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 February 28, 2009
 
 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
April 9, 2009, there were 21,858,673 shares of the Registrant’s common stock,
$0.001 par value per share, outstanding.
  
  BSD
MEDICAL CORPORATION
 FORM
10-Q
 
 FOR
THE QUARTER ENDED FEBRUARY 28, 2009
 
 
 PART
      I - Financial InformationItem
      1.
                                                                                    Financial
      Statements (Unaudited)Condensed
      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 Condition and Results of
      Operations
                                                                                    14Item
      4.
                                                                                    Controls
      and Procedures
                                                                                    25PART
      II - Other InformationItem
      1A.
                                                                                    Risk
      Factors
                                                                                    25Item
      4.
                                                                                    Submission
      of Matters to a Vote of Security Holders
                                                                                    25Item
      6.
                                                                                    Exhibits
                                                                                    26Signatures
                                                                                    
                                                                                    27
 
 
 
  2
  PART
I - FINANCIAL INFORMATION
  Item
1.  Financial Statements
  BSD
      MEDICAL CORPORATIONCondensed
      Balance Sheets(Unaudited)ASSETS
                                                                  
                                                                  February
      28,
                                                                    2009
                                                                  
                                                                  
                                                                  August
      31,
                                                                    2008Current
      assets:Cash
      and cash equivalents
                                                                  
                                                                  $
                                                                  291,112
                                                                  
                                                                  
                                                                  $
                                                                  1,394,652Investments
                                                                  
                                                                  
                                                                  10,108,644
                                                                  
                                                                  
                                                                  
                                                                  14,487,192Accounts
      receivable, net of allowance for doubtful accounts of
    $20,000
                                                                  
                                                                  
                                                                  564,837
                                                                  
                                                                  
                                                                  
                                                                  439,739Related
      party trade accounts receivable
                                                                  
                                                                  
                                                                  150,212
                                                                  
                                                                  
                                                                  
                                                                  737,483Income
      tax receivable
                                                                  
                                                                  
                                                                  1,315,014
                                                                  
                                                                  
                                                                  
                                                                  1,409,996Inventories,
      net
                                                                  
                                                                  
                                                                  1,712,513
                                                                  
                                                                  
                                                                  
                                                                  1,425,153Other
      current assets
                                                                  
                                                                  
                                                                  43,713
                                                                  
                                                                  
                                                                  
                                                                  113,829Total
      current assets
                                                                  
                                                                  
                                                                  14,186,045
                                                                  
                                                                  
                                                                  
                                                                  20,008,044Property
      and equipment, net
                                                                  
                                                                  
                                                                  1,400,471
                                                                  
                                                                  
                                                                  
                                                                  1,441,524Patents,
      net
                                                                  
                                                                  
                                                                  33,962
                                                                  
                                                                  
                                                                  
                                                                  37,330$
                                                                  15,620,478
                                                                  
                                                                  
                                                                  $
                                                                  21,486,898LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                                                  
                                                                  $
                                                                  207,333
                                                                  
                                                                  
                                                                  $
                                                                  221,605Accrued
      liabilities
                                                                  
                                                                  
                                                                  569,730
                                                                  
                                                                  
                                                                  
                                                                  585,777Customer
      deposits
                                                                  
                                                                  
                                                                  230,008
                                                                  
                                                                  
                                                                  
                                                                  427,677Deferred
      revenue – current portion
                                                                  
                                                                  
                                                                  28,877
                                                                  
                                                                  
                                                                  
                                                                  41,885Total
      current liabilities
                                                                  
                                                                  
                                                                  1,035,948
                                                                  
                                                                  
                                                                  
                                                                  1,276,944Deferred
      revenue – net of current portion
                                                                  
                                                                  
                                                                  44,094
                                                                  
                                                                  
                                                                  
                                                                  54,094Total
      liabilities
                                                                  
                                                                  
                                                                  1,080,042
                                                                  
                                                                  
                                                                  
                                                                  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, 21,858,673 and
      21,388,958 shares issued
                                                                  
                                                                  
                                                                  21,859
                                                                  
                                                                  
                                                                  
                                                                  21,389Additional
      paid-in capital
                                                                  
                                                                  
                                                                  27,957,327
                                                                  
                                                                  
                                                                  
                                                                  27,565,373Treasury
      stock, 24,331 shares at cost
                                                                  
                                                                  
                                                                  (234
                                                                  )
                                                                  
                                                                  
                                                                  (234
                                                                  )Other
      comprehensive loss
                                                                  
                                                                  
                                                                  (2,180,912
                                                                  )
                                                                  
                                                                  
                                                                  (2,141,416
                                                                  )Accumulated
      deficit
                                                                  
                                                                  
                                                                  (11,257,604
                                                                  )
                                                                  
                                                                  
                                                                  (5,289,252
                                                                  )Total
      stockholders’ equity
                                                                  
                                                                  
                                                                  14,540,436
                                                                  
                                                                  
                                                                  
                                                                  20,155,860$
                                                                  15,620,478
                                                                  
                                                                  
                                                                  $
                                                                  21,486,898See
      accompanying notes to condensed financial statements
  3
 
 BSD
      MEDICAL CORPORATIONCondensed
      Statements of Operations(Unaudited)
 
 Three
      Months Ended
                                                                    
                                                                    
                                                                    Six
      Months EndedFebruary
      28,
                                                                      2009
                                                                    
                                                                    
                                                                    February
      29,
                                                                      2008
                                                                    
                                                                    
                                                                    February
      28,
                                                                      2009
                                                                    
                                                                    
                                                                    February
      29,
                                                                      2008Revenues:Sales
                                                                    
                                                                    $
                                                                    627,701
                                                                    
                                                                    
                                                                    $
                                                                    640,539
                                                                    
                                                                    
                                                                    $
                                                                    1,836,097
                                                                    
                                                                    
                                                                    $
                                                                    1,120,242Sales
      to related parties
                                                                    
                                                                    
                                                                    102,328
                                                                    
                                                                    
                                                                    
                                                                    835,113
                                                                    
                                                                    
                                                                    
                                                                    125,496
                                                                    
                                                                    
                                                                    
                                                                    1,743,138Total
      revenues
                                                                    
                                                                    
                                                                    730,029
                                                                    
                                                                    
                                                                    
                                                                    1,475,652
                                                                    
                                                                    
                                                                    
                                                                    1,961,593
                                                                    
                                                                    
                                                                    
                                                                    2,863,380Operating
      costs and expenses:Cost
      of sales
                                                                    
                                                                    
                                                                    388,630
                                                                    
                                                                    
                                                                    
                                                                    261,083
                                                                    
                                                                    
                                                                    
                                                                    989,110
                                                                    
                                                                    
                                                                    
                                                                    424,064Cost
      of related party sales
                                                                    
                                                                    
                                                                    63,149
                                                                    
                                                                    
                                                                    
                                                                    330,002
                                                                    
                                                                    
                                                                    
                                                                    85,321
                                                                    
                                                                    
                                                                    
                                                                    607,876Research
      and development
                                                                    
                                                                    
                                                                    426,918
                                                                    
                                                                    
                                                                    
                                                                    433,869
                                                                    
                                                                    
                                                                    
                                                                    934,141
                                                                    
                                                                    
                                                                    
                                                                    771,222Selling,
      general and administrative
                                                                    
                                                                    
                                                                    1,500,272
                                                                    
                                                                    
                                                                    
                                                                    1,434,118
                                                                    
                                                                    
                                                                    
                                                                    3,010,579
                                                                    
                                                                    
                                                                    
                                                                    2,828,065Total
      operating costs and expenses
                                                                    
                                                                    
                                                                    2,378,969
                                                                    
                                                                    
                                                                    
                                                                    2,459,072
                                                                    
                                                                    
                                                                    
                                                                    5,019,151
                                                                    
                                                                    
                                                                    
                                                                    4,631,227Loss
      from operations
                                                                    
                                                                    
                                                                    (1,648,940
                                                                    )
                                                                    
                                                                    
                                                                    (983,420
                                                                    )
                                                                    
                                                                    
                                                                    (3,057,558
                                                                    )
                                                                    
                                                                    
                                                                    (1,767,847
                                                                    )Other
      income (expense):Interest
      and investment income
                                                                    
                                                                    
                                                                    263,835
                                                                    
                                                                    
                                                                    
                                                                    355,640
                                                                    
                                                                    
                                                                    
                                                                    522,567
                                                                    
                                                                    
                                                                    
                                                                    544,988Realized
      loss on investments
                                                                    
                                                                    
                                                                    (4,375,587
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (4,375,587
                                                                    )
                                                                    
                                                                    
                                                                    -Other
      expense
                                                                    
                                                                    
                                                                    (29,515
                                                                    )
                                                                    
                                                                    
                                                                    (47,057
                                                                    )
                                                                    
                                                                    
                                                                    (63,774
                                                                    )
                                                                    
                                                                    
                                                                    (110,913
                                                                    )Total
      other income (expense)
                                                                    
                                                                    
                                                                    (4,141,267
                                                                    )
                                                                    
                                                                    
                                                                    308,583
                                                                    
                                                                    
                                                                    
                                                                    (3,916,794
                                                                    )
                                                                    
                                                                    
                                                                    434,075Loss
      before income taxes
                                                                    
                                                                    
                                                                    (5,790,207
                                                                    )
                                                                    
                                                                    
                                                                    (674,837
                                                                    )
                                                                    
                                                                    
                                                                    (6,974,352
                                                                    )
                                                                    
                                                                    
                                                                    (1,333,772
                                                                    )Income
      tax benefit
                                                                    
                                                                    
                                                                    1,255,000
                                                                    
                                                                    
                                                                    
                                                                    268,000
                                                                    
                                                                    
                                                                    
                                                                    1,006,000
                                                                    
                                                                    
                                                                    
                                                                    311,000Net
      loss
                                                                    
                                                                    
                                                                    (4,535,207
                                                                    )
                                                                    
                                                                    
                                                                    (406,837
                                                                    )
                                                                    
                                                                    
                                                                    (5,968,352
                                                                    )
                                                                    
                                                                    
                                                                    (1,022,772
                                                                    )Other
      comprehensive income (loss) –  unrealized gain (loss) on
      investments, net of income tax
                                                                    
                                                                    
                                                                    4,415,083
                                                                    
                                                                    
                                                                    
                                                                    (1,099,414
                                                                    )
                                                                    
                                                                    
                                                                    39,496
                                                                    
                                                                    
                                                                    
                                                                    (1,468,014
                                                                    )Net
      comprehensive income (loss)
                                                                    
                                                                    $
                                                                    (120,124
                                                                    )
                                                                    
                                                                    $
                                                                    (1,506,251
                                                                    )
                                                                    
                                                                    $
                                                                    (5,928,856
                                                                    )
                                                                    
                                                                    $
                                                                    (2,490,786
                                                                    )Loss
      per common share:Basic
                                                                    
                                                                    $
                                                                    (0.21
                                                                    )
                                                                    
                                                                    $
                                                                    (0.02
                                                                    )
                                                                    
                                                                    $
                                                                    (0.27
                                                                    )
                                                                    
                                                                    $
                                                                    (0.05
                                                                    )Diluted
                                                                    
                                                                    $
                                                                    (0.21
                                                                    )
                                                                    
                                                                    $
                                                                    (0.02
                                                                    )
                                                                    
                                                                    $
                                                                    (0.27
                                                                    )
                                                                    
                                                                    $
                                                                    (0.05
                                                                    )Weighted
      average number of shares outstanding:Basic
                                                                    
                                                                    
                                                                    21,850,000
                                                                    
                                                                    
                                                                    
                                                                    21,321,000
                                                                    
                                                                    
                                                                    
                                                                    21,809,000
                                                                    
                                                                    
                                                                    
                                                                    21,316,000Diluted
                                                                    
                                                                    
                                                                    21,850,000
                                                                    
                                                                    
                                                                    
                                                                    21,321,000
                                                                    
                                                                    
                                                                    
                                                                    21,809,000
                                                                    
                                                                    
                                                                    
                                                                    21,316,000See
      accompanying notes to condensed financial statements
  4
 
 BSD
      MEDICAL CORPORATIONCondensed
      Statements of Cash Flows(Unaudited)
 
 Six
      Months EndedFebruary
      28,
                                                              2009
                                                            
                                                            
                                                            February
      29,
                                                              2008Cash
      flows from operating activities:Net
      loss
                                                            
                                                            $
                                                            (5,968,352
                                                            )
                                                            
                                                            $
                                                            (1,022,772
                                                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                            
                                                            
                                                            66,761
                                                            
                                                            
                                                            
                                                            57,954Stock-based
      compensation
                                                            
                                                            
                                                            549,360
                                                            
                                                            
                                                            
                                                            365,095Stock
      issued for services
                                                            
                                                            
                                                            37,500
                                                            
                                                            
                                                            
                                                            30,000Realized
      loss on investments
                                                            
                                                            
                                                            4,375,587
                                                            
                                                            
                                                            
                                                            -Decrease
      (increase) in:Receivables
                                                            
                                                            
                                                            462,173
                                                            
                                                            
                                                            
                                                            (447,878
                                                            )Income
      tax receivable
                                                            
                                                            
                                                            (99,454
                                                            )
                                                            
                                                            
                                                            (555,000
                                                            )Inventories
                                                            
                                                            
                                                            (287,360
                                                            )
                                                            
                                                            
                                                            (105,652
                                                            )Other
      current assets
                                                            
                                                            
                                                            70,116
                                                            
                                                            
                                                            
                                                            62,520Deferred
      tax assets
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            244,000Increase
      (decrease) in:Accounts
      payable
                                                            
                                                            
                                                            (14,272
                                                            )
                                                            
                                                            
                                                            110,610Accrued
      liabilities
                                                            
                                                            
                                                            (16,047
                                                            )
                                                            
                                                            
                                                            (62,605
                                                            )Customer
      deposits
                                                            
                                                            
                                                            (197,669
                                                            )
                                                            
                                                            
                                                            (129,888
                                                            )Deferred
      revenue
                                                            
                                                            
                                                            (23,008
                                                            )
                                                            
                                                            
                                                            (15,444
                                                            )Net
      cash used in operating activities
                                                            
                                                            
                                                            (1,044,665
                                                            )
                                                            
                                                            
                                                            (1,469,060
                                                            )Cash
      flows from investing activities:Sales
      of investments
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            4,988,760Purchases
      of investments
                                                            
                                                            
                                                            (36,535
                                                            )
                                                            
                                                            
                                                            (2,246,253
                                                            )Purchase
      of property and equipment
                                                            
                                                            
                                                            (22,340
                                                            )
                                                            
                                                            
                                                            (1,226,703
                                                            )Increase
      in patents
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (20,966
                                                            )Net
      cash (used in) provided by investing activities
                                                            
                                                            
                                                            (58,875
                                                            )
                                                            
                                                            
                                                            1,494,838Cash
      flows from financing activities:Proceeds
      from the sale of common stock
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            12,000Net
      (decrease) increase in cash and cash equivalents
                                                            
                                                            
                                                            (1,103,540
                                                            )
                                                            
                                                            
                                                            37,778Cash
      and cash equivalents, beginning of period
                                                            
                                                            
                                                            1,394,652
                                                            
                                                            
                                                            
                                                            416,540Cash
      and cash equivalents, end of period
                                                            
                                                            $
                                                            291,112
                                                            
                                                            
                                                            $
                                                            454,318See
      accompanying notes to condensed financial statements
  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 February 28, 2009 and August 31, 2008, the related unaudited
condensed statements of operations for the three months and six months ended
February 28, 2009 and February 29, 2008, and the related unaudited condensed
statements of cash flows for the three months and six months ended February 28,
2009 and February 29, 2008 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 February 28, 2009 and August
31, 2008, our results of operations for the three months and six months ended
February 28, 2009 and February 29, 2008, and our cash flows for the six months
ended February 28, 2009 and February 29, 2008 have been included.  The
results of operations for the three months and six months ended February 28,
2009 may not be indicative of the results for our fiscal 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
                              
                              
                              Six
      Months EndedFebruary
      28,
                              
                              
                              February
      29,
                              
                              
                              February
      28,
                              
                              
                              February
      29,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Weighted
      average number of shares outstanding – basic
                              
                              
                              21,850,000
                              
                              
                              
                              21,321,000
                              
                              
                              
                              21,809,000
                              
                              
                              
                              21,316,000Dilutive
      effect of stock options
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Weighted
      average number of shares outstanding – diluted
                              
                              
                              21,850,000
                              
                              
                              
                              21,321,000
                              
                              
                              
                              21,809,000
                              
                              
                              
                              21,316,000
 
 No stock
options are included in the computation of diluted weighted average number of
shares for the three months and six months ended February 28, 2009 and February
29, 2008 because the effect would be anti-dilutive.  At February 28,
2009, the Company had outstanding options to purchase a total of 1,822,963
common shares of the Company that could have a future dilutive effect on the
calculation of earnings per share.
  6
  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 February 28, 2009
and 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.  The mutual funds are 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 at February 28, 2009 and August 31, 2008:
 
 February
      28, 2009
                              
                              
                              
                              
                              Gross
                              
                              
                              GrossAmortized
                              
                              
                              Unrealized
                              
                              
                              Unrealized
                              
                              
                              FairType
      of Security
                              
                              Cost
                              
                              
                              Gains
                              
                              
                              (Losses)
                              
                              
                              ValueCorporate
      debt funds
                              
                              $
                              9,951,515
                              
                              
                              $
                              -
                              
                              
                              $
                              (2,180,912
                              )
                              
                              $
                              7,770,603Equity
      income funds
                              
                              
                              2,315,785
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,315,785Other
      short-term interest-bearing securities
                              
                              
                              22,256
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              22,256Total
                              
                              $
                              12,289,556
                              
                              
                              $
                              -
                              
                              
                              $
                              (2,180,912
                              )
                              
                              $
                              10,108,644
 
 
 August
      31, 2008
                                
                                
                                
                                
                                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 were comprised primarily of money market funds.
 
 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.
  7
  Statement
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.
 
 Our investments measured at fair value
at February 28, 2009 are as follows:
 
 Description
                                        
                                        Quoted
      Prices
                                          In
      Active
                                          Markets
      For
                                          Identical
      Assets
                                          (Level
      1)
                                        
                                        
                                        Significant
                                          Other
                                          Observable
                                          Inputs
                                          (Level
      2)
                                        
                                        
                                        Significant
                                          Unobservable
                                          Inputs
                                          (Level
      3)Available-for-sale
      securities
                                        
                                        $
                                        10,108,644
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
 
 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.
 
 In March 2009, after considering the
factors outlined above, we liquidated a significant portion of our mutual funds,
including 100% of our equity income funds, realizing losses on the
transactions.  Accordingly, we concluded that the portion of the
unrealized loss at February 28, 2009 attributed to the investments sold was
other than temporary.  We recognized a loss on investments of
$4,375,587 in the condensed statements of operations for the three months and
six months ended February 28, 2009.  The proceeds from the sales of
investments have been deposited in money market funds.
 
 
 Note
4.  Inventories
 
 Inventories
consist of the following:
  February
      28,
                                2009
                              
                              
                              August
      31,
                                2008Parts
      and supplies
                              
                              $
                              1,087,390
                              
                              
                              $
                              802,956Work-in-process
                              
                              
                              553,989
                              
                              
                              
                              608,391Finished
      goods
                              
                              
                              111,134
                              
                              
                              
                              53,806Reserve
      for obsolete inventory
                              
                              
                              (40,000
                              )
                              
                              
                              (40,000
                              )Inventories,
      net
                              
                              $
                              1,712,513
                              
                              
                              $
                              1,425,153
  8
 
 Note
5.  Property and Equipment
 
 Property
and equipment consist of the following:
  February
      28,
                                  2009
                                
                                
                                August
      31,
                                  2008Equipment
                                
                                $
                                1,063,601
                                
                                
                                $
                                1,048,061Furniture
      and fixtures
                                
                                
                                298,576
                                
                                
                                
                                298,576Leasehold
      improvements
                                
                                
                                24,220
                                
                                
                                
                                17,420Building
                                
                                
                                956,000
                                
                                
                                
                                956,000Land
                                
                                
                                244,000
                                
                                
                                
                                244,0002,586,397
                                
                                
                                
                                2,564,057Less
      accumulated depreciation
                                
                                
                                (1,185,926
                                )
                                
                                
                                (1,122,533
                                )Property
      and equipment, net
                                
                                $
                                1,400,471
                                
                                
                                $
                                1,441,524
 
 
 Note
6.  Related Party Transactions
  During
the three months ended February 28, 2009 and February 29, 2008, we had sales of
$102,328 and $835,113, respectively, to an entity controlled by a significant
stockholder and member of the Board of Directors.  These related party
transactions represent approximately 14% and 57% of total sales for each
respective three-month period.
  During
the six months ended February 28, 2009 and February 29, 2008, we had sales of
$125,496 and $1,743,138, respectively, to this entity.  These related
party transactions represent approximately 6% and 61% of total sales for each
respective six-month period.
  At
February 28, 2009 and August 31, 2008, receivables included $150,212 and
$737,483, respectively, from this entity.
 
 
 Note
7.  Stock-Based Compensation
 
 We have
both an employee and director stock incentive plan, which are described more
fully in Note 10 in our 2008 Annual Report on Form 10-K.  As of
February 28, 2009, we had approximately 1,276,000 shares of common stock
reserved for future issuance under the stock incentive plans.
  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 has been allocated to the various categories of operating
costs and expenses in a manner similar to the allocation of payroll expense as
follows:
  9
 
 Three
      Months Ended
                          
                          
                          Six
      Months EndedFebruary
      28,
                          
                          
                          February
      29,
                          
                          
                          February
      28,
                          
                          
                          February
      29,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Cost
      of sales
                          
                          $
                          18,429
                          
                          
                          $
                          21,148
                          
                          
                          $
                          36,858
                          
                          
                          $
                          42,296Research
      and development
                          
                          
                          48,278
                          
                          
                          
                          35,125
                          
                          
                          
                          90,607
                          
                          
                          
                          60,620Selling,
      general and administrative
                          
                          
                          209,480
                          
                          
                          
                          150,192
                          
                          
                          
                          421,895
                          
                          
                          
                          262,179Total
                          
                          $
                          276,187
                          
                          
                          $
                          206,465
                          
                          
                          $
                          549,360
                          
                          
                          $
                          365,095
 
 During
the six months ended February 28, 2009, 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 $60,313 and $116,297 of the total
stock-based compensation expense for the three months and six months ended
February 28, 2009.
  Unrecognized
stock-based compensation expense expected to be recognized over the estimated
weighted-average amortization period of 3.20 years is approximately $2,800,000
at February 28, 2009.
  Our weighted-average assumptions used
in the Black-Scholes valuation model for equity awards with time-based vesting
provisions granted during the six months ended February 28, 2009 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 six
months ended February 28, 2009 was $4.37.
  10
  A summary
of the time-based stock option awards as of February 28, 2009, and changes
during the six months then ended, is as follows:
  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
                                                        
                                                        
                                                        (544,666
                                                        )
                                                        
                                                        
                                                        0.96Forfeited
      or expired
                                                        
                                                        
                                                        (50,000
                                                        )
                                                        
                                                        
                                                        7.04Outstanding
      at February 28, 2009
                                                        
                                                        
                                                        1,822,963
                                                        
                                                        
                                                        $
                                                        4.13
                                                        
                                                        
                                                        
                                                        7.35Exercisable
      at February 28, 2009
                                                        
                                                        
                                                        1,047,131
                                                        
                                                        
                                                        $
                                                        2.91
                                                        
                                                        
                                                        
                                                        6.38
                                                        
                                                        $1,020,764
 
 
 Note
8.  Income Taxes
 
 The income tax (provision) benefit
consists of the following:
 
 Three
      Months Ended
                              
                              
                              Six
      Months EndedFebruary
      28,
                              
                              
                              February
      29,
                              
                              
                              February
      28,
                              
                              
                              February
      29,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Current
                              
                              $
                              1,255,000
                              
                              
                              $
                              268,000
                              
                              
                              $
                              1,235,000
                              
                              
                              $
                              479,000Deferred
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (229,000
                              )
                              
                              
                              (168,000
                              )Total
                              
                              $
                              1,255,000
                              
                              
                              $
                              268,000
                              
                              
                              $
                              1,006,000
                              
                              
                              $
                              311,000
 
 The
current income tax benefit for all periods 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.  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 fiscal 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 six months ended
February 28, 2009 and February 29, 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 portions of 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.
 
 
 Note
9.  Supplemental Cash Flow Information
 
 The Company paid $1,673 and $0 for
interest expense during the six months ended February 28, 2009 and the six
months ended February 29, 2008, respectively.  The Company paid
$10,561 and $0 for income taxes during the six months ended February 28, 2009
and the six months ended February 29, 2008, respectively.
  11
  During the six months ended February
28, 2009, the Company had the following non-cash financing and investing
activities:
 
 ·
              Increased
      other comprehensive loss and decreased investments by
      $4,415,083.
 
 ·
              Increased
      common stock and decreased additional paid-in capital by
    $465.
 
 ·
              Decreased
      income tax receivable and additional paid-in capital by
      $194,436.
 
 During
the six months ended February 29, 2008, the Company had the following non-cash
financing and investing activities:
 
 ·
              Recorded
      an increase in additional paid-in capital of $115,027 and an increase in
      income tax receivable of $115,027 related to the tax benefit from the
      exercise of stock options.
 
 ·
              Increased
      other comprehensive loss by $1,468,014, decreased investments by
      $1,256,014 and decreased short-term deferred tax asset by
      $212,000.
 
 ·
              Increased
      common stock and decreased additional paid-in capital by
    $17.
 
 
 Note
10.  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
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.
  12
  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 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 3).  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
11.  Subsequent Events
 
 In March
2009, we sold mutual funds with a total cost basis of $11,077,707, including
100% of our equity income funds, for total proceeds of $6,393,222, resulting in
a realized loss of $4,684,485.  The proceeds have been deposited in
money market funds.
  13
  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.
  We have
also enhanced the BSD-2000 to create the BSD-2000/3D and the
BSD-2000/3D/MR.  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.  Sophisticated treatment planning software for the BSD-2000/3D
has also been developed.  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.  We have not yet submitted to the FDA a pre-market
approval application for either the BSD-2000/3D or 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 provided we interface the system
with an MRI system that also is approved in Europe.
  14
  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.
  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.
  15
  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 February 28, 2009
and 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.
 
 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.
  16
  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.
 
 
 Results of
Operations
  Revenues:  The
following table summarizes the number of our systems sold for the respective
reporting periods:
  Three
      Months Ended
                                Six
      Months EndedFebruary
      28,
                                February
      29,
                                February
      28,
                                February
      29,2009
                                2008
                                2009
                                2008BSD-500
                                1
                                3
                                4
                                5BSD-2000
                                1
                                -
                                3
                                -BSD-2000/3D/MR
                                -
                                1
                                -
                                2Total
                                2
                                4
                                7
                                7
 
 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, 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.  Through February 28, 2009, we have not
had any sales of our MicroThermX-100 system.
  17
  Total
revenues for the three months ended February 28, 2009 were $730,029 compared to
$1,475,652 for the three months ended February 29, 2008, a decrease of $745,623,
or 51%.  Total revenues for the six months ended February 28, 2009
were $1,961,593 compared to $2,863,380 for the six months ended February 29,
2008, a decrease of $901,787, or 31%.  The overall decrease in
revenues in the current fiscal year is due primarily to a decrease in related
party sales, with non-related party sales remaining fairly constant, as further
discussed below.  In addition, we have not sold any higher priced
BSD-2000/3D/MR systems in the current fiscal year.
  Non-Related Party
Sales:  In the three months ended February 28, 2009, we earned
$627,701, or 86%, of our revenues from sales to unrelated parties, as compared
to $640,539, or 43%, in the three months ended February 29, 2008.  We
sold fewer systems in the second quarter of the current fiscal year, but did
sell one higher priced system.  These sales for the three months ended
February 28, 2009 consisted of product sales of $610,000, service of $14,701,
and other revenue of $3,000.  By comparison, these sales for the three
months ended February 29, 2008 consisted of product sales of $620,700, service
of $9,495, probes of $600 and other revenues of $9,744.
  In the six months ended February 28,
2009, we earned $1,836,097, or 94%, of our revenues from sales to unrelated
parties, as compared to $1,120,242, or 39%, in the six months ended February 29,
2008, with the increase due primarily to higher prices per system sold in the
current fiscal year.  These sales for the six months ended February
28, 2009 consisted of product sales of $1,789,040, service of $30,343, probes of
$2,402 and other revenue of $14,312.  By comparison, these sales for the six
months endedFebruary 29, 2008consisted of product
sales of $1,055,700, service of $24,866, probes of $14,447 and other revenues of
$25,229.
  Related Party
Sales:  We earned $102,328, or approximately 14%, of our
revenues in the three months ended February 28, 2009 from sales to related
parties as compared to $835,113 or approximately 57%, in the three months ended
February 29, 2008.  These sales 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 component parts of $65,839,
sales of probes of $8,250 and other revenues of $28,239 in the three months
ended February 29, 2008.  We had no related party system sales in the
three months ended February 28, 2009.  These sales for the three
months endedFebruary 29, 2008consisted of product
sales of $803,200, sales of probes of $10,725 and other revenues of
$21,188.
  In the six months ended February 28,
2009, we earned $125,496, or approximately 6%, of our revenues from sales to
related parties as compared to $1,743,138 or approximately 61%, in the six
months ended February 29, 2008.  These sales 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 component
parts of $65,839, sales of probes of $27,713 and other revenues of $31,944 in
the six months ended February 28, 2009.  We had no related party
system sales in the six months ended February 28, 2009.  These sales for the six
months endedFebruary 29, 2008consisted of product
sales of $1,682,712, sales of probes of $19,425 and other revenues of
$41,001.
  Cost of
Sales:  Cost of sales in the three months ended February 28,
2009 was $388,630 compared to $261,083 in the three months ended February 29,
2008, an increase of $127,547, or 49%.  Cost of sales in the six
months ended February 28, 2009 was $989,110 compared to $424,064 in the six
months ended February 29, 2008, an increase of $565,046, or
133%.  This increase resulted primarily from increased product sales
in the current fiscal year of systems with higher sales prices and higher cost
of sales per system.  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.
  18
  Cost of sales to related parties in the
three months ended February 28, 2009 decreased to $63,149 from $330,002 in the
three months ended February 29, 2008 and decreased in the six months ended
February 28, 2009 to $85,321 from $607,876 in the six months ended February 29,
2008.  These decreases resulted primarily from decreases in related
party product sales in the current fiscal year.  We had no related
party system sales in the six months ended February 28, 2009.  All of
the related party cost of sales was attributable to sales to
Medizin-Technik.
  Gross
Profit:  Total gross profit in the three months ended February
28, 2009 was $278,250 or 38% of total sales, as compared to $884,567 or 60% of
total sales in the three months ended February 29, 2008.  Total gross
profit in the six months ended February 28, 2009 was $887,162 or 45% of total
sales, as compared to $1,831,440 or 64% of total sales in the six months ended
February 29, 2008.  This decrease resulted from the increase in sales
of systems in the current year with lower gross margins than the higher priced,
higher margin systems sold in the first six months of the prior fiscal
year.  In addition, margins decreased in the current year as a result
of pricing with certain products and the increase in manufacturing costs
discussed above.  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
$426,918 for the three months ended February 28, 2009, as compared to $433,869
for the three months ended February 29, 2008, a decrease of $6,951, or
approximately 2%.  Research and development expenses were $934,141 for
the six months ended February 28, 2009, as compared to $771,222 for the six
months ended February 29, 2008, an increase of $162,919, or approximately
21%.  The increase in research and development expenses on a
year-to-date basis 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.
  Selling General
and Administrative Expenses:  Selling, general and
administrative expenses for the three months ended February 28, 2009 were
$1,500,272, as compared to $1,434,118 for the three months ended February 29,
2008, an increase of $66,154, or approximately 5%.  Selling, general
and administrative expenses for the six months ended February 28, 2009 were
$3,010,579, as compared to $2,828,065 for the six months ended February 29,
2008, an increase of $182,514, or approximately 6%. 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 decreased to
$263,835 in the three months ended February 28, 2009, as compared to $355,640
for the three months ended February 29, 2008 and decreased to $522,567 in the
six months ended February 28, 2009, as compared to $544,988 in the six months
ended February 29, 2008.  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 year.  The proceeds from
the sale of our mutual funds in March 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.
  Realized Loss on
Investments:  In March 2009, we sold mutual funds with a total
cost basis of $11,077,707, including 100% of our equity income funds, for total
proceeds of $6,393,222, resulting in a realized loss of
$4,684,485.  Accordingly, we concluded that the portion of the
unrealized loss at February 28, 2009 attributed to the investments sold was
other than temporary.  We recognized a loss on investments of
$4,375,587 in the condensed statements of operations for the three months and
six months ended February 28, 2009.  We had no realized loss on
investments in the prior fiscal year.
  19
 
 The
recorded value of our investments at February 28, 2009 has been reduced by an
unrealized loss of $2,180,912.  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.  To the extent that we further liquidate our investments
when they are in an unrealized loss position, or conclude, based on our
evaluation, that the unrealized losses are other-than-temporary, we will record
realized losses in our statements of operations.
 
 (Provision)
Benefit for Income Taxes:The income
tax benefit in the three months ended February 28, 2009 and February 29, 2008
was $1,255,000 and $268,000, respectively, consisting of a current tax
benefit.  The income tax benefit of $1,006,000 in the six months ended
February 28, 2009 is comprised of a current income tax benefit of $1,235,000,
partially offset by a deferred income tax provision of $229,000. By comparison,
the income tax benefit for the six months ended February 29, 2008 was $311,000,
comprised of a current benefit of $479,000, partially offset by a deferred
provision of $168,000.  The current income tax benefit in all periods
presented represents an increase to our income tax receivable resulting from our
ability to carry back our taxable loss in the current period to offset income
taxes previously paid.
 
 The
current income tax benefit for all periods 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.  As a result of the
enactment of the American Recovery and Reinvestment Act of 2009 in February
2009, we are able to carry back 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 six months ended
February 28, 2009 and February 29, 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.
 
 Net
Loss:  During the three months ended February 28, 2009 we had a
net loss of $4,535,207, after recording an income tax benefit of $1,255,000, as
compared to a net loss of $406,837, after recording an income tax benefit of
$268,000 in the three months ended February 29, 2008.  During the six
months ended February 28, 2009 we had a net loss of $5,968,352, after recording
an income tax benefit of $1,006,000, as compared to a net loss of $1,022,772,
after recording an income tax benefit of $311,000 in the six months ended
February 29, 2008.  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 realized loss on investments as
discussed above.
   Liquidity and Capital
Resources
  Since
inception through February 28, 2009, we have generated an accumulated deficit of
$11,257,604.  Included in this amount is a realized loss on
investments of $4,375,587 recorded in the quarter ended February 28,
2009.  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
February 28, 2009, we had cash, cash equivalents and investments totaling
$10,399,756 compared to cash, cash equivalents and investments totaling
$15,881,844 as of August 31, 2008.  The recorded value of our
investments at February 28, 2009 has been reduced by an unrealized loss of
$2,180,912.
  20
  As
discussed under Results of Operations, we reported a net loss of $4,535,207 and
$5,968,352 for the three months and six months ended February 28,
2009.  The net loss for both periods includes a non-cash loss on
investments of $4,375,587 and significant non-cash stock-based compensation
expense from our stock options.  We have, however, reduced the amount
of net cash used in operating activities for the six months ended February 28,
2009 to $1,044,665 from $1,469,060 for the six months ended February 29,
2008.
  During
the six months ended February 28, 2009, we used cash of $1,044,665 in operating
activities, primarily as a result of our net loss partially offset by the
non-cash realized loss on investments, stock-based compensation and other
non-cash expenses, increase in income tax receivable of $99,454, increase in
inventories of $287,360, decrease in accounts payable of $14,272, decrease in
accrued liabilities of $16,047, decrease in customer deposits of $197,669, and
decrease in deferred revenue of $23,008, partially offset by a decrease in
receivables of $462,173 and a decrease in other current assets of
$70,116.  By comparison, net cash used in operating activities was
$1,469,060 during the six months ended February 29, 2008, which included an
increase in accounts receivable of $447,878, increase in income tax receivable
of $555,000, increase in inventories of $105,652, decrease in customer deposits
of $129,888, and decrease in deferred revenue of $15,444, partially offset by a
decrease in other current assets of $62,520, decrease in deferred tax assets of
$244,000 and an increase in accounts payable of $110,610.
  Net cash
used in investing activities for the six months ended February 28, 2009 was
$58,875, consisting of the net purchase of investments of $36,535 and the
purchase of property and equipment of $22,340.  For the six months
ended February 29, 2008, net cash provided by investing activities was
$1,494,838, resulting from the net sale of investments of $2,742,507, partially
offset by the purchase of property and equipment of $1,226,703 and the increase
in patents of $20,966.
  No net
cash was provided by financing activities for the six months ended February 28,
2009.  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 six months ended February 29, 2008.
  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
February 28, 2009, 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
further impacted and we could determine our remaining investments have
experienced other-than-temporary declines in fair value, which could further
adversely impact our financial results and decrease the amount of the
investments available to fund our operations.
  21
  At
February 28, 2009, the remaining corporate debt funds that were not liquidated
in March 2009 had a cost basis of approximately $5.5 million, a market value of
approximately $3.3 million and an unrealized loss of $2.2
million.  These corporate debt funds are comprised of a liquid,
managed portfolio of mutual funds that are invested in senior, secured corporate
debt with floating interest rates.  The primary investment objective
of these mutual funds is to provide a high level of income.  The
senior loans are loans made by U.S. banks and other financial institutions to
large corporate customers, and typically these loans are the most senior source
of capital in a borrower’s capital structure and have certain of the borrower’s
assets and/or stock pledged as collateral.  The debt obligations of
the funds are considered below investment grade, and therefore, speculative
because of the increased credit risk of their issuers.  Economic and
other market factors may reduce demand for certain senior loans of the funds,
which may negatively impact net asset value.  The senior loans are
also subject to the risk of increases in prevailing interest rates, although
floating-rate securities are less susceptible to this risk than other fixed-rate
obligations.  However, because floating rates on senior loans only
reset periodically changes in prevailing interest rates may cause some
fluctuation in the funds’ net asset value.  We do not utilize
derivative instruments to offset the exposure to interest rate
changes.
  We
currently have the intent, and we believe the ability, to hold these investments
until a recovery of unrealized losses, which may be at maturity of the debt
within the debt funds.  However, there can be no assurance that we
will recover the unrealized losses.  Furthermore, we continually
review our investments to determine whether a decline in fair value below the
cost basis is other than temporary.  As discussed previously, we
consider several factors, evaluated both individually and collectively, with the
evaluation involving a high level of complexity and judgment.  To the
extent that we further liquidate the corporate debt funds when they are in an
unrealized loss position, or conclude, based on our evaluation, that the
unrealized losses are other-than-temporary, we will record realized losses in
our statements of operations.  This could have a material impact on
the results of our operations.
  The
Company has no off balance sheet arrangements as of February 28,
2009.
   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
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.
  22
 
 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 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.  See Note 3 to our
condensed financial statements for the expanded disclosure provided as a result
of implementing SFAS No. 157 in the current fiscal year.  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.
  23
 
 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
      belief that the implementation of recent accounting pronouncements will
      not have a material impact on our financial
  statements;
  ·
              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
      expectation that our interest and investment income for the foreseeable
      future will be substantially less than previously earned on our mutual
      funds.
  ·
              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 regarding FDA approvals relating to the BSD-2000
      system;
  ·
              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;
  ·
              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;
      and
  ·
              our
      intent to hold certain of our investments until a recovery of unrealized
      losses has occurred.
  24
  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
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.
   25
  Item
4.    Submission of Matters to a Vote of Security
Holders
  The
annual meeting of shareholders of the Company was held on February 4,
2009.  The shareholders voted, either in person or by proxy, on the
following proposals.  The directors listed below were elected, and the
other proposals submitted to a vote of the shareholders were approved, with the
results of the shareholder vote as follows:
  1
              The
      following seven directors were elected to hold office until the next
      annual meeting or until their successors are duly elected and
      qualified:
 
 Votes
      For
                  Votes
                    Withheld
                  Total
      VotedPaul
      F. Turner
                  16,722,587
                  571,462
                  17,294,049Hyrum
      A. Mead
                  16,722,079
                  571,970
                  17,294,049Gerhard
      W. Sennewald
                  16,737,619
                  556,430
                  17,294,049Steven
      G. Stewart
                  17,215,491
                  78,558
                  17,294,049Michael
      Nobel
                  17,218,189
                  75,860
                  17,294,049Douglas
      P. Boyd
                  17,216,439
                  77,610
                  17,294,049Timothy
      C. McQuay
                  17,216,439
                  77,610
                  17,294,049
 
 2.
              To
      ratify the selection of Tanner LC as the Company’s independent registered
      public accountants for the fiscal year ending August 31,
    2009:
 
 For
                          17,201,748Against
                          56,256Abstain
                          36,045
 
 3.
              To
      transact such other business as may properly come before the Annual
      Meeting or any adjournment or postponement
  thereof:
 
 For
                  16,539,777Against
                  625,542Abstain
                  128,729
  26
  Item
6.    Exhibits
  The
following exhibits are filed as part of this report:
  Exhibit
      No.
                              
                              Description
      of Exhibit10.1
                              
                              Exclusive
      Distribution Agreement with Sennewald/Medizin-Technik
  GmbH31.1
                              
                              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
 
 
  27
  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:   April
      9, 2009
                        /s/
      Harold R. WolcottHarold
      R. WolcottPresident
      (Principal Executive Officer)Date:   April
      9, 2009
                        /s/
      Dennis P. GaugerDennis
      P. GaugerChief
      Financial Officer (Principal Accounting
Officer)
 
 
 28