but physicians are
allowed to utilize medical devices that have been approved or cleared by the
FDA, including the BSD-500 Hyperthermia System, for off label indications
(indications for use that are not included in the FDA approval or
clearance).




We have
received FDA approval through FDA supplements for implementation of a new
operating system and a new power generation system and other commercial upgrades
for the BSD-500 configurations. We have also certified the BSD-500 systems for
the CE Mark, which is required for export into some European and non-European
countries.




BSD-2000.  The
BSD-2000 family of products includes the BSD-2000, the BSD-2000/3D and the
BSD-2000/3D/MR.  These systems non-invasively deliver localized
therapeutic heating (hyperthermia) to solid tumors by applying radiofrequency
(RF) energy to certain cancerous tumors, including those located deep within the
body.  These systems consist of four major subsystems:  an
RF power generator delivery subsystem; a proprietary, thermistor-based,
thermometry subsystem; a computerized monitoring and control subsystem; and an
applicator subsystem that includes an applicator and patient support system; as
well as various accessories.  The BSD-2000 delivers energy to a
patient using a power source and an array of multiple antennae that surround the
patient’s body.  The BSD-2000 systems create a central focusing of
energy that can be adjusted to target the 3-dimensional shape, size, and
location of the tumor, thus providing dynamic control of the heating delivered
to the tumor region.  The basic BSD-2000 has eight microwave antennae
enabling this electronic steering of energy within the patient’s
body.  The BSD-2000/3D has 24 microwave antennae enabling additional
electronic steering along the long axis of the body.  The 3D steering
is particularly useful when implemented with a magnetic resonance system that is
capable of non-invasive 3D imaging showing the heated regions, thus permitting
the 3D steering to more accurately target the energy to the tumor
site.





8





The
BSD-2000 system has not yet received PMA from the FDA for commercial marketing
in the United States, but the BSD-2000 has obtained an investigational device
exemption, or IDE, for placement in the United States for research purposes
only.  We have also certified the BSD-2000 family for the CE Mark
required for export into certain European and non-European countries and have
obtained regulatory approval for the sale of the BSD-2000 in the People’s
Republic of China.




We have
been engaged over the past three years in the extensive process of supporting an
FDA submission requesting PMA for the BSD-2000 that was filed on March 28,
2006.  During the PMA review process, we continued to work closely
with the FDA to determine an appropriate pathway to obtain a marketing approval
for the BSD-2000 utilizing the clinical data that was available to us to support
a marketing approval.  During this process, we submitted multiple
amendments and held multiple face-to-face meetings with the FDA.  As a
result of the process, the FDA suggested that the HDE marketing approval process
might be the most expeditious pathway for us to obtain a marketing
approval.  Due to the length of time that the submission had already
been under review by the FDA, the significant amount of additional time required
to continue to pursue the PMA, and our desire to bring the BSD-2000 to market as
quickly as possible, we followed the FDA’s suggestion.




On May
18, 2009, the FDA granted HUD designation for our BSD-2000 for use in
conjunction with radiation therapy for the treatment of cervical carcinoma
patients who are ineligible for chemotherapy.  This is the first of
the two steps required to obtain HDE marketing approval.  Subsequent
to the FDA granting the HUD for the BSD-2000, which confirms that the intended
use population is fewer than 4,000 patients per year, we filed an HDE submission
with the FDA.  The FDA generally has 75 days from the date of receipt
of the HDE submission to grant or deny an HDE application.  This
period includes a 30-day filing period during which the FDA determines whether
the HDE application is sufficiently complete to permit substantive
review.  During this review, the FDA may refine the indications for
use which received HUD designation to finalize the indications for use for which
HDE approval will be granted.  This decision will be based on the data
that is available to support the device’s HDE application.  We believe
that the data previously submitted to the FDA and reviewed by the agency in our
PMA application can be used to support the HDE approval.  As of the
date of filing this report, the FDA continues its review of our HDE marketing
submission for the BSD-2000.  Although we remain optimistic that HDE
marketing approval will be granted, we are unable to predict when the review
process will be completed and its ultimate outcome.  If we are unable
to receive HDE marketing approval, or if the FDA requires us to undergo
extensive testing in order to grant HDE marketing approval, our business could
be adversely affected.




The PMA
was placed on hold until the HUD designation was granted by the
FDA.  Once the HUD designation was granted and the HDE was filed, per
FDA regulations, we withdrew the PMA submission.   We can decide
to pursue PMA for the BSD-2000 at a future date.




The HDE
approval of the BSD-2000 Hyperthermia System will authorize the commercial sale
of the BSD-2000 in the United States.  However, there are some
differences between the HDE marketing approval and PMA approval, as well as some
limitations on the HDE approved devices.  The HDE approval
demonstrates safety and probable benefit, is intended for use in the treatment
of a disease that affects fewer than 4,000 individuals in the United States per
year, is only granted when no comparable device has been approved to treat the
same disease population, and requires approval from an Institutional Review
Board before being used in a facility.    In addition, we
cannot charge an amount for an HDE approved device that exceeds the costs of
research and development, fabrication, and distribution.  A device can
have both PMA and an HDE approval as long as the approvals are for different
indications for use.  In addition, a product can have multiple HDE
approvals for different applications, and we may decide to pursue additional HDE
approvals for the BSD-2000 in the future.




9





Development
of the BSD-2000, the BSD-2000/3D and the BSD-2000/3D/MR has required substantial
effort involving the cooperative work of such United States research
institutions as Duke University, Northwestern University, University of Southern
California, Stanford University, University of Utah and University of Washington
St. Louis.  Contributing European research institutions include Daniel
den Hoed Cancer Center of the Academisch Ziekenhuis (Rotterdam, Netherlands),
Haukeland University Hospital (Bergen, Norway), Dusseldorf University Medical
School, Tübingen University Medical School, Essen University Hospital, Charité
Medical School of Humboldt University (Berlin), Luebeck University Medical
School, Munich University Medical School Grosshadern, Interne Klinik Argirov of
the Munich Comprehensive Cancer Center, University of Erlangen (all of Germany),
University of Verona Medical Center (Italy), Graz University Medical School
(Austria) and Kantonsspital Aarau (Switzerland).





BSD-2000/3D.  Through
research funded by the National Cancer Institute in the United States and
supportive efforts by other domestic and international research institutions, we
enhanced the BSD-2000 to create the new BSD-2000/3D.  The BSD-2000/3D
adds three-dimensional steering of deep focused energy, as opposed to the
two-dimensional steering of energy available in the BSD-2000, delivering even
more precise heating of the tumor.  As part of our international
collaborative research efforts, sophisticated treatment planning software for
the BSD-2000/3D has also been developed.




We have
not yet submitted to the FDA a PMA application for the
BSD-2000/3D.  However, we have obtained the CE Mark necessary to
export the BSD-2000/3D to certain European countries and other countries
requiring CE Mark certification.




BSD-2000/3D/MR.  As
a further enhancement of the BSD-2000/3D, we have added to it the option of
concurrent magnetic resonance imaging, or MRI, used for monitoring the delivery
of deep hyperthermia therapy.  Using sophisticated microwave filtering
and imaging software, the BSD-2000/3D/MR allows an MRI system to be interfaced
with and operate simultaneously with a BSD-2000/3D.  The development
of MRI treatment monitoring is a significant breakthrough in the development of
hyperthermic oncology primarily because it allows non-invasive “on-line” review
of hyperthermic treatment progress.




We
installed and tested the first BSD-2000/3D/MR system at a leading German
oncological research institution, the Clinic of Medical Oncology of the Klinikum
Großhadern Medical School of Ludwigs-Maximilians-Universität München, in Munich,
Germany.  We have since installed BSD-2000/3D/MR systems at multiple
other locations.




As is the
case for the BSD-2000/3D, we have not yet submitted to the FDA a PMA application
for the BSD-2000/3D/MR.  We can, however, market the BSD-2000/3D/MR in
Europe as we have CE Mark approval for the BSD-2000/3D/MR, provided we interface
the system with an MRI system that also is approved in Europe.




10




Marketing and
Distribution




Our
target customers include clinics, hospitals and institutions in which cancer is
treated, located either in the United States or international
markets.




To
support our sales and marketing efforts in the United States, we maintain a
sales and marketing organization currently consisting of eight
persons.  Our vice president of international sales directs our
international sales and marketing efforts, which consist of relationships with
distributors and other agents as well as our own direct sales
efforts.




We are
currently concentrating on expanding our business into international markets,
which we consider to represent our greatest business opportunities.




We
entered into an agreement with Dalian Orientech Co. LTD, a privately owned
company, to assist us in obtaining regulatory approval for the sale of the
BSD-2000 in the People’s Republic of China, and thereafter to act as our
distributor for the sale of the BSD-2000 in that country.  We
subsequently obtained Chinese regulatory approval, allowing the distributor to
begin to market and sell the BSD-2000 system to hospitals in
China.  We believe the prospects for increased sales of our systems in
China represent one of our greatest business opportunities.




Historically,
a significant portion of our revenues have been derived from sales to
Medizin-Technik GmbH located in Munich, Germany, which is our exclusive
distributor of hyperthermia systems in Germany, Austria and Switzerland, and to
certain medical institutions in Belgium and the Netherlands.  Medizin
Technik is owned by Dr. Gerhard W. Sennewald, one of our directors and a
significant stockholder. We have also sold systems in Poland and Italy, and have
conducted our own direct sales and marketing efforts in other countries in
Europe, India, and Asia.  We recently announced the selection of a
distributor in India, the world’s second most populated country, and have
appointed a sales manager for Latin America whose focus will be the medical
markets in Mexico, Brazil, Argentina and Chile, as well as other Latin American
countries.




Third-Party Reimbursement




We view
obtaining adequate third-party reimbursement arrangements as essential to
achieving commercial acceptance of our hyperthermia therapy
products.  Our products are purchased primarily by clinics, hospitals
and other medical institutions that bill various third-party payors, such as
Medicare, Medicaid, other government programs and private insurance plans, for
the health care services provided to their patients using our
products.  Additionally, managed care organizations and insurance
companies directly pay for services provided to their patients.  The
Center for Medicare and Medicaid Services, or CMS, has established 23 billing
codes that allow for third-party reimbursement and can be used for or in
combination with the delivery of hyperthermia therapy, depending on the
circumstances of the treatment. Appropriate codes apply to billing for
superficial and interstitial hyperthermia delivered using our BSD-500 systems
when used in combination with radiation therapy.  Codes also have been
established for providing deep hyperthermia therapy.  Billing codes
are available for both institutions and physicians.  Even though
billing codes have been established, payments must also be approved by and
authorized through the various third-party payors, and third-party payors can
establish varying reimbursement plans and levels that can affect hyperthermia
reimbursement levels.




In
November 1995, HCFA, the predecessor agency to CMS, authorized Medicare
reimbursement of costs for all investigational therapies and devices for which
underlying questions of safety and effectiveness of that device type have been
resolved, based on categorization by the FDA.  Our BSD-2000 system,
which has been given IDE status by the FDA, has been placed in this category by
the FDA, and thus may be reimbursed by Medicare.




11





Medical
reimbursement rates are unpredictable, and we cannot project the extent to which
our business may be affected by future legislative and regulatory
developments.  There can be no assurance that future health care
legislation or regulation will not have a material adverse effect on BSD’s
business, financial condition and results of operations, or that reimbursement,
existing or in the future, will be adequate for all customers.




Competition




Competition
in the medical products industry is intense.  We believe that
established product lines and cancer therapies, FDA approvals, know-how and
reputation in the industry are key competitive factors.  Currently,
only a few companies besides BSD have received FDA approval to manufacture and
sell hyperthermia therapy systems within the United States, including U.S.
Labthermics and Celsion Corporation.  Celsion has been principally
involved with clinical trials related to thermotherapy, hyperthermia and related
fields, however Celsion has announced the transformation of its company from a
medical device company to a biopharmaceutical, solely focused on the development
of drugs for the treatment of cancer.  Labthermics produces
ultrasound-based systems, which compete with our microwave hyperthermia systems;
however Labthermics is not currently active in the sale of products in our
industry.  Several other companies have received IDEs in the United
States or other international clearance for certain experimental hyperthermia
systems designed to treat both malignant and benign
diseases.  Additionally, other companies, particularly established
companies that currently manufacture and sell other cancer therapy systems,
could potentially become competitors (in that they are also engaged in cancer
treatment businesses), and they have significantly greater resources than we
do.




Competitors
in the thermal ablation market include RadioTherapeutics, a division of Boston
Scientific Corporation, Covidien Ltd., Angiodynamics, Inc. and Microsulis
Medical Ltd.





Product
Service




We
generally provide a 12-month warranty and record a liability for the warranty
following installation on all cancer treatment systems and a 90-day limited
warranty on individual components.  We install and service the
hyperthermia systems we sell to domestic customers.  In addition, we
or our consultants provide technical and clinical training to our
customers.  Subsequent to the applicable warranty period, we offer our
domestic customers full or limited service contracts.




Generally,
our distributors install and service systems sold to foreign customers and are
responsible for managing their own warranty programs for their customers,
including labor and travel expenses.  We provide warranties for the
replacement and/or repair of parts for 12 months for systems sold
internationally through distributors and for 90 days for individual
components.  Spare parts are generally purchased by the distributors
and stored at the distributors’ maintenance facilities to allow prompt
repair.  Distributor service personnel are usually trained at customer
sites and at our facilities in Salt Lake City, Utah.




Production




We
manufacture and test our systems and products at our facilities in Salt Lake
City, Utah.  Our manufacturing facility is ISO 13485:2003 certified
and follows FDA quality systems regulations.  Some equipment
components we purchase from suppliers are customized to our
specifications.  Key factors in our manufacturing process are assembly
and testing.  We purchase component parts and other materials from a
variety of suppliers.  We do not depend on a single supplier for any
item, and believe we can acquire materials and parts from multiple sources on a
timely basis.




12





Product Liability
Exposure




The
manufacturing and marketing of medical devices involves an inherent risk of
product liability.  We presently carry product liability insurance
with coverage limits of $3 million.  However, we cannot assure that
our product liability insurance will provide adequate coverage against potential
claims that might be made against us.  No product liability claims are
presently pending against us; however, we cannot assume that product liability
claims will not be filed in the future or that such claims will not exceed our
coverage limits.




Government
Regulation




The
medical devices that we have developed and are developing are subject to
extensive and rigorous regulation by numerous governmental authorities,
principally by the FDA, and comparable foreign agencies.  Pursuant to
the Federal Food, Drug and Cosmetic Act, as amended, the FDA regulates and must
approve the clinical testing, manufacture, labeling, distribution, and promotion
of medical devices in the United States.




Although
our MicroThermX-100 system has received FDA marketing clearance as a 510(k)
submission, most of our hyperthermia treatment systems, including the BSD-500
and the BSD-2000 and related products, have required or require PMA or an HDE
marketing approval from the FDA instead of the simpler 510(k)
clearance.  PMA or HDE approval requires that we demonstrate that the
medical device is safe and effective or safe with a probable
benefit.  To do this, we conduct either laboratory and/or clinical
testing.  FDA approval must be obtained before commercial distribution
of the product.  We intend to continue to make improvements in and to
our existing products.  Significant product changes for PMA or HDE
approved devices must be submitted to the FDA under investigational device
exemptions, or IDEs, or under PMA supplements.  As described in the
section entitled “Our Products and Services” above, we have obtained a PMA for
our BSD-500 systems and IDE status for our BSD-2000 system.  A PMA
submission was made to the FDA for the BSD-2000 in March 2006.  Due to
the lengthy nature of the PMA review process and the length of time that the
submission was under review by the FDA, we worked closely with FDA to seek the
most expeditious pathway that could lead to marketing approval for the BSD-2000.
FDA recommended that BSD pursue HDE marketing approval rather than continue to
pursue the PMA approval and BSD followed FDA’s
recommendation.   On May 18, 2009, the FDA granted HUD
designation for the BSD-2000 Hyperthermia System for use in conjunction with
radiation therapy for the treatment of cervical carcinoma patients who are
ineligible for chemotherapy. This is the first of the two steps required to
obtain HDE marketing approval, which requires us to demonstrate the device’s
safety and probable benefit in treating a disease or condition that affects
fewer than 4,000 individuals in the United States per year.  We
subsequently filed an HDE submission with the FDA, which is the final step
required to obtain HDE marketing approval.  The HDE is still under
review by the FDA.  The HDE approval of the BSD-2000 Hyperthermia
System would authorize the commercial sale of the BSD-2000 in the United
States.




Foreign
countries, in which our products are or may be sold, have regulatory
requirements that can vary widely from country to country.  Sales into
the European Union, or EU, require compliance with the Medical Devices
Directive, or MDD, and require us to obtain the necessary certifications to have
a CE Mark affixed to our products.  We have obtained necessary ISO
certification of our quality, development, and manufacturing processes, and we
have successfully completed the CE Mark testing and Annex II
audit.    However, we must maintain compliance with all
current and future directives and requirements to maintain ISO certification and
to continue to affix the CE Mark, and there can be no assurance that we will
continue to maintain compliance with regulatory requirements imposed on
us.




13





After we
receive FDA approval to distribute a medical device, we continue to have ongoing
responsibilities under the Federal Food, Drug, and Cosmetic Act and FDA
regulations.   The FDA reviews design and manufacturing
practices, labeling, record-keeping, and required reporting of adverse
experiences.  All medical devices must be manufactured in accordance
with regulations specified in the FDA Quality System Regulations, or QSR, and in
compliance with the ISO and other applicable standards.  In complying
with these regulations, we must continue to expend time, money and effort in the
areas of design control, production, and quality control to ensure full
compliance.  The FDA’s mandatory Medical Device Reporting regulation
requires us to provide information to the FDA on death or serious injuries
alleged to have been associated with the use of our products, as well as
information on product malfunctions that would likely cause or contribute to a
death or serious injury if the malfunctions were to recur.  In Europe,
the MDD vigilance system regulations require that we, through a representative
in Europe, provide information to authorities on death or serious injuries
alleged to have been associated with the use of our products, as well as
information on product malfunctions that would likely cause or contribute to a
death or serious injury if the malfunctions were to recur.  If the FDA
were to assert that we are not in compliance with applicable laws or
regulations, or that any of our medical devices are ineffective or pose an
unreasonable risk to patient health, the FDA could seize our medical devices,
ban such medical devices, or order a recall, repair, replacement or refund of
such devices, and require us to notify health care professionals and others that
the devices present unreasonable risk of substantial harm to the
public.  The FDA may also impose operating restrictions, restrain
certain violations of law, and assess civil or criminal penalties against
us.  The FDA can also recommend prosecution to the Department of
Justice.  Certain regulations are subject to administrative
interpretation and we cannot assure that future interpretations made by the FDA
or other regulatory bodies, with possible retroactive effect, will not adversely
affect us.





International
sales of medical devices are subject to FDA export requirements.  We
have obtained export approvals for all countries into which we have delivered
products.  This includes countries in Western Europe and much of
Eastern Europe and many Asian countries.




International
sales are subject to the regulatory and safety requirements of the country into
which the sale occurs.  There can be no assurance that all of the
necessary approvals will be granted on a timely basis or at
all.  Delays in receipt of or failure to receive such approvals would
have a material adverse effect on our financial condition and results of
operations.




In
addition to FDA regulations, certain U.S. health care laws apply when a claim
for reimbursement for one of our medical devices is submitted to Medicare,
Medicaid, or other federal health care programs.  For instance,
federal law prohibits the filing of false or improper claims for federal
payments.  In addition, federal law prohibits the payment of anything
of value for the purpose of inducing referrals of business reimbursable under a
federal health care program.  Other federal laws prohibit physicians
from making referrals for certain services and items payable under certain
federal programs if the physician has a financial relationship with the entity
providing the service or item.




All of
these laws are subject to evolving interpretations.  If the federal
government were to conclude that we are not in compliance with any of these
health care laws, we could be subject to substantial criminal and civil
penalties, and could be excluded from participation as a supplier to
beneficiaries in federal health care programs.




The
Federal Communications Commission, or FCC, regulates the frequencies of
microwave and radio frequency emissions from medical and other types of
equipment to prevent interference with commercial and governmental
communications networks. The BSD-500 fixed frequency systems and applicators and
the MTX-180 ablation system and applicators emit 915 MHz, which is approved by
the FCC for medical applications.  Accordingly, these systems do not
require shielding to prevent interference with communications.  Our
BSD-2000 deep hyperthermia variable-frequency generators and applicators require
electromagnetic shielding.




14





Patents, Licenses, and Other
Rights




Because
of the substantial length of time and expense associated with bringing new
products through development and regulatory approval to the marketplace, the
medical device industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and
processes.  Our policy is to file patent applications to protect
significant technology, inventions and product improvements.  We
currently own two patents in the United States related to certain components or
technology of our hyperthermia systems.  In addition, three current
patents were assigned to TherMatrx, for which we obtained a
license.  We currently have one patent license from Duke
University.  Six new U.S. patent applications are pending and have
been published, other U.S. patents are pending but not published, and one
foreign patent is pending.  We believe that our patents represent the
early pioneering and dominant patents in this field.




In July
1979, we entered into an exclusive worldwide license for a unique temperature
probe called the Bowman Probe.  The license will remain in effect as
long as the technology does not become publicly known as a result of actions
taken by the licensor.  We pay royalties based upon our sales of the
Bowman Probe.  The license agreement was amended and renewed in August
2000 and is currently in effect.




On July
31, 2007, BSD obtained an exclusive sub-license to a patent owned by Duke
University using phased array technology for the treatment of primary breast
cancer on terms that included hyperthermia equipment upgrades and payment of
some prior patent costs.  This technology and patent is expected to enhance
future developments with the current BSD phased array hyperthermia
systems.




On July
1, 2001, we acquired the rights to all FDA approvals and the rights to
manufacture all cancer products formerly owned by Clini-Therm
Corp.  These products are related to the hyperthermia therapy
delivered by our BSD-500 systems, the exclusive patent obtained from UCSF, and
our enhancements to such systems involve incorporating some of the Clini-Therm
rights we acquired into such systems.  This involved only a one-time
cash payment with no continuing costs.




We cannot
assure that the patents presently issued to us will be of significant value to
us in the future or will be held valid upon judicial
review.  Successful litigation against these patents by a competitor
would have a material adverse effect upon our business, financial condition and
results of operations.  We believe that we possess significant
proprietary know-how in our hardware and software
capabilities.  However, we cannot assure that others will not develop,
acquire or patent technologies similar to ours or that such secrecy will not be
breached.




Research and
Development




Research
and development expenses for fiscal years 2009 and 2008 were $2,043,268 and
$1,737,924, respectively.  Research and development expenses in fiscal
2009 related to the following:




·
            updating
      of our commercial version of the BSD-2000 with complete modernization of
      the computer system, applicators and patient supports
      and  development of commercial configuration of BSD-2000
      3D/MR;




·
            installing
      BSD-2000 system at Long Beach Memorial
Hospital;




·
            updating
      our BSD-500 and BSD-2000 system designs for both reduced cost, improved
      manufacturability, and more up-to-date
  technology;




·
            making
      enhancements to the BSD-500 and 2000
systems;




15




·
            incorporating
      new development regulations in design
process;




·
            completing
      the MicroThermX-180 microwave ablation
system;




·
            designing
      a new generation of microwave ablation system microwave
      generator;




·
            designing
      and testing of new advanced cooled disposable microwave ablation
      applicators;




·
            supporting
      BSD-2000 FDA approval efforts;


·
            installing
      in collaboration with General Electric and Duke engineers a new
      BSD-2000/3D/MR at Duke University;




·
            developing
      new microwave applicators and technical research to evaluate the various
      treatment sites and diseases suitable for the application of microwave
      ablation and thermal therapy; and




·
            R&D
      projects not publically disclosed.




Technological
changes play an important part in the advancement of our industry.  We
intend to continue to devote substantial sums to research and
development.  Research and development efforts inherently involve
costs, risks and uncertainties that could aversely affect our projections,
outlook and operating results.




Seasonality




Our operations are generally not
subject to seasonal fluctuations.





Segment Information and
Sales Concentrations




We consider our operations to comprise
one business segment.  All of our operating assets are located in the
United States.





A
significant portion of our revenues are derived from sales to Medizin-Technik
GmbH located in Munich, Germany, which is a significant distributor of our
products in Europe and which is owned by Dr. Gerhard W. Sennewald, one of our
directors and a significant stockholder.  For fiscal year 2009 we had
sales of $603,000, or 17% of our total sales, from the sale of systems and
various component parts sold to Medizin-Technik, as compared to sales of
$2,809,132, or 55% of our total sales, in fiscal 2008.  Management
believes the terms of the transactions with Medizin-Technik were arms length and
fair to the Company.




A significant portion of our revenues
are derived from sales to foreign customers.  During the years ended
August 31, 2009, 2008 and 2007, export sales totaled $1,668,547, $2,812,796 and
$1,787,363, or 47%, 55% and 63% of total sales, respectively.  During
fiscal year 2009, export sales to China, Switzerland and Poland were
approximately 16%, 13% and 14% of total sales, respectively.  During
fiscal years 2008 and 2007, export sales to Switzerland were approximately 53%
and 44% of total sales, respectively.





Backlog





As of August 31, 2009, we had no sales
backlog.





16





Employees




As of August 31, 2009, we had 49
employees; 46 of whom were full-time employees.  None of our employees
are covered by a collective bargaining agreement.  We consider our
relations with our employees to be satisfactory.  We depend upon a
limited number of key management, manufacturing, and technical
personnel.  Our future success will depend in part on our ability to
retain these highly qualified employees.





Available
Information




We file
annual, quarterly and current reports, and other reports and documents with the
Securities and Exchange Commission (the "SEC").  The public may read
and copy any materials we file with the SEC at the SEC's Public Reference Room,
100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.  The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC.  The address of that
website is http://www.sec.gov.





The
Company's Internet address is http://www.bsdmc.com.  We make available
on or through our investor link on our website, free of charge, our Annual
Reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and any amendments to those reports as soon as reasonably
practicable after this material is electronically filed or furnished to the
SEC.  We also make available, on our website, the charter of the Audit
Committee of our Board of Directors and our Code of
Ethics.  Information contained on our website is not deemed to be a
part of this Annual Report.





ITEM 1A.  RISK
FACTORS





Our
future operating results are highly uncertain.  Before deciding to
invest in BSD Medical or to maintain or increase your investment, you should
carefully consider the risks described below, in addition to the other
information contained in this annual report on Form 10-K.  If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed.  In that event, the market price
for our common stock could decline and you may lose all or part of your
investment.  Although the Company has attempted to list the factors of
which it is currently aware that may have an impact on its operations, there may
be other factors of which the Company is currently unaware or to which it does
not assign sufficient significance, and the following list should not be
considered comprehensive.




We
have a history of significant operating losses and such losses may continue in
the future.




Since our
inception in 1978, our expenses have substantially exceeded our revenue,
resulting in continuing losses and an accumulated deficit of $16,674,122 at
August 31, 2009.  We reported net losses of $11,384,870, $2,439,099
and $3,348,195 in fiscal years 2009, 2008 and 2007, respectively.




We may
continue to incur operating losses in the future as we continue to incur costs
to develop our products, protect our intellectual property and expand our sales
and marketing activities.  To become profitable we will need to
increase significantly the revenues we receive from sales of our hyperthermia
therapy products and to successfully commercialize our new ablation product to
improve our profitability on a quarterly or annual basis.  We have
been unable to do this in the past and we may be unable to do so in the future,
and therefore may never achieve profitability.




17


Adverse
worldwide economic conditions have made it difficult for our customers to obtain
approval for the purchase of and funding for our hyperthermia
systems.





Our
hyperthermia cancer treatment systems represent capital equipment purchases for
our customers.  Adverse worldwide economic conditions have made it
difficult for our customers to obtain approval for the purchase of and funding
for our hyperthermia systems.  This has contributed to a lack of
growth in our worldwide sales of our system.  To the extent that
adverse economic conditions continue, we believe our sales of hyperthermia
systems will continue to be negatively impacted and possibly decrease in fiscal
year 2010 as compared to fiscal year 2009.




Our
revenues can fluctuate significantly from period to period because our sales, to
date have been based upon a relatively small number of systems, the sales price
of each being substantial enough to greatly impact revenue levels in the periods
in which they occur.




Our
revenues can fluctuate significantly from period to period because our sales, to
date, have been based upon a relatively small number of hyperthermia systems,
the sales price of each being substantial enough to greatly impact revenue
levels in the periods in which they occur.  Sales of a few systems,
particularly BSD-2000/3D/MR systems, can cause a large change in our revenues
from period to period and the sales cycle for our systems generally extends over
multiple financial reporting periods.  In addition, differences in the
configuration of the systems sold, pricing, and other factors can result in
significant differences in the sales price per system and in the total revenues
reported in a given period.  As a result, there may be quarterly
financial reporting periods where we may report no or minimal revenues from the
sale of hyperthermia systems.




A
significant portion of our revenues have been from related parties, and we have
had significant concentrations of revenues in foreign countries.




During
the years ended August 31, 2009, 2008, and 2007, we had sales of $603,000,
$2,809,132 and $1,385,332, respectively, to entities controlled by a significant
stockholder and member of the Board of Directors.  These related party
transactions represent 17%, 55% and 49% of total sales for each respective
year.




A
significant portion of our revenues are derived from sales to foreign
customers.  During the years ended August 31, 2009, 2008 and 2007,
export sales totaled $1,668,547, $2,812,796 and $1,787,363, or 47%, 55% and 63%
of total sales, respectively.  During fiscal year 2009, export sales
to China, Switzerland and Poland were approximately 16%, 13% and 14% of total
sales, respectively.  During fiscal years 2008 and 2007, export sales
to Switzerland were approximately 53% and 44% of total sales,
respectively.





To the
extent that we are unable to maintain or increase the level of our revenues
derived from related parties or foreign customers, the results of our operations
could be negatively impacted.




Our
hyperthermia therapy products may not achieve market acceptance which could
limit our future revenue and ability to achieve profitability.




To date,
hyperthermia therapy has not gained wide acceptance by cancer-treating
physicians.  We believe this is due in part to the lingering
impression created by the inability of early hyperthermia therapy technologies
to focus and control heat directed at specific tissue locations and conclusions
drawn in early scientific studies that hyperthermia was only marginally
effective.  Additionally, market acceptance depends upon physicians
and hospitals obtaining adequate reimbursement rates from third-party payors to
make our products commercially viable, and we believe that reimbursement rates
have not been adequate to stimulate strong interest in adopting hyperthermia as
a new cancer therapy.  If our sales and marketing efforts to promote
hyperthermia therapy acceptance in the medical community fail, or our efforts to
improve third-party reimbursement rates for hyperthermia therapy are not
successful, then our future revenue from sales of our products may be limited,
and we may never be able to obtain profitable recurring operations.




18





We
have delayed market introduction of our MTX-180 ablation product and are unable
to predict when design modification, marketing and sales strategies will be
completed or when regulatory approval will be obtained.




Our
MTX-180 Microwave Ablation System represents a major part of our business plan
moving forward.  The FDA granted us a 510(k) clearance to market the
MTX-100, which authorizes the commercial sale of the device in the United
States.  Since receipt of FDA clearance to market the MTX-100, we have
devoted significant efforts to optimizing the design of the system to improve
its ease of use and its medical applications.  Following clinical
evaluations of Phase I, we decided to postpone market entry until completion of
the optimized Phase II design, the MTX-180.  We believe this will
allow us to enter this market with an optimized system that will have a wider
range of clinical applications and increased revenue streams.




Additional
time will be required to complete the market-ready Phase II design, apply for
applicable regulatory approvals, and finalize the manufacturing processes for
the MTX-180 and the applicators.  Also, final marketing and sales
strategies must be completed prior to market introduction.  We
currently are unable to predict when these efforts will be completed and when
revenues from the sale of the MTX-180 and related applicators will
begin.  We do not believe, however, that these revenues will begin
until at least the first or second quarter of calendar year 2010.  We
cannot be assured that our efforts to commercialize the MTX-180 will be
successful.  If our efforts to commercialize the MTX-180 are not
successful, our business will be adversely affected.




Sales
of our product could be significantly reduced if government, private health
insurers and other third-party payors do not provide sufficient coverage or
reimbursement.




Our
success in selling our products will depend in large part on the extent to which
reimbursement for the costs of our products and related treatments are available
from government health agencies, private health insurers and other third-party
payers.  Despite the existence of general reimbursement policies,
local medical review policies may differ for public and private insurance
payers, which may cause payment to be refused for some hyperthermia
treatments.  Private payers also may refuse to pay for hyperthermia
treatments.




Medical
reimbursement rates are unpredictable and we cannot predict the extent to which
our business may be affected by future legislative and regulatory
developments.  Future health care legislation or regulation may limit
our business or impose additional delays and costs on our business and
third-party reimbursement may not be adequate to cover our costs associated with
producing and selling our products.




Cancer
therapy is subject to rapid technological change and therapies that are more
effective than ours could render our technology obsolete.




The
treatment of cancer is currently subject to extensive research and
development.  Many cancer therapies are being researched and our
products may be rendered obsolete by existing therapies and as a result of
therapy innovations by others.  If our products are rendered obsolete,
our revenue will decline, we may never achieve profitability, and we may not be
able to continue in business.




Additionally,
other companies, particularly established companies that currently manufacture
and sell other cancer therapy systems, could potentially become competitors (in
that they are also engaged in cancer treatment business), and they have
significantly greater resources than we do.




19





Some
of the medical institutions to which we have sold in the past have not been able
to pay for their equipment, and some of our sales have therefore become
substantial bad debts, a risk that could continue into the future.




A limited
number of our customers have been developing clinics, and these customers have
been particularly vulnerable to financial difficulties that can cause them to be
unable to pay for equipment that they have purchased. If we choose to accept
higher risk sales opportunities to clinics in the future, we will be subject to
these customer credit risks that could lower future net sales due to bad-debt
write offs, resulting in losses in future periods and potentially lowering the
value of our stock.  While we attempt to provide for foreseeable
doubtful accounts, we cannot assure that this provision will always be adequate
to cover our credit risks.




Increasing
sales of our hyperthermia systems depends on our ability to successfully expand
our sales distribution channels; however, we have had failures with the
productivity of new channels of distribution in the past.  Expanding
our channels of distribution will also significantly increase our sales
expenses, which could negatively impact our financial performance.




We
believe that the success of our efforts to increase sales of our hyperthermia
systems in the future depends on our ability to successfully expand our sales
distribution channels.  Historically, we have sometimes failed in
establishing successful new sales channels.




We
anticipate that the success of our multi-year plan for selling hyperthermia
systems will require expanding our sales and marketing organization through a
combination of direct sales people, distributors and internal and external
marketing expertise.  However, as we pursue our marketing plan, there
can be no assurance that we will be successful in securing reliable channels of
distribution to meet our plan through expanded sales.  Recruiting and
training new distribution channels can take time and considerable expense. We
project that sales and marketing expenses will increase substantially in the
future as compared to past years.  This added expense could have an
adverse effect on our future financial performance that is greater than any
potential increases in sales.




In
addition, there can be no assurance that our channels of distribution that have
been successful in the past will be successful in the future.  We have
derived a significant portion of our revenue from sales in Europe and in
China.  Sales in Europe were made through our distributor
Medizin-Technik, GmbH, which also purchases equipment components and parts from
us.  Medizin-Technik is controlled by Dr. Sennewald, one of our
directors.  The loss or ineffectiveness of either Medizin-Technik or
our Chinese distributor as a distributor and significant customer could result
in lower revenue.




We
may face significant uncertainty in the industry due to government healthcare
reform.




Political,
economic and regulatory influences are subjecting the healthcare industry to
fundamental changes.  We anticipate that the current administration,
Congress and certain state legislatures will continue to review and assess
alternative healthcare delivery systems and payment methods with an objective of
ultimately reducing healthcare costs and expanding access.  Public
debate of these issues will likely continue in the future.  The
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation may have an adverse effect on our customers’
purchasing decisions regarding our products and services.  At this
time, we cannot predict which, if any, healthcare reform proposals will be
adopted, when they may be adopted or what impact they may have on our
business.




20





We
are subject to government regulations that can delay our ability to sell our
products and cause us to incur substantial expenses.




Our
research and development efforts, pre-clinical tests and clinical trials, and
the manufacturing, marketing, distribution and labeling of our products are
subject to extensive regulation by the FDA and comparable international
agencies.  The process of obtaining FDA and other required regulatory
approvals is lengthy and expensive and our financial resources are
limited.




Obtaining
pre-market approval or marketing clearance as a 510(k) submission from the FDA
is necessary for us to commercially market our systems in the United
States.  Obtaining approvals is a lengthy and expensive
process.  We may not be able to obtain these approvals on a timely
basis, if at all, and such failure could harm our business prospects
substantially. Further, even if we are able to obtain the approvals we seek from
the FDA, the approvals granted might include significant limitations on the
indicated uses for which the products may be marketed, which restrictions could
negatively impact our business.  As described above in “Business—Our
Products and Services”, the FDA is currently reviewing our HDE marketing
submission for the BSD-2000.  We are unable to predict when the review
process will be completed and its ultimate outcome.  If we are unable
to receive HDE marketing approval, or if the FDA requires us to undergo
extensive testing in order to grant HDE marketing approval, our business could
be adversely affected.




After a
product is approved for commercial distribution by the FDA, we have ongoing
responsibilities under the Federal Food, Drug, and Cosmetic Act and FDA
regulations, including regulation of our manufacturing facilities and processes,
labeling and record-keeping, and reporting of adverse experiences and other
information.  Failure to comply with these ongoing requirements could
result in the FDA imposing operating restrictions on us, enjoining or
restraining certain violations, or imposing civil or criminal penalties on
us.




All of
these laws are subject to evolving interpretations.  If the federal
government were to conclude that we are not in compliance with any of these
health care laws, we could be subject to substantial criminal and civil
penalties, and could be excluded from participation as a supplier to
beneficiaries in federal health care programs.




We
depend on adequate protection of our patent and other intellectual property
rights to stay competitive.




We rely
on patents, trade secrets, trademarks, copyrights, know-how, license agreements
and contractual provisions to establish and protect our intellectual property
rights.  Our success will substantially depend on our ability to
protect our intellectual property rights and maintain rights granted to us
through license agreements.  Our intellectual property rights may only
afford us limited protection and may not adequately protect our rights or
remedies to gain or keep any advantages we may have over our competitors, which
could reduce our ability to be competitive and generate sales and
profitability.




In the
past, we have participated in substantial litigation regarding our patent and
other intellectual property rights in the medical device industry.  We
have previously filed lawsuits for patent infringement against three of our
competitors and subsequently settled all three of those
lawsuits.  Additional litigation against other parties may be
necessary in the future to enforce our intellectual property rights, to protect
our patents and trade secrets, and to determine the validity and scope of our
proprietary rights.  This litigation may require more financial
resources than are available to us.  We cannot guarantee that we will
be able to successfully protect our rights in litigation.  Failure to
successfully protect our rights in litigation could reduce our ability to be
competitive and generate sales and profitability.




21





A
product liability settlement could exceed our ability to pay.




The
manufacturing and marketing of medical devices involves an inherent risk of
product liability.  We presently carry product liability insurance
with coverage limits of $3 million.  Our product liability insurance
does not cover intended injury, injury or damage resulting from the intoxication
of any person, payment of workers’ compensation benefits, injury of our own
employee, injury or damage due to war, damage to property that we own, damage to
our work, loss of use of property, patent infringements, pollution claims,
interest payments, depreciation of property, or injury or damage resulting from
asbestos inhalation.  We are responsible to pay the first $10,000
resulting from any claim up to a maximum of $50,000 in one year.  We
cannot assure that our product liability insurance will provide adequate
coverage against potential claims that might be made against us.  If
we were to be subject to a claim in excess of our coverage or to a claim not
covered by our insurance and the claim succeeded, we would be required to pay
the claim from our limited resources, which would reduce our limited capital
resources and liquidity and reduce capital we could otherwise use to obtain
approvals for and market our products.  In addition, liability or
alleged liability could harm our business by diverting the attention and
resources of our management and by damaging our reputation.




We
are dependent upon key personnel, some of whom would be difficult to
replace.




Our
success will be largely dependent upon the efforts of Harold R. Wolcott, our
President, Paul F. Turner, our Senior Vice President and Chief Technology
Officer, and Dixie T. Sells, our Vice President of Regulatory Affairs, and other
key employees.  We do not maintain key-person insurance on any of
these employees.  Our future success also will depend in large part
upon our ability to identify, attract and retain other highly qualified
managerial, technical and sales and marketing personnel.  Competition
for these individuals is intense.  The loss of the services of any of
our key personnel, the inability to identify, attract or retain qualified
personnel in the future or delays in hiring qualified personnel could make it
more difficult for us to manage our business and meet key objectives such as the
sale of our products and the introduction of new products.




The
market for our stock is limited and our stock price may be
volatile.




The
market for our common stock has been limited due to low trading volume and the
small number of brokerage firms acting as market makers.  Because of
the limitations of our market and volatility of the market price of our stock,
investors may face difficulties in selling shares at attractive prices when they
want to.  The average daily trading volume for our stock has varied
significantly from week to week and from month to month, and the trading volume
often varies widely from day to day.  The following factors could
impact the market for our stock and cause further volatility in our stock
price:




·
            announcements
      of new technological innovations;




·
            FDA
      and other regulatory developments;




·
            changes
      in third-party reimbursements;




·
            developments
      concerning proprietary rights;




·
            third
      parties receiving FDA approval for competing products;
  and




·
            market
      conditions generally for medical and technology
  stocks.







22




Our
directors and executive officers own a substantial number of shares of our
capital stock, which could discourage or prevent a takeover, even if an
acquisition would be beneficial to our stockholders.




Our
directors and executive officers own approximately 40% of our outstanding voting
power.  Accordingly, these stockholders, individually and as a group,
may be able to influence the outcome of stockholder votes involving the election
of directors, the adoption or amendment of provisions in our certificate of
incorporation and bylaws and the approval of certain mergers or other similar
transactions, such as a sale of substantially all of our assets.  Such
control by existing stockholders could have the effect of delaying, deferring or
preventing a change in control of our company.




Future
sales of shares of our securities pursuant to our universal shelf registration
statement may negatively affect our stock price.




We
currently have the ability to offer and sell up to $50.0 million of common
stock, preferred stock, warrants, senior debt, subordinated debt or units under
a currently effective universal shelf registration statement.  Sales
of substantial amounts of shares of our common stock or other securities under
our universal shelf registration statement could lower the market price of our
common stock and impair our ability to raise capital.




Anti-takeover
provisions in our certificate of incorporation may have a possible negative
effect on our stock price.




Certain
provisions of our certificate of incorporation and bylaws may make it more
difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of us.  We have in place several
anti-takeover measures that could discourage or prevent a takeover, even if an
acquisition would be beneficial to our stockholders.  The increased
difficulties faced by a third party who wishes to acquire us could adversely
affect our stock price.






ITEM
1B.  UNRESOLVED STAFF COMMENTS





None.





ITEM
2.  PROPERTIES





We own
our office, production and research facilities located in Salt Lake City,
Utah.  The complete headquarters and production facility occupies
approximately 20,000 square feet.  The building is currently in good
condition, is adequate for our needs, and is suitable for all company
functions.  We believe that we carry adequate insurance on the
property.






ITEM 3.  LEGAL
PROCEEDINGS





There are
no material legal proceedings, to our knowledge, pending against or being taken
by BSD Medical Corporation.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.




23





PART
II





ITEM 5.  MARKET
FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





On July
9, 2005, the American Stock Exchange (AMEX) approved the listing for BSD Medical
Corporation and the shares began trading on that day under the symbol
“BSM”.  On April 22, 2008, the shares began trading on the Nasdaq
Stock Market under the symbol “BSDM”.  The following table sets forth
the high and low sales prices, as provided by AMEX and NASDAQ for the quarters
in fiscal years 2008 and 2009.  The amounts reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not represent
actual transactions.


Quarter
      Ended:
            High
            LowNovember
      30, 2007
            $7.11
            $4.89February
      29, 2008
            6.35
            4.30May
      31, 2008
            7.50
            4.57August
      31, 2008
            8.20
            5.00November
      30, 2008
            8.50
            3.10February
      28, 2009
            5.18
            2.50May
      31, 2009
            2.99
            1.17August
      31, 2009
            2.31
            1.70




As of
August 31, 2009, there were approximately 488 holders of record of our common
stock.  We have not paid any cash dividends on our common stock since
our inception, and we currently plan to retain our future earnings, if any, to
fund the growth of our business.




On
November 3, 2009, the last reported sales price of our common stock on the
Nasdaq Stock Market was $2.16 per share.




Repurchases
of Equity Securities




None.




Recent
Sales of Unregistered Securities




Following is a summary of sales of
unregistered securities for the fiscal year ended August 31, 2009.  We
issued a total of 4,715 shares of our common stock on September 1, 2008 and a
total of 28,200 shares of our common stock on May 1, 2009 to members of our
Board of Directors pursuant to the Company’s Amended and Restated 1998 Directors
Stock Plan.  All securities were issued as restricted common shares
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or the
rules promulgated pursuant to Section 4(2).  These shares are
generally subject to Rule 144 of the Securities and Exchange
Commission.  Generally, Rule 144 requires shareholders to hold the
shares for a minimum of six months before sale.  In addition,
officers, directors and other affiliates are further restricted in their ability
to sell such shares.  There have been no underwriters of these
securities and no commissions or underwriting discounts have been
paid.





24





Consideration
      or Nature of Service Performed
            
            Shares
      Issued
            
            Value
      ReceivedMembers
      of Board of Directors
            
            Board
      Services
            
            32,915
            
            $             105,180








Performance
Graph





The
following graph shows a comparison of the five-year cumulative total return for
the Company's common stock, the S&P 500 Index, and the S&P Health Care
Equipment Index, assuming an investment of $100 on August 31,
2004.  The cumulative return of the Company was computed by dividing
the difference between the price of the Company's common stock at the end and
the beginning of the measurement period (August 31, 2004 to August 31, 2009) by
the price of the Company's common stock at the beginning of the measurement
period.















25





ITEM 6.  SELECTED
FINANCIAL DATA





The
following selected financial data as of and for each of the fiscal years in the
five year period ended August 31, 2009 were derived from the Company’s financial
statements audited by Tanner LC, independent registered public
accountants.  The data set forth below should be read in conjunction
with “Management's Discussion and Analysis of Financial Condition and Results of
Operations” included in Item 7 of this Form 10-K and the financial statements
and notes thereto included in Item 8 of this Form 10-K.  See also the
discussion in “The Sale of TherMatrx” included in Item 1, “Business”, of this
Form 10-K.


Years
      Ended August 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Results of Operations
      Data:Revenues
            
            $
            3,536,487
            
            
            $
            5,143,140
            
            
            $
            2,834,386
            
            
            $
            2,898,402
            
            
            $
            2,021,104Loss
      from operations
            
            
            (6,526,493
            )
            
            
            (4,252,344
            )
            
            
            (6,384,540
            )
            
            
            (5,099,151
            )
            
            
            (2,293,696
            )Net
      income (loss)
            
            
            (11,384,870
            )
            
            
            (2,439,099
            )
            
            
            (3,348,195
            )
            
            
            9,249,496
            
            
            
            3,321,692Income
      (loss) per common share - diluted
            
            $
            (0.52
            )
            
            $
            (0.11
            )
            
            $
            (0.16
            )
            
            $
            0.42
            
            
            $
            0.15Dividends
      per common share
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Balance
      Sheet Data:Total
      Assets
            
            $
            12,857,358
            
            
            $
            21,486,898
            
            
            $
            24,341,640
            
            
            $
            28,309,868
            
            
            $
            15,599,943Long-term
      debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Stockholders'
      equity
            
            
            11,940,989
            
            
            
            20,155,860
            
            
            
            23,183,788
            
            
            
            25,624,001
            
            
            
            14,977,667








ITEM
7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS




Overview





This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this annual report on Form 10-K contain
forward-looking statements that involve risks and
uncertainties.  Forward-looking statements can also be identified by
words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and
similar terms.  Forward-looking statements are not guarantees of
future performance and our actual results may differ significantly from the
results discussed in the forward-looking statements.  Factors that
might cause such differences include, but are not limited to, those discussed in
the subsection entitled “Forward-Looking Statements” below and the Item 1A “Risk
Factors” above.  The following discussion should be read in
conjunction with our financial statements and notes thereto included in this
annual report on Form 10-K.  All information presented herein is based
on our fiscal year ended August 31, 2009.  We assume no obligation to
revise or update any forward-looking statements for any reason, except as
required by law.




We
develop, manufacture, market and service medical systems that deliver
precision-focused radio frequency (RF) or microwave energy into diseased sites
of the body, heating them to specified temperatures as required by a variety of
medical therapies.  Our business objectives are to commercialize our
products developed for the treatment of cancer and to further expand our systems
to treat other diseases and medical conditions.  Our product line for
cancer therapy has been created to offer hospitals and clinics a complete
solution for thermal treatment of cancer as provided through microwave/RF
systems.




26





In
addition to revenues from the sale of our hyperthermia cancer treatment systems,
we recognize revenue from the sale of parts and accessories related to our
systems, the sale of consumable devices used with certain of our systems,
training, service support contracts, and other miscellaneous
revenues.  System and product sales totaled $3,293,116, $4,631,713 and
$2,520,818 for the years ended August 31, 2009, 2008 and 2007,
respectively.  Sales of consumable devices, service and other revenues
totaled $243,371, $511,427 and $313,568 for the years ended August 31, 2009,
2008 and 2007, respectively.




As of
August 31, 2009, we had no sales backlog.





Critical Accounting
Policies





The
following is a discussion of our critical accounting policies and estimates that
management believes are material to an understanding of our results of
operations and which involve the exercise of judgment or estimates by
management.




Revenue
Recognition:  Revenue from the sale of cancer treatment systems
is recognized when a purchase order has been received, the system has been
shipped, the selling price is fixed or determinable, and collection is
reasonably assured.  Most system sales are F.O.B. shipping point;
therefore, shipment is deemed to have occurred when the product is delivered to
the transportation carrier.  Most system sales do not include
installation.  If installation is included as part of the contract,
revenue is not recognized until installation has occurred, or until any
remaining installation obligation is deemed to be perfunctory.  Some
sales of cancer treatment systems may include training as part of the
sale.  In such cases, the portion of the revenue related to the
training, calculated based on the amount charged for training on a stand-alone
basis, is deferred and recognized when the training has been
provided.  The sales of our cancer treatment systems do not require
specific customer acceptance provisions and do not include the right of return,
except in cases where the product does not function as warranted by
us.  To date, returns have not been significant.




Revenue
from the sale of probes is recognized when a purchase order has been received,
the probes have been shipped, the selling price is fixed or determinable, and
collection is reasonably assured.  Our customers are not required to
purchase a minimum number of probes in connection with the purchase of our
systems.




Revenue
from manufacturing services is recorded when an agreement with the customer
exists for such services, the services have been provided, and collection is
reasonably assured.  Revenue from training services is recorded when
an agreement with the customer exists for such training, the training services
have been provided, and collection is reasonably assured.  Revenue
from service support contracts is recognized on a straight-line basis over the
term of the contract.




Our
revenue recognition policy is the same for sales to both related parties and
non-related parties.  We provide the same products and services under
the same terms to non-related parties as to related parties.  Sales to
distributors are recognized in the same manner as sales to end-user
customers.  Deferred revenue and customer deposits payable include
amounts from service contracts as well as cash received for the sales of
products, which have not been shipped.




Investments:  Investments
with scheduled maturities greater than three months, but not greater than one
year, are recorded as short-term investments.  As of August 31, 2009,
we had no investments.  As of August 31, 2008, our investments
consisted primarily of a highly liquid, managed portfolio of mutual funds, and
were all considered available-for-sale securities.  The investments
are carried at fair value based on quoted market prices, with net unrealized
gains and losses reported as other comprehensive income (loss) in stockholders’
equity in our balance sheets.  Realized gains and losses are included
in our statements of operations.  We continually review our
investments to determine whether a decline in fair value below the cost basis is
other than temporary.  We consider several factors, evaluated both
individually and collectively, with the evaluation involving a high level of
complexity and judgment.  The following factors, among others, are
considered: general market conditions; the length of time and extent to which
our investments’ market value has been less than cost; the level of income that
we continue to receive from our mutual funds, noting whether our dividends have
been reduced or eliminated or any scheduled dividend payments have not been
made; the recommendation of our investment advisor; sales of investments or our
decision to sell investments subsequent to a reporting period; for our corporate
debt funds, our analysis and conclusion that the decline in value is not
attributable to specific conditions in any one industry or geographic area; and
for our corporate debt funds, our analysis and conclusion that the default rate
within the individual funds continues to be low and that no significant
concentrations of debt is scheduled to mature in the next two
years.  Changes in financial and economic markets can result in
significant changes in these estimates.





27





Inventory
Reserves:  We periodically review our inventory levels and
usage, paying particular attention to slower-moving items.  If
projected sales do not materialize or if our hyperthermia systems do not receive
increased market acceptance, we may be required to increase the reserve for
inventory impairment in future periods.




Product
Warranty:  We provide product warranties on our
systems.  These warranties vary from contract to contract, but
generally consist of parts and labor warranties for one year from the date of
installation.  To date, expenses resulting from such warranties have
not been material.  We record a warranty expense at the time of each
sale.  This reserve is estimated based on prior history of service
expense associated with similar units sold in the past.




Allowance for
Doubtful Accounts:We maintain
allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments.  This allowance
is a significant estimate and is regularly evaluated by us for adequacy by
taking into consideration factors such as past experience, credit quality of the
customer base, age of the receivable balances, both individually and in the
aggregate, and current economic conditions that may affect a customer’s ability
to pay.  If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.




Stock-based
Compensation:  We account for stock-based compensation in
accordance with SFAS No. 123(R), which requires us to measure the compensation
cost of stock options and other stock-based awards to employees and directors at
fair value at the grant date and recognize compensation expense over the
requisite service period for awards expected to vest.  The grant date
fair value of stock options is computed using the Black-Scholes valuation model,
which model utilizes inputs that are subject to change over time, including the
volatility of the market price of our common stock, risk free interest rates,
requisite service periods and assumptions made by us regarding the assumed life
and vesting of stock options and stock-based awards.  As new options
or stock-based awards are granted, additional non-cash compensation expense will
be recorded by us.





Income
Taxes:  We account for income taxes using the asset and
liability method.  Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.





We
maintain valuation allowances where it is more likely than not that all or a
portion of a deferred tax asset will not be realized.  Changes in
valuation allowances are included in our income tax provision in the period of
change.  In determining whether a valuation allowance is warranted, we
evaluate factors such as prior earnings history, expected future earnings and
our ability to carry back reversing items within two years to offset income
taxes previously paid.





To the
extent that we have the ability to carry back current period taxable losses to
offset income taxes previously paid, we record an income tax receivable and a
current income tax benefit.


28




Results of
Operations




Revenues




We
recognize revenue from the sale of our hyperthermia cancer treatment systems and
related parts and accessories (collectively, product sales), the sale of
consumable devices used with certain of our systems, training, service support
contracts and other miscellaneous revenues.  Our revenues can
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of hyperthermia systems, the sales
price of each being substantial enough to greatly impact revenue levels in the
periods in which they occur.  Sales of a few systems, particularly
BSD-2000/3D/MR systems, can cause a large change in our revenues from period to
period and the sales cycle for our systems generally extends over multiple
financial reporting periods.  In addition, differences in the
configuration of the systems sold, pricing, and other factors can result in
significant differences in the sales price per system and in the total revenues
reported in a given period.  As a result, there may be quarterly
financial reporting periods where we may report no or minimal revenues from the
sale of hyperthermia systems.  Through August 31, 2009, we have not
had any sales of our MTX-180 system.




We also
believe the worldwide economic downturn has made it difficult for many of our
customers to obtain approval for the purchase of our hyperthermia systems and to
arrange related financing.   As a result, we have not experienced
significant growth in the number of our systems sold.  We believe
these difficulties may continue to negatively impact our operating
results.  To the extent that adverse economic conditions continue, we
believe our sales of hyperthermia systems will continue to be negatively
impacted and possibly decrease in fiscal year 2010 as compared to fiscal year
2009.




The
following table summarizes the number of our hyperthermia systems sold for the
years ended August 31, 2009, 2008 and 2007:




2009
            2008
            2007BSD-500
            7
            10
            8BSD-2000
            4
            -
            1BSD-2000/3D
            1
            1
            2BSD-2000/3D/MR
            -
            2
            -Total
            12
            13
            11





We have
historically derived a substantial portion of our revenues from sales to related
parties.  All of the related party revenue was for the sale of
hyperthermia systems and related component parts and services sold to
Medizin-Technik GmbH and Dr. Gerhard Sennewald.  Dr. Sennewald, one of
our directors and significant stockholders, is a stockholder, executive officer
and a director of Medizin-Technik GmbH.  We derived $603,000, or
approximately 17%, of our total revenue in fiscal 2009 from sales to related
parties, as compared to $2,809,132, or 55%, in fiscal 2008, and $1,385,332, or
49%, in fiscal 2007.




29





In fiscal
2009, we derived $2,933,487, or approximately 83%, of our total revenue from
non-related parties, as compared to $2,334,008, or 45%, in fiscal 2008, and
$1,449,054, or 51%, in fiscal 2007.




The
following tables summarize the sources of our revenues for the years ended
August 31, 2009, 2008 and 2007:


Non-Related
      Parties
            
            2009
            
            
            2008
            
            
            2007Product
      sales
            
            $
            2,784,777
            
            
            $
            2,218,700
            
            
            $
            1,347,887Consumable
      devices
            
            
            4,802
            
            
            
            16,247
            
            
            
            22,970Service
      contracts
            
            
            78,763
            
            
            
            56,968
            
            
            
            41,338Other
            
            
            65,145
            
            
            
            42,093
            
            
            
            36,859Total
            
            $
            2,933,487
            
            
            $
            2,334,008
            
            
            $
            1,449,054







Related
      Parties
            
            2009
            
            
            2008
            
            
            2007Product
      sales
            
            $
            508,339
            
            
            $
            2,623,013
            
            
            $
            1,172,930Consumable
      devices
            
            
            54,200
            
            
            
            38,550
            
            
            
            47,902Service
      contracts
            
            
            -
            
            
            
            -
            
            
            
            -Other
            
            
            40,461
            
            
            
            147,569
            
            
            
            164,500Total
            
            $
            603,000
            
            
            $
            2,809,132
            
            
            $
            1,385,332







Total
revenues for the year ended August 31, 2009 were $3,536,487 compared to
$5,143,140 for the year ended August 31, 2008, a decrease of $1,606,653, or
31%.  The overall decrease in revenues in the current fiscal year is
due primarily to a significant decrease in related party sales, partially offset
by an increase in non-related party sales.  We sold two more
hyperthermia systems in fiscal year 2009 to non-related parties than we did in
fiscal year 2008.  In addition, we did not sell any higher priced
BSD-2000/3D/MR systems to related parties in the current fiscal
year.




Total
revenues for the year ended August 31, 2008 were $5,143,140 compared to
$2,834,386 for the year ended August 31, 2007, an increase of $2,308,754, or
81%.  The overall increase in revenues in fiscal year 2008 was due
primarily to significant increases in both related party and non-related party
sales.  We sold two more hyperthermia systems in fiscal year 2008 to
non-related parties than we did in fiscal year 2007. During the year ended
August 31, 2008, we sold two higher priced BSD-2000/3D/MR systems to related
parties, but did not sell any of these systems in the year ended August 31,
2007.




Gross
Profit




Our gross profit and gross profit
percentage will fluctuate from period to period depending on the mix of revenues
reported for the period and the type and configuration of the hyperthermia
systems sold during the period.  Our total gross profit was
$1,614,269, or 46% of total sales, for fiscal year 2009, $3,058,891, or 59%, for
fiscal year 2008, and $1,252,824, or 44%, for fiscal year 2007.  The
increase in gross profit in fiscal year 2008 compared to fiscal years 2009 and
2007, primarily resulted from the increase in product sales in fiscal 2008, for
which our gross profit is higher than our other sources of
revenue.  In addition, as sales volume increases, we believe we will
more fully absorb certain fixed operating costs that are included in cost of
sales, thus increasing our gross profit percentage.




30


Operating
Costs and Expenses: Comparison of Fiscal Years ended August 31, 2009 and
2008
  Cost of
Sales – Cost of sales include raw material, labor and allocated overhead
costs.  We calculate and report separately cost of sales for both
non-related and related party sales, which are sales to Medizin-Technik and Dr.
Sennewald.  Cost of sales as a percentage of sales will fluctuate from
period to period depending on the mix of sales for the period and the type and
configuration of the hyperthermia systems sold during the
period.  Total cost of sales for fiscal 2009 was $1,922,218 compared
to $2,084,249 for fiscal 2008, a decrease of $162,031, or 8%.  This
decrease resulted primarily from less product sales in fiscal 2009, particularly
to related parties.  In total, we sold one less hyperthermia system in
fiscal 2009 than we did in fiscal 2008.





Research and
Development Expenses – Research and development expenses include
expenditures for new product development and development of enhancements to
existing products.  Research and development expenses were $2,043,268
for fiscal 2009 compared to $1,737,924, for fiscal 2008, an increase of
$305,344, or approximately 18%.  The increase in research and
development expenses in the current fiscal year is due to our continuing efforts
to develop an advanced generation of the microwave ablation system, software
improvements to enhance the utility of the BSD-500 and BSD-2000 systems,
possible market expansion of our current products into other cancer and
non-cancerous indications, and other enhancements to our current products and
the development of new products.  See the discussion under “Research
and Development” in Item 1, “Business” of this Annual Report.




Selling, General
and Administrative Expenses – Selling, general and administrative
expenses were $6,097,494 for fiscal 2009 compared to $5,573,311 in fiscal 2008,
an increase of $524,183, or approximately 9%.  The increase in
selling, general and administrative expenses in the current fiscal year is due
to severance payments made to our former president, higher non-cash stock option
expense, and an increase in our board compensation due to the addition of a new
director.




Operating
Costs and Expenses: Comparison of Fiscal Years ended August 31, 2008 and
2007




Cost of
Sales – Total cost of sales for fiscal 2008 was $2,084,249 compared to
$1,581,562 for fiscal 2007, an increase of $502,687, or 32%.  This
increase resulted primarily from more product sales in fiscal 2008 to both
non-related and related parties.  Cost of sales as a percentage of
sales will fluctuate from period to period depending on the mix of sales for the
period and the type and configuration of the hyperthermia systems sold during
the period.




Research and
Development Expenses – Research and development expenses include
expenditures for new product development and development of enhancements to
existing products.  Research and development expenses were $1,737,924
for the year ended August 31, 2008, as compared to $1,875,147, for the year
ended August 31, 2007, a decrease of $137,223, or approximately 7%.




Selling General
and Administrative Expenses – Selling, general and administrative
expenses remained fairly constant, decreasing to $5,573,311 in the year ended
August 31, 2008, from $5,762,217 for the year ended August 31, 2007, a decrease
of $188,906, or approximately 3%.




Other
Income (Expense) and Income Tax Benefit




Interest and
Investment Income:  Interest and investment income was
$584,523, $1,046,313 and $1,133,125 for the years ended August 31, 2009, 2008
and 2007, respectively.  The decrease in interest and investment
income in the current fiscal year resulted primarily from lower levels of cash
and investments compared to the prior fiscal years.  The proceeds from
the sale of our mutual funds in March and May 2009 have been deposited in money
market funds.  Therefore, we anticipate that our interest and
investment income for the foreseeable future will be substantially less than
previously earned on our mutual funds, but we believe we have significantly
reduced the exposure to our funds of market fluctuations.




31





Realized Loss on
Investments:  We sold 100% of our investments in mutual funds
in March and May 2009.  The investments had a total cost basis of
$16,652,543 and we received total proceeds of $10,150,957, resulting in a
realized loss of $6,501,586.  We had no realized loss on investments
in the prior fiscal years.  As a result, at August 31, 2009, we had no
investments, but cash and equivalents of $7,791,938, comprised primarily of
money market funds.





Income Tax
Benefit:  The income tax benefit was $1,150,000, $961,000 and
$1,865,000 for the years ended August 31, 2009, 2008 and 2007,
respectively.  The income tax benefit for each year represents an
increase in our income tax receivable resulting from our ability to carry back
our taxable loss in that year to offset income taxes previously paid, partially
offset by a deferred tax provision in 2009 and 2008.  As a result of
the enactment of the American Recovery and Reinvestment Act of 2009 in February
2009, we are able to carry back current year operating losses and realized
losses on investments to the extent of the remaining taxable income for our
fiscal year 2005.





The
deferred income tax provision of $229,000 and $168,000 in the years ended August
31, 2009 and 2008, respectively, resulted from our recording a valuation
allowance against our deferred tax assets.  In recording the valuation
allowance, we were unable to conclude that it is more likely than not that our
deferred tax assets, including our taxable loss and tax credit carry forwards,
will be realized.  In reaching this determination, we evaluated
factors such as prior earnings history, expected future earnings and our ability
to carry back reversing items to offset income taxes paid.  As a
result, we do not anticipate that we will record further income tax benefits
from taxable losses and tax credits as a result of recording a 100% valuation
allowance against the related deferred tax assets.





Fluctuation
in Operating Results




Our
results of operations have fluctuated in the past and may fluctuate in the
future from year to year as well as from quarter to quarter.  Revenue
may fluctuate as a result of factors relating to the demand and market
acceptance for our hyperthermia systems and related component parts and
services,  world-wide economic conditions, availability of financing
for our customers, changes in the medical capital equipment market, changes in
order mix and product order configurations, competition, regulatory developments
and other matters.  Operating expenses may fluctuate as a result of
the timing of sales and marketing activities, research and development, and
general and administrative expenses associated with our potential
growth.  For these and other reasons described elsewhere, our results
of operations for a particular period may not be indicative of operating results
for any other period.




Liquidity and Capital
Resources




Since
inception through August 31, 2009, we have generated an accumulated deficit of
$16,674,122.  Included in this amount is a realized loss on
investments of $6,501,586 recorded in the year ended August 31,
2009.  The remainder of the accumulated deficit can be attributed to
our operations, where our operating revenues have been insufficient to cover our
operating expenses.  We have historically financed our operations
through cash from operations, research grants, licensing of technological
assets, issuance of common stock and sale of investments in spinoff
operations.  As of August 31, 2009, we had liquidated 100% of our
investments in mutual funds and had cash and cash equivalents of $7,791,938,
comprised primarily of money market funds.  At August 31, 2008, we had
cash, cash equivalents and investments totaling $15,881,844.




During
the year ended August 31, 2009, we used cash of $3,643,814 in operating
activities, primarily as a result of our net loss of $11,384,870 decreased by
non cash expenses of $1,357,778, including depreciation and amortization, and
stock-based compensation, and realized loss on investments of
$6,501,586.  Net cash used in operating activities also included an
increase in income tax receivable of $200,198, increase in inventories of
$369,323, decrease in accrued liabilities of $37,698 and a decrease in customer
deposits of $427,677, partially offset by a decrease in receivables of $846,589,
decrease in other current assets of $19,293, increase in accounts payable of
$5,300 and increase in deferred revenue of $45,406.




32





By
comparison, net cash used in operating activities was $902,576 during the year
ended August 31, 2008, primarily as a result of our net loss of $2,439,099
decreased by non cash expenses of $981,843, including depreciation and
amortization, and stock-based compensation, and loss on disposition of property
of $3,444.  Net cash used in operating activities also included an
increase in receivables of $485,755, decrease in accounts payable of $14,071,
and decrease in accrued liabilities of $47,313, partially offset by a decrease
in income tax receivable of $521,717, decrease in inventories of $84,914,
decrease in deferred tax assets of $244,000, decrease in other current assets of
$13,174, increase in customer deposits of $213,039, and an increase in deferred
tax liability of $21,531.





Net cash
provided by investing activities for the year ended August 31, 2009 was
$10,041,100, resulting from the proceeds from the sale of investments of
$10,150,957, partially offset by the purchase of investments of $23,935, the
purchase of property and equipment of $36,478, and purchase of patents of
$49,444.  For the year ended August 31, 2008, net cash provided by
investing activities was $1,722,206, resulting from the sale of investments of
$4,988,760, partially offset by the purchase of investments of $1,954,490, the
purchase of property and equipment of $1,291,098 and an increase in patents of
$20,966.




No net
cash was provided by or used in financing activities for the year ended August
31, 2009. Net cash provided by financing activities for the year ended August
31, 2008 consisted of proceeds of $158,482 from the sale of common stock through
the exercise of stock options.




We expect
to incur additional expenses related to the commercial introduction of our
systems, research and development, trade shows, expenditures on publicity,
travel, increased salaries and commissions and other related
expenses.  In addition, we anticipate that we will continue to incur
expenses related to seeking governmental and regulatory approvals for our
products and for corporate governance and compliance with the Sarbanes-Oxley Act
of 2002.




We
believe that our current cash and cash equivalents and income tax refunds
receivable will be sufficient to fund our operations for the next twelve
months.




If we
cannot cover any future cash shortfalls with cost cutting or available cash, we
would need to obtain additional financing.  Due to adverse conditions
in the global financial markets, we cannot be certain that any financing will be
available when needed or will be available on terms acceptable to
us.  If we raise equity capital, our stockholders will be
diluted.  Insufficient funds may require us to delay, scale back or
eliminate some or all of our programs designed to facilitate the commercial
introduction of our systems or entry into new markets.




On
October 1, 2009, our universal shelf registration statement was declared
effective by the SEC for the issuance of common stock, preferred stock,
warrants, senior debt, subordinated debt and units up to an aggregate amount of
$50.0 million.  However, the amount of securities which we may offer
pursuant to this shelf registration statement during any twelve-month period
shall be limited to one-third of the aggregate market value of the common equity
of BSD Medical held by our non-affiliates since our public float is not in
excess of $75.0 million.  We may periodically offer one or more of
these securities in amounts, prices and on terms to be announced when and if the
securities are offered.  At the time any of the securities covered by
the registration statement are offered for sale, a prospectus supplement will be
prepared and filed with the SEC containing specific information about the terms
of any such offering.




As of
August 31, 2009, we had no significant commitments for the purchase of property
and equipment.




We had no
off balance sheet arrangements as of August 31, 2009.




33





Recent Accounting
Pronouncements




In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a
Replacement of FASB Statement No. 162. The Codification will become the
source of authoritative U.S. generally accounting principles (GAAP) recognized
by the FASB to be applied to nongovernmental entities.  Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants.  On the effective date of this Statement, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification will become nonauthoritative.  This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009 (our quarter ended November 30,
2009).  We are currently unable to determine what impact the future
application of this pronouncement may have on our financial
statements.





On June
12, 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R).  This statement is a revision to FASB Interpretation
No. 46(R), Consolidation of
Variable Interest Entities, and changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated.  The determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance.  The statement is effective at the start of a company’s
first fiscal year beginning after November 15, 2009 (our fiscal year beginning
September 1, 2010), or January 1, 2010 for companies reporting on a calendar
year basis.  We currently are unable to determine what impact the
future application of this pronouncement may have on our financial
statements.





On June
12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets – an Amendment of FASB Statement No.
140.  This statement is a revision to Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and
will require more information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets.  It eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosures.  The statement is effective at the start of a company’s
first fiscal year beginning after November 15, 2009 (our fiscal year beginning
September 1, 2010), or January 1, 2010 for companies reporting on a calendar
year basis.  We currently are unable to determine what impact the
future application of this pronouncement may have on our financial
statements.





On May
28, 2009, the FASB issued SFAS No. 165, Subsequent
Events.This statement is intended to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued.  It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date—that is,
whether that date represents the date the financial statements were issued or
were available to be issued.  This disclosure is intended to alert all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being
presented.  The statement is effective for interim and annual periods
ending after June 15, 2009, or our fiscal year ended August 31,
2009.  The implementation of this statement did not have a material
impact on our financial statements.




34





In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business
Combinations.  This statement replaces SFAS No. 141, Business Combinations and
applies to all transactions or other events in which an entity (the acquirer)
obtains control of one or more businesses (the acquiree), including those
sometimes referred to as “true mergers” or “mergers of equals” and combinations
achieved without the transfer of consideration.  This statement
establishes principles and requirements for how the acquirer: a) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; b)
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  This statement will be effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, or our fiscal year beginning September 1,
2009.  Earlier adoption is prohibited.  We currently are
unable to determine what impact the future application of this pronouncement may
have on our financial statements.





In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements.  This statement applies to
all entities that prepare consolidated financial statements, except
not-for-profit organizations, and amends Accounting Research Bulletin (“ARB”) 51
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary.  It also
amends certain of ARB 51’s consolidation procedures for consistency with the
requirements of SFAS No. 141(R) (revised 2007).  This statement will
be effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, or our fiscal year beginning September
1, 2009.  Earlier adoption is prohibited.  We currently are
unable to determine what impact the future application of this pronouncement may
have on our financial statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value.  Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option.  However, the amendment to SFAS No. 115 Accounting for Certain Investments
in Debt and Equity Securities applies to all entities with
available-for-sale and trading securities.  SFAS No. 159 is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007.  We adopted SFAS No. 159 on September 1, 2008, with no
material impact on our financial statements.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value,
and requires enhanced disclosures about fair value measurements.  SFAS
No. 157 requires companies to disclose the fair value of their financial
instruments according to a fair value hierarchy as defined in the
standard.  Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities.  In February 2008, the FASB issued
FSP No. FAS 157-2, which delays by one year the effective date of SFAS No. 157
for certain types of non-financial assets and non-financial
liabilities.  As a result, SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 for
financial assets and liabilities carried at fair value on a recurring basis, and
for fiscal years beginning after November 15, 2008 for non-recurring
non-financial assets and liabilities that are recognized or disclosed at fair
value.  In October 2008, the FASB issued FSP No. 157-3,
Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active, or FSP
157-3.  FSP 157-3 clarifies the application of SFAS 157 in a market that is
not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active.  FSP 157-3 was effective upon issuance,
including prior periods for which financial statements have not been
issued.





We
adopted SFAS No. 157 for financial assets and liabilities carried at fair value
on a recurring basis on September 1, 2008 (Note 14).  We are currently
unable to determine the impact on our financial statements of the application of
SFAS No. 157 on September 1, 2009, for non-recurring non-financial assets and
liabilities that are recognized or disclosed at fair value.




35




FORWARD-LOOKING
STATEMENTS
  With the
exception of historical facts, the statements contained in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
other parts of this annual report on Form 10-K are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which reflect our current expectations and beliefs regarding our future results
of operations, performance and achievements.  These statements are
subject to risks and uncertainties and are based upon assumptions and beliefs
that may or may not materialize.  These forward-looking statements
include, but are not limited to, statements concerning:


·
            our
      belief about the market opportunities for our
  products;




·
            our
      anticipated financial performance and business
  plan;




·
            our
      expectations regarding the commercialization of, and the potential revenue
      from, the BSD-2000, BSD 500 and MTX-180
systems;




·
            our
      belief that we do not depend on a single supplier for any item and that we
      can acquire material and parts from multiple sources on a timely
      basis;




·
            our
      expectations to further expand our developments to treat other forms of
      cancer and other diseases and medical
  conditions;




·
            our
      expectations that the patented phased array technology for which we
      obtained a sub-license from Duke University will enhance future
      developments of our current phased array hyperthermia
    systems;




·
            our
      belief that the implementation of recent accounting pronouncements will
      not have a material impact on our financial
  statements;




·
            our
      belief that expanding our business into international markets represents a
      significant business opportunity;




·
            our
      expectations that our international sales of the MTX-180 will be conducted
      through established and new distributors located primarily in Europe and
      Asia;




·
            our
      expectations that our interest and investment income for the foreseeable
      future will be substantially less than previously earned on our mutual
      funds.




·
            our
      expectations that we will continue to incur expenses related to seeking
      governmental and regulatory approvals for our
  products;


36




·
              our
      belief that postponing market entry of the MTX-180 until completion of the
      phase II design will allow us to enter the market with an optimized system
      that will have a wider range of applications and increased revenue
      streams;
  ·
              our
      belief that the MTX-180 has the potential to be the market leader in
      microwave ablation and will be a major part of our business plan moving
      forward;
  ·
              our
      expectations that the MTX-180 will be ready to market in
    2010;
  ·
              our
      expectations that the disposable applicator to be used in conjunction with
      the MTX-180 represents a significant ongoing revenue
    stream;
  ·
              our
      expectations regarding FDA approvals relating to the BSD-2000
      system;
  ·
              our
      belief that as sales volume increases we will increase our gross profits
      percentage by more fully absorbing certain fixed operating costs that are
      included in our cost of sales;
  ·
              our
      intentions to continue to devote substantial sums to research and
      development;


·
            our
      expectations related to the amount of expenses we will incur for the
      commercial introduction of our
systems;




·
            our
      expectations that we will continue to incur expenses related to our
      corporate governance and compliance with the Sarbanes-Oxley Act of 2002;
      and




·
            our
      belief that our current working capital, cash and cash equivalents, income
      tax receivable, and cash from operations will be sufficient to finance our
      operations through working capital and capital resources needs for the
      next twelve months.




We wish
to caution readers that the forward-looking statements and our operating results
are subject to various risks and uncertainties that could cause our actual
results and outcomes to differ materially from those discussed or anticipated,
including the factors set forth in Item 1A – “Risk Factors” in this Annual
Report and our other filings with the Securities and Exchange
Commission.  We also wish to advise readers not to place any undue
reliance on the forward-looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this
report.  We assume no obligation to update or revise these
forward-looking statements to reflect new events or circumstances or any changes
in our beliefs or expectations, other than as required by law.








ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Our cash
and cash equivalents consist primarily of money market funds, which are
investment grade securities.  The money market funds bear variable
interest rates that are adjusted to market conditions and changes in financial
market conditions and in market rates will affect interest income earned on
these funds.  We do not believe, however, that the interest income
earned on our money market funds is material to the results of our
operations.  Further, we do not believe that we are currently exposed
to changes in financial market conditions that expose our money market funds to
material changes in the market value of their principal.





We do have significant sales to foreign
customers and are therefore subject to the effects changes in foreign currency
exchange rates may have on demand for our products and services. We currently do
not utilize derivative instruments to offset the exposure to changes in foreign
currency exchange rates.  To minimize foreign exchange risk, our
export sales are transacted in United States dollars.





37




ITEM 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
 
 The
Financial Statements of the Company called for by this item are contained in a
separate section of this report.  See “Index to Financial Statements”
on Page F-1.
   ITEM 9.  CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
 
 None.
   ITEM 9A.  CONTROLS
AND PROCEDURES
 
 Disclosure
Controls and Procedures
 
 We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934 (the “Act”) is recorded, processed, summarized
and reported within the specified time periods and accumulated and communicated
to management, including our Chief Executive Officer (Principal Executive
Officer) and Chief Financial Officer (Principal Accounting Officer), as
appropriate, to allow timely decisions regarding required
disclosure.
  Management,
under the supervision and with the participation of our Chief Executive Officer
(Principal Executive Officer) and Chief Financial Officer (Principal Accounting
Officer), evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Act), as
of August 31, 2009.  Based on that evaluation, management concluded
that our disclosure controls and procedures were effective as of August 31,
2009.





Attached
as exhibits to this Annual Report on Form 10-K are certifications of our
Chief Executive Officer (Principal Executive Officer) and Chief Financial
Officer (Principal Accounting Officer), which are required in accordance with
Rule 13a-14 of the Act.  This Disclosure Controls and Procedures
section includes information concerning management’s evaluation of disclosure
controls and procedures referred to in those certifications and, as such, should
be read in conjunction with the certifications of our Chief Executive Officer
(Principal Executive Officer) and Chief Financial Officer (Principal Accounting
Officer).





Management’s
Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting of the Company.  Management’s intent is to design
this system 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 in the
United States of America.





38




Our
internal control over financial reporting includes those policies and procedures
that:
 
 1.
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
 
 2.
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that
      receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and directors of the Company;
      and
 
 3.
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.
 
 A
material weakness is a significant deficiency, or combination of significant
deficiencies, in internal controls over financial reporting such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely
basis.  Management performed an assessment of the effectiveness of the
Company’s internal control over financial reporting as of August 31, 2009,
utilizing the criteria described in the “Internal Control — Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).  The objective of this assessment was to
determine whether our internal control over financial reporting was effective as
of such date.  In its assessment of the effectiveness of internal
control over financial reporting as of August 31, 2009, management concluded
that our internal control over financial reporting is effective.
 
 Management’s
assessment of the effectiveness of our internal control over financial reporting
has been audited by Tanner LC, an independent registered public accounting firm,
as stated in their report which is included herein.


Changes
in Internal Control Over Financial Reporting





There
have been no changes in our internal control over financial reporting (as such
item is defined in Rule 13 a-15(f) under the Act) that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.





Limitations
on the Effectiveness of Controls





Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our internal controls will
prevent or detect all errors and all fraud.  A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake.  Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls.  The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.  Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with
associated policies or procedures.  Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.






ITEM 9B.  OTHER
INFORMATION





None.





39




PART
III





ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Information
required by this item is incorporated by reference from the information in the
Company’s definitive Proxy Statement to be filed for the 2010 Annual Meeting of
Stockholders.





ITEM 11. EXECUTIVE
COMPENSATION





Information
required by this item is incorporated by reference from the information in the
Company’s definitive Proxy Statement to be filed for the 2010 Annual Meeting of
Stockholders.





ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





Information
required by this item is incorporated by reference from the information in the
Company’s definitive Proxy Statement to be filed for the 2010 Annual Meeting of
Stockholders.





ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
information required by this item is incorporated by reference from the
information in the Company’s definitive Proxy Statement to be filed for the 2010
Annual Meeting of Stockholders.





ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES





Information
required by this item is incorporated by reference from the information in the
Company’s definitive Proxy Statement to be filed for the 2010 Annual Meeting of
Stockholders.





40




PART
IV





ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES





(a)(1)      
Financial Statements




The Index
to Financial Statements on page F-1 is incorporated herein by reference as the
list of financial statements required as part of this report.




(2)           Financial
Statement Schedules




Financial
statement schedules have been omitted because they are not required or are not
applicable, or because the required information is shown in the financial
statements or notes thereto.




(3)           Exhibits





The
following exhibits are incorporated herein by reference as
indicated:





Exhibit
              Number
            Description3.1
            Amended
      and Restated Certificate of Incorporation.  Incorporated by
      reference to Exhibit 3.1 of the BSD Medical Corporation Annual Report Form
      10-KSB, filed December 1, 2003.3.2
            By-Laws.  Incorporated
      by reference to Exhibit 3.2 of the BSD Medical Corporation Registration
      Statement on Form S-1, filed October 16, 1986.3.3
            Amendment
      to Bylaws.  Incorporated by reference to Exhibit 3.1 of Current
      Report on Form 8-K filed January 4, 2008.4.1
            Specimen
      Common Stock Certificate.  Incorporated by reference to Exhibit
      4 of the BSD Medical Corporation Registration Statement on Form S-1, filed
      October 16, 1986.4.2
            Emerson
      Securities Purchase Agreement.  Incorporated by reference to
      Exhibit 4.1 of the BSD Medical Corporation Annual Report on Form 10-KSB,
      filed December 1, 2003.10.1
            Transfer
      of Trade Secrets Agreement dated December 7, 1979, among BSD Medical
      Corporation, Vitek, Incorporated and Ronald R.
      Bowman.  Incorporated by reference to Exhibit 10.6 of the BSD
      Medical Corporation Registration Statement on Form S-1, filed October 16,
      1986.10.2
            Second
      Addendum to Exclusive Transfer of Trade Secrets Agreement dated April 2,
      1987.  Incorporated by reference to Exhibit 10 of the BSD
      Medical Corporation Annual Report on Form 10-K, filed April 8,
      1988.10.3
            License
      Agreement between BSD Medical Corporation and EDAP Technomed, Inc., dated
      July 3, 1996.  Incorporated by reference to Exhibit 10 of
      Current Report on Form 8-K, filed August 7, 1996.10.4
            Stock
      Purchase Agreement dated October 31, 1997, by and among TherMatrx, Inc.,
      BSD Medical Corporation, Oracle Strategic Partners, L.P. and Charles
      Manker.  Incorporated by reference to Exhibit 10.6 of the BSD
      Medical Corporation Annual Report on Form 10-KSB filed December 10,
      1998.10.5*
            BSD
      Medical Corporation 1998 Director Stock Plan.  Incorporated by
      reference to Exhibit A of the BSD Medical Corporation Schedule 14A, filed
      July 27, 1998.10.6*
            BSD
      Medical Corporation 1998 Stock Incentive Plan.  Incorporated by
      reference to Exhibit B of the BSD Medical Corporation Schedule 14B, filed
      July 27, 1998.10.7*
            BSD
      Medical Corporation Form of Employee Stock Option Grant10.8*
            BSD
      Medical Corporation Form of Director Stock Option Grant10.9*
            Employment
      Agreement dated August 10, 1999 between BSD Medical Corporation and Hyrum
      A. Mead.  Incorporated by reference to Exhibit 10.7 to BSD
      Medical Corporation’s Registration Statement on Form SB-2 filed January
      27, 2004.





41




10.10*
            Employment
      Agreement dated November 2, 2008 between BSD Medical Corporation and Paul
      F. Turner.  Incorporated by reference to Exhibit 10.8 to BSD
      Medical Corporation’s Registration Statement on Form SB-2 filed January
      27, 2004.10.11
            Exclusive
      Distribution Agreement with Sennewald/Medizin-Technik GmbH dated May 13,
      200910.12*
            Separation
      Agreement, dated April 7, 2009, between BSD Medical Corporation and Hyrum
      A. Mead.  Incorporated by reference to Exhibit 10.1 of Current
      Report on Form 8-K filed on April 8, 200910.13*
            Offer
      Letter, dated April 7, 2009, between BSD Medical Corporation and Harold R.
      Wolcott.  Incorporated by reference to Exhibit 10.2 of Current
      Report on Form 8-K filed on April 8, 200921.1
            Subsidiary
      List.  Incorporated by reference to Exhibit 21.1 of the BSD
      Medical Corporation Annual Report on Form 10-KSB filed December 1,
      2003.23.1
            Consent
      of Independent Registered Public Accounting Firm31.1
            Certification
      of Chief Executive Officer of BSD pursuant to Rule
  13a-14.31.2
            Certification
      of Chief Financial Officer of BSD pursuant to Rule
  13a-14.32.1
            Certification
      of Chief Executive Officer attached pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes Oxley Act of
      2002.32.2
            Certification
      of the Chief Financial Officer of BSD pursuant to 18 U.S.C. §1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





* Exhibits marked with an asterisk (*) are management contracts or compensatory
plans or arrangements.





42





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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.







BSD MEDICAL CORPORATION





Date:  November
      6, 2009
            By:
            /s/ Harold R.
      WolcottHarold
      R. WolcottPresident
      and Member of the Board of Directors(principal
      executive officer)





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





Date:  November
      6, 2009
            By:
            /s/ Harold R.
      WolcottHarold
      R. WolcottPresident
      and Member of the Board of Directors (principal
      executive officer)





Date:  November
      6, 2009
            By:
            /s/ Dennis P.
      GaugerDennis
      P. GaugerChief
      Financial Officer (principal financial and accounting
    officer)





Date:  November
      6, 2009
            By:
            /s/ Timothy C.
      McQuayTimothy
      C. McQuayChairman
      of the Board of Directors





Date:  November
      6, 2009
            By:
            /s/ Paul F.
      TurnerPaul
      F. Turner
              Senior
      Vice President and Chief Technology Officer and Member of the Board of
      Directors







Date:  November
      6, 2009
            By:
            /s/ Gerhard W.
      SennewaldDr.
      Gerhard W. SennewaldMember
      of the Board of Directors





Date:  November
      6, 2009
            By:
            /s/ Steven G.
      StewartSteven
      G. StewartMember
      of the Board of Directors





Date:  November
      6, 2009
            By:
            /s/ Michael
      NobelDr.
      Michael NobelMember
      of the Board of Directors





Date:  November
      6, 2009
            By:
            /s/ Douglas P.
      BoydDr.
      Douglas P. BoydMember
      of the Board of Directors




43




BSD
MEDICAL CORPORATION


Index
to Financial Statements








Report
      of Independent Registered Public Accounting Firm on Internal Control Over
      Financial Reporting
            F-2Report
      of Independent Registered Public Accounting Firm
            F-3Balance
      Sheets
            F-4Statements
      of Operations
            F-5Statements
      of Stockholders’ Equity
            F-6Statements
      of Cash Flows
            F-7Notes
      to Financial Statements
            F-8





F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING





To the
Board of Directors and Stockholders


of
BSD Medical Corporation








We have
audited the internal control of BSD Medical Corporation (the Company) over
financial reporting as of August 31, 2009 and 2008, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinion.





A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company's assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.





In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of August 31, 2009 and 2008, based on the
COSO criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of the Company as of August
31, 2009 and 2008, and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
August 31, 2009, and our report dated November 6, 2009 expressed an unqualified
opinion thereon.








/s/
TANNER LC





Salt Lake
City, Utah


November
6, 2009





F-2




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the
Board of Directors and Stockholders


of
BSD Medical Corporation








We have
audited the accompanying balance sheets of BSD Medical Corporation as of August
31, 2009 and 2008, and the related statements of operations, stockholders’
equity and cash flows for each of the years in the three-year period ended
August 31, 2009.  These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion
on these financial statements based on our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of BSD Medical Corporation as of
August 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended August 31, 2009, in
conformity with U.S. generally accepted accounting principles.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of BSD Medical Corporation’s
internal control over financial reporting as of August 31, 2009, based on
criteria established in Internal Control−Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated November 6, 2009 expressed an unqualified opinion thereon.








/s/
TANNER LC





Salt Lake
City, Utah


November
6, 2009




F-3




BSD
      MEDICAL CORPORATIONBalance
      SheetsAugust
      31,ASSETS
            
            2009
            
            
            2008Current
      assets:Cash
      and cash equivalents
            
            $
            7,791,938
            
            
            $
            1,394,652Investments
            
            
            -
            
            
            
            14,487,192Accounts
      receivable, net of allowance for doubtful accounts of
    $20,000
            
            
            289,617
            
            
            
            439,739Related
      party trade accounts receivable
            
            
            41,016
            
            
            
            737,483Income
      tax receivable
            
            
            1,415,758
            
            
            
            1,409,996Inventories,
      net
            
            
            1,794,476
            
            
            
            1,425,153Other
      current assets
            
            
            94,536
            
            
            
            113,829Total
      current assets
            
            
            11,427,341
            
            
            
            20,008,044Property
      and equipment, net
            
            
            1,352,384
            
            
            
            1,441,524Patents,
      net
            
            
            77,633
            
            
            
            37,330$
            12,857,358
            
            
            $
            21,486,898LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            226,905
            
            
            $
            221,605Accrued
      liabilities
            
            
            548,079
            
            
            
            585,777Customer
      deposits
            
            
            -
            
            
            
            427,677Deferred
      revenue – current portion
            
            
            67,851
            
            
            
            41,885Total
      current liabilities
            
            
            842,835
            
            
            
            1,276,944Deferred
      revenue – net of current portion
            
            
            73,534
            
            
            
            54,094Total
      liabilities
            
            
            916,369
            
            
            
            1,331,038Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.001 par value; 10,000,000 shares authorized, no shares issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock; $.001 par value, 40,000,000 shares authorized, 22,039,301 and
      21,388,958 shares issued,respectively
            
            
            22,040
            
            
            
            21,389Additional
      paid-in capital
            
            
            28,593,305
            
            
            
            27,565,373Treasury
      stock, 24,331 shares at cost
            
            
            (234
            )
            
            
            (234
            )Other
      comprehensive loss
            
            
            -
            
            
            
            (2,141,416
            )Accumulated
      deficit
            
            
            (16,674,122
            )
            
            
            (5,289,252
            )Total
      stockholders’ equity
            
            
            11,940,989
            
            
            
            20,155,860$
            12,857,358
            
            
            $
            21,486,898See
      accompanying notes to financial statements





F-4




BSD
      MEDICAL CORPORATIONStatements
      of OperationsYears
      Ended August 31,2009
            
            
            
            2008
            
            
            
            2007Revenues:Sales
            
            $
            2,933,487
            
            
            $
            2,334,008
            
            
            $
            1,449,054Sales
      to related parties
            
            
            603,000
            
            
            
            2,809,132
            
            
            
            1,385,332Total
      revenues
            
            
            3,536,487
            
            
            
            5,143,140
            
            
            
            2,834,386Operating
      costs and expenses:Cost
      of sales
            
            
            1,553,197
            
            
            
            956,220
            
            
            
            766,040Cost
      of related party sales
            
            
            369,021
            
            
            
            1,128,029
            
            
            
            815,522Research
      and development
            
            
            2,043,268
            
            
            
            1,737,924
            
            
            
            1,875,147Selling,
      general and administrative
            
            
            6,097,494
            
            
            
            5,573,311
            
            
            
            5,762,217Total
      operating costs and expenses
            
            
            10,062,980
            
            
            
            9,395,484
            
            
            
            9,218,926Loss
      from operations
            
            
            (6,526,493
            )
            
            
            (4,252,344
            )
            
            
            (6,384,540
            )Other
      income (expense):Interest
      and investment income
            
            
            584,523
            
            
            
            1,046,313
            
            
            
            1,133,125Other
      expense
            
            
            (91,314
            )
            
            
            (194,068
            )
            
            
            (164,003
            )Realized
      loss on investments
            
            
            (6,501,586
            )
            
            
            -
            
            
            
            -Gain
      on sale of equity interest
            
            
            -
            
            
            
            -
            
            
            
            202,223Total
      other income (expense)
            
            
            (6,008,377
            )
            
            
            852,245
            
            
            
            1,171,345Loss
      before income taxes
            
            
            (12,534,870
            )
            
            
            (3,400,099
            )
            
            
            (5,213,195
            )Income
      tax benefit
            
            
            1,150,000
            
            
            
            961,000
            
            
            
            1,865,000Net
      loss
            
            $
            (11,384,870
            )
            
            $
            (2,439,099
            )
            
            $
            (3,348,195
            )Loss
      per common share:Basic
            
            $
            (0.52
            )
            
            $
            (0.11
            )
            
            $
            (0.16
            )Diluted
            
            $
            (0.52
            )
            
            $
            (0.11
            )
            
            $
            (0.16
            )Weighted
      average number of shares outstanding:Basic
            
            
            21,887,000
            
            
            
            21,339,000
            
            
            
            21,125,000Diluted
            
            
            21,887,000
            
            
            
            21,339,000
            
            
            
            21,125,000See
      accompanying notes to financial
statements





F-5




BSD
      MEDICAL CORPORATIONStatements
      of Stockholders’ EquityYears
      Ended August 31, 2009, 2008 and
2007
  RetainedAdditional
              
              
              
              
              
              
              
              
              
              
              
              Other
              
              
              EarningsCommon
      Stock
              
              
              Paid-in
              
              
              Deferred
              
              
              Treasury
      Stock
              
              
              Comprehensive
              
              
              (AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Compensation
              
              
              Shares
              
              
              Amount
              
              
              Income (Loss)
              
              
              Deficit)
              
              
              TotalBalance,
      September 1, 2006
              
              
              21,023,668
              
              
              $
              21,024
              
              
              $
              25,452,231
              
              
              $
              (247,700
              )
              
              
              24,331
              
              
              $
              (234
              )
              
              $
              (99,362
              )
              
              $
              498,042
              
              
              $
              25,624,001Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,348,195
              )
              
              
              (3,348,195
              )Unrealized
      loss on investments, net of income tax benefit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (261,398
              )
              
              
              -
              
              
              
              (261,398
              )Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,609,593
              )Close
      out deferred compensation
              
              
              -
              
              
              
              -
              
              
              
              (247,700
              )
              
              
              247,700
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Common
      stock issued for:Cash
              
              
              195,933
              
              
              
              196
              
              
              
              229,511
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              229,707Services
              
              
              10,288
              
              
              
              10
              
              
              
              59,990
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              60,000Cashless option exercises
              
              
              67,557
              
              
              
              68
              
              
              
              (68)
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              832,224
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              832,224Income
      tax benefit from exercise of stock options
              
              
              -
              
              
              
              -
              
              
              
              47,449
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              47,449Balance,
      August 31, 2007
              
              
              21,297,446
              
              
              
              21,298
              
              
              
              26,373,637
              
              
              
              -
              
              
              
              24,331
              
              
              
              (234
              )
              
              
              (360,760
              )
              
              
              (2,850,153
              )
              
              
              23,183,788Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,439,099
              )
              
              
              (2,439,099
              )Unrealized
      loss on investments, net of income tax benefit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,780,656
              )
              
              
              -
              
              
              
              (1,780,656
              )Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,219,755
              )Common
      stock issued for:Cash
              
              
              56,499
              
              
              
              56
              
              
              
              158,426
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              158,482Services
              
              
              10,514
              
              
              
              11
              
              
              
              61,184
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              61,195Cashless option exercises
              
              
              24,499
              
              
              
              24
              
              
              
              (24
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              800,432
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              800,432Income
      tax benefit from exercise of stock options
              
              
              -
              
              
              
              -
              
              
              
              171,718
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              171,718Balance,
      August 31, 2008
              
              
              21,388,958
              
              
              
              21,389
              
              
              
              27,565,373
              
              
              
              -
              
              
              
              24,331
              
              
              
              (234
              )
              
              
              (2,141,416
              )
              
              
              (5,289,252
              )
              
              
              20,155,860Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (11,384,870
              )
              
              
              (11,384,870
              )Unrealized
      loss on investments, net of income tax benefit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,141,416
              
              
              
              -
              
              
              
              2,141,416Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (9,243,454
              )Common
      stock issued for:Services
              
              
              32,915
              
              
              
              33
              
              
              
              105,147
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              105,180Cashless option exercises
              
              
              617,428
              
              
              
              618
              
              
              
              (618
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              1,117,839
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,117,839Income
      tax provision from exercise of stock options
              
              
              -
              
              
              
              -
              
              
              
              (194,436
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (194,436
              )Balance,
      August 31, 2009
              
              
              22,039,301
              
              
              $
              22,040
              
              
              $
              28,593,305
              
              
              $
              -
              
              
              
              24,331
              
              
              $
              (234
              )
              
              $
              -
              
              
              $
              (16,674,122
              )
              
              $
              11,940,989See
      accompanying notes to financial statements





F-6




BSD
      MEDICAL CORPORATIONStatements
      of Cash FlowsYears
      Ended August 31,2009
            
            
            
            2008
            
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (11,384,870
            )
            
            $
            (2,439,099
            )
            
            $
            (3,348,195
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            134,759
            
            
            
            120,216
            
            
            
            97,849Stock
      issued for services
            
            
            105,180
            
            
            
            61,195
            
            
            
            60,000Stock-based
      compensation
            
            
            1,117,839
            
            
            
            800,432
            
            
            
            832,224Realized
      loss on investments
            
            
            6,501,586
            
            
            
            -
            
            
            
            -Loss
      on disposition of property
            
            
            -
            
            
            
            3,444
            
            
            
            2,597Gain
      on sale of equity interest
            
            
            -
            
            
            
            -
            
            
            
            (202,223
            )Decrease
      (increase) in:Receivables
            
            
            846,589
            
            
            
            (485,755
            )
            
            
            894,376Income
      tax receivable
            
            
            (200,198
            )
            
            
            521,717
            
            
            
            (1,752,492
            )Inventories
            
            
            (369,323
            )
            
            
            84,914
            
            
            
            (143,803
            )Deferred
      tax asset
            
            
            -
            
            
            
            244,000
            
            
            
            (66,000
            )Other
      current assets
            
            
            19,293
            
            
            
            13,174
            
            
            
            (6,726
            )Increase
      (decrease) in:Accounts
      payable
            
            
            5,300
            
            
            
            (14,071
            )
            
            
            (129,720
            )Accrued
      liabilities
            
            
            (37,698
            )
            
            
            (47,313
            )
            
            
            187,977Customer
      deposits
            
            
            (427,677
            )
            
            
            213,039
            
            
            
            114,638Income
      taxes payable
            
            
            -
            
            
            
            -
            
            
            
            (1,500,000
            )Deferred
      revenue
            
            
            45,406
            
            
            
            -
            
            
            
            (160,964
            )Deferred
      tax liability
            
            
            -
            
            
            
            21,531
            
            
            
            -Net
      cash used in operating activities
            
            
            (3,643,814
            )
            
            
            (902,576
            )
            
            
            (5,120,462
            )Cash
      flows from investing activities:Sales
      of investments
            
            
            10,150,957
            
            
            
            4,988,760
            
            
            
            10,207,840Purchases
      of investments
            
            
            (23,935
            )
            
            
            (1,954,490
            )
            
            
            (7,215,250
            )Purchase
      of property and equipment
            
            
            (36,478
            )
            
            
            (1,291,098
            )
            
            
            (66,612
            )Purchase
      of patents
            
            
            (49,444
            )
            
            
            (20,966
            )
            
            
            -Proceeds
      from sale of equity interest
            
            
            -
            
            
            
            -
            
            
            
            202,223Net
      cash provided by investing activities
            
            
            10,041,100
            
            
            
            1,722,206
            
            
            
            3,128,201Cash
      flows from financing activities:Proceeds
      from the sale of common stock
            
            
            -
            
            
            
            158,482
            
            
            
            229,707Net
      increase (decrease) in cash and cash equivalents
            
            
            6,397,286
            
            
            
            978,112
            
            
            
            (1,762,554
            )Cash
      and cash equivalents, beginning of year
            
            
            1,394,652
            
            
            
            416,540
            
            
            
            2,179,094Cash
      and cash equivalents, end of year
            
            $
            7,791,938
            
            
            $
            1,394,652
            
            
            $
            416,540See
      accompanying notes to financial
statements





F-7





BSD
MEDICAL CORPORATION


Notes
to Financial Statements








Note
1:  Organization and Significant Accounting Policies





Organization and Business –
BSD Medical Corporation (the Company) was incorporated in the State of Delaware
on July 3, 1986.  We develop, manufacture, market, and service medical
systems that deliver precision-focused radio frequency (RF) or microwave energy
into diseased sites of the body, heating them to specified temperatures as
required by a variety of medical therapies.  Our business objectives
are to commercialize our products developed for the treatment of cancer and to
further expand our systems to treat other diseases and medical
conditions.  Our product line for cancer therapy has been created to
offer hospitals and clinics a complete solution for thermal treatment of cancer
as provided through microwave/RF systems.  Our microwave ablation
system is to be used to ablate (remove or vaporize)soft tissue with heat
alone.  Thermal ablation is used to destroy local tumors using a short
intense focus of heat on a specific area, which is usually small, similar to
surgical removal of the tumor.





Cash and Cash Equivalents –
Cash and cash equivalents consist of cash and investments with original
maturities to the Company of three months or less.





Investments – Investments with
scheduled maturities greater than three months, but not greater than one year,
are recorded as short-term investments.  As of August 31, 2009, we had
no investments.   As of August 31, 2008, our investments
consisted primarily of a highly liquid, managed portfolio of mutual funds, and
were all considered available-for-sale securities.  The investments
were carried at fair value based on quoted market prices, with net unrealized
gains and losses reported as other comprehensive income (loss) in stockholders’
equity in our balance sheets.  Realized gains and losses are included
in our statements of operations.  The mutual funds were comprised of
two categories:  corporate debt funds and equity income
funds.





Accounts Receivable – Trade
accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management estimates an allowance for doubtful accounts by
identifying troubled accounts and by using historical experience applied to an
aging of accounts. Trade accounts receivable are written off when deemed
uncollectible. Recoveries of trade receivables previously written off are
recorded when received. Interest is not charged on trade receivables that are
outstanding beyond their due date.





Inventories –Parts and
supplies inventories are stated at the lower of cost or market.  Cost
is determined using the average cost method.  Work-in-process and
finished goods are stated at the lower of the accumulated manufacturing costs or
market.  Provisions, when required, are made to reduce excess and
obsolete inventories to their estimated net realizable value.  The
provision was $60,000 at August 31, 2009 and $40,000 at August 31,
2008.





Property and Equipment –
Property and equipment are stated at cost less accumulated
depreciation.  Depreciation is determined using the straight-line
method over the following estimated useful lives of the assets.





Equipment
            2 –
      5 yearsFurniture
      and fixtures
            5
      yearsBuilding
      improvements
            15
      yearsBuilding
            40
      years





Expenditures for maintenance and
repairs are expensed when incurred and betterments are
capitalized.  Gains and losses on sales of property and equipment are
reflected in operations.





The cost and accumulated depreciation
of property and equipment sold or otherwise retired are removed from the
accounts and any related gain or loss on disposition is reflected in net income
or loss for the period.





F-8




Patents – Patents are carried
at cost and are being amortized over their remaining legal life, up to a period
of 17 years.





Warranty Reserve – We provide
limited warranties to our customers for products sold.  Estimated
future warranty obligations are accrued each period.  As of August 31,
2009 and 2008, the accrued warranty reserve was $39,219 and $22,640,
respectively.  During the fiscal years ended August 31, 2009, 2008,
and 2007, total warranty expense was $58,002, $68,470 and $38,519,
respectively.





Income Taxes–We account for income taxes
using the asset and liability method.  Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.  Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.  The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.





Income (Loss) Per Common
Share– The
computation of basic income (loss) per common share is based on the weighted
average number of shares outstanding during each year.





The computation of diluted earnings per
common share is based on the weighted average number of shares outstanding
during the year, plus the common stock equivalents that would arise from the
exercise of stock options and warrants outstanding, using the treasury stock
method and the average market price per share during the year.  Common
stock equivalents are not included in the diluted loss per share calculation
when their effect is anti-dilutive.  Options to purchase 2,379,087,
2,182,629 and 1,795,853 shares of common stock at prices ranging from $0.56 to
$7.95, $0.37 to $6.50, and $0.37 to $5.76 per share were outstanding at August
31, 2009, 2008 and 2007, respectively.





The shares used in the computation of
the basic and diluted earnings per share are reconciled as follows:





Years
      Ended August 31,2009
            
            
            2008
            
            
            2007Weighted
      average number of shares outstanding – basic
            
            
            21,887,000
            
            
            
            21,339,000
            
            
            
            21,125,000Dilutive
      effect of stock options
            
            
            -
            
            
            
            -
            
            
            
            -Weighted
      average number of shares outstanding, assuming dilution
            
            
            21,887,000
            
            
            
            21,339,000
            
            
            
            21,125,000




Stock-Based Compensation -We
account for stock-based compensation in accordance with SFAS No. 123(R), Share Based
Payments.Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on
the value of the award granted using the Black-Scholes option pricing model, and
recognized over the period in which the award vests.  We allocate the
stock-based compensation expense to the various categories of operating costs
and expenses in a manner similar to the allocation of payroll
expense.





F-9


Revenue Recognition – We
recognize revenue from the sale of medical systems, the sale of parts and
accessories related to the systems, providing training, and service support
contracts.  Product sales were $3,293,116, $4,841,713 and $2,520,818
for the years ended August 31, 2009, 2008 and 2007,
respectively.  Service and other revenues were $243,371, $301,427 and
$313,568 for the years ended August 31, 2009, 2008 and 2007,
respectively.


Revenue
from the sale of medical systems is recognized when a purchase order has been
received, the system has been shipped, the selling price is fixed or
determinable, and collection is reasonably assured.  Most system sales
are F.O.B. shipping point, therefore shipment is deemed to have occurred when
the product is delivered to the transportation carrier.  Most system
sales do not include installation.  If installation is included as
part of the contract, revenue is not recognized until installation has occurred,
or until any remaining installation obligation is deemed to be
perfunctory.  Some sales of medical systems may include training as
part of the sale.  In such cases, the portion of the revenue related
to the training, calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the training has been
provided.  The sales of our medical systems do not require specific
customer acceptance provisions and do not include the right of return except in
cases where the product does not function as guaranteed by us.  We
provide a reserve allowance for estimated returns.  To date, returns
have not been significant.





Revenue
from training services is recorded when an agreement with the customer exists
for such training, the training services have been provided, and collection is
reasonably assured.





Revenue
from service support contracts is recognized on a straight-line basis over the
term of the contract, which approximates recognizing it as it is
earned.





Our
revenue recognition policy is the same for sales to both related parties and
non-related parties.  We provide the same products and services under
the same terms for non-related parties as with related parties.





Sales to
distributors are recognized in the same manner as sales to end-user
customers.





Deferred
revenue and customer deposits payable include amounts from service contracts as
well as cash received for the sales of products, which have not been
shipped.





Concentration of Credit Risk –
Financial instruments that potentially subject us to concentration of credit
risk consists primarily of trade receivables.  In the normal course of
business, we provide credit terms to our customers.  Accordingly, we
perform ongoing credit evaluations of our customers and maintain allowances for
possible losses.





We have
cash in the bank and short-term investments that exceed federally insured
limits.  We have not experienced any losses in such
accounts.





Advertising and Promotion –Advertising and promotion costs, which are principally included in sales
expenses, are expensed as incurred.  Advertising and promotion expense
was approximately $86,000, $206,000 and $331,000 for the years ended August 31,
2009, 2008 and 2007, respectively.





Use of Estimates in the Preparation
of Financial Statements – The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.  Actual results
could differ from those estimates.





Comprehensive Income (Loss) –
Comprehensive income (loss) consists of net income (loss) and the net change in
other comprehensive income (loss) resulting from net unrealized gains and losses
on our investments, which is reported on the accompanying statements of
stockholders’ equity.





Reclassifications – Certain
amounts in the prior years have been reclassified to conform with the current
year presentation.





F-10





Note
2:  Detail of Certain Balance Sheet Accounts





Details of certain balance sheet
accounts are as follows:





August
      31,Accounts
      receivable:
            
            2009
            
            
            2008Trade
      receivables – non-related party
            
            $
            307,194
            
            
            $
            407,528Other
      receivables
            
            
            1,101
            
            
            
            8,305Accrued
      interest receivable
            
            
            1,322
            
            
            
            43,906Allowance
      for doubtful accounts
            
            
            (20,000
            )
            
            
            (20,000
            )$
            289,617
            
            
            $
            439,739





August
      31,Inventories:
            
            2009
            
            
            2008Parts
      and supplies
            
            $
            1,041,355
            
            
            $
            802,956Work-in-process
            
            
            555,584
            
            
            
            608,391Finished
      goods
            
            
            257,537
            
            
            
            53,806Reserve
      for obsolete inventory
            
            
            (60,000
            )
            
            
            (40,000
            )$
            1,794,476
            
            
            $
            1,425,153





August
      31,Accrued
      liabilities:
            
            2009
            
            
            2008Accrued
      vacation
            
            $
            221,464
            
            
            $
            301,413Accrued
      taxes payable
            
            
            59,177
            
            
            
            14,994Accrued
      bonuses
            
            
            -
            
            
            
            161,000Other
      accrued liabilities
            
            
            267,438
            
            
            
            108,370$
            548,079
            
            
            $
            585,777




Note
3:  Investments





Investments with scheduled maturities
greater than three months, but not greater than one year, are recorded as
short-term investments.  As of August 31, 2009, we had no investments,
but had cash and cash equivalents of $7,791,938, comprised primarily of money
market funds.  As of August 31, 2008, our investments consisted
primarily of a highly liquid, managed portfolio of mutual funds, and were all
considered available-for-sale securities.  The mutual funds were
comprised of two categories:  corporate debt funds and equity income
funds.





The amortized cost, gross unrealized
gains and losses, and fair value of our investments by major security type were
as follows as of August 31, 2008:





F-11





Gross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairType
      of Security
            
            Cost
            
            
            Gains
            
            
            (Losses)
            
            
            ValueCorporate
      debt funds
            
            $
            11,518,134
            
            
            $
            -
            
            
            $
            (1,158,692
            )
            
            $
            10,359,442Equity
      income funds
            
            
            5,031,467
            
            
            
            -
            
            
            
            (982,724
            )
            
            
            4,048,743Other
      short-term interest-bearing securities
            
            
            79,007
            
            
            
            -
            
            
            
            -
            
            
            
            79,007Total
            
            $
            16,628,608
            
            
            $
            -
            
            
            $
            (2,141,416
            )
            
            $
            14,487,192





The other short-term interest-bearing
securities as of August 31, 2008 were comprised primarily of money market
funds.





Investments
in an unrealized loss position at August 31, 2008, by duration of the period of
the unrealized losses, are shown below:





Less
      Than 12 Months
            
            
            12
      Months of More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedType
      of Security
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesCorporate
      debt funds
            
            $
            -
            
            
            $
            -
            
            
            $
            10,359,442
            
            
            $
            (1,158,692
            )
            
            $
            10,359,442
            
            
            $
            (1,158,692
            )Equity
      income funds
            
            
            -
            
            
            
            -
            
            
            
            4,048,743
            
            
            
            (982,724
            )
            
            
            4,048,743
            
            
            
            (982,724
            )Total
            
            $
            -
            
            
            $
            -
            
            
            $
            14,408,185
            
            
            $
            (2,141,416
            )
            
            $
            14,408,185
            
            
            $
            (2,141,416
            )





Effective
September 1, 2008, we adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and requires enhanced disclosures about fair
value measurements.  SFAS No. 157 requires companies to disclose the
fair value of their financial instruments according to a fair value hierarchy as
defined in the standard.  Additionally, companies are required to
provide enhanced disclosure regarding financial instruments in one of the
categories, including a reconciliation of the beginning and ending balances
separately for each major category of assets and liabilities.  In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, which
delays by one year the effective date of SFAS No. 157 for certain types of
non-financial assets and non-financial liabilities, or our fiscal year beginning
September 1, 2009.





SFAS No.
157 provides a hierarchy that prioritizes inputs to valuation techniques used to
measure fair value into three broad levels.  Level 1 inputs are quoted
market prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement
date.  Level 2 inputs are inputs, other than quoted market prices
included within Level 1 that are observable for the asset or liability, either
directly or indirectly.  Level 3 inputs are unobservable inputs for
the asset or liability.





We continually review our investments
to determine whether a decline in fair value below the cost basis is other than
temporary.  We consider several factors, evaluated both individually
and collectively, with the evaluation involving a high level of complexity and
judgment.  The following factors, among others, are considered:
general market conditions; the length of time and extent to which our
investments’ market value has been less than cost; the level of income that we
continue to receive from our mutual funds, noting whether our dividends have
been reduced or eliminated or any scheduled dividend payments have not been
made; the recommendation of our investment advisor; sales of investments or our
decision to sell investments subsequent to a reporting period; for our corporate
debt funds, our analysis and conclusion that the decline in value is not
attributable to specific conditions in any one industry or geographic area; and
for our corporate debt funds, our analysis and conclusion that the default rate
within the individual funds continues to be low and that no significant
concentrations of debt is scheduled to mature in the next two
years.





F-12





After considering the factors outlined
above, we liquidated 100% of our mutual funds in March and May 2009 and
recognized a loss on investments in the statements of operations of $6,501,586
for the year ended August 31, 2009.  The cost basis of these
investments was $16,652,543, determined on a specific identification
basis.  Proceeds of $10,150,957 from these sales of investments were
deposited in money market funds.





Note
4:  Property and Equipment





Property and equipment consists of the
following:





August
      31,2009
            
            
            2008Equipment
            
            $
            1,074,364
            
            
            $
            1,048,061Furniture
      and fixtures
            
            
            298,576
            
            
            
            298,576Leasehold
      improvements
            
            
            24,220
            
            
            
            17,420Building
            
            
            956,000
            
            
            
            956,000Land
            
            
            244,000
            
            
            
            244,0002,597,160
            
            
            
            2,564,057Less
      accumulated depreciation
            
            
            (1,244,776
            )
            
            
            (1,122,533
            )$
            1,352,384
            
            
            $
            1,441,524





Depreciation expense for the years
ended August 31, 2009, 2008 and 2007 totaled $125,618, $117,207 and $95,971,
respectively.





Note
5:  Patents





We have four patents recorded net of
accumulated amortization.  The patents are being amortized on a
straight-line basis over their remaining legal life, up to a period of 17 years.
Amortization expense was $9,141, $3,009 and $1,878 for the years ended August
31, 2009, 2008, and 2007, respectively.  Amortization expense relating
to the patents for the next five years is expected to be as
follows:





Year
      ending August 31,2010
            
            $
            21,8792011
            
            
            21,8792012
            
            
            21,8792013
            
            
            1,8132014
            
            
            1,408$
            68,858




F-13





Note
6:  Operating Lease





When the
lease on our office, production and research facilities expired in November
2007, we exercised our option to purchase the building and land for a total
purchase price of $1,200,000.





Prior to
the exercise of the purchase option, rent expense on this operating lease for
the years ended August 31, 2008 and 2007 amounted to $20,699 and $93,032,
respectively.





Note
7:  Deferred Revenue





We have
entered into certain service contracts for which we have received payment in
advance.  We are recognizing these service revenues over the life of
the service agreements.





As of
August 31, 2009 and 2008, we had $141,385 and $95,979 of deferred revenue,
respectively.





Note
8:  Major Customers and Foreign Sales





We had
the following customer revenue concentrations:





Years
      Ended August 31,2009
            2008
            2007Customer
      A
            17.05%
            54.62%
            48.88%Customer
      B
            16.40%
            *
            *Customer
      C
            13.73%
            *
            *Customer
      D
            10.18%
            *
            *





*Sales to
customers were less than 10%.




Export
sales were $1,668,547, $2,812,796 and $1,787,363 in fiscal years 2009, 2008 and
2007, respectively.




During
fiscal year 2009, export sales to China, Switzerland and Poland were
approximately 16%, 13% and 14% of total sales, respectively.  During
fiscal years 2008 and 2007, export sales to Switzerland were approximately 53%
and 44% of total sales, respectively.




Note
9:  Income Taxes





The components of the income tax
(provision) benefit are as follows:





Years
      Ended August 31,2009
            
            
            2008
            
            
            2007Current:Federal
            
            $
            1,346,000
            
            
            $
            1,088,000
            
            
            $
            1,653,000State
            
            
            33,000
            
            
            
            41,000
            
            
            
            146,0001,379,000
            
            
            
            1,129,000
            
            
            
            1,799,000Deferred:Federal
            
            
            (229,000
            )
            
            
            (168,000
            )
            
            
            66,000$
            1,150,000
            
            
            $
            961,000
            
            
            $
            1,865,000




F-14





The
income tax (provision) benefit differs from the amount computed at federal
statutory rates as follows:




Years
      Ended August 31,2009
            
            
            2008
            
            
            2007Income
      tax (provision) benefit at federal statutory rate
            
            $
            4,262,000
            
            
            $
            1,156,000
            
            
            $
            1,772,000Stock-based
      compensation
            
            
            (252,000
            )
            
            
            (176,000
            )
            
            
            (233,000
            )State
      income taxes, net of federal benefit
            
            
            447,000
            
            
            
            288,000
            
            
            
            96,000Research
      and development credit
            
            
            309,000
            
            
            
            160,000
            
            
            
            160,000Valuation
      allowance
            
            
            (3,809,000
            )
            
            
            (518,000
            )
            
            
            -Other
            
            
            193,000
            
            
            
            51,000
            
            
            
            70,000$
            1,150,000
            
            
            $
            961,000
            
            
            $
            1,865,000





Deferred
tax assets (liabilities) are comprised of the following:





August
      31,2009
            
            
            2008Current
      Asset:Accruals
      and reserves
            
            $
            130,000
            
            
            $
            145,000Deferred
      revenue
            
            
            52,000
            
            
            
            36,000Inventories
            
            
            21,000
            
            
            
            15,000Investment
      and other tax credits
            
            
            1,390,000
            
            
            
            -Net
      operating loss carryforward
            
            
            1,672,000
            
            
            
            -State
      net operating loss carryforward
            
            
            761,000
            
            
            
            252,000Unrealized
      loss on investments
            
            
            -
            
            
            
            792,000Valuation
      allowance
            
            
            (4,026,000
            )
            
            
            (1,240,000
            )$
            -
            
            
            $
            -Long-Term
      Asset:Deferred
      compensation
            
            $
            282,000
            
            
            $
            120,000Depreciation
      and amortization
            
            
            20,000
            
            
            
            (50,000
            )Valuation
      allowance
            
            
            (302,000
            )
            
            
            (70,000
            )$
            -
            
            
            $
            -




At August
31, 2009, we had a net operating loss carryforward available to offset future
taxable income of approximately $4,500,000, which will begin to expire in
2029.  If substantial changes in the Company’s ownership should occur,
there would be an annual limitation of the amount of the net operating loss
carryforward which could be utilized.




The
Financial Accounting Standards Board (FASB) has issued Financial Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109
(FIN 48).  FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes.  FIN 48 requires a company to determine
whether it is more likely than not that a tax position will be sustained upon
examination based upon the technical merits of the position.  If the
more-likely-than-not threshold is met, a company must measure the tax position
to determine the amount to recognize in the financial statements.




We
perform a review of our material tax positions in accordance with recognition
and measurement standards established by FIN 48.  Upon adoption of FIN
48 on September 1, 2007, we had no unrecognized tax benefit which would affect
the effective tax rate if recognized.  There has been no significant
change in the unrecognized tax benefit during the years ended August 31, 2009
and 2008.




We
classify interest and penalties arising from the underpayment of income taxes in
our statements of operations in other income (expense).  As of August
31, 2009 and 2008, we had no accrued interest or penalties related to uncertain
tax positions.





F-15





We file
income tax returns in the U.S. federal jurisdiction and various state
jurisdictions.  U.S. federal income tax returns from the year ended
August 31, 2006 through the year ended August 31, 2009 are subject to
examination.





The
ultimate realization of the deferred tax assets is dependent, in part, upon the
tax laws in effect, our future earnings, and other events.  As of
August 31, 2009, we recorded a valuation allowance of $4,026,000 against current
deferred tax assets and a valuation allowance of $302,000 against net long-term
deferred tax assets.  The increase in the valuation allowance for the
year ended August 31, 2009 relates primarily to our operating losses. The
general valuation allowance has been established under the provisions of SFAS
No. 109, Accounting for
Income Taxes, which requires that a valuation allowance be established
when it is more likely than not that the net deferred tax assets will not be
realized.




Note
10:  Stock-Based Compensation





Our
Amended and Restated 1998 Stock Incentive Plan authorizes the granting of
incentive stock options to certain key employees and non-employees who provide
services to the Company.  The Plan, as amended, provides for the
granting of options for an aggregate of 3,427,300 shares.  The options
vest subject to management’s discretion.





Effective
February 4, 2009, our Amended and Restated 1998 Directors Stock Plan provides an
annual retainer of $60,000 to each non-employee director with the exception of
the Audit Committee Chairman who is to receive $65,000.  The cash
portion of the compensation of $30,000 ($35,000 for the Audit Committee
Chairman) is paid 50% twice each year, with $30,000 compensation paid in common
stock of the Company once each year.  Prior to February 4, 2009, the
annual compensation consisted of $15,000 cash ($20,000 for the Audit Committee
Chairman) paid 50% twice each year, with $15,000 in common stock of the
Company.  Prior to February 4, 2009, the Plan also granted each
non-employee outside director 30,000 options each year at an exercise price
equal to the fair market value of the common stock at the date the option was
granted.  The options vest according to a set schedule over a
five-year period and expire upon the director’s termination, or after ten years
from the date of grant.  The Plan allows for an aggregate of 1,500,000
shares to be granted.





We
account for stock-based compensation in accordance with SFAS No. 123(R), Share Based
Payments.  Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on
the value of the award granted using the Black-Scholes option pricing model, and
recognized over the period in which the award vests.





The
stock-based compensation expense for the year ended August 31, 2009 and 2008 has
been allocated to the various categories of operating costs and expenses in a
manner similar to the allocation of payroll expense as follows:





2009
            
            
            2008Cost
      of sales
            
            $
            72,988
            
            
            $
            86,262Research
      and development
            
            
            186,690
            
            
            
            136,993Selling,
      general and administrative
            
            
            858,161
            
            
            
            577,177Total
            
            $
            1,117,839
            
            
            $
            800,432








F-16





Stock-based
compensation expense for the year ended August 31, 2007 of $832,224 has been
included in selling, general and administrative expenses.




During
the year ended August 31, 2009, we granted 1,140,760 options to our directors
and employees, 1,055,760 options with one fifth vesting each year for the next
five years, and 85,000 options with one third vesting each year for the next
three years.  The options have a life of ten years.




Unrecognized
stock-based compensation expense expected to be recognized over the estimated
weighted-average amortization period of 2.86 years is approximately $3,062,000
at August 31, 2009.




Our weighted-average assumptions used
in the Black-Scholes valuation model for equity awards with time-based vesting
provisions granted during the year ended August 31, 2009 are shown
below:




Expected
      volatility
            66.23%Expected
      dividends
            0%Expected
      term
            6.00
      YearsRisk-free
      interest rate
            2.79%




The
expected volatility rate was estimated based on the historical volatility of our
common stock.   The expected term was estimated based on
historical experience of stock option exercise and forfeiture.  The
risk-free interest rate is the rate provided by the U.S. Treasury for Daily
Treasury Yield Curve Rates commonly referred to as “Constant Maturity Treasury”
rate in effect at the time of grant with a remaining term equal to the expected
option term.




A summary
of the time-based stock option awards as of August 31, 2009, and changes during
the year then ended, is as follows:




Shares
            Weighted-
              Average
              Exercise
              Price
            Weighted-
              Average
              Remaining
              Contract
      Term
              (Years)
            Aggregate
              Intrinsic
              ValueOutstanding
      at September 1, 2008
            2,182,629
            $
            3.02Granted
            1,140,760
            
            2.94Exercised
            (815,102)
            
            1.04Forfeited
      or expired
            (129,200)
            
            5.94Outstanding
      at August 31, 2009
            2,379,087
            $
            3.54
            8.12Exercisable
      at August 31, 2009
            954,971
            $
            3.62
            6.73
            $
            295,653





The
aggregate intrinsic value in the preceding table represents the total pretax
intrinsic value, based on the Company’s closing stock price of $2.13 as of
August 31, 2009, which would have been received by the holders of in-the-money
options had the option holders exercised their options as of that
date.





The
weighted-average grant-date fair value of stock options granted during the year
ended August 31, 2009 was $1.79.





F-17





Note
11:  Related Party Transactions





During
the years ended August 31, 2009, 2008, and 2007, we had sales of $603,000,
$2,809,132 and $1,385,332, respectively, to entities controlled by a significant
stockholder and member of the Board of Directors.  These related party
transactions represent 17%, 55% and 49% of total sales for each respective
year.





At August
31, 2009 and 2008, receivables include $41,016 and $737,483, respectively, from
these related parties.




Note
12:  Supplemental Cash Flow Information





Actual
amounts paid for interest and income taxes are as follows:





Years
      Ended August 31,2009
            
            
            2008
            
            
            2007Interest
      expense
            
            $
            1,675
            
            
            $
            -
            
            
            $
            -Income
      taxes
            
            $
            17,132
            
            
            $
            8,929
            
            
            $
            1,798,676




We had
the following non-cash financing and investing activities:





During the year ended August 31, 2009,
we:





·
            Decreased
      income tax receivable and additional paid-in capital by
      $194,436.





·
            Increased
      other comprehensive loss and decreased investments by
      $4,360,170.





·
            Increased
      common stock and decreased additional paid-in capital by
    $618.





During
the year ended August 31, 2008, we:





·
            Recorded
      an increase in additional paid-in capital of $171,718 and an increase in
      income tax receivable of $171,718 related to the tax benefit from the
      exercise of stock options.





·
            Increased
      other comprehensive loss by $1,780,656, decreased investments by
      $1,568,656 and decreased short-term deferred tax assets by
      $212,000.





·
            Increased
      common stock and decreased additional paid-in capital by
    $24.





During
the year ended August 31, 2007, we:





·
            Recorded
      an increase in additional paid in capital of $47,449 and corresponding
      decrease to income taxes payable related to the tax benefit from the
      exercise of stock options.





·
            Increased
      other comprehensive loss by $261,398, decreased investments by $473,398
      and increased short-term deferred tax asset by
  $212,000.





·
            Transferred
      deferred compensation of $247,700 to additional paid-in
      capital.




·
            Decreased
      income taxes payable and decreased income tax receivable by
      $39,946.





·
            Increased
      common stock and decreased additional paid-in capital by
    $68.




F-18




Note
13:  Commitments and Contingencies





We
entered into an employment agreement with our Senior Vice President and Chief
Technical Officer (“CTO”) dated November 2, 1988.  The agreement sets
the CTO’s annual base salary for each year until October 1, 1993 and provides
that after October 1, 1993 the CTO’s annual base salary will be based upon a
reasonable mutual agreement between the CTO and the Company.  The
CTO’s annual base salary was raised to $210,000 effective September 1,
2006.  In the event of termination of the CTO’s employment with the
Company without cause (as defined in the agreement) or the CTO’s resignation for
good reason (as defined in the agreement), the agreement provides that the CTO
will receive severance pay for a one-year period, which pay includes an
extension of all of his rights, privileges and benefits as an employee
(including medical insurance).  The one-year severance pay shall be
equal to the CTO’s average annual salary for the 12-month period immediately
prior to the termination.  The agreement also requires us to pay the
CTO for any accrued, unused vacation at the time of termination.  We
are also obligated to pay the CTO $1,000 (or the equivalent value in stock
options) for each newly issued patent obtained by us as a result of the CTO’s
efforts (the CTO receives only $500 if multiple inventors are
involved).  The CTO’s agreement includes a non-competition covenant
prohibiting him from competing with us for one year following his
termination.  We may continue the non-competition period for up to
four additional years by notifying the CTO in writing and by continuing the
severance payments for the additional years during which the non-competition
period is extended.





We have
an exclusive worldwide license for a unique temperature probe.  The
license has no determinable life.  We pay royalties based upon its
sales of this probe.  Accrued royalties were $665 and $1,890 as of
August 31, 2009 and 2008, respectively.  Royalty expense amounted to
$6,180, $4,760 and $5,445 for the years ended August 31, 2009, 2008 and 2007,
respectively.




Note
14:  Fair Value of Financial Instruments





Our
financial instruments currently consist primarily of cash and cash equivalents,
accounts receivable and accounts payable.  We have also historically
held short-term investments, which have been classified as held-for-sale, and
which are discussed in Note 3.  None of our financial instruments are
held for trading purposes.  We estimate that the fair value of our
cash, accounts receivable and accounts payable at August 31, 2009 and 2008 does
not differ materially from their aggregate carrying values due to the short-term
nature of these financial instruments.





Included
in our cash equivalents at August 31, 2009 are money market funds of $7,672,673,
which are highly liquid and have a maturity of three months or
less.





F-19





In
accordance with SFAS No. 157, we categorize our financial assets and liabilities
that we measure on a recurring basis into a three-level fair value hierarchy as
defined in the standard.  As of August 31, 2009, our money market
funds are the only financial instruments that we measure on a recurring
basis.  The following table summarizes our financial assets measured
on a recurring basis as of August 31, 2009:





Description
            Quoted
      Prices in
              Active
      Markets for
              Identical
      Assets (Level 1)
            Significant
      Other
              Observable
              Inputs
      (Level 2)
            Significant
              Unobservable
              Inputs
      (Level 3)Money
      Market Funds
            $             7,672,673
            $                        -
            $                        -




Note
15:  Sale of Equity Interest





The
Company held an equity interest in TherMatrx, Inc. (“TherMatrx”) until July 15,
2004.  On July 15, 2004, TherMatrx was sold to American Medical
Systems Holdings, Inc. (AMS).  The Company’s part of the total
proceeds from this sale was approximately 25%.  A portion of the
payout from the sale was based on contingency payments.  In April
2007, the Company received an additional $202,223 in proceeds from the sale of
TherMatrx.




Note
16:  Recent Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a
Replacement of FASB Statement No. 162. The Codification will become the
source of authoritative U.S. generally accounting principles (GAAP) recognized
by the FASB to be applied to nongovernmental entities.  Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants.  On the effective date of this Statement, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification will become nonauthoritative.  This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009 (our quarter ended November 30,
2009).  We are currently unable to determine what impact the future
application of this pronouncement may have on our financial
statements.





On June
12, 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R).  This statement is a revision to FASB Interpretation
No. 46(R), Consolidation of
Variable Interest Entities, and changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated.  The determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance.  The statement is effective at the start of a company’s
first fiscal year beginning after November 15, 2009 (our fiscal year beginning
September 1, 2010), or January 1, 2010 for companies reporting on a calendar
year basis.  We currently are unable to determine what impact the
future application of this pronouncement may have on our financial
statements.





On June
12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets – an Amendment of FASB Statement No.
140.  This statement is a revision to Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and
will require more information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets.  It eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosures.  The statement is effective at the start of a company’s
first fiscal year beginning after November 15, 2009 (our fiscal year beginning
September 1, 2010), or January 1, 2010 for companies reporting on a calendar
year basis.  We currently are unable to determine what impact the
future application of this pronouncement may have on our financial
statements.





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On May
28, 2009, the FASB issued SFAS No. 165, Subsequent
Events.This statement is intended to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued.  It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date—that is,
whether that date represents the date the financial statements were issued or
were available to be issued.  This disclosure is intended to alert all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being
presented.  The statement is effective for interim and annual periods
ending after June 15, 2009, or our fiscal year ended August 31,
2009.  The implementation of this statement did not have a material
impact on our financial statements.





In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business
Combinations.  This statement replaces SFAS No. 141, Business Combinations and
applies to all transactions or other events in which an entity (the acquirer)
obtains control of one or more businesses (the acquiree), including those
sometimes referred to as “true mergers” or “mergers of equals” and combinations
achieved without the transfer of consideration.  This statement
establishes principles and requirements for how the acquirer: a) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; b)
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  This statement will be effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, or our fiscal year beginning September 1,
2009.  Earlier adoption is prohibited.  We currently are
unable to determine what impact the future application of this pronouncement may
have on our financial statements.





In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements.  This statement applies to
all entities that prepare consolidated financial statements, except
not-for-profit organizations, and amends Accounting Research Bulletin (“ARB”) 51
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary.  It also
amends certain of ARB 51’s consolidation procedures for consistency with the
requirements of SFAS No. 141(R) (revised 2007).  This statement will
be effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, or our fiscal year beginning September
1, 2009.  Earlier adoption is prohibited.  We currently are
unable to determine what impact the future application of this pronouncement may
have on our financial statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value.  Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option.  However, the amendment to SFAS No. 115 Accounting for Certain Investments
in Debt and Equity Securities applies to all entities with
available-for-sale and trading securities.  SFAS No. 159 is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007.  We adopted SFAS No. 159 on September 1, 2008, with no
material impact on our financial statements.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value,
and requires enhanced disclosures about fair value measurements.  SFAS
No. 157 requires companies to disclose the fair value of their financial
instruments according to a fair value hierarchy as defined in the
standard.  Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities.  In February 2008, the FASB issued
FSP No. FAS 157-2, which delays by one year the effective date of SFAS No. 157
for certain types of non-financial assets and non-financial
liabilities.  As a result, SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 for
financial assets and liabilities carried at fair value on a recurring basis, and
for fiscal years beginning after November 15, 2008 for non-recurring
non-financial assets and liabilities that are recognized or disclosed at fair
value.  In October 2008, the FASB issued FSP No. 157-3,
Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active, or FSP
157-3.  FSP 157-3 clarifies the application of SFAS 157 in a market that is
not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active.  FSP 157-3 was effective upon issuance,
including prior periods for which financial statements have not been
issued.





F-21





We
adopted SFAS No. 157 for financial assets and liabilities carried at fair value
on a recurring basis on September 1, 2008 (Note 14).  We are currently
unable to determine the impact on our financial statements of the application of
SFAS No. 157 on September 1, 2009, for non-recurring non-financial assets and
liabilities that are recognized or disclosed at fair value.




Note
17:  Subsequent Events





We have
evaluated events occurring after the date of our accompanying balance sheets
through November 6, 2009, the date of the filing of this Annual Report on Form
10-K.  We did not identify any material subsequent events requiring
adjustment to our accompanying financial statements.






F-22