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 May 31, 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes o  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
July 10, 2009, there were 22,039,301 shares of the Registrant’s common stock,
$0.001 par value per share, outstanding.





1





BSD
MEDICAL CORPORATION


FORM
10-Q





FOR
THE QUARTER ENDED MAY 31, 2009








PART I -
Financial Information





Item
      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
                                    28PART
      II - Other InformationItem
      1A.
                                    Risk
      Factors
                                    29Item
      5.
                                    Other
      Information
                                    29Item
      6.
                                    Exhibits
                                    29Signatures
                                    30











2





PART
I - FINANCIAL INFORMATION




Item
1.  Financial Statements




BSD
MEDICAL CORPORATION


Condensed
Balance Sheets


(Unaudited)





ASSETS
                
                May
      31,
                  2009
                
                
                August
      31,
                  2008Current
      assets:Cash
      and cash equivalents
                
                $
                9,003,163
                
                
                $
                1,394,652Investments
                
                
                -
                
                
                
                14,487,192Accounts
      receivable, net of allowance for doubtful accounts of
    $20,000
                
                
                89,194
                
                
                
                439,739Related
      party trade accounts receivable
                
                
                248,485
                
                
                
                737,483Income
      tax receivable
                
                
                1,466,014
                
                
                
                1,409,996Inventories,
      net
                
                
                1,800,885
                
                
                
                1,425,153Other
      current assets
                
                
                89,780
                
                
                
                113,829Total
      current assets
                
                
                12,997,521
                
                
                
                20,008,044Property
      and equipment, net
                
                
                1,379,265
                
                
                
                1,441,524Patents,
      net
                
                
                32,357
                
                
                
                37,330$
                14,409,143
                
                
                $
                21,486,898LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                472,857
                
                
                $
                221,605Accrued
      liabilities
                
                
                403,451
                
                
                
                585,777Customer
      deposits
                
                
                39,777
                
                
                
                427,677Deferred
      revenue – current portion
                
                
                43,596
                
                
                
                41,885Total
      current liabilities
                
                
                959,681
                
                
                
                1,276,944Deferred
      revenue – net of current portion
                
                
                91,574
                
                
                
                54,094Total
      liabilities
                
                
                1,051,255
                
                
                
                1,331,038Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.001 par value; 10,000,000 shares authorized, no shares issued and
      outstanding
                
                
                -
                
                
                
                -Common
      stock; $.001 par value, 40,000,000 shares authorized, 22,039,301 and
      21,388,958 shares issued
                
                
                22,040
                
                
                
                21,389Additional
      paid-in capital
                
                
                28,309,130
                
                
                
                27,565,373Treasury
      stock, 24,331 shares at cost
                
                
                (234
                )
                
                
                (234
                )Other
      comprehensive loss
                
                
                -
                
                
                
                (2,141,416
                )Accumulated
      deficit
                
                
                (14,973,048
                )
                
                
                (5,289,252
                )Total
      stockholders’ equity
                
                
                13,357,888
                
                
                
                20,155,860$
                14,409,143
                
                
                $
                21,486,898




See
accompanying notes to condensed financial statements





3




BSD
MEDICAL CORPORATION


Condensed
Statements of Operations


(Unaudited)





Three
      Months Ended
                                                                          
                                                                          
                                                                          Nine
      Months EndedMay
      31,
                                                                            2009
                                                                          
                                                                          
                                                                          May
      31,
                                                                            2008
                                                                          
                                                                          
                                                                          May
      31,
                                                                            2009
                                                                          
                                                                          
                                                                          May
      31,
                                                                            2008Revenues:Sales
                                                                          
                                                                          $
                                                                          465,652
                                                                          
                                                                          
                                                                          $
                                                                          725,810
                                                                          
                                                                          
                                                                          $
                                                                          2,301,749
                                                                          
                                                                          
                                                                          $
                                                                          1,846,052Sales
      to related parties
                                                                          
                                                                          
                                                                          460,423
                                                                          
                                                                          
                                                                          
                                                                          189,207
                                                                          
                                                                          
                                                                          
                                                                          585,919
                                                                          
                                                                          
                                                                          
                                                                          1,932,345Total
      revenues
                                                                          
                                                                          
                                                                          926,075
                                                                          
                                                                          
                                                                          
                                                                          915,017
                                                                          
                                                                          
                                                                          
                                                                          2,887,668
                                                                          
                                                                          
                                                                          
                                                                          3,778,397Operating
      costs and expenses:Cost
      of sales
                                                                          
                                                                          
                                                                          270,629
                                                                          
                                                                          
                                                                          
                                                                          309,276
                                                                          
                                                                          
                                                                          
                                                                          1,259,739
                                                                          
                                                                          
                                                                          
                                                                          713,724Cost
      of related party sales
                                                                          
                                                                          
                                                                          267,556
                                                                          
                                                                          
                                                                          
                                                                          66,570
                                                                          
                                                                          
                                                                          
                                                                          352,877
                                                                          
                                                                          
                                                                          
                                                                          694,062Research
      and development
                                                                          
                                                                          
                                                                          509,422
                                                                          
                                                                          
                                                                          
                                                                          481,692
                                                                          
                                                                          
                                                                          
                                                                          1,443,563
                                                                          
                                                                          
                                                                          
                                                                          1,252,914Selling,
      general and administrative
                                                                          
                                                                          
                                                                          1,653,363
                                                                          
                                                                          
                                                                          
                                                                          1,368,451
                                                                          
                                                                          
                                                                          
                                                                          4,663,942
                                                                          
                                                                          
                                                                          
                                                                          4,196,516Total
      operating costs and expenses
                                                                          
                                                                          
                                                                          2,700,970
                                                                          
                                                                          
                                                                          
                                                                          2,225,989
                                                                          
                                                                          
                                                                          
                                                                          7,720,121
                                                                          
                                                                          
                                                                          
                                                                          6,857,216Loss
      from operations
                                                                          
                                                                          
                                                                          (1,774,895
                                                                          )
                                                                          
                                                                          
                                                                          (1,310,972
                                                                          )
                                                                          
                                                                          
                                                                          (4,832,453
                                                                          )
                                                                          
                                                                          
                                                                          (3,078,819
                                                                          )Other
      income (expense):Interest
      and investment income
                                                                          
                                                                          
                                                                          56,246
                                                                          
                                                                          
                                                                          
                                                                          226,692
                                                                          
                                                                          
                                                                          
                                                                          578,813
                                                                          
                                                                          
                                                                          
                                                                          771,680Realized
      loss on investments
                                                                          
                                                                          
                                                                          (2,125,999
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (6,501,586
                                                                          )
                                                                          
                                                                          
                                                                          -Other
      expense
                                                                          
                                                                          
                                                                          (21,796
                                                                          )
                                                                          
                                                                          
                                                                          (41,020
                                                                          )
                                                                          
                                                                          
                                                                          (85,570
                                                                          )
                                                                          
                                                                          
                                                                          (151,933
                                                                          )Total
      other income (expense)
                                                                          
                                                                          
                                                                          (2,091,549
                                                                          )
                                                                          
                                                                          
                                                                          185,672
                                                                          
                                                                          
                                                                          
                                                                          (6,008,343
                                                                          )
                                                                          
                                                                          
                                                                          619,747Loss
      before income taxes
                                                                          
                                                                          
                                                                          (3,866,444
                                                                          )
                                                                          
                                                                          
                                                                          (1,125,300
                                                                          )
                                                                          
                                                                          
                                                                          (10,840,796
                                                                          )
                                                                          
                                                                          
                                                                          (2,459,072
                                                                          )Income
      tax benefit
                                                                          
                                                                          
                                                                          151,000
                                                                          
                                                                          
                                                                          
                                                                          336,071
                                                                          
                                                                          
                                                                          
                                                                          1,157,000
                                                                          
                                                                          
                                                                          
                                                                          647,071Net
      loss
                                                                          
                                                                          
                                                                          (3,715,444
                                                                          )
                                                                          
                                                                          
                                                                          (789,229
                                                                          )
                                                                          
                                                                          
                                                                          (9,683,796
                                                                          )
                                                                          
                                                                          
                                                                          (1,812,001
                                                                          )Other
      comprehensive income (loss) – (increase) decrease in unrealized loss on
      investments,  net of income tax
                                                                          
                                                                          
                                                                          2,101,920
                                                                          
                                                                          
                                                                          
                                                                          545,841
                                                                          
                                                                          
                                                                          
                                                                          2,141,416
                                                                          
                                                                          
                                                                          
                                                                          (922,173
                                                                          )Net
      comprehensive loss
                                                                          
                                                                          $
                                                                          (1,613,524
                                                                          )
                                                                          
                                                                          $
                                                                          (243,388
                                                                          )
                                                                          
                                                                          $
                                                                          (7,542,380
                                                                          )
                                                                          
                                                                          $
                                                                          (2,734,174
                                                                          )Net
      loss per common share:Basic
                                                                          
                                                                          $
                                                                          (0.17
                                                                          )
                                                                          
                                                                          $
                                                                          (0.04
                                                                          )
                                                                          
                                                                          $
                                                                          (0.44
                                                                          )
                                                                          
                                                                          $
                                                                          (0.09
                                                                          )Diluted
                                                                          
                                                                          $
                                                                          (0.17
                                                                          )
                                                                          
                                                                          $
                                                                          (0.04
                                                                          )
                                                                          
                                                                          $
                                                                          (0.44
                                                                          )
                                                                          
                                                                          $
                                                                          (0.09
                                                                          )Weighted
      average number of sharesoutstanding:Basic
                                                                          
                                                                          
                                                                          21,886,000
                                                                          
                                                                          
                                                                          
                                                                          21,359,000
                                                                          
                                                                          
                                                                          
                                                                          21,835,000
                                                                          
                                                                          
                                                                          
                                                                          21,325,000Diluted
                                                                          
                                                                          
                                                                          21,886,000
                                                                          
                                                                          
                                                                          
                                                                          21,359,000
                                                                          
                                                                          
                                                                          
                                                                          21,835,000
                                                                          
                                                                          
                                                                          
                                                                          21,325,000




See
accompanying notes to condensed financial statements





4





BSD
MEDICAL CORPORATION


Condensed
Statements of Cash Flows


(Unaudited)





Nine
      Months EndedMay
      31,
                                                      2009
                                                    
                                                    
                                                    May
      31,
                                                      2008Cash
      flows from operating activities:Net
      loss
                                                    
                                                    $
                                                    (9,683,796
                                                    )
                                                    
                                                    $
                                                    (1,812,001
                                                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                    
                                                    
                                                    100,087
                                                    
                                                    
                                                    
                                                    88,955Stock-based
      compensation
                                                    
                                                    
                                                    833,664
                                                    
                                                    
                                                    
                                                    574,413Stock
      issued for services
                                                    
                                                    
                                                    105,180
                                                    
                                                    
                                                    
                                                    61,195Realized
      loss on investments
                                                    
                                                    
                                                    6,501,586
                                                    
                                                    
                                                    
                                                    -Loss
      on disposition of property and equipment
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,153Decrease
      (increase) in:Receivables
                                                    
                                                    
                                                    539,543
                                                    
                                                    
                                                    
                                                    28,029Income
      tax receivable
                                                    
                                                    
                                                    (250,454
                                                    )
                                                    
                                                    
                                                    (900,000
                                                    )Inventories
                                                    
                                                    
                                                    (375,732
                                                    )
                                                    
                                                    
                                                    (51,856
                                                    )Other
      current assets
                                                    
                                                    
                                                    24,049
                                                    
                                                    
                                                    
                                                    2,004Deferred
      tax assets
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    244,000Increase
      (decrease) in:Accounts
      payable
                                                    
                                                    
                                                    251,252
                                                    
                                                    
                                                    
                                                    17,310Accrued
      liabilities
                                                    
                                                    
                                                    (182,326
                                                    )
                                                    
                                                    
                                                    (160,489
                                                    )Customer
      deposits
                                                    
                                                    
                                                    (387,900
                                                    )
                                                    
                                                    
                                                    (129,838
                                                    )Deferred
      revenue
                                                    
                                                    
                                                    39,191
                                                    
                                                    
                                                    
                                                    23,045Net
      cash used in operating activities
                                                    
                                                    
                                                    (2,485,656
                                                    )
                                                    
                                                    
                                                    (2,014,080
                                                    )Cash
      flows from investing activities:Sales
      of investments
                                                    
                                                    
                                                    10,150,957
                                                    
                                                    
                                                    
                                                    4,988,760Purchases
      of investments
                                                    
                                                    
                                                    (23,935
                                                    )
                                                    
                                                    
                                                    (1,925,808
                                                    )Purchase
      of property and equipment
                                                    
                                                    
                                                    (32,855
                                                    )
                                                    
                                                    
                                                    (1,273,449
                                                    )Increase
      in patents
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (20,966
                                                    )Net
      cash provided by investing activities
                                                    
                                                    
                                                    10,094,167
                                                    
                                                    
                                                    
                                                    1,768,537Cash
      flows from financing activities:Proceeds
      from the sale of common stock
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    106,506Net
      increase (decrease) in cash and cash equivalents
                                                    
                                                    
                                                    7,608,511
                                                    
                                                    
                                                    
                                                    (139,037
                                                    )Cash
      and cash equivalents, beginning of period
                                                    
                                                    
                                                    1,394,652
                                                    
                                                    
                                                    
                                                    416,540Cash
      and cash equivalents, end of period
                                                    
                                                    $
                                                    9,003,163
                                                    
                                                    
                                                    $
                                                    277,503




See
accompanying notes to condensed financial statements





5





BSD
MEDICAL CORPORATION


Notes
to Condensed Financial Statements


(Unaudited)





Note
1.  Basis of Presentation




The interim financial information of BSD
Medical Corporation (the “Company”) as of May 31, 2009 and for the three months
and nine months ended May 31, 2009 and 2008 is unaudited, and the balance sheet
as of August 31, 2008 is derived from audited financial
statements.  The accompanying unaudited condensed balance sheets of
the Company as of May 31, 2009 and August 31, 2008, the related unaudited
condensed statements of operations for the three months and nine months endedMay 31, 2009 and
2008,and the related
unaudited condensed statements of cash flows for the nine months ended May 31,
2009 and 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 byU.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 May 31, 2009 and August 31, 2008, our results of
operations for the three months and nine months ended May 31, 2009 and 2008, and
our cash flows for the nine months ended May 31, 2009 and 2008 have been
included.  The results of operations for the three months and nine
months ended May 31, 2009 may not be indicative of the results for our fiscal
year ending August 31, 2009.





Note
2.  Net 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
                                
                                
                                Nine
      Months EndedMay
      31,
                                
                                
                                May
      31,
                                
                                
                                May
      31,
                                
                                
                                May
      31,2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Weighted
      average number of shares outstanding – basic
                                
                                
                                21,886,000
                                
                                
                                
                                21,359,000
                                
                                
                                
                                21,835,000
                                
                                
                                
                                21,325,000Dilutive
      effect of stock options
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Weighted
      average number of shares outstanding – diluted
                                
                                
                                21,886,000
                                
                                
                                
                                21,359,000
                                
                                
                                
                                21,835,000
                                
                                
                                
                                21,325,000





No stock
options are included in the computation of diluted weighted average number of
shares for the three months and
nine months ended May 31, 2009 and 2008because the effect would be
anti-dilutive.  As of May 31, 2009, the Company had outstanding
options to purchase a total of 2,277,287 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 May 31, 2009, we had no investments,
but had cash and cash equivalents of $9,003,163, comprised primarily of money
market funds.  As of August 31, 2008, our investments consisted
primarily of a highly liquid, managed portfolio of mutual funds, and were all
considered available-for-sale securities.  The 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 were comprised of two
categories:  corporate debt funds and equity income
funds.





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





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





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





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





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





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





7





After considering the factors outlined
above, we liquidated 100% of our mutual funds in March and May 2009 and
recognized a loss on investments in the condensed statements of operations of
$6,501,586 for the nine months ended May 31, 2009 and $2,125,999 for the three
months ended May 31, 2009.  The cost basis of these investments was
$16,652,543, determined on a specific identification basis.  We had
concluded that the portion of the unrealized loss at February 28, 2009
attributed to the investments sold was other than
temporary.  Therefore, we recognized a loss on investments of
$4,375,587 in the condensed statements of operations for the three months ended
February 28, 2009.  Proceeds of $10,150,957 from these sales of
investments were deposited in money market funds.





Note
4.  Inventories





Inventories
consisted of the following:


May
      31,
                                  2009
                                
                                
                                August
      31,
                                  2008Parts
      and supplies
                                
                                $
                                1,108,465
                                
                                
                                $
                                802,956Work-in-process
                                
                                
                                621,157
                                
                                
                                
                                608,391Finished
      goods
                                
                                
                                111,263
                                
                                
                                
                                53,806Reserve
      for obsolete inventory
                                
                                
                                (40,000
                                )
                                
                                
                                (40,000
                                )Inventories,
      net
                                
                                $
                                1,800,885
                                
                                
                                $
                                1,425,153





Note
5.  Property and Equipment





Property
and equipment consisted of the following:


May
      31,
                                      2009
                                    
                                    
                                    August
      31,
                                      2008Equipment
                                    
                                    $
                                    1,074,116
                                    
                                    
                                    $
                                    1,048,061Furniture
      and fixtures
                                    
                                    
                                    298,576
                                    
                                    
                                    
                                    298,576Leasehold
      improvements
                                    
                                    
                                    24,220
                                    
                                    
                                    
                                    17,420Building
                                    
                                    
                                    956,000
                                    
                                    
                                    
                                    956,000Land
                                    
                                    
                                    244,000
                                    
                                    
                                    
                                    244,0002,596,912
                                    
                                    
                                    
                                    2,564,057Less
      accumulated depreciation
                                    
                                    
                                    (1,217,647
                                    )
                                    
                                    
                                    (1,122,533
                                    )Property
      and equipment, net
                                    
                                    $
                                    1,379,265
                                    
                                    
                                    $
                                    1,441,524




8








Note
6.  Related Party Transactions




During
the three months ended May 31, 2009 and 2008, we had sales of $460,423 and
$189,207, respectively, to an entity controlled by a significant stockholder and
member of the Board of Directors.  These related party transactions
represent approximately 50% and 21% of total sales for each respective
three-month period.




During
the nine months ended May 31, 2009 and 2008, we had sales of $585,919 and
$1,932,345, respectively, to this entity.  These related party
transactions represent approximately 20% and 51% of total sales for each
respective nine-month period.




As of May
31, 2009 and August 31, 2008, receivables included $248,485 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 May
31, 2009, we had approximately 719,000 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:




Three
      Months Ended
                          
                          
                          Nine
      Months EndedMay
      31,
                          
                          
                          May
      31,
                          
                          
                          May
      31,
                          
                          
                          May
      31,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Cost
      of sales
                          
                          $
                          18,009
                          
                          
                          $
                          21,148
                          
                          
                          $
                          54,867
                          
                          
                          $
                          63,444Research
      and development
                          
                          
                          48,042
                          
                          
                          
                          35,125
                          
                          
                          
                          138,648
                          
                          
                          
                          95,745Selling,
      general and administrative
                          
                          
                          218,254
                          
                          
                          
                          153,046
                          
                          
                          
                          640,149
                          
                          
                          
                          415,224Total
                          
                          $
                          284,305
                          
                          
                          $
                          209,319
                          
                          
                          $
                          833,664
                          
                          
                          $
                          574,413





During
the nine months ended May 31, 2009, we granted 990,760 options to our directors
and employees, 905,760 options with one fifth vesting each year for the next
five years, and 85,000 options with one third vesting each year for the next
three years.




Unrecognized
stock-based compensation expense expected to be recognized over the estimated
weighted-average amortization period of 2.93 years is approximately $3,275,000
as of May 31, 2009.




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




Expected
      volatility
                      66.30%Expected
      dividends
                      0.00%Expected
    term
                      6.0YearsRisk-free interest
      rate
                      2.70%




9




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 nine months ended May 31, 2009 was
$1.89.





A summary of the time-based stock option
awards as of May 31, 2009, and changes during the nine 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
                                                                                  
                                                                                  
                                                                                  990,760
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.10Exercised
                                                                                  
                                                                                  
                                                                                  (815,102
                                                                                  )
                                                                                  
                                                                                  
                                                                                  1.04Forfeited or
      expired
                                                                                  
                                                                                  
                                                                                  (81,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  6.35Outstanding atMay 31,
2009
                                                                                  
                                                                                  
                                                                                  2,277,287
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.69
                                                                                  
                                                                                  
                                                                                  
                                                                                  8.26Exercisable atMay 31,
2009
                                                                                  
                                                                                  
                                                                                  858,335
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.61
                                                                                  
                                                                                  
                                                                                  
                                                                                  6.76
                                                                                  
                                                                                  
                                                                                  $331,477








Note 8.  Income
Taxes





The income tax (provision) benefit
consisted of the following:





Three
      Months Ended
                            
                            
                            Nine
      Months EndedMay
      31,
                            
                            
                            May
      31,
                            
                            
                            May
      31,
                            
                            
                            May
      31,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Current
                            
                            $
                            151,000
                            
                            
                            $
                            336,071
                            
                            
                            $
                            1,386,000
                            
                            
                            $
                            815,071Deferred
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (229,000
                            )
                            
                            
                            (168,000
                            )Total
                            
                            $
                            151,000
                            
                            
                            $
                            336,071
                            
                            
                            $
                            1,157,000
                            
                            
                            $
                            647,071





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 nine months ended May 31, 2009 and 2008,
respectively, resulted from our recording a valuation allowance against our
deferred tax assets.  In recording the valuation allowance, we were
unable to conclude that it is more likely than not that our deferred tax assets,
including 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.





10




Note 9.  Supplemental Cash
Flow Information





The Company paid $1,675 and $0 for
interest expense during the nine months ended May 31, 2009 and 2008,
respectively.  The Company paid $10,561 and $8,929 for income taxes
during the nine months ended May 31, 2009 and 2008,
respectively.





During the nine months ended May 31,
2009, the Company had the following non-cash financing and investing
activities:





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





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





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





During the nine months ended May 31,
2008, the Company had the following non-cash financing and investing
activities:





·
            Recorded an increase in additional
      paid-in capital of $173,961 and an increase in income tax receivable of
      $173,961 related to the tax benefit from the exercise of stock
      options.





·
            Increased other comprehensive loss
      by $922,173, decreased investments by $710,173 and decreased short-term
      deferred tax asset by
$212,000.





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








Note
10.  Recent Accounting Pronouncements





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





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





11





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





On May 9, 2008, the FASB issued 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.  On June 3, 2009, in connection with the issuance of SFAS No.
162, the FASB voted to approve the FASB Accounting Standards Codification as the
single source of authoritative nongovernmental GAAP to be launched on July 1,
2009.  The Codification will be effective for interim and annual
periods ending after September 15, 2009, which means that preparers must begin
to use the Codification for periods that end after September 15,
2009.  All existing accounting standard documents are
superseded.  All other accounting literature not included in the
Codification will be considered non-authoritative.  We currently are
unable to determine what impact the future application of this pronouncement may
have on our financial statements.





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





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





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
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.





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 (the “Company”) 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 systems to treat other diseases and medical
conditions.  Our product line for cancer therapy has been created to
offer hospitals and clinics a complete solution for thermal treatment of cancer
as provided through microwave/RF systems.




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




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




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




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




Commercialization
of our systems that are used to treat cancer is our most immediate business
objective.  Current and future cancer treatment sites for our systems
may include cancers of the prostate, breast, head, neck, bladder, cervix,
colon/rectum, 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 many awards, including the Frost &
Sullivan “Technology Innovation of the Year Award” for cancer therapy devices
awarded for the development of the BSD-2000.





14




Our Products and
Services




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




·
            Thermal
      ablation ablates soft tissues at high temperatures through focused
      microwave energy.




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




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




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




MicroThermX-100.  Our
MicroThermX-100 Microwave Ablation System (the “MTX-100”) has been developed to
employ precision-guided microwave energy to ablate soft tissue.  The
MTX-100 is a compact, mobile system that includes a state-of-the-art computer, a
microwave generator, single-patient-use disposable applicators and a proprietary
thermistor-based temperature monitoring system.  The delivery of
microwave energy is controlled by time and power parameters set by the operator
utilizing an interactive touch-screen monitor that allows the operator to
quickly and easily control the treatment.  The MTX-100 provides
minimally invasive access to the target tissue and can be used in open surgical
as well as in percutaneous ablation procedures, which will allow the MTX-100 to
be used by both surgeons and interventional radiologists.  The MTX-100
was developed to provide treatments as a stand-alone therapy, rather than only
in combination with other therapies.




The
MTX-100 represents a major part of our business plan moving
forward.  It introduces into our product line a disposable applicator
used in each treatment, which we believe represents the potential for a
significant ongoing revenue stream after the sale of the system.  Our
sales force is experienced in marketing to interventional radiologists and
surgeons, the users of thermal ablation systems.  Internationally, we
expect sales will be conducted through established and new distributors located
primarily in Europe and Asia.




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





15




Additional
time will be required to complete the market-ready Phase II design, apply for
applicable regulatory approvals, and finalize the manufacturing processes for
the MTX-100 and the applicators.  Also, final marketing and sales
strategies must be completed prior to market introduction.  We
currently are unable to predict when these efforts will be completed and when
revenues from the sale of the MTX-100 and related applicators will
begin.  We do not believe, however, that these revenues will begin
until at least the first or second quarter of calendar year 2010.




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




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




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




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





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





16




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




On May
18, 2009, the FDA granted Humanitarian Use Device (“HUD”) designation for our
BSD-2000 for use in conjunction with radiation therapy for the treatment of
cervical carcinoma patients who are ineligible for chemotherapy.  This
is the first of the two steps required to obtain HDE marketing
approval.  Subsequent to the FDA granting the Humanitarian Use
Designation for the BSD-2000, which confirms that the intended use population is
fewer than 4,000 patients per year, we filed an HDE submission with the
FDA.  The FDA has 75 days from the date of receipt of the HDE
submission to grant or deny an HDE application.  This period includes
a 30 day filing period during which the FDA determines whether the HDE
application is sufficiently complete to permit substantive
review.  During this review, the FDA may refine the indications for
use which received HUD designation to finalize the indications for use for which
HDE approval will be granted.  This decision will be based on the data
that is available to support the device’s HDE application.  We believe
that the data previously submitted to the FDA and reviewed by the agency in our
PMA application can be used to support the HDE approval, and that this previous
review may expedite marketing approval for the BSD-2000.




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




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




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





17




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




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




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




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




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




Marketing
and Distribution





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




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




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




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




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





18




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.  To date, returns have not been significant.




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




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




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




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





19





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




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




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




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





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





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





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





20





Results of
Operations




Revenues:  The
following table summarizes the number of our systems sold for the respective
reporting periods:




Three
      Months Ended
                                      Nine
      Months EndedMay
      31,
                                      May
      31,
                                      May
      31,
                                      May
      31,2009
                                      2008
                                      2009
                                      2008BSD-500
                                      1
                                      3
                                      5
                                      8BSD-2000
                                      1
                                      -
                                      4
                                      -BSD-2000/3D
                                      1
                                      -
                                      1
                                      -BSD-2000/3D/MR
                                      -
                                      -
                                      -
                                      2Total
                                      3
                                      3
                                      10
                                      10





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 May 31, 2009, we have not had any
sales of our MicroThermX-100 system.




Total
revenues for the three months ended May 31, 2009 were $926,075 compared to
$915,017 for the three months ended May 31, 2008, an increase of $11,058, or
1%.  Total revenues for the nine months ended May 31, 2009 were
$2,887,668 compared to $3,778,397 for the nine months ended May 31, 2008, a
decrease of $890,729, or 24%.  The overall decrease in revenues in the
current fiscal year is due primarily to a significant decrease in related party
sales, partially offset by an increase in non-related party sales, 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 May 31, 2009, we earned
$465,652, or 50%, of our revenues from sales to unrelated parties, as compared
to $725,810, or 79%, in the three months ended May 31, 2008.  These
sales for the three months ended May 31, 2009 consisted of product sales of
$430,000, service of $22,199, probes of $2,400, and other revenue of
$11,053.  By comparison, these sales for the three months ended May
31, 2008 consisted of product sales of $703,000, service of $13,975, probes of
$1,800 and other revenues of $7,035.  Even though we sold the same
number of systems in the second quarter of the current fiscal year compared to
the same quarter last year, we had a different mix of systems sold with a lower
average sales price per system.




In the nine months ended May 31, 2009,
we earned $2,301,749, or 80%, of our revenues from sales to unrelated parties,
as compared to $1,846,052, or 49%, in the nine months ended May 31, 2008, with
the increase due primarily to more systems sold in the current fiscal
year.  In addition, as the number of our systems in use increases, our
service revenue increases.  These sales for the nine months ended May
31, 2009 consisted of product sales of $2,219,040, service of $52,542, probes of
$4,802 and other revenue of $25,365.  By comparison, these sales for the nine
months endedMay 31, 2008consisted of product
sales of $1,758,700, service of $38,842, probes of $16,247 and other revenues of
$32,263.





21




Related Party
Sales:  We earned $460,423, or approximately 50%, of our
revenues in the three months ended May 31, 2009 from sales to related parties as
compared to $189,207 or approximately 21%, in the three months ended May 31,
2008.  These sales were to Medizin-Technik and increased in the three
months of the current fiscal year primarily due to an increase in the number of
systems sold compared to the same three months of the prior fiscal
year.  The sales consisted of product sales of $442,500, sales of
probes of $8,250 and other revenues of $9,673 in the three months ended May 31,
2009.  These sales for the three
months endedMay 31, 2008consisted of sales of
component parts of $166,313, sales of probes of $6,225 and other revenues of
$16,669.  We had no related party systems sales in the three
months ended May 31, 2008.




In the nine months ended May 31, 2009,
we earned $585,919, or approximately 20%, of our revenues from sales to related
parties as compared to $1,932,345 or approximately 51%, in the nine months ended
May 31, 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 product sales of $442,500, sales of
component parts of $65,839, sales of probes of $44,271 and other revenues of
$33,309 in the six months ended February 28, 2009.  These sales for the nine
months endedMay 31, 2008consisted of product
sales of $1,682,711, sales of component parts of $166,313, sales of probes of
$25,650 and other revenues of $57,671.




Cost of
Sales:  Cost of sales in the three months ended May 31, 2009
was $270,629 compared to $309,276 in the three months ended May 31, 2008, a
decrease of $38,647, or 12%.  Even though we sold the same number of
systems in the second quarter of the current fiscal year compared to the same
quarter last year, we had a different mix of systems sold with a lower average
sales price per system and a lower average direct cost of sales per
system.  Cost of sales in the nine months ended March 31, 2009 was
$1,259,739 compared to $713,724 in the nine months ended March 31, 2008, an
increase of $546,015, or 77%.  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.




Cost of sales to related parties in the
three months ended May 31, 2009 increased to $267,556 from $66,750 in the three
months ended May 31, 2008 primarily due to an increase in the number of systems
sold in the three months of the current fiscal year compared to the same three
months of the prior fiscal year.  Cost of sales to related parties
decreased in the nine months ended May 31, 2009 to $352,877 from $694,062 in the
nine months ended May 31, 2008 resulting primarily from decreases in related
party product sales in the current fiscal year.  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 May 31,
2009 was $387,890 or 42% of total sales, as compared to $539,171 or 59% of total
sales in the three months ended May 31, 2008.  Total gross profit in
the nine months ended May 31, 2009 was $1,275,052 or 44% of total sales, as
compared to $2,370,611 or 63% of total sales in the nine months ended May 31,
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 nine 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.





22




Research and
Development Expenses:  Research and development expenses were
$509,422 for the three months ended May 31, 2009, as compared to $481,692 for
the three months ended May 31, 2008, an increase of $27,730, or approximately
6%.  Research and development expenses were $1,443,563 for the nine
months ended May 31, 2009, as compared to $1,252,914 for the nine months ended
May 31, 2008, an increase of $190,649, or approximately 15%.  The
increase in research and development expenses on a year-to-date basis in the
current fiscal year is due to our continuing efforts to develop an advanced
generation of the microwave ablation system, software improvements to enhance
the utility of the BSD-500 and BSD-2000 systems, possible market expansion of
our current products into other cancer and non-cancerous indications, and other
enhancements to our current products and the development of new
products.




Selling, General
and Administrative Expenses:  Selling, general and
administrative expenses for the three months ended May 31, 2009 were $1,653,363,
as compared to $1,368,451 for the three months ended May 31, 2008, an increase
of $284,912, or approximately 21%.  Selling, general and
administrative expenses for the nine months ended May 31, 2009 were $4,663,942,
as compared to $4,196,516 for the nine months ended May 31, 2008, an increase of
$467,426, or approximately 11%. The increase in selling, general and
administrative expenses in the current fiscal year is due primarily to severance
payments paid in the three months ended May 31, 2009 to our former president,
higher non-cash stock option expense, and an increase in our board compensation
due to the addition of one new director.




Interest and
Investment Income:  Interest and investment income decreased to
$56,246 in the three months ended May 31, 2009, as compared to $226,692 for the
three months ended May 31, 2008, and decreased to $578,813 in the nine months
ended May 31, 2009, as compared to $771,680 in the nine months ended May 31,
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 and May 2009 have been deposited in money market
funds.  Therefore, we anticipate that our interest and investment
income for the foreseeable future will be substantially less than previously
earned on our mutual funds, but will significantly reduce our exposure to market
fluctuations.




Realized Loss on
Investments:  We sold 100% of our investments in mutual funds
in March and May 2009.  The investments had a total cost basis of
$16,652,543 and we received total proceeds of $10,150,957, resulting in a
realized loss of $6,501,586.  We recognized $2,125,999 of the loss in
the three months ended May 31, 2009 and $4,375,587 of the loss in the three
months ended February 28, 2009.  We had no realized loss on
investments in the prior fiscal year.  As a result, at May 31, 2009,
we had no investments, but cash and equivalents of $9,003,163, comprised
primarily of money market funds.





Income
Tax Benefit:The income
tax benefit in the three months ended May 31, 2009 and 2008 was $151,000 and
$336,071, respectively, consisting of a current tax benefit.  The
income tax benefit of $1,157,000 in the nine months ended May 31, 2009 is
comprised of a current income tax benefit of $1,386,000, partially offset by a
deferred income tax provision of $229,000. By comparison, the income tax benefit
for the nine months ended May 31, 2008 was $647,071, comprised of a current
benefit of $815,071, partially offset by a deferred provision of
$168,000.





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





23




Net
Loss:  During the three months ended May 31, 2009 we had a net
loss of $3,715,444, after recording an income tax benefit of $151,000, as
compared to a net loss of $789,229, after recording an income tax benefit of
$336,071 in the three months ended May 31, 2008.  During the nine
months ended May 31, 2009 we had a net loss of $9,683,796, after recording an
income tax benefit of $1,157,000, as compared to a net loss of $1,812,001, after
recording an income tax benefit of $647,071 in the nine months ended May 31,
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 May 31, 2009, we have generated an accumulated deficit of
$14,973,048.  Included in this amount is a realized loss on
investments of $6,501,586 recorded in the nine months ended May 31,
2009.  The remainder of the accumulated deficit can be attributed to
our operations, where our operating revenues have been insufficient to cover our
operating expenses.  We have historically financed our operations
through cash from operations, research grants, licensing of technological
assets, issuance of common stock and sale of investments in spinoff
operations.  As of May 31, 2009, we had liquidated 100% of our
investments in mutual funds and had cash and cash equivalents of $9,003,163,
comprised primarily of money market funds.  At August 31, 2008, we had
cash, cash equivalents and investments totaling $15,881,844.




During
the nine months ended May 31, 2009, we used cash of $2,485,656 in operating
activities, primarily as a result of our net loss of $9,683,796 decreased by non
cash expenses of $1,038,931, including depreciation and amortization, and
stock-based compensation, and realized loss on investments of
$6,501,586.  Net cash used in operating activities also included an
increase in income tax receivable of $250,454, increase in inventories of
$375,732, decrease in accrued liabilities of $182,326 and a decrease in customer
deposits of $387,900, partially offset by a decrease in receivables of $539,543,
decrease in other current assets of $24,049, increase in accounts payable of
$251,252 and increase in deferred revenue of $39,191.




By
comparison, net cash used in operating activities was $2,014,080 during the nine
months ended May 31, 2008, which included an increase in income tax receivable
of $900,000, increase in inventories of $51,856, decrease in accrued liabilities
of $160,489, and decrease in customer deposits of $129,838, partially offset by
a decrease in receivables of $28,029, decrease in other current assets of
$2,004, decrease in deferred tax assets of $244,000, increase in accounts
payable of $17,310 and an increase in deferred revenue of $23,045.




Net cash
provided by investing activities for the nine months ended May 31, 2009 was
$10,094,167, resulting from the proceeds from the sale of investments of
$10,150,957, partially offset by the purchase of investments of $23,935 and the
purchase of property and equipment of $32,855.  For the nine months
ended May 31, 2008, net cash provided by investing activities was $1,768,537,
resulting from the sale of investments of $4,988,760, partially offset by the
purchase of investments of $1,925,808, the purchase of property and equipment of
$1,273,449 and the increase in patents of $20,966.




No net
cash was provided by financing activities for the nine months ended May 31,
2009.  Net cash provided by financing activities for the nine months
ended May 31, 2008 consisted of proceeds of $106,506 from the sale of common
stock through the exercise of stock options.





24




We expect
to incur additional expenses related to the commercial introduction of our
systems, research and development, trade shows, expenditures on publicity,
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 that our current cash and cash equivalents and income tax refunds
receivable will be sufficient to fund our operations for the next twelve
months.




If we
cannot cover any future cash shortfalls with cost cutting or available cash, we
would need to obtain additional financing.  Due to 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 May
31, 2009, we have no significant commitments for the purchase of property and
equipment.




The
Company has no off balance sheet arrangements as of May 31, 2009.




Recent Accounting
Pronouncements




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





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





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





25





On May 9, 2008, the FASB issued 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 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.  On June 3, 2009, in connection
with the issuance of SFAS No. 162, the FASB voted to approve the FASB Accounting
Standards Codification as the single source of authoritative nongovernmental
GAAP to be launched on July 1, 2009.  The Codification will be
effective for interim and annual periods ending after September 15, 2009, which
means that preparers must begin to use the Codification for periods that end
after September 15, 2009.  All existing accounting standard documents
are superseded.  All other accounting literature not included in the
Codification will be considered non-authoritative.  We currently are
unable to determine what impact the future application of this pronouncement may
have on our financial statements.





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





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





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





26





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.





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, and the potential revenue
      from, 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
      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 that we will incur increased expenses related to seeking
      governmental and regulatory approvals for our
  products;




27




·
            our
      expectations regarding FDA approvals relating to the BSD-2000
      system;




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




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




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




We wish
to caution readers that the forward-looking statements and our operating results
are subject to various risks and uncertainties that could cause our actual
results and outcomes to differ materially from those discussed or anticipated,
including the factors set forth in Item 1A – “Risk Factors” in our Annual Report
on Form 10-K for the year ended August 31, 2008 and our other filings with the
Securities and Exchange Commission.  We also wish to advise readers
not to place any undue reliance on the forward-looking statements contained in
this report, which reflect our beliefs and expectations only as of the date of
this report.  We assume no obligation to update or revise these
forward-looking statements to reflect new events or circumstances or any changes
in our beliefs or expectations, other than as required by law.







Item
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.





28





PART
II – OTHER INFORMATION




Item
1A.   Risk Factors




In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Item 1A – “Risk Factors” in our Annual Report
on Form 10-K for the year ended August 31, 2008, which could materially affect
our business, financial condition or future results of operations.




Item
5.      Other Information




In April 2009, Dennis P. Gauger, our
Chief Financial Officer, became a full time employee, and his annual base salary
was increased to $180,000.  In addition, Mr. Gauger was granted an
option to purchase 100,000 shares of our common stock with an exercise price of
$2.40 per share and vesting 20% per year over five years.




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 GmbH dated May 13,
      200910.2
              
              Separation
      Agreement, dated April 7, 2009, between BSD Medical Corporation and Hyrum
      A. Mead.  Incorporated by reference to Exhibit 10.1 of Current
      Report on Form 8-K filed on April 8, 200910.3
              
              Offer
      Letter, dated April 7, 2009, between BSD Medical Corporation and Harold R.
      Wolcott.  Incorporated by reference to Exhibit 10.2 of Current
      Report on Form 8-K filed on April 8, 200931.1
              
              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











29





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:    July
      10, 2009
                              /s/
      Harold R. WolcottHarold
      R. WolcottPresident
      (Principal Executive Officer)Date:    July
      10, 2009
                              /s/
      Dennis P. GaugerDennis
      P. GaugerChief
      Financial Officer (Principal Accounting
Officer)









30