UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  FORM 10-Q
 
 (Mark
One)
 
 ý           Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 
 For
the quarterly period ended November 30, 2008
 
 o           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 
 For
the transition period from ___________ to __________
 
 Commission
File No. 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 SouthSalt
      Lake City, Utah 84119(Address
      of principal executive offices, including zip code)(801)
      972-5555(Registrant’s
      telephone number, including area
code)
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes ý  No o
 
 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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 Large
      accelerated filer o
              Accelerated
      filer ýNon-accelerated
      filer o
              Smaller
      reporting company ý
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).Yes o  No ý
 
 As of
January 9, 2009, there were 21,843,673 shares of the Registrant’s common stock,
$0.001 par value per share, outstanding.
  
  BSD MEDICAL CORPORATION
 FORM
10-Q
 
 FOR
THE QUARTER ENDED NOVEMBER 30, 2008
 
 
 PART
      I - Financial InformationItem
      1.
              Financial StatementsCondensed Balance Sheets
              3Condensed Statements of Operations
              4Condensed Statements of Cash Flows
              5Notes to Condensed Financial Statements
              6Item
      2.
              Management’s Discussion and Analysis of Financial
      Conditionand Results of Operations
              12Item
      3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              20Item
      4.
              Controls and Procedures
              21PART
      II - Other InformationItem
      1A.
              Risk Factors
              21Item
      6.
              Exhibits
              21Signatures
              
              22
 
  2
  PART I - FINANCIAL INFORMATION
  Item
1.  Financial Statements.
  BSD MEDICAL CORPORATIONCondensed
      Balance Sheets(Unaudited)ASSETS
              
              November
      30,
                2008
              
              
              August
      31,
                2008Current
      assets:Cash
      and cash equivalents
              
              $
              243,209
              
              
              $
              1,394,652Investments
              
              
              10,312,265
              
              
              
              14,487,192Accounts
      receivable, net of allowance for doubtfulaccounts
      of $20,000
              
              
              737,166
              
              
              
              439,739Related
      party trade accounts receivable
              
              
              399,344
              
              
              
              737,483Income
      tax receivable
              
              
              1,001,438
              
              
              
              1,409,996Inventories,
      net
              
              
              1,661,394
              
              
              
              1,425,153Other
      current assets
              
              
              89,323
              
              
              
              113,829Total
      current assets
              
              
              14,444,139
              
              
              
              20,008,044Property
      and equipment, net
              
              
              1,428,117
              
              
              
              1,441,524Patents,
      net
              
              
              35,646
              
              
              
              37,330$
              15,907,902
              
              
              $
              21,486,898LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              530,673
              
              
              $
              221,605Accrued
      liabilities
              
              
              499,344
              
              
              
              585,777Customer
      deposits
              
              
              307,948
              
              
              
              427,677Deferred
      revenue – current portion
              
              
              38,578
              
              
              
              41,885Total
      current liabilities
              
              
              1,376,543
              
              
              
              1,276,944Deferred
      revenue – net of current portion
              
              
              49,094
              
              
              
              54,094Total
      liabilities
              
              
              1,425,637
              
              
              
              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,
      21,843,673 and 21,388,958 shares issued
              
              
              21,844
              
              
              
              21,389Additional
      paid-in capital
              
              
              27,716,033
              
              
              
              27,565,373Treasury
      stock, 24,331 shares at cost
              
              
              (234
              )
              
              
              (234
              )Other
      comprehensive loss
              
              
              (6,532,981
              )
              
              
              (2,141,416
              )Accumulated
      deficit
              
              
              (6,722,397
              )
              
              
              (5,289,252
              )Total
      stockholders’ equity
              
              
              14,482,265
              
              
              
              20,155,860$
              15,907,902
              
              
              $
              21,486,898See
      accompanying notes to condensed financial statements
  Return to Table of Contents
 3
 
 BSD MEDICAL CORPORATIONCondensed
      Statements of Operations(Unaudited)
 
 Three
      Months Ended
                November
      30,2008
              
              
              2007Revenues:Sales
              
              $
              1,208,396
              
              
              $
              479,703Sales
      to related parties
              
              
              23,168
              
              
              
              908,025Total
      revenues
              
              
              1,231,564
              
              
              
              1,387,728Operating
      costs and expenses:Cost
      of sales
              
              
              600,480
              
              
              
              162,981Cost
      of related party sales
              
              
              22,172
              
              
              
              277,874Research
      and development
              
              
              507,223
              
              
              
              337,353Selling,
      general and administrative
              
              
              1,510,307
              
              
              
              1,393,947Total
      operating costs and expenses
              
              
              2,640,182
              
              
              
              2,172,155Loss
      from operations
              
              
              (1,408,618
              )
              
              
              (784,427
              )Other
      income (expense):Interest
      and investment income
              
              
              258,732
              
              
              
              189,348Other
      expense
              
              
              (34,259
              )
              
              
              (63,856
              )Total
      other income (expense)
              
              
              224,473
              
              
              
              125,492Loss
      before income taxes
              
              
              (1,184,145
              )
              
              
              (658,935
              )(Provision)
      benefit for income taxes
              
              
              (249,000
              )
              
              
              43,000Net
      loss
              
              
              (1,433,145
              )
              
              
              (615,935
              )Other
      comprehensive loss – unrealized losson
      investments, net of income tax
              
              
              (4,391,565
              )
              
              
              (368,600
              )Net
      comprehensive loss
              
              $
              (5,824,710
              )
              
              $
              (984,535
              )Loss
      per common share:Basic
              
              $
              (0.07
              )
              
              $
              (0.03
              )Diluted
              
              $
              (0.07
              )
              
              $
              (0.03
              )Weighted
      average number of sharesoutstanding:Basic
              
              
              21,769,000
              
              
              
              21,311,000Diluted
              
              
              21,769,000
              
              
              
              21,311,000See
      accompanying notes to condensed financial statements
  Return to Table of Contents
 4
 
 BSD MEDICAL CORPORATIONCondensed
      Statements of Cash Flows(Unaudited)
 
 Three
      Months Ended
                November
      30,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (1,433,145
              )
              
              $
              (615,935
              )Adjustments
      to reconcile net loss to net cash usedin
      operating activities:Depreciation
      and amortization
              
              
              33,276
              
              
              
              26,373Stock-based
      compensation
              
              
              273,173
              
              
              
              158,630Stock
      issued for services
              
              
              37,500
              
              
              
              30,000Decrease
      (increase) in:Receivables
              
              
              40,712
              
              
              
              (835,910
              )Income
      tax receivable
              
              
              249,000
              
              
              
              (211,000
              )Inventories
              
              
              (236,241
              )
              
              
              (92,436
              )Deferred
      tax assets
              
              
              -
              
              
              
              168,000Other
      current assets
              
              
              24,506
              
              
              
              7,227Increase
      (decrease) in:Accounts
      payable
              
              
              309,068
              
              
              
              33,629Accrued
      liabilities
              
              
              (86,433
              )
              
              
              (72,358
              )Customer
      deposits
              
              
              (119,729
              )
              
              
              (131,573
              )Deferred
      revenue
              
              
              (8,307
              )
              
              
              (7,722
              )Net
      cash used in operating activities
              
              
              (916,620
              )
              
              
              (1,543,075
              )Cash
      flows from investing activities:(Purchase)
      sale of investments
              
              
              (216,638
              )
              
              
              3,072,907Purchase
      of property and equipment
              
              
              (18,185
              )
              
              
              (1,205,892
              )Increase
      in patents
              
              
              -
              
              
              
              (20,967
              )Net
      cash (used in) provided by investing activities
              
              
              (234,823
              )
              
              
              1,846,048Cash
      flows from financing activities:Proceeds
      from the sale of common stock
              
              
              -
              
              
              
              12,000Net
      (decrease) increase in cash and cash equivalents
              
              
              (1,151,443
              )
              
              
              314,973Cash
      and cash equivalents, beginning of period
              
              
              1,394,652
              
              
              
              416,540Cash
      and cash equivalents, end of period
              
              $
              243,209
              
              
              $
              731,513See
      accompanying notes to condensed financial statements
  Return to Table of Contents
 5
 
 BSD MEDICAL CORPORATION
 Notes
to Condensed Financial Statements
 (Unaudited)
 
 Note
1.  Basis of Presentation
  The
accompanying unaudited condensed balance sheets of BSD Medical Corporation (the
“Company”) as of November 30, 2008 and August 31, 2008, the related unaudited
condensed statements of operations for the three months ended November 30, 2008
and 2007, and the related unaudited condensed statements of cash flows for the
three months ended November 30, 2008 and 2007 have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
reporting and pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”).  The condensed financial statements
do not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial
statements.  These condensed financial statements should be read in
conjunction with the notes thereto, and the financial statements and notes
thereto included in our annual report on Form 10-K for the year ended August 31,
2008.
 
 All
adjustments (consisting only of normal recurring adjustments) necessary for the
fair presentation of our financial position as of November 30, 2008 and August
31, 2008, our results of operations for the three months ended November 30, 2008
and 2007, and our cash flows for the three months ended November 30, 2008 and
2007 have been included.  The results of operations for the three
months ended November 30, 2008 may not be indicative of the results for the year
ending August 31, 2009.
  
 Note
2.  Net Income (Loss) Per Common Share
  The
computation of basic earnings per common share is based on the weighted average
number of shares outstanding during the period.  The computation of
diluted earnings per common share is based on the weighted average number of
shares outstanding during the period plus the weighted average common stock
equivalents which would arise from the exercise of stock options outstanding
using the treasury stock method and the average market price per share during
the period.
 
 The shares used in the computation of
the Company’s basic and diluted earnings per share are reconciled as
follows:
 Three
      Months Ended
                November
      30,2008
              
              
              2007Weighted
      average number of shares outstanding – basic
              
              
              21,769,000
              
              
              
              21,311,000Dilutive
      effect of stock options
              
              
              -
              
              
              
              -Weighted
      average number of shares outstanding – diluted
              
              
              21,769,000
              
              
              
              21,311,000
 
 No stock
options are included in the computation of diluted weighted average number of
shares for the three months ended November 30, 2008 and 2007 because the effect
would be anti-dilutive.  At November 30, 2008, the Company had
outstanding options to purchase a total of 1,851,600 common shares of the
Company that could have a future dilutive effect on the calculation of earnings
per share.
  Return to Table of Contents
 6
  Note
3.  Inventories
 
 Inventories
consist of the following:
  November
      30,
                2008
              
              
              August
      31,
                2008Parts
      and supplies
              
              $
              999,047
              
              
              $
              802,956Work-in-process
              
              
              648,541
              
              
              
              608,391Finished
      goods
              
              
              53,806
              
              
              
              53,806Reserve
      for obsolete inventory
              
              
              (40,000
              )
              
              
              (40,000
              )Inventories,
      net
              
              $
              1,661,394
              
              
              $
              1,425,153
 
 
 Note
4.  Property and Equipment
 
 Property
and equipment consist of the following:
  November
      30,
                2008
              
              
              August
      31,
                2008Equipment
              
              $
              1,059,447
              
              
              $
              1,048,061Furniture
      and fixtures
              
              
              298,576
              
              
              
              298,576Leasehold
      improvements
              
              
              24,220
              
              
              
              17,420Building
              
              
              956,000
              
              
              
              956,000Land
              
              
              244,000
              
              
              
              244,0002,582,243
              
              
              
              2,564,057Less
      accumulated depreciation
              
              
              (1,154,126
              )
              
              
              (1,122,533
              )Property
      and equipment, net
              
              $
              1,428,117
              
              
              $
              1,441,524
 
 
 Note
5.   Related Party Transactions
  During
the three months ended November 30, 2008 and 2007, we had sales of $23,168 and
$908,025, respectively, to an entity controlled by a significant stockholder and
member of the Board of Directors.  These related party transactions
represent approximately 2% and 65% of total sales for each respective
three-month period.
  At
November 30, 2008 and August 31, 2008, receivables included $399,344 and
$737,483, respectively, from this entity.
 
 
 Note
6.  Stock-Based Compensation
 
 We have
both an employee and director stock option plan, which are described more fully
in Note 10 in our 2008 Annual Report on Form 10-K.  As of November 30,
2008, we had approximately 1,262,000 shares of common stock reserved for future
issuance under the stock option plans.
  Return to Table of Contents
 7
  The
Company accounts 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 three-month periods ended November 30, 2008 and
2007 has been allocated to the various categories of operating costs and
expenses in a manner similar to the allocation of payroll expense as
follows:
  Three
      Months Ended
                November
      30,2008
              
              
              2007Cost
      of sales
              
              $
              18,429
              
              
              $
              21,148Research
      and development
              
              
              42,329
              
              
              
              25,495Selling,
      general and administrative
              
              
              212,415
              
              
              
              111,987Total
              
              $
              273,173
              
              
              $
              158,630
 
  During
the three months ended November 30, 2008, we granted 235,000 options to our
directors and employees, 150,000 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. These grants account for $55,984 of the total stock-based
compensation expense for the three months ended November 30, 2008.
  Unrecognized
stock-based compensation expense expected to be recognized over the estimated
weighted-average amortization period of 3.64 years is approximately $3,088,000
at November 30, 2008.
  Our weighted-average assumptions used
in the Black-Scholes valuation model for equity awards with time-based vesting
provisions granted during the three months ended November 30, 2008 are shown
below:
  Expected
      volatility
              62.11%Expected
      dividends
              0%Expected
      term
              6.0
      YearsRisk-free
      interest rate
              3.35%
 
 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.
  The
weighted-average grant-date fair value of stock options granted during the three
months ended November 30, 2008 was $4.37.
 
 A summary
of the time-based stock option awards as of November 30, 2008, and changes
during the three months then ended, is as follows:
  Return to Table of Contents
 8
  Shares
              
              
              Weighted-
                Average
                Exercise
                Price
              
              
              Weighted-
                Average
                Remaining
                Contract
      Term
                (Years)
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at August 31, 2008
              
              
              2,182,629
              
              
              $
              3.02Granted
              
              
              235,000
              
              
              
              7.32Exercised
              
              
              (516,029
              )
              
              
              0.94Forfeited
      or expired
              
              
              (50,000
              )
              
              
              7.04Outstanding
      at November 30, 2008
              
              
              1,851,600
              
              
              $
              4.09
              
              
              
              7.56Exercisable
      at November 30, 2008
              
              
              1,007,410
              
              
              $
              2.67
              
              
              
              6.43
              
              $1,502,264
  
 Note
7.  Income Taxes
 
 The income tax (provision) benefit
consists of the following:
 
 Three
      Months Ended
                November
      30,2008
              
              
              2007Current
              
              $
              (20,000
              )
              
              $
              211,000Deferred
              
              
              (229,000
              )
              
              
              (168,000
              )Total
              
              $
              (249,000
              )
              
              $
              43,000
 
 The
current provision for income tax of $20,000 in the three months ended November
30, 2008 resulted from a decrease in our income tax receivable due to a change
in the amount of taxable loss and tax credits that we can carry back to offset
income taxes previously paid.  The current income tax benefit of
$211,000 in the three months ended November 30, 2007 represents an increase in
our income tax receivable resulting from our ability to carry back our taxable
loss in that period to offset income taxes previously paid.
 
 The
deferred income tax provision of $229,000 and $168,000 in the three months ended
November 30, 2008 and 2007, 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 within two years
to offset income taxes paid.
 
 
 Note
8.  Supplemental Cash Flow Information
 
 The
Company paid no amounts for interest during the three months ended November 30,
2008 and 2007.  The Company paid no amounts for income taxes during
the three months ended November 30, 2008 and 2007.
  Return to Table of Contents
 9
  During the three months ended November
30, 2008, the Company had the following non-cash financing and investing
activities:
 
 ·
              Increased
      other comprehensive loss and decreased investments by
      $4,391,565.
 
 ·
              Increased
      common stock and decreased additional paid-in capital by
    $450.
 
 ·
              Decreased
      income tax receivable and additional paid-in capital by
      $159,558.
 
 During
the three months ended November 30, 2007, the Company had the following non-cash
financing and investing activities:
 
 ·
              Recorded
      an increase in additional paid-in capital of $115,027, a decrease in
      long-term deferred tax asset of $76,000 and an increase in income tax
      receivable of $191,027 related to the tax benefit from the exercise of
      stock options.
 
 ·
              Increased
      other comprehensive loss by $368,600, decreased investments by $156,600
      and increased short-term deferred tax asset by
  $212,000.
 
 ·
              Increased
      common stock and decreased additional paid-in capital by
    $1.
 
 Note
9.  Recent Accounting Pronouncements
 
 On May 9, 2008, the FASB issued
Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted
Accounting Principles.  This statement is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities.  The statement establishes that the GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP.  This statement
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.  We
do not believe the implementation of this statement will have a material impact
on our financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  This statement changes the
disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows.  This
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, or our fiscal year beginning
September 1, 2009, with early application encouraged.  This statement
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption.  We currently are unable to determine what impact
the future application of this pronouncement may have on our financial
statements.
  Return to Table of Contents
 10
  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
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.  As a result, SFAS No. 157 will be 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, with no material impact on our
financial statements.  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.
  Return to Table of Contents
 11
  Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
  This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this report 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.  The following discussion should be read in
conjunction with our financial statements and notes thereto included in this
report.   We assume no obligation to revise or update any
forward-looking statements for any reason, except as required by
law.
  General
  BSD
Medical Corporation develops, manufactures, markets and services 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 developments 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.  We consider our operations
to comprise one business segment.
  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 much of the
technology that has successfully created a substantial 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.  Commercialization of our systems used to treat cancer is our
most immediate business objective.  Our BSD-2000 and BSD-500 cancer
treatment systems are used to treat cancer with heat while boosting the
effectiveness of radiation through a number of biological
mechanisms.  Our MicroThermX-100 Microwave Ablation System is used to
ablate soft tissue with heat alone.  Current and targeted cancer
treatment sites for our systems include cancers of the prostate, breast, head,
neck, bladder, cervix, colon/rectum, esophagus, liver, brain, bone, stomach and
lung.  Our cancer treatment systems have been used to treat thousands
of patients throughout the world, and have received much notoriety, including
the Frost & Sullivan “Technology Innovation of the Year Award” for cancer
therapy devices awarded for the development of the BSD-2000.
  Our
BSD-2000 systems are used to non-invasively treat cancers located deeper in the
body, and are designed to be companions to the estimated 7,500 linear
accelerators used to treat cancer through radiation and in combination with
chemotherapy treatments.  Our BSD-500 systems treat cancers on or near
the body surface and those that can be approached through body orifices such as
the throat, the rectum, etc., or through interstitial treatment in combination
with interstitial radiation (brachytherapy).  BSD-500 systems can be
used as companions to our BSD-2000 systems and the estimated 2,500 brachytherapy
systems installed.
  Based on
our management team’s knowledge of the market, we believe that the fully
saturated potential market for these developed cancer therapy systems is in
excess of $5 billion.  We also project an after-market opportunity
based on service agreements that equates to approximately 15% of the purchase
price of our systems per year.  We believe that the replacement cycle
for our systems, based on advances in software, hardware and other components,
will average 5-7 years. Our financial model in the higher production environment
of established commercial sales is to achieve a 60% gross margin on systems and
an 80% gross margin on service agreements and disposable applicators used with
our MicroThermX-100 system.
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 12
  We have
received United States Food and Drug Administration, or FDA, approval to market
our commercial version of the BSD-500, and in March 2006, we completed a
submission for FDA approval to sell the BSD-2000 in the United
States.  In August 2007, we successfully concluded a pre-approval and
quality system inspection by the FDA.  In December 2007, we received a
letter from the FDA denying our application for pre-market approval of the BSD
2000 and providing guidance regarding amendments needed to make the BSD-2000
submission approvable.  We have subsequently met with the FDA to
clarify its requirements and are currently seeking to satisfy these
requirements.  In April 2008, we submitted a 510(k) premarket
notification to the FDA for the MicroThermX-100 system, and in September 2008 we
received FDA clearance to market the MicroThermX-100 thermal ablation system in
the United States.  We have designed our cancer therapy systems such
that together they are capable of providing treatment for most solid tumors
located virtually anywhere in the body.
  Although
we have not entered these markets, we also believe that our technology has
application for a number of other medical purposes in addition to
cancer.
  
 Critical Accounting Policies
and Estimates
 
 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.  We provide a reserve allowance for estimated
returns.  To date, returns have not been significant.
  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.
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 13
  Investments.  Investments
with scheduled maturities greater than three months, but not greater than one
year, are recorded as short-term investments.  We have currently
classified these investments as available-for sale.  The short-term
investments are recorded at fair value, with net unrealized gains and losses
reported as other comprehensive income (loss) in stockholders’ equity on our
balance sheets.  Realized gains and losses are included in our
statements of operations.
 
 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
within two years to offset income taxes previously paid, we record an income tax
receivable and a current income tax benefit.
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 14
 
 Results of Operations:
Comparison of Three-Month Periods ended November 30, 2008 and
2007
  Revenues –
Total revenues for the three months ended November 30, 2008 were $1,231,564
compared to $1,387,728 for the three months ended November 30, 2007, a decrease
of $156,164, or 11%.  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.  Sales of a few systems can cause a large change in our
revenues from period to period.
  Related Party
Sales – We earned $23,168, or approximately 2%, of our revenues in the
three months ended November 30, 2008 from sales to related parties as compared
to $908,025 or approximately 65%, in the three months ended November 30,
2007.  These sales for the three months ended November 30, 2008 and
2007 were to Medizin-Technik and decreased in the current fiscal year primarily
due to a decrease in the number of systems sold.  The sales consisted
of sales of probes of $19,463 and other revenues of $3,705 in the three months
ended November 30, 2008, and product sales of $879,512, probes of $8,700 and
other revenues of $19,813 in the three months ended November 30,
2007.  Sales to Medizin-Technik may 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.  Sales of a few systems can cause a large change in our revenue
from period to period.
  Non-Related Party
Sales – In the three months ended November 30, 2008, we earned
$1,208,396, or 98%, of our revenues from sales to unrelated parties, as compared
to $479,703, or 35%, in the three months ended November 30, 2007, with the
increase due primarily to more systems sold in the current fiscal
year.  These sales for the three months ended November 30, 2008
consisted of product sales of $1,179,040, service of $15,641, probes of $2,402
and consulting and other revenue of $11,313.  By comparison, these
sales for the three months ended November 30, 2007 consisted of product sales of
$435,000, service of $15,371, probes of $13,847 and other revenue of
$15,485.
  Cost of
Sales – Cost of sales in the three months ended November 30, 2008 was
$600,480 compared to $162,981 in the three months ended November 30, 2007, an
increase of $437,499, or 268%.  This increase resulted primarily from
increased product sales in the current fiscal year.  We also have
experienced a modest increase in our manufacturing costs in the current fiscal
year, primarily from increased labor costs.  Cost of sales as a
percentage of sales will fluctuate from period to period depending on the mix of
revenues for the period, the product configuration, pricing and other
factors.  Cost of sales to related parties in the three months ended
November 30, 2008 decreased to $22,172 from $277,874 in the three months ended
November 30, 2007 primarily due to the decrease in related party product
sales.  All of the related party cost of sales were attributable to
sales to Medizin-Technik.
  Gross
Profit – Gross profit in the three months ended November 30, 2008 was
$608,912 or 49% of total sales, as compared to $946,873 or 68% of total sales in
the three months ended November 30, 2007.  The increase in non-related
party product sales in the current year resulted in a lower gross margin than in
the first quarter of the prior fiscal year as a result of pricing with certain
products.  The decrease in related party product sales in the current
year also contributed to the decrease in the overall gross
margin.  The gross margin percentage will fluctuate from period to
period depending on the mix of revenues for the period, the product
configuration, pricing and other factors.
  Research and
Development Expenses – Research and development expenses were $507,223
for the three months ended November 30, 2008, as compared to $337,353 for the
three months ended November 30, 2007, an increase of $137,223, or approximately
50%.  The increase in research and development expenses in the current
fiscal year is due primarily to the development of new products and an increase
in fees to outside consultants used in support of these development
efforts.
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 15
  Selling General
and Administrative Expenses – Selling, general and administrative
expenses for the three months ended November 30, 2008 were $1,510,307, as
compared to $1,393,947 for the three months ended November 30, 2007, an increase
of $116,360, or approximately 8%.  The increase in selling, general
and administrative expenses in the current fiscal year is due primarily to an
increase in our non-cash stock option expense and board compensation due to the
addition of one new director.
  Interest and
Investment Income – Interest and investment income increased to $258,732
for the three months ended November 30, 2008, as compared to $189,348 for the
three months ended November 30, 2007, due to losses on the liquidation of
investments realized in the prior fiscal year.
  (Provision)
Benefit for Income Taxes–The provision for
income taxes in the three months ended November 30, 2008 was $249,000 comprised
of a current provision of $20,000 and a deferred provision of
$229,000.  By comparison, the income tax benefit for the three months
ended November 30, 2007 was $43,000, comprised of a current benefit of $211,000,
partially offset by a deferred provision of $168,000.
 
 The
current provision for income tax of $20,000 in the three months ended November
30, 2008 resulted from a decrease in our income tax receivable due to a change
in the amount of taxable loss and tax credits that we can carry back to offset
income taxes previously paid.  The current income tax benefit of
$211,000 in the three months ended November 30, 2007 represents an increase in
our income tax receivable resulting from our ability to carry back our taxable
loss in that period to offset income taxes previously paid.
 
 The
deferred income tax provision of $229,000 and $168,000 in the three months ended
November 30, 2008 and 2007, 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 within two years
to offset income taxes paid.
 
 Net Loss –
During the three months ended November 30, 2008 we had a net loss of $1,433,145,
after recording a provision for income taxes of $249,000 as compared to a net
loss of $615,935, after recording a tax benefit of $43,000 in the three months
ended November 30, 2007.  The increase in the net loss in the current
fiscal year is due primarily to the decrease in total revenues, increase in
total operating costs and expenses, and increase in the provision for income
taxes as discussed above.
  Liquidity and Capital
Resources
  Since
inception through November 30, 2008, we have generated an accumulated deficit of
$6,722,297.  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
November 30, 2008, we had cash, cash equivalents and investments totaling
$10,555,474 as compared to cash, cash equivalents and investments totaling
$15,881,844 as of August 31, 2008.  The recorded value of our
investments at November 30, 2008 has been reduced by an unrealized loss of
$6,532,981.
  During
the three months ended November 30, 2008, we used cash of $916,620 in operating
activities, primarily as a result of our net loss of $1,433,145, increase in
inventories of $236,241, decrease in accrued liabilities of $86,433, and
decrease in customer deposits of $119,729, partially offset by a decrease in
income tax receivable of $249,000 and an increase in accounts payable of
$309,068.  By comparison, net cash used in operating activities was
$1,543,075 during the three months ended November 30, 2007, which included an
increase in accounts receivable of $835,910, increase in income tax receivable
of $211,000, increase in inventories of $92,436, decrease of accrued liabilities
of $72,358, and decrease in customer deposits of $131,573, partially offset by a
decrease in deferred tax assets of $168,000 and an increase in accounts payable
of $33,629.
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 16
  Net cash
used in investing activities for the three months ended November 30, 2008 was
$234,823, consisting of the net purchase of investments of $216,638 and the
purchase of property and equipment of $18,185.  For the three months
ended November 30, 2007, net cash provided by investing activities was
$1,846,048, resulting from the net sale of investments of $3,072,907, partially
offset by the purchase of property and equipment of $1,205,892 and the increase
in patents of $20,967.
  No net
cash was provided by financing activities for the three months ended November
30, 2008.  Net cash provided by financing activities consisted of
proceeds from the sale of common stock through the exercise of stock options of
$12,000 in the three months November 30, 2007.
  We expect
to incur additional expenses related to the commercial introduction of our
systems, due to additional participation at trade shows, expenditures on
publicity, additional travel, increased sales salaries and commissions and other
related expenses. In addition, we anticipate that we will incur increased
expenses related to seeking governmental and regulatory approvals for our
products and continued expenses related to corporate governance and compliance
with the Sarbanes-Oxley Act of 2002, during the remainder of fiscal
2009.
  We
believe we can cover any cash requirements with cost cutting or available
cash.  If we cannot cover any such cash shortfall with cost cutting or
available cash, we would need to obtain additional financing.  Due to
recent turmoil 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.
  As of
November 30, 2008, we have no significant commitments for the purchase of
property and equipment.
  We
believe that our current cash and cash equivalents, investments, income tax
refunds receivable, and expected cash provided from operating activities will be
sufficient to fund our operations for the next twelve months.  If the
global credit market continues to deteriorate, our investment portfolio may be
impacted and we could determine some of our investments have experienced
other-than-temporary declines in fair value, which could adversely impact our
financial results and decrease the amount of the investments available to fund
our operations.
  The
Company has no off balance sheet arrangements as of November 30,
2008.
  Recent Accounting
Pronouncements
  On May 9, 2008, the FASB issued
Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted
Accounting Principles.  This statement is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities.  The statement establishes that the GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP.  This statement
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.  We
do not believe the implementation of this statement will have a material impact
on our financial statements.
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 17
  In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  This statement changes the
disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows.  This
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, or our fiscal year beginning
September 1, 2009, with early application encouraged.  This statement
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption.  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 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.
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 18
  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
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.  As a result, SFAS No. 157 will be 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, with no material impact on our
financial statements.  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.
 
 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” 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 the BSD-2000, BSD 500 and
      MicroThermX-100 systems;
  ·
              our
      expectations to further expand our developments to treat other diseases
      and medical conditions;
  ·
              our
      expectations that in a higher production environment of established
      commercial sales we could achieve a 60% gross margin on system sales and
      an 80% gross margin on service agreements and disposable applicators used
      with our MicroThermX-100 system;
  ·
              our
      belief concerning the market potential for developed cancer therapy
      systems;
  ·
              our
      expectations related to the after-market opportunity for service
      agreements;
  ·
              our
      expectations related to the replacement cycle for our
    systems;
  ·
              our
      expectations that we will incur increased expenses related to seeking
      governmental and regulatory approvals for our
  products;
  ·
              our
      expectations and efforts regarding FDA approvals relating to the BSD-2000
      system;
  Return to Table of Contents
 19
  ·
              our
      belief that our technology has application for additional approaches to
      treating cancer and for other medical
purposes;
  ·
              our
      expectations related to the amount of expenses we will incur for the
      commercial introduction of our
systems;
  ·
              our
      expectation that we will incur increased expenses related to our corporate
      governance and compliance with the Sarbanes-Oxley Act of
    2002;
  ·
              our
      belief that we can cover any cash shortfall with cost cutting or available
      cash; and
  ·
              our
      belief that our current working capital, investments 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 our Annual Report
on Form 10-K for the year ended August 31, 2008 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 3.  Quantitative and Qualitative Disclosure About
Market Risk.
  A
significant portion of the Company’s cash equivalents and short-term investments
bear variable interest rates that are adjusted to market
conditions.  Changes in financial market conditions and in market
rates will affect interest and investment income earned and potentially the
market value of the principal of these instruments.  The Company does
not utilize derivative instruments to offset the exposure to interest rate
changes.  Significant changes in interest rates may have a material
impact on the Company’s results of operations.
 
 The
Company does have significant sales to foreign customers and is therefore
subject to the effects of changes in foreign currency exchange rates may have on
demand for its products and services. The Company does not utilize derivative
instruments to offset the exposure to changes in foreign currency exchange
rates.  To minimize foreign exchange risk, the Company’s export sales
are transacted in United States dollars.
  Return to Table of Contents
 20
  Item 4.  Controls and Procedures.
  Evaluation
of disclosure controls and procedures.
 
 As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our management including our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation, the principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in applicable rules and forms and
that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, in a
manner that allows timely decisions regarding required disclosure.
 
 Changes
in internal controls over financial reporting.
 
 There was
no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) during our most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
 
 
 PART
II – OTHER INFORMATION
  Item 1A.  Risk Factors.
  In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Item 1A – “Risk Factors” in our Annual Report
on Form 10-K for the year ended August 31, 2008, which could materially affect
our business, financial condition or future results of operations.
  Item 6.  Exhibits.
  The
following exhibits are filed as part of this report:
  Exhibit No.
              
              Description of
      Exhibit31.1
              
              Certification of the Principal Executive
      Officer Required Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
              
              Certification of the Principal Accounting
      Officer Required Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
              
              Certification of Principal Executive Officer
      Required Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
              
              Certification of Principal Accounting
      Officer Required Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
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 21
  SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  BSD
      MEDICAL CORPORATIONDate:     January
      9, 2009
              /s/ Hyrum A.
      MeadHyrum
      A. MeadPresident
      (Principal Executive Officer)Date:     January
      9, 2009
              /s/ Dennis P.
      GaugerDennis
      P. GaugerChief
      Financial Officer (Principal Accounting
Officer)
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