UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM 10-Q





(Mark
One)





ý           Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934





For
the quarterly period ended February 28, 2010





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 oNon-accelerated
      filer o
            Smaller
      reporting company ý





Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).Yes o  No ý





As of
April 13, 2010, there were 23,215,772 shares of the Registrant’s common stock,
$0.001 par value per share, outstanding.





BSD
MEDICAL CORPORATION


FORM
10-Q





FOR
THE QUARTER ENDED FEBRUARY 28, 2010








PART
      I - Financial InformationItem
      1.  Financial Statements (Unaudited)Condensed
      Balance Sheets
            3Condensed
      Statements of Operations
            4Condensed
      Statements of Cash Flows
            5Notes
      to Condensed Financial Statements
            6Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            14Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
            30Item
      4.  Controls and Procedures
            30PART
      II - Other InformationItem
      1A.  Risk Factors
            31Item
      5.  Other Information
            31Item
      6.  Exhibits
            32Signatures
            33











2


PART
I - FINANCIAL INFORMATION




Item
1.  Financial Statements




BSD
      MEDICAL CORPORATIONCondensed
      Balance Sheets(Unaudited)ASSETS
            
            February
      28,
              2010
            
            
            August
      31,
              2009Current
      assets:Cash
      and cash equivalents
            
            $
            5,854,697
            
            
            $
            7,791,938Accounts
      receivable, net of allowance for doubtful accounts of
    $20,000
            
            
            493,394
            
            
            
            289,617Related
      party trade accounts receivable
            
            
            12,436
            
            
            
            41,016Income
      tax receivable
            
            
            1,417,006
            
            
            
            1,415,758Inventories,
      net
            
            
            2,047,128
            
            
            
            1,794,476Other
      current assets
            
            
            98,507
            
            
            
            94,536Total
      current assets
            
            
            9,923,168
            
            
            
            11,427,341Property
      and equipment, net
            
            
            1,331,643
            
            
            
            1,352,384Patents,
      net
            
            
            66,693
            
            
            
            77,633$
            11,321,504
            
            
            $
            12,857,358LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            325,229
            
            
            $
            226,905Accrued
      liabilities
            
            
            388,420
            
            
            
            548,079Deferred
      revenue – current portion
            
            
            73,266
            
            
            
            67,851Total
      current liabilities
            
            
            786,915
            
            
            
            842,835Deferred
      revenue – net of current portion
            
            
            132,030
            
            
            
            73,534Total
      liabilities
            
            
            918,945
            
            
            
            916,369Commitments
      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, 23,215,772 and
      22,039,301 shares issued, respectively
            
            
            23,216
            
            
            
            22,040Additional
      paid-in capital
            
            
            30,920,417
            
            
            
            28,593,305Treasury
      stock, 24,331 shares at cost
            
            
            (234
            )
            
            
            (234
            )Accumulated
      deficit
            
            
            (20,540,840
            )
            
            
            (16,674,122
            )Total
      stockholders’ equity
            
            
            10,402,559
            
            
            
            11,940,989$
            11,321,504
            
            
            $
            12,857,358See
      accompanying notes to condensed financial statements


3


BSD
      MEDICAL CORPORATIONCondensed
      Statements of Operations(Unaudited)





Three
      Months Ended
              February
      28,
            
            
            Six
      Months Ended
              February
      28,2010
            
            
            2009
            
            
            2010
            
            
            2009Revenues:Sales
            
            $
            586,448
            
            
            $
            627,701
            
            
            $
            859,343
            
            
            $
            1,836,097Sales
      to related parties
            
            
            13,626
            
            
            
            102,328
            
            
            
            166,934
            
            
            
            125,496Total
      revenues
            
            
            600,074
            
            
            
            730,029
            
            
            
            1,026,277
            
            
            
            1,961,593Operating
      costs and expenses:Cost
      of sales
            
            
            517,079
            
            
            
            388,630
            
            
            
            743,599
            
            
            
            989,110Cost
      of related party sales
            
            
            11,531
            
            
            
            63,149
            
            
            
            162,378
            
            
            
            85,321Research
      and development
            
            
            621,201
            
            
            
            426,918
            
            
            
            1,164,628
            
            
            
            934,141Selling,
      general and administrative
            
            
            1,376,344
            
            
            
            1,500,272
            
            
            
            2,835,739
            
            
            
            3,010,579Total
      operating costs and expenses
            
            
            2,526,155
            
            
            
            2,378,969
            
            
            
            4,906,344
            
            
            
            5,019,151Loss
      from operations
            
            
            (1,926,081
            )
            
            
            (1,648,940
            )
            
            
            (3,880,067
            )
            
            
            (3,057,558
            )Other
      income (expense):Interest
      and investment income
            
            
            1,091
            
            
            
            263,835
            
            
            
            4,300
            
            
            
            522,567Realized
      loss on investments
            
            
            -
            
            
            
            (4,375,587
            )
            
            
            -
            
            
            
            (4,375,587
            )Other
      income (expense)
            
            
            (1,726
            )
            
            
            (29,515
            )
            
            
            2,478
            
            
            
            (63,774
            )Total
      other income (expense)
            
            
            (635
            )
            
            
            (4,141,267
            )
            
            
            6,778
            
            
            
            (3,916,794
            )Loss
      before income taxes
            
            
            (1,926,716
            )
            
            
            (5,790,207
            )
            
            
            (3,873,289
            )
            
            
            (6,974,352
            )Income
      tax benefit
            
            
            6,571
            
            
            
            1,255,000
            
            
            
            6,571
            
            
            
            1,006,000Net
      loss
            
            
            (1,920,145
            )
            
            
            (4,535,207
            )
            
            
            (3,866,718
            )
            
            
            (5,968,352
            )Other
      comprehensive income – decrease in unrealized loss on investments, net of
      income tax
            
            
            -
            
            
            
            4,415,083
            
            
            
            -
            
            
            
            39,496Net
      comprehensive loss
            
            $
            (1,920,145
            )
            
            $
            (120,124
            )
            
            $
            (3,866,718
            )
            
            $
            (5,928,856
            )Net
      loss per common share:Basic
            
            $
            (0.09
            )
            
            $
            (0.21
            )
            
            $
            (0.17
            )
            
            $
            (0.27
            )Diluted
            
            $
            (0.09
            )
            
            $
            (0.21
            )
            
            $
            (0.17
            )
            
            $
            (0.27
            )Weighted
      average number of shares outstanding:Basic
            
            
            22,196,000
            
            
            
            21,850,000
            
            
            
            22,117,000
            
            
            
            21,809,000Diluted
            
            
            22,196,000
            
            
            
            21,850,000
            
            
            
            22,117,000
            
            
            
            21,809,000See
      accompanying notes to condensed financial statements




4





BSD
      MEDICAL CORPORATIONCondensed
      Statements of Cash Flows(Unaudited)





Six
      Months Ended
              February
      28,2010
            
            
            2009Cash
      flows from operating activities:Net
      loss
            
            $
            (3,866,718
            )
            
            $
            (5,968,352
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            70,970
            
            
            
            66,761Stock-based
      compensation
            
            
            599,314
            
            
            
            549,360Stock
      issued for services
            
            
            -
            
            
            
            37,500Realized
      loss on investments
            
            
            -
            
            
            
            4,375,587Decrease
      (increase) in:Receivables
            
            
            (175,197
            )
            
            
            462,173Income
      tax receivable
            
            
            (1,248
            )
            
            
            (99,454
            )Inventories
            
            
            (252,652
            )
            
            
            (287,360
            )Other
      current assets
            
            
            (3,971
            )
            
            
            70,116Increase
      (decrease) in:Accounts
      payable
            
            
            98,324
            
            
            
            (14,272
            )Accrued
      liabilities
            
            
            (159,659
            )
            
            
            (16,047
            )Customer
      deposits
            
            
            -
            
            
            
            (197,669
            )Deferred
      revenue
            
            
            63,911
            
            
            
            (23,008
            )Net
      cash used in operating activities
            
            
            (3,626,926
            )
            
            
            (1,044,665
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (39,289
            )
            
            
            (22,340
            )Purchase
      of investments
            
            
            -
            
            
            
            (36,535
            )Net
      cash used in investing activities
            
            
            (39,289
            )
            
            
            (58,875
            )Cash
      flows from financing activities:Net
      proceeds from the sale of common stock
            
            
            1,728,974
            
            
            
            -Net
      decrease in cash and cash equivalents
            
            
            (1,937,241
            )
            
            
            (1,103,540
            )Cash
      and cash equivalents, beginning of period
            
            
            7,791,938
            
            
            
            1,394,652Cash
      and cash equivalents, end of period
            
            $
            5,854,697
            
            
            $
            291,112See
      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
February 28, 2010 and for the three months and six months ended February 28,
2010 and 2009 is unaudited, and the condensed balance sheet as of August 31,
2009 is derived from our audited financial statements.  The
accompanying unaudited condensed balance sheets as of February 28, 2010 and
August 31, 2009, the related unaudited condensed statements of operations for
the three months and six months ended February 28, 2010 and 2009, and the
related unaudited condensed statements of cash flows for the six months ended
February 28, 2010 and 2009 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 notes required by U.S. generally accepted accounting principles
for complete financial statements.  These condensed financial
statements should be read in conjunction with the notes thereto, and the
financial statements and notes thereto included in our annual report on Form
10-K for the year ended August 31, 2009.





All
adjustments (consisting only of normal recurring adjustments) necessary for the
fair presentation of our financial position as of February 28, 2010 and August
31, 2009, our results of operations for the three months and six months ended
February 28, 2010 and 2009, and our cash flows for the six months ended February
28, 2010 and 2009 have been included.  The results of operations for
the three months and six months ended February 28, 2010 may not be indicative of
the results for our fiscal year ending August 31, 2010.





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 and warrants
outstanding using the treasury stock method and the average market price per
share during the period.





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




Three
      Months Ended
              February
      28,
            
            
            Six
      Months Ended
              February
      28,2010
            
            
            2009
            
            
            2010
            
            
            2009Weighted
      average number of shares outstanding – basic
            
            
            22,196,000
            
            
            
            21,850,000
            
            
            
            22,117,000
            
            
            
            21,809,000Dilutive
      effect of stock options and warrants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Weighted
      average number of shares outstanding – diluted
            
            
            22,196,000
            
            
            
            21,850,000
            
            
            
            22,117,000
            
            
            
            21,809,000





No stock
options or warrants are included in the computation of diluted weighted average
number of shares for the three months and six months ended February 28, 2010 and
2009 because the effect would be anti-dilutive.  As of February 28,
2010, we had outstanding options and warrants to purchase a total of
3,394,641 shares of our common stock that could have a future dilutive effect on
the calculation of earnings per share.


6




Note
3.  Fair Value of Financial Instruments





Our
financial instruments currently consist primarily of cash and cash equivalents,
accounts receivable and accounts payable.  We estimate that the fair
value of our cash, accounts receivable and accounts payable at February 28, 2010
and August 31, 2009 does not differ materially from their aggregate carrying
values due to the short-term nature of these financial instruments.





Included
in our cash equivalents at February 28, 2010 and August 31, 2009 are money
market funds of $5,767,203 and $7,672,673, respectively, which are highly liquid
and have a maturity of three months or less.





In
accordance with Financial Accounting Standards Board (FASB) Accounting Standards
CodificationTM (ASC) Topic 820, Fair Value Measurements and
Disclosure, we categorize our financial assets and liabilities that we
measure on a recurring basis into a three-level fair value hierarchy as defined
in the standard.  Our money market funds are the only financial
instruments that we currently measure on a recurring basis.  The
following table summarizes our financial assets measured on a recurring basis as
of February 28, 2010 and August 31, 2009:





Description
            
            Quoted
      Prices in
              Active
      Markets for
              Identical
      Assets (Level 1)
            
            
            Significant
      Other
              Observable
              Inputs
      (Level 2)
            
            
            Significant
              Unobservable
              Inputs
      (Level 3)February
      28, 2010Money
      Market Funds
            
            $
            5,767,203
            
            
            $
            -
            
            
            $
            -August
      31, 2009Money
      Market Funds
            
            $
            7,672,673
            
            
            $
            -
            
            
            $
            -








Note
4.  Inventories





Inventories
consisted of the following:


February
      28,
              2010
            
            
            August
      31,
              2009Parts
      and supplies
            
            $
            1,162,652
            
            
            $
            1,041,355Work-in-process
            
            
            901,659
            
            
            
            555,584Finished
      goods
            
            
            42,817
            
            
            
            257,537Reserve
      for obsolete inventory
            
            
            (60,000
            )
            
            
            (60,000
            )Inventories,
      net
            
            $
            2,047,128
            
            
            $
            1,794,476




7


Note
5.  Property and Equipment





Property
and equipment consisted of the following:




February
      28,
              2010
            
            
            August
      31,
              2009Equipment
            
            $
            1,098,754
            
            
            $
            1,074,364Furniture
      and fixtures
            
            
            298,576
            
            
            
            298,576Leasehold
      improvements
            
            
            24,220
            
            
            
            24,220Building
            
            
            956,000
            
            
            
            956,000Land
            
            
            244,000
            
            
            
            244,0002,621,550
            
            
            
            2,597,160Less
      accumulated depreciation
            
            
            (1,289,907
            )
            
            
            (1,244,776
            )Property
      and equipment, net
            
            $
            1,331,643
            
            
            $
            1,352,384








Note
6.  Stock Offering





On February 11, 2010, we entered into a
placement agency agreement (the “Agency Agreement”) with Roth Capital Partners,
LLC (the “Placement Agent”), pursuant to which the Placement Agent agreed to use
its reasonable efforts to arrange for the sale of up to 1,176,471 shares of our
common stock and warrants to purchase up to 882,354 shares of our common stock
in a registered direct public offering (the “Offering”). The Placement Agent was
entitled to a cash fee of 6.5% of the gross proceeds paid to us for the
securities we would sell in this Offering.  We would also reimburse
the Placement Agent for all reasonable and documented out-of-pocket expenses
that would be incurred by the Placement Agent in connection with the Offering,
which could not exceed the lesser of (i) $75,000, less a $25,000 cash advance
for expenses, or (ii) 8% of the gross proceeds of the Offering, less the
Placement Agent’s placement fee and the $25,000 cash advance for
expenses.





The
Agency Agreement contains customary representations, warranties and covenants by
us. It also provides for customary indemnification by us and the Placement Agent
for losses or damages arising out of or in connection with the sale of the
securities being offered. We agreed to indemnify the Placement Agent against
liabilities under the Securities Act of 1933, as amended.  We also
agreed to contribute to payments the Placement Agent may be required to make in
respect of such liabilities.





Also on
February 11, 2010, we and certain institutional investors entered into a
securities purchase agreement (the “Purchase Agreement”) in connection with the
Offering, pursuant to which we agreed to sell an aggregate of 1,176,471 shares
of our common stock and warrants to purchase a total of 882,354 shares of our
common stock to such investors for aggregate gross proceeds, before deducting
fees to the Placement Agent and other offering expenses payable by us, of
approximately $2 million.  The Offering was effected as a takedown off
our shelf registration statement on Form S-3, which became effective on October
1, 2009.  The common stock and warrants were sold in fixed
combinations, with each combination consisting of one share of common stock and
a warrant to purchase 0.75 shares of common stock.  The purchase price
was $1.70 per fixed combination.  The warrants will become exercisable
six months and one day following the closing date of the Offering and will
remain exercisable for five years thereafter at an exercise price of $2.04 per
share.  The exercise price of the warrants is subject to adjustment in
the case of stock splits, stock dividends, combinations of shares and similar
recapitalization transactions.


8


The
exercisability of the warrants may be limited if, upon exercise, the holder or
any of its affiliates would beneficially own more than 4.9% of our common
stock.





Under the
Purchase Agreement, we have agreed with each of the purchasers that, subject to
certain exceptions, we will not, within the 30 trading days following the
closing of the Offering (which period may be extended in certain circumstances),
enter into any agreement to issue or announce the issuance or proposed issuance
of any securities.





We agreed
with each of the purchasers that while the warrants are outstanding, we will not
effect or enter into an agreement to effect a “Variable Rate Transaction,” which
means a transaction in which we:





·
            issue
      or sell any convertible securities either (A) at a conversion, exercise or
      exchange rate or other price that is based upon and/or varies with the
      trading prices of, or quotations for, the shares of our common stock at
      any time after the initial issuance of such convertible securities, or (B)
      with a conversion, exercise or exchange price that is subject to being
      reset at some future date after the initial issuance of such convertible
      securities or upon the occurrence of specified or contingent events
      directly or indirectly related to our business or the market for our
      common stock, other than pursuant to a customary “weighted average”
      anti-dilution provision; or





·
            enter
      into any agreement (including, without limitation, an equity line of
      credit) whereby we may sell securities at a future determined price (other
      than standard and customary “preemptive” or “participation”
      rights).





We agreed
with each of the purchasers if we issue securities within the 12 months
following the closing of the Offering, the purchasers shall have the right to
purchase all of the securities on the same terms, conditions and price provided
for in the proposed issuance of securities.





We agreed
to indemnify each of the purchasers against certain losses resulting from our
breach of any of our representations, warranties, or covenants under agreements
with each of the purchasers, as well as under certain other circumstances
described in the Purchase Agreement.





We closed
the Offering on February 17, 2010.  The net proceeds to us from the
Offering, after deducting placement agent fees and the offering expenses borne
by us were $1,728,974.








Note
7.  Related Party Transactions




During
the three months ended February 28, 2010 and 2009, we had sales of $13,626 and
$102,328, respectively, to entities controlled by a significant stockholder and
member of the Board of Directors.  These related party transactions
represent approximately 2% and 14% of total sales for each respective
three-month period.




During
the six months ended February 28, 2010 and 2009, we had sales of $166,934 and
$125,496, respectively, to entities controlled by a significant stockholder and
member of the Board of Directors.  These related party transactions
represent approximately 16% and 6% of total sales for each respective six-month
period.




As of
February 28, 2010 and August 31, 2009, receivables included $12,436 and $41,016,
respectively, from these related parties.


9




Note
8.  Stock-Based Compensation





We have
both an employee and director stock incentive plan, which are described more
fully in Note 10 in our 2009 Annual Report on Form 10-K.  As of
February 28, 2010, we had approximately 3,569,000 shares of common stock
reserved for future issuance under the stock incentive plans.




We
account for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock
Compensation.Under the fair value recognition provisions of
this standard, 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
              February
      28,
            
            
            Six
      Months Ended
              February
      28,2010
            
            
            2009
            
            
            2010
            
            
            2009Cost
      of sales
            
            $
            16,365
            
            
            $
            18,429
            
            
            $
            32,730
            
            
            $
            36,858Research
      and development
            
            
            50,015
            
            
            
            48,278
            
            
            
            95,874
            
            
            
            90,607Selling,
      general and administrative
            
            
            235,355
            
            
            
            209,480
            
            
            
            470,710
            
            
            
            421,895Total
            
            $
            301,735
            
            
            $
            276,187
            
            
            $
            599,314
            
            
            $
            549,360





During the six months ended February
28, 2010, we granted 150,000 stock options to an employee with an exercise price
of $1.81 per share and with one fifth vesting each year for the next five
years.  The estimated grant-date fair value per share of these stock
options was $1.10, and our assumptions used in the Black-Scholes valuation model
to determine this estimated fair value are shown below:




Expected
      volatility
            67.20%Expected
      dividends
            0%Expected
      term
            5.7
      YearsRisk-free
      interest rate
            2.51%




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 forfeitures.  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.




Unrecognized
stock-based compensation expense expected to be recognized over the estimated
weighted-average amortization period of 2.58 years is approximately $2,625,000
as of February 28, 2010.


10





A summary
of the time-based stock option awards as of February 28, 2010, and changes
during the six months then ended, is as follows:




Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Weighted-
              Average
              Remaining
              Contract
      Term
              (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at August 31, 2009
            
            
            2,379,087
            
            
            $
            3.54Granted
            
            
            150,000
            
            
            
            1.81Exercised
            
            
            -Forfeited
      or expired
            
            
            (16,800
            )
            
            
            5.47Outstanding
      at February 28, 2010
            
            
            2,512,287
            
            
            $
            3.43
            
            
            7.77Exercisable
      at February 28, 2010
            
            
            1,172,455
            
            
            $
            3.68
            
            
            6.60
            
            $189,236





The aggregate intrinsic value in the
preceding table represents the total pretax intrinsic value, based on our
closing stock price of $1.78 as of February 26, 2010, which would have been
received by the holders of in-the-money options had the option holders exercised
their options as of that date.








Note
9.  Income Taxes





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





Three
      Months Ended
              February
      28,
            
            
            Six
      Months Ended
              February
      28,2010
            
            
            2009
            
            
            2010
            
            
            2009Current
            
            $
            6,571
            
            
            $
            1,255,000
            
            
            $
            6,571
            
            
            $
            1,235,000Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (229,000
            )Total
            
            $
            6,571
            
            
            $
            1,255,000
            
            
            $
            6,571
            
            
            $
            1,006,000





The
current income tax benefit for the three months and six months ended February
28, 2010 represents overpayment of state income taxes for which we will receive
a refund.  The current income tax benefit for the three months and six
months ended February 28, 2009 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 fiscal year 2009 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 in the six months ended February 28, 2009 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.


11


Note
10.  Supplemental Cash Flow Information





We paid no amounts for interest expense
during the six months ended February 28, 2010 and 2009.  We paid $0
and $10,561 for income taxes during the six months ended February 28, 2010 and
2009.





During the six months ended February
28, 2010, we had no non-cash financing and investing activities.





During the six months ended February
28, 2009, we had the following non-cash financing and investing
activities:





·
            Increased
      other comprehensive loss and decreased investments by
      $4,415,083.





·
            Increased
      common stock and decreased additional paid-in capital by
    $465.





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








Note
11.  Recent Accounting Pronouncements





Effective
July 1, 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a
Replacement of FASB Statement No. 162. The FASB Codification became the
source of authoritative U.S. generally accounting principles (GAAP) recognized
by the FASB to be applied to nongovernmental entities.  Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants.  On the effective date of this Statement, the
Codification superseded all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification became nonauthoritative.  This
statement was effective for financial statements issued for interim and annual
periods ending after September 15, 2009, or our quarter ended November 30,
2009.  Accounting Standards Updates (ASU) are now issued for changes
to the FASB Codification for new GAAP promulgated by the FASB, amendments to the
SEC content in the FASB Codification, as well as for editorial
changes.





ASU 2009-13, Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements – a Consensus of the FASB Emerging
Issues Task Force,was issued in October 2009.  This ASU
establishes a selling price hierarchy for allocating the sales price of a
multiple element arrangement and eliminates the residual method of
allocation.  The ASU will require that a vendor determine its best
estimate of selling price in a manner that is consistent with that used to
determine the price to sell the deliverable on a standalone
basis.  The ASU significantly expands the disclosures related to a
vendor’s multiple-deliverable revenue arrangements.  The guidance will
be effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010.  Early
adoption is permitted.  We currently are unable to determine what
impact the future application of this pronouncement may have on our financial
statements.





ASU 2009-14, Software (Topic 985) – Certain
Revenue Arrangements That Include Software Elements – a Consensus of the FASB
Emerging Issues Task Force, was issued in October 2009.  This
ASU provides guidance on allocating and measuring revenue when vendors sell or
lease tangible products in an arrangement that contains software that is more
than incidental to the tangible product as a whole.  The ASU requires
that hardware components of a tangible product would be excluded from the scope
of the software revenue guidance and clarifies that if the software contained in
the tangible product is essential to the tangible product’s functionality, the
software is excluded from the scope of the software revenue
guidance.  The guidance will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, or our fiscal year beginning September 1,
2010.  Early adoption is permitted.  We currently are unable
to determine what impact the future application of this pronouncement may have
on our financial statements.


12




Note
12.  Subsequent Events





We have evaluated events occurring
after the date of our accompanying balance sheets through the date of the filing
of this Quarterly Report on Form 10-Q.  We did not identify any
material subsequent events requiring adjustment to our accompanying condensed
financial statement.









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




Commercialization
of our systems that are used to treat cancer is our most immediate business
objective.  Current and future cancer treatment sites for our systems
may include cancers of the prostate, breast, head, neck, bladder, cervix,
colon/rectum, ovarian, esophagus, liver, kidney, brain, bone, stomach and
lung.  Our cancer treatment systems have been used to treat thousands
of patients throughout the world and
have received many awards, including the Frost & Sullivan “Technology
Innovation of the Year Award” for cancer therapy devices awarded for the
development of the BSD-2000.  Although
we have not entered most of these markets, we also believe that our technology
has application for a number of other medical purposes in addition to
cancer.




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 (removes or vaporizes) soft tissues at high temperatures
      through focused microwave energy.




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




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




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




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




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




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


15




In March
2010, we filed a 510(k) submission with the FDA for premarket clearance of the
MTX-180.  Clearance from the FDA of the 510(k) premarket notification
submission will authorize commercial distribution of the MTX-180 in the United
States.  We are currently unable to predict when the FDA review
process will be completed and its ultimate outcome.




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




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




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




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




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


16





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




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




Our FDA
submission requesting PMA for the BSD 2000 that was filed on March 28, 2006 was
placed on hold until the HUD designation was granted by the FDA.  Once
the HUD designation was granted and the HDE was filed, per FDA regulations, we
withdrew the PMA submission.   We can decide to pursue PMA for
the BSD-2000 at a future date.




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




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


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 PMA application for the
BSD-2000/3D.  However, we have obtained the CE Mark necessary to
export the BSD-2000/3D to certain European countries and other countries
requiring CE Mark certification.




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




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




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




Marketing and
Distribution




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




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




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




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


18


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.




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 February 28, 2010
and August 31, 2009, we had no investments, but had cash and cash equivalents
comprised primarily of money market funds.  Prior to the liquidation
of all our mutual funds in March and May 2009, our investments consisted
primarily of a highly liquid, managed portfolio of mutual funds, and were all
considered available-for-sale securities.  The investments were
carried at fair value based on quoted market prices, with net unrealized gains
and losses
reported as other comprehensive income (loss) in stockholders’ equity in our
balance sheets.  Realized gains and losses are included in our
statements of operations.


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 ASC Topic 718, 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




We
recognize revenue from the sale of our hyperthermia cancer treatment systems and
related parts and accessories (collectively, product sales), the sale of
consumable devices used with certain of our systems, training, service support
contracts and other miscellaneous revenues.  Our revenues can
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of hyperthermia systems, the sales
price of each being substantial enough to greatly impact revenue levels in the
periods in which they occur.  Sales of a few systems, particularly
BSD-2000/3D/MR systems, can cause a large change in our revenues from period to
period and the sales cycle for our systems generally extends over multiple
financial reporting periods.  In addition, differences in the
configuration of the systems sold, pricing, and other factors can result in
significant differences in the sales price per system and in the total revenues
reported in a given period.  As a result, there may be quarterly
financial reporting periods where we may report no or minimal revenues from the
sale of hyperthermia systems.  Through February 28, 2010, we have not
had any sales of our MTX-180 system.




To date,
hyperthermia therapy has not gained wide acceptance by cancer-treating
physicians.  We believe this is due in part to the lingering
impression created by the inability of early hyperthermia therapy technologies
to focus and control heat directed at specific tissue locations and conclusions
drawn in early scientific studies that hyperthermia was only marginally
effective.  Additionally, we do not believe that reimbursement rates
from third-party payers have been adequate to promote hyperthermia therapy
acceptance in the medical community.




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




Political,
economic and regulatory influences are subjecting the U.S. healthcare industry
to fundamental changes.  We may continue to face significant
uncertainty in the industry due to recent governmental healthcare
reform.  We believe the uncertainties regarding the ultimate features
of reform initiatives and their enactment and implementation may also have an
adverse effect on our customers’ purchasing decisions regarding our products and
services.




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




Three
      Months Ended
              February
      28,
            Six
      Months Ended
              February
      28,2010
            2009
            2010
            2009BSD-500
            1
            1
            2
            4BSD-2000
            2
            1
            2
            3BSD-2000/3D
            -
            -
            -
            -BSD-2000/3D/MR
            -
            -
            -
            -Total
            3
            2
            4
            7





We have
historically derived a substantial portion of our revenues from sales to related
parties.  All of the related party revenue was for the sale of
hyperthermia systems and related component parts and services
sold to Medizin-Technik GmbH and Dr. Gerhard Sennewald.  Dr.
Sennewald, one of our directors and significant stockholders, is a stockholder,
executive officer and a director of Medizin-Technik GmbH.  We derived
$13,626, or approximately 2%, of our total revenue in the three months ended
February 28, 2010 from sales to related parties, as compared to $102,328 or
approximately 14%, in the three months ended February 28, 2009, and $166,934 or
approximately 16% in the six months ended February 28, 2010 as compared to
$125,496 or 6% in the six months ended February 28,
2009.


21




In the
three months ended February 28, 2010, we derived $586,448, or approximately 98%,
of our total revenue from non-related parties, as compared to $627,701, or
approximately 86%, in the three months ended February 28, 2009, and $859,343 or
approximately 84% in the six months ended February 28, 2010 as compared to
$1,836,097 or approximately 94% in the six months ended February 28,
2009.




The
following tables summarize the sources of our revenues for the respective
reporting periods:




Three
      Months Ended
              February
      28,
            
            
            Six
      Months Ended
              February
      28,Non-Related
      Parties
            
            2010
            
            
            2009
            
            
            2010
            
            
            2009Product
      sales
            
            $
            550,440
            
            
            $
            610,000
            
            
            $
            795,440
            
            
            $
            1,789,040Consumable
      devices
            
            
            4,200
            
            
            
            -
            
            
            
            4,200
            
            
            
            2,402Service
      contracts
            
            
            29,221
            
            
            
            14,701
            
            
            
            52,806
            
            
            
            30,343Other
            
            
            2,587
            
            
            
            3,000
            
            
            
            6,897
            
            
            
            14,312Total
            
            $
            586,448
            
            
            $
            627,701
            
            
            $
            859,343
            
            
            $
            1,836,097Related
      PartiesProduct
      sales
            
            $
            -
            
            
            $
            65,839
            
            
            $
            110,175
            
            
            $
            65,839Consumable
      devices
            
            
            8,250
            
            
            
            8,250
            
            
            
            16,500
            
            
            
            27,713Service
      contracts
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
            
            
            5,376
            
            
            
            28,239
            
            
            
            40,259
            
            
            
            31,944Total
            
            $
            13,626
            
            
            $
            102,328
            
            
            $
            166,934
            
            
            $
            125,496







Total
revenues for the three months ended February 28, 2010 were $600,074 compared to
$730,029 for the three months ended February 28, 2009, a decrease of $129,955,
or approximately 18%.  Total revenues for the six months ended
February 28, 2010 were $1,026,277 compared to $1,961,593 for the six months
ended February 28, 2009, a decrease of $935,316, or approximately
48%.  The overall decrease in revenues in the second quarter of the
current fiscal year compared to the same quarter last fiscal year is due
primarily to a significant decrease in non-related party sales.  We
had no sales of hyperthermia systems to related parties in the three months and
six months ended February 28, 2010 and 2009.  We sold three
hyperthermia systems in the three months ended February 28, 2010 to non-related
parties compared to two hyperthermia systems in the three months ended February
28, 2009.  We sold four hyperthermia systems in the six months ended
February 28, 2010 to non-related parties compared to seven hyperthermia systems
in the six months ended February 28, 2009.  This decrease in number of
hyperthermia systems sold on a year-to-date basis in the current year accounts
for the decrease in total revenues on a year-to-date basis compared to the same
period last fiscal year.




Gross
Profit




Our gross profit and gross profit
percentage will fluctuate from period to period depending on the mix of revenues
reported for the period and the type and configuration of the hyperthermia
systems sold during
the period.  Our total gross profit was $71,464, or 12% of total
sales, for the three months ended February 28, 2010, and $278,250, or 38%, for
the three months ended February 28, 2009.  Our total gross profit was
$120,300, or 12% of total sales, for the six months ended February 28, 2010, and
$887,162, or 45%, for the six months ended February 28, 2009.  The
decrease in gross profit in the current fiscal year primarily resulted from the
decrease in product sales, for which our gross profit is higher than our other
sources of revenue.  In addition, as our sales volume decreases, we
believe we are unable to fully absorb certain fixed manufacturing costs that are
included in cost of sales, thus decreasing our gross profit
percentage.


22




Operating
Costs and Expenses:




Cost of
Sales – Cost of sales include raw material, labor and allocated overhead
costs.  We calculate and report separately cost of sales for both
non-related and related party sales, which are sales to Medizin-Technik and Dr.
Sennewald.  Cost of sales as a percentage of sales will fluctuate from
period to period depending on the mix of sales for the period and the type and
configuration of the hyperthermia systems sold during the
period.  Total cost of sales for the three months ended February 28,
2010 was $528,610 compared to $451,779 for the three months ended February 28,
2009, an increase of $76,831, or 17%.  This increase resulted
primarily from the sale of one more hyperthermia system in the second quarter of
the current fiscal year compared to the same period last fiscal
year.  Total cost of sales for the six months ended February 28, 2010
was $905,977 compared to $1,074,431 for the six months ended February 28, 2009,
a decrease of $168,454, or 16%.  This decrease resulted primarily from
the sale of fewer hyperthermia systems in the first six months of the current
fiscal year compared to the same period last fiscal year.  As
discussed above, in total, we sold three fewer hyperthermia systems in the six
months ended February 28, 2010 than we did in the six months ended February 28,
2009.




Research and
Development Expenses – Research and development expenses include
expenditures for new product development and development of enhancements to
existing products.  Research and development expenses were $621,201
for the three months ended February 28, 2010 compared to $426,918, for the three
months ended February 28, 2009, an increase of $194,283, or approximately
46%.  Research and development expenses were $1,164,628 for the six
months ended February 28, 2010 compared to $934,141, for the six months ended
February 28, 2009, an increase of $230,487, or approximately 25%.  The
increase in research and development expenses in the current fiscal year is due
to our continuing efforts to develop an advanced generation of the microwave
ablation system, software improvements to enhance the utility of the BSD-500 and
BSD-2000 systems, possible market expansion of our current products into other
cancer and non-cancerous indications, and other enhancements to our current
products and the development of new products.




Selling, General
and Administrative Expenses – Our selling, general and administrative
expenses were $1,376,344 for the three months ended February 28, 2010 compared
to $1,500,272 for the three months ended February 28, 2009, a decrease of
$123,928, or approximately 8%.  Our selling, general and
administrative expenses were $2,835,739 for the six months ended February 28,
2010 compared to $3,010,579 for the six months ended February 28, 2009, a
decrease of $174,840, or approximately 6%.  The decrease in selling,
general and administrative expenses in the current year is due primarily to
decreases in professional fees and sales salaries, partially offset by increases
in board compensation and non-cash stock option expenses.




Other
Income (Expense) and Income Tax Provision




Interest and
Investment Income – Interest and investment income was $1,091 for the
three months ended February 28, 2010 compared to $263,835 for the three months
ended February 28, 2009, and $4,300 for the six months ended February 28, 2010
compared to $522,567 for the six months ended February 28, 2009.  The
decrease in interest and investment income in the current fiscal year resulted
primarily from lower levels of cash and investments compared to the prior fiscal
years.  The proceeds from the
sale of our mutual funds in March and May 2009 have been deposited in money
market funds.  Therefore, we anticipate that our interest and
investment income for the foreseeable future will be substantially less than
previously earned on our mutual funds, but we believe we have significantly
reduced the exposure to our funds of market
fluctuations.


23




Realized Loss on
Investments – We sold 100% of our investments in mutual funds in March
and May 2009, resulting in a total realized loss of
$6,501,568.  Accordingly, we concluded that the portion of the
unrealized loss at February 28, 2009 attributed to the investments sold was
other than temporary.  We recognized a loss on investments of
$4,375,587 for the three months and six months ended February 28,
2009.  We had no realized loss on investments in the current fiscal
year.




Income Tax
Benefit – The income tax (provision) benefit consisted of the
following:





Three
      Months Ended
              February
      28,
            
            
            Six
      Months Ended
              February
      28,2010
            
            
            2009
            
            
            2010
            
            
            2009Current
            
            $
            6,571
            
            
            $
            1,255,000
            
            
            $
            6,571
            
            
            $
            1,235,000Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (229,000
            )Total
            
            $
            6,571
            
            
            $
            1,255,000
            
            
            $
            6,571
            
            
            $
            1,006,000





The
current income tax benefit for the three months and six months ended February
28, 2010 represents overpayment of state income taxes for which we will receive
a refund.  The current income tax benefit for the three months and six
months ended February 28, 2009 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 fiscal year 2009 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 in the six months ended February 28, 2009 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.





Fluctuation
in Operating Results




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




Liquidity and Capital
Resources




Since
inception through February 28, 2010, we have generated an accumulated deficit of
$20,540,840 where generally 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 February 28, 2010, we had
cash and cash equivalents of $5,854,697, comprised primarily of money market
funds.  In addition, we collected substantially all of the income tax
receivable of $1,417,006 in March 2010.


24




During
the six months ended February 28, 2010, we used cash of $3,626,926 in operating
activities, primarily as a result of our net loss of $3,866,718, decreased by
non cash expenses totaling $670,284, including depreciation and amortization,
and stock-based compensation.  Net cash used in operating activities
also included increases in receivables of $175,197, income tax receivable of
$1,248, inventories of $252,652, and other current assets of $3,971 and a
decrease in accrued liabilities of $159,659, partially offset by increases in
accounts payable of $98,324 and deferred revenue of $63,911.




By
comparison, net cash used in operating activities was $1,044,665 during the six
months ended February 28, 2009, primarily as a result of our net loss of
$5,968,352 decreased by non cash expenses totaling $5,029,208, including
depreciation and amortization, stock-based compensation, stock issued for
services and realized loss on investments.  Net cash used in operating
activities also included increases in income tax receivable of $99,454 and
inventories of $287,360, and decreases in accounts payable of $14,272, accrued
liabilities of $16,047, customer deposits of $197,669 and deferred revenue of
$23,008, partially offset by decreases in receivables of $462,173 and other
current assets of $70,116.




Net cash
used in investing activities for the six months ended February 28, 2010 was
$39,289, resulting from the purchase of property and equipment.  For
the six months ended February 28, 2009, net cash used by investing activities
was $58,875, resulting from the purchase of property and equipment of $22,340
and the purchase of investments of $36,535.




Net cash
provided by financing activities for the six months ended February 28, 2010 was
$1,728,974 consisting of the net proceeds from the sale of common
stock.  No net cash was provided by or used in financing activities
for the six months ended February 28, 2009.




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




We
believe that our current cash and cash equivalents, income tax refunds
receivable and projected sales 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, or
our sales are less than projected, we would need to obtain additional
financing.  Due to adverse conditions in the global financial markets,
we cannot be certain that any financing will be available when needed or will be
available on terms acceptable to us.  If we raise equity capital, our
stockholders will be diluted.  Insufficient funds may require us to
delay, scale back or eliminate some or all of our programs designed to
facilitate the commercial introduction of our systems or entry into new
markets.




Stock
Offering




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


25




On
February 11, 2010, we entered into a placement agency agreement (the “Agency
Agreement”) with Roth Capital Partners, LLC (the “Placement Agent”), pursuant to
which the Placement Agent agreed to use its reasonable efforts to arrange for
the sale of up to 1,176,471 shares of our common stock and warrants to purchase
up to 882,354 shares of our common stock in a registered direct public offering
(the “Offering”). The Placement Agent was entitled to a cash fee of 6.5% of the
gross proceeds paid to us for the securities we would sell in this
Offering.  We would also reimburse the Placement Agent for all
reasonable and documented out-of-pocket expenses that would be incurred by the
Placement Agent in connection with the Offering, which could not exceed the
lesser of (i) $75,000, less a $25,000 cash advance for expenses, or (ii) 8% of
the gross proceeds of the Offering, less the Placement Agent’s placement fee and
the $25,000 cash advance for expenses.





The
Agency Agreement contains customary representations, warranties and covenants by
us. It also provides for customary indemnification by us and the Placement Agent
for losses or damages arising out of or in connection with the sale of the
securities being offered. We agreed to indemnify the Placement Agent against
liabilities under the Securities Act of 1933, as amended.  We also
agreed to contribute to payments the Placement Agent may be required to make in
respect of such liabilities.





Also on
February 11, 2010, we and certain institutional investors entered into a
securities purchase agreement (the “Purchase Agreement”) in connection with the
Offering, pursuant to which we agreed to sell an aggregate of 1,176,471 shares
of our common stock and warrants to purchase a total of 882,354 shares of our
common stock to such investors for aggregate gross proceeds, before deducting
fees to the Placement Agent and other offering expenses payable by us, of
approximately $2 million.  The Offering was effected as a takedown off
our shelf registration statement on Form S-3.  The common stock and
warrants were sold in fixed combinations, with each combination consisting of
one share of common stock and a warrant to purchase 0.75 shares of common
stock.  The purchase price was $1.70 per fixed
combination.  The warrants will become exercisable six months and one
day following the closing date of the Offering and will remain exercisable for
five years thereafter at an exercise price of $2.04 per share.  The
exercise price of the warrants is subject to adjustment in the case of stock
splits, stock dividends, combinations of shares and similar recapitalization
transactions.





The
exercisability of the warrants may be limited if, upon exercise, the holder or
any of its affiliates would beneficially own more than 4.9% of our common
stock.





Under the
Purchase Agreement, we have agreed with each of the purchasers that, subject to
certain exceptions, we will not, within the 30 trading days following the
closing of the Offering (which period may be extended in certain circumstances),
enter into any agreement to issue or announce the issuance or proposed issuance
of any securities.





We agreed
with each of the purchasers that while the warrants are outstanding, we will not
effect or enter into an agreement to effect a “Variable Rate Transaction,” which
means a transaction in which we:





·
            issue
      or sell any convertible securities either (A) at a conversion, exercise or
      exchange rate or other price that is based upon and/or varies with the
      trading prices of, or quotations for, the shares of our common stock at
      any time after the initial issuance of such convertible securities, or (B)
      with a conversion, exercise or exchange price that is subject to being
      reset at some future date after the initial issuance of such convertible
      securities or upon the occurrence of specified or contingent events
      directly or indirectly related to our business or the market for our
      common stock, other than pursuant to a customary “weighted average”
      anti-dilution provision; or





·
            enter
      into any agreement (including, without limitation, an equity line of
      credit) whereby we may sell securities at a future determined price (other
      than standard and customary “preemptive” or “participation”
      rights).




26





We agreed
with each of the purchasers if we issue securities within the 12 months
following the closing of the Offering, the purchasers shall have the right to
purchase all of the securities on the same terms, conditions and price provided
for in the proposed issuance of securities.





We agreed
to indemnify each of the purchasers against certain losses resulting from our
breach of any of our representations, warranties, or covenants under agreements
with each of the purchasers, as well as under certain other circumstances
described in the Purchase Agreement.





We closed
the Offering on February 17, 2010.  The net proceeds to us from the
Offering, after deducting placement agent fees and the offering expenses borne
by us were $1,728,974.





As of
February 28, 2010, we had no significant commitments for the purchase of
property and equipment.





We had no
off balance sheet arrangements as of February 28, 2010.




Recent Accounting
Pronouncements




Effective
July 1, 2009, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a
Replacement of FASB Statement No. 162. The FASB Codification became the
source of authoritative U.S. generally accounting principles (GAAP) recognized
by the FASB to be applied to nongovernmental entities.  Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants.  On the effective date of this Statement, the
Codification superseded all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification became nonauthoritative.  This
statement was effective for financial statements issued for interim and annual
periods ending after September 15, 2009, or our quarter ended November 30,
2009.  Accounting Standards Updates (ASU) are now issued for changes
to the FASB Codification for new GAAP promulgated by the FASB, amendments to the
SEC content in the FASB Codification, as well as for editorial
changes.





ASU 2009-13, Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements – a Consensus of the FASB Emerging
Issues Task Force,was issued in October 2009.  This ASU
establishes a selling price hierarchy for allocating the sales price of a
multiple element arrangement and eliminates the residual method of
allocation.  The ASU will require that a vendor determine its best
estimate of selling price in a manner that is consistent with that used to
determine the price to sell the deliverable on a standalone
basis.  The ASU significantly expands the disclosures related to a
vendor’s multiple-deliverable revenue arrangements.  The guidance will
be effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010.  Early
adoption is permitted.  We currently are unable to determine what
impact the future application of this pronouncement may have on our financial
statements.





ASU 2009-14, Software (Topic 985) – Certain
Revenue Arrangements That Include Software Elements – a Consensus of the FASB
Emerging Issues Task Force, was issued in October 2009.  This
ASU provides guidance on allocating and measuring revenue when vendors sell or
lease tangible products in an
arrangement that contains software that is more than incidental to the tangible
product as a whole.  The ASU requires that hardware components of a
tangible product would be excluded from the scope of the software revenue
guidance and clarifies that if the software contained in the tangible product is
essential to the tangible product’s functionality, the software is excluded from
the scope of the software revenue guidance.  The guidance will be
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, or our fiscal year
beginning September 1, 2010.  Early adoption is
permitted.  We currently are unable to determine what impact the
future application of this pronouncement may have on our financial
statements.


27




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 MTX-180
systems;




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




·
            our
      expectations about the impact on our financial statements resulting from
      the implementation of recent accounting
  pronouncements;




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




·
            our
      belief that the prospects for increased sales in China represents one of
      our greatest business
opportunities;




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




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




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




·
            our
      belief that postponing market entry of the MTX-180 until completion of the
      Phase II design will allow us to enter the market with an optimized system
      that will have a wider range of applications and increased revenue
      streams;




·
            our
      expectations about when the MTX-180 will be ready to market and when
      revenues from the sale of the MTX-180 and related applicators will
      begin;




28


·
            our
      expectations that the disposable applicator to be used in conjunction with
      the MTX-180 represents a significant ongoing revenue
    stream;




·
            our
      expectations regarding FDA approvals relating to the BSD-2000 system and
      the MTX-180;




·
            our
      belief that as sales volume increases (decreases) we will increase
      (decrease) our gross profits percentage because certain fixed
      manufacturing costs are included in our cost of
  sales;




·
            our
      intentions to continue to devote substantial sums to research and
      development;




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




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




·
            our
      belief that our operating results, revenue, and operating expenses may
      fluctuate in the future from year to year as well as from quarter to
      quarter; and




·
            our
      belief that our current cash and cash equivalents, income tax refunds
      receivable, and projected sales will be sufficient to finance our
      operations 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, 2009 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.




29





Item
3.   Quantitative and Qualitative Disclosures About Market
Risk




We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 (Exchange Act) and are not required to provide the information
required under this item.








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 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.


30





PART
II – OTHER INFORMATION




Item
1A.   Risk Factors




The risk
factor set forth below updates and should be read together with the risk factors
reported in our Annual Report on Form 10-K for the year ended August 31,
2009.




In March
2010, Congress passed sweeping healthcare reform in the Patient Protection and
Affordable Care Act.  We have not been able to assess the impact of
the legislation on the Company, but it could result in new taxes on revenues for
medical device companies and impact the utilization and reimbursement of our
products.  Our results of operations, our financial position and cash
flows could be materially adversely affected by changes under the new
legislation or under any federal or state healthcare legislation adopted in the
future.




Item
5.  Other Information




The
annual meeting of shareholders of the Company was held on February 3,
2010.  The shareholders voted, either in person or by proxy, on the
following proposals.  The directors listed below were elected, and the
other proposals submitted to a vote of the shareholders were approved, with the
results of the shareholder vote as follows:




1
            The
      following seven directors were elected to hold office until the next
      annual meeting or until their successors are duly elected and
      qualified:





Votes
      For
            
            Votes
              Withheld
            
            Total
      Voted
            
            Broker
              Non-VotesTimothy
      C. McQuay
            10,172,226
            
            108,629
            
            10,280,855
            
            5,797,663Harold
      R. Wolcott
            9,705,989
            
            574,866
            
            10,280,855
            
            5,797,663Paul
      F. Turner
            9,679,995
            
            600,860
            
            10,280,855
            
            5,797,663Gerhard
      W. Sennewald
            9,715,573
            
            565,282
            
            10,280,855
            
            5,797,663Michael
      Nobel
            10,178,526
            
            102,329
            
            10,280,855
            
            5,797,663Douglas
      P. Boyd
            10,179,616
            
            101,239
            
            10,280,855
            
            5,797,663Steven
      G. Stewart
            10,176,587
            
            104,268
            
            10,280,855
            
            5,797,663





2.
            To
      approve the amendment and restatement of the Third Amended and Restated
      1998 Director Stock Plan:





For
            9,901,980Against
            261,479Abstain
            117,396Broker
      Non-Votes
            5,797,663





3.
            To
      approve the amendment and restatement of the Second Amended and Restated
      1998 Stock Incentive Plan:





For
            9,387,938Against
            773,921Abstain
            118,996Broker
      Non-Votes
            5,797,663





4.
            To
      ratify the selection of Tanner LC as the Company’s independent registered
      public accountants for the fiscal year ending August 31,
    2010:




For
              15,926,415Against
              126,708Abstain
              25,395




31




5.
            To
      transact such other business as may properly come before the Annual
      Meeting or any adjournment or postponement
  thereof:





For
            15,135,604Against
            860,142Abstain
            82,771






Item
6.  Exhibits




The
following exhibits are filed as part of this report:




Exhibit
      No.
            
            Description
      of Exhibit1.1
            
            Placement
      Agency Agreement, dated as of February 11, 2010, by and among BSD Medical
      Corporation and Roth Capital Partners, LLC.  Incorporated by
      reference to Exhibit 1.1 to the BSD Medical Corporation Form 8-K, filed
      February 11, 2010.4.1
            
            Form
      of Common Stock Purchase Warrant.  Incorporated by reference to
      Exhibit 4.1 to the BSD Medical Corporation Form 8-K, filed February 11,
      2010.10.1
            
            BSD
      Medical Corporation Fourth Amended and Restated 1998 Director Stock Plan.
      Incorporated by reference to Appendix A to the BSD Medical Corporation
      Schedule 14A, filed December 28, 2009.10.2
            
            BSD
      Medical Corporation Third Amended and Restated 1998 Stock Incentive Plan.
      Incorporated by reference to Appendix B to the BSD Medical Corporation
      Schedule 14A, filed December 28, 2009.10.3
            
            Securities
      Purchase Agreement, dated as of February 11, 2010, by and between BSD
      Medical Corporation and each of the purchasers identified on the signature
      pages thereto.  Incorporated by reference to Exhibit 10.1 to the
      BSD Medical Corporation Form 8-K, filed February 11,
  2010.31.1
            
            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




32


SIGNATURES








Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




BSD
      MEDICAL CORPORATIONDate:    April
      13, 2010
            /s/
      Harold R. WolcottHarold
      R. WolcottPresident
      (Principal Executive Officer)Date:    April
      13, 2010
            /s/
      Dennis P. GaugerDennis
      P. GaugerChief
      Financial Officer (Principal Accounting
Officer)








33