UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM 10-Q





(Mark
One)





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





For
the quarterly period ended November 30, 2009





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





For
the transition period from ___________ to __________





Commission
File No. 001-32526









BSD
Medical Corporation


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
            
            75-1590407(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)2188
      West 2200 SouthSalt
      Lake City, Utah 84119(Address
      of principal executive offices, including zip code)(801)
      972-5555(Registrant’s
      telephone number, including area
code)





Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes ý  No o





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes o  No o





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


Large
      accelerated filer o
            Accelerated
      filer 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
January 14, 2010, there were 22,039,301 shares of the Registrant’s common stock,
$0.001 par value per share, outstanding.





BSD
MEDICAL CORPORATION


FORM
10-Q





FOR
THE QUARTER ENDED NOVEMBER 30, 2009








PART
      I - Financial InformationItem
      1.
            Financial
      Statements (Unaudited)Condensed
      Balance Sheets
            3Condensed
      Statements of Operations
            4Condensed
      Statements of Cash Flows
            5Notes
      to Condensed Financial Statements
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            11Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            24Item
      4.
            Controls
      and Procedures
            24PART
      II - Other InformationItem
      1A.
            Risk
      Factors
            25Item
      6.
            Exhibits
            25Signatures
            
            26







2


PART
I - FINANCIAL INFORMATION





Item
1.  Financial Statements




BSD
MEDICAL CORPORATION


Condensed
Balance Sheets


(Unaudited)





ASSETS
            
            November
      30,
              2009
            
            August
      31,
              2009Current
      assets:Cash
      and cash equivalents
            
            $
            5,933,675
            
            
            $
            7,791,938Accounts
      receivable, net of allowance for doubtful accounts of
    $20,000
            
            
            135,800
            
            
            
            289,617Related
      party trade accounts receivable
            
            
            152,560
            
            
            
            41,016Income
      tax receivable
            
            
            1,415,758
            
            
            
            1,415,758Inventories,
      net
            
            
            2,042,627
            
            
            
            1,794,476Other
      current assets
            
            
            143,157
            
            
            
            94,536Total
      current assets
            
            
            9,823,577
            
            
            
            11,427,341Property
      and equipment, net
            
            
            1,335,259
            
            
            
            1,352,384Patents,
      net
            
            
            72,163
            
            
            
            77,633$
            11,230,999
            
            
            $
            12,857,358LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            367,575
            
            
            $
            226,905Accrued
      liabilities
            
            
            393,696
            
            
            
            548,079Deferred
      revenue – current portion
            
            
            57,039
            
            
            
            67,851Total
      current liabilities
            
            
            818,310
            
            
            
            842,835Deferred
      revenue – net of current portion
            
            
            120,694
            
            
            
            73,534Total
      liabilities
            
            
            939,004
            
            
            
            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, 22,039,301 shares
      issued
            
            
            22,040
            
            
            
            22,040Additional
      paid-in capital
            
            
            28,890,884
            
            
            
            28,593,305Treasury
      stock, 24,331 shares at cost
            
            
            (234
            )
            
            
            (234
            )Accumulated
      deficit
            
            
            (18,620,695
            )
            
            
            (16,674,122
            )Total
      stockholders’ equity
            
            
            10,291,995
            
            
            
            11,940,989$
            11,230,999
            
            
            $
            12,857,358See
      accompanying notes to condensed financial
  statements


3





BSD
MEDICAL CORPORATION


Condensed
Statements of Operations


(Unaudited)





Three
      Months Ended
              November
      30,2009
            
            2008Revenues:Sales
            
            $
            272,895
            
            
            $
            1,208,396Sales
      to related parties
            
            
            153,308
            
            
            
            23,168Total
      revenues
            
            
            426,203
            
            
            
            1,231,564Operating
      costs and expenses:Cost
      of sales
            
            
            226,520
            
            
            
            600,480Cost
      of related party sales
            
            
            150,847
            
            
            
            22,172Research
      and development
            
            
            543,427
            
            
            
            507,223Selling,
      general and administrative
            
            
            1,459,395
            
            
            
            1,510,307Total
      operating costs and expenses
            
            
            2,380,189
            
            
            
            2,640,182Loss
      from operations
            
            
            (1,953,986
            )
            
            
            (1,408,618
            )Other
      income (expense):Interest
      and investment income
            
            
            3,209
            
            
            
            258,732Other
      income (expense)
            
            
            4,204
            
            
            
            (34,259
            )Total
      other income (expense)
            
            
            7,413
            
            
            
            224,473Loss
      before income taxes
            
            
            (1,946,573
            )
            
            
            (1,184,145
            )Income
      tax provision
            
            
            -
            
            
            
            (249,000
            )Net
      loss
            
            
            (1,946,573
            )
            
            
            (1,433,145
            )Other
      comprehensive loss - increase in unrealized loss on
      investments,  net of income tax
            
            
            -
            
            
            
            (4,391,565
            )Net
      comprehensive loss
            
            $
            (1,946,573
            )
            
            $
            (5,824,710
            )Net
      loss per common share:Basic
            
            $
            (0.09
            )
            
            $
            (0.07
            )Diluted
            
            $
            (0.09
            )
            
            $
            (0.07
            )Weighted
      average number of shares outstanding:Basic
            
            
            22,039,000
            
            
            
            21,769,000Diluted
            
            
            22,039,000
            
            
            
            21,769,000See
      accompanying notes to condensed financial statements




4





BSD
MEDICAL CORPORATION


Condensed
Statements of Cash Flows


(Unaudited)





Three
      Months Ended
              November
      30,2009
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (1,946,573
            )
            
            $
            (1,433,145
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            35,774
            
            
            
            33,276Stock-based
      compensation
            
            
            297,579
            
            
            
            273,173Stock
      issued for services
            
            
            -
            
            
            
            37,500Decrease
      (increase) in:Receivables
            
            
            42,273
            
            
            
            40,712Income
      tax receivable
            
            
            -
            
            
            
            249,000Inventories
            
            
            (248,151
            )
            
            
            (236,241
            )Other
      current assets
            
            
            (48,621
            )
            
            
            24,506Increase
      (decrease) in:Accounts
      payable
            
            
            140,670
            
            
            
            309,068Accrued
      liabilities
            
            
            (154,383
            )
            
            
            (86,433
            )Customer
      deposits
            
            
            -
            
            
            
            (119,729
            )Deferred
      revenue
            
            
            36,348
            
            
            
            (8,307
            )Net
      cash used in operating activities
            
            
            (1,845,084
            )
            
            
            (916,620
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (13,179
            )
            
            
            (18,185
            )Purchase
      of investments
            
            
            -
            
            
            
            (216,638
            )Net
      cash used in investing activities
            
            
            (13,179
            )
            
            
            (234,823
            )Cash
      flows from financing activities
            
            
            -
            
            
            
            -Net
      decrease in cash and cash equivalents
            
            
            (1,858,263
            )
            
            
            (1,151,443
            )Cash
      and cash equivalents, beginning of period
            
            
            7,791,938
            
            
            
            1,394,652Cash
      and cash equivalents, end of period
            
            $
            5,933,675
            
            
            $
            243,209See
      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
November 30, 2009 and for the three months ended November 30, 2009 and 2008 is
unaudited, and the condensed balance sheet as of August 31, 2009 is derived from
audited financial statements.  The accompanying unaudited condensed
balance sheets of the Company as of November 30, 2009 and August 31, 2009, the
related unaudited condensed statements of operations and of cash flows for the
three months ended November 30, 2009 and 2008 have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
reporting and pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”).  The condensed financial statements
do not include all of the information and 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 November 30, 2009 and August
31, 2009, and our results of operations and our cash flows for the three months
ended November 30, 2009 and 2008 have been included.  The results of
operations for the three months ended November 30, 2009 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 outstanding
using the treasury stock method and the average market price per share during
the period.





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





Three
      Months Ended
              November
      30,2009
            
            2008Weighted
      average number of shares outstanding – basic
            
            
            22,039,000
            
            
            
            21,769,000Dilutive
      effect of stock options
            
            
            -
            
            
            
            -Weighted
      average number of shares outstanding – diluted
            
            
            22,039,000
            
            
            
            21,769,000





No stock
options are included in the computation of diluted weighted average number of
shares for the three months ended November 30, 2009 and 2008 because the effect
would be anti-dilutive.  As of November 30, 2009, the Company had
outstanding options to purchase a total of 2,362,287 common shares of the
Company 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 November 30, 2009
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 November 30, 2009 and August 31, 2009 are money
market funds of $5,751,590 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 November 30, 2009 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)November
      30, 2009Money
      Market Funds
            
            $
            5,751,590
            
            
            $
            -
            
            
            $
            -August
      31, 2009Money
      Market Funds
            
            $
            7,672,673
            
            
            $
            -
            
            
            $
            -




Note
4.  Inventories





Inventories
consisted of the following:




November
      30,
              2009
            
            August
      31,
              2009Parts
      and supplies
            
            $
            1,093,821
            
            
            $
            1,041,355Work-in-process
            
            
            841,126
            
            
            
            555,584Finished
      goods
            
            
            167,680
            
            
            
            257,537Reserve
      for obsolete inventory
            
            
            (60,000
            )
            
            
            (60,000
            )Inventories,
      net
            
            $
            2,042,627
            
            
            $
            1,794,476




7


Note
5.  Property and Equipment





Property
and equipment consisted of the following:




November
      30,
              2009
            
            August
      31,
              2009Equipment
            
            $
            1,072,643
            
            
            $
            1,074,364Furniture
      and fixtures
            
            
            298,576
            
            
            
            298,576Leasehold
      improvements
            
            
            24,220
            
            
            
            24,220Building
            
            
            956,000
            
            
            
            956,000Land
            
            
            244,000
            
            
            
            244,0002,595,439
            
            
            
            2,597,160Less
      accumulated depreciation
            
            
            (1,260,180
            )
            
            
            (1,244,776
            )Property
      and equipment, net
            
            $
            1,335,259
            
            
            $
            1,352,384




Note
6.  Related Party Transactions




During
the three months ended November 30, 2009 and 2008, we had sales of $153,308 and
$23,168, respectively, to entities controlled by a significant stockholder and
member of the Board of Directors.  These related party transactions
represent approximately 36% and 2% of total sales for each respective
three-month period.




As of
November 30, 2009 and August 31, 2009, receivables included $152,560 and
$41,016, respectively, from these related parties.





Note
7.  Stock-Based Compensation





We have
both an employee and director stock incentive plan, which are described more
fully in Note 10 in our 2009 Annual Report on Form 10-K.  As of
November 30, 2009, we had approximately 559,000 shares of common stock reserved
for future issuance under the stock incentive plans.




The
Company accounts 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
              November
      30,2009
            
            2008Cost
      of sales
            
            $
            16,365
            
            
            $
            18,429Research
      and development
            
            
            45,859
            
            
            
            42,329Selling,
      general and administrative
            
            
            235,355
            
            
            
            212,415Total
            
            $
            297,579
            
            
            $
            273,173




8





During
the three months ended November 30, 2009, we granted no stock
options.




Unrecognized
stock-based compensation expense expected to be recognized over the estimated
weighted-average amortization period of 2.86 years is approximately $2,762,000
as of November 30, 2009.





A summary
of the time-based stock option awards as of November 30, 2009, and changes
during the three 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
            
            
            -Exercised
            
            
            -Forfeited
      or expired
            
            
            (16,800
            )
            
            
            5.47Outstanding
      at November 30, 2009
            
            
            2,362,287
            
            
            $
            3.53
            
            
            
            7.88Exercisable
      at November 30, 2009
            
            
            1,057,240
            
            
            $
            3.65
            
            
            
            6.68
            
            
            
            $257,958





The aggregate intrinsic value in the
preceding table represents the total pretax intrinsic value, based on the
Company’s closing stock price of $1.98 as of November 30, 2009, which would have
been received by the holders of in-the-money options had the option holders
exercised their options as of that date.





Note
8.  Income Taxes





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





Three
      Months Ended
              November
      30,2009
            
            2008Current
            
            $
            -
            
            
            $
            (20,000
            )Deferred
            
            
            -
            
            
            
            (229,000
            )Total
            
            $
            -
            
            
            $
            (249,000
            )





The deferred income tax provision of
$229,000 in the three months ended November 30, 2008 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.




9


Note
9.  Supplemental Cash Flow Information





The Company paid no amounts for
interest expense during the three months ended November 30, 2009 and
2008.  The Company paid no amounts for income taxes during the three
months ended November 30, 2009 and 2008.





During the three months ended November
30, 2009, the Company had no non-cash financing and investing
activities.





During the three months ended November
30, 2008, the Company had the following non-cash financing and investing
activities:





·
            Increased
      other comprehensive loss and decreased investments by
      $4,391,565.





·
            Increased
      common stock and decreased additional paid-in capital by
    $450.





·
            Decreased
      income tax receivable and additional paid-in capital by
      $159,558.




Note
10.  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.




Note
11.  Subsequent Events





We have evaluated events occurring
after the date of our accompanying balance sheets through January 14, 2010, 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.




10


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 and chemotherapy for
the treatment of locally advanced cancers.  Hyperthermia usually
refers to treatments delivered at temperatures of 40-49°C for one
hour.




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




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




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




11




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 already started design of a more advanced Phase II
ablation system that would provide a wider range of clinical applications and
improved ease of use as well as additional revenue streams.  Since
receipt of FDA clearance to market the MTX-100, we have devoted significant
efforts to optimizing the design of the system to improve its ease of use and
its medical applications.  Following clinical evaluations of Phase I,
we decided to postpone market entry until completion of the optimized Phase II
MTX-180 design.  We believe this will allow us to enter this market
with an optimized system that will have a wider range of clinical applications
and increased revenue streams.




12




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


13





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




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




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




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




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




14




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




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




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




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




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




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




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.


15




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




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




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.


16




Investments:Investments
with scheduled maturities greater than three months, but not greater than one
year, are recorded as short-term investments.  As of November 30, 2009
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.





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.


17





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 November 30, 2009, 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 payors 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.




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




Three
      Months Ended
              November
      30,2009
            
            2008BSD-500
            
            
            1
            
            
            
            3BSD-2000
            
            
            -
            
            
            
            2BSD-2000/3D
            
            
            -
            
            
            
            -BSD-2000/3D/MR
            
            
            -
            
            
            
            -Total
            
            
            1
            
            
            
            5





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 $153,308, or
approximately 36%, of our total revenue in the three months ended November 30,
2009 from sales to related parties, as compared to $23,168 or approximately 2%,
in the three months ended November 30, 2008.


18




In the
three months ended November 30, 2009, we derived $272,895, or approximately 64%,
of our total revenue from non-related parties, as compared to $1,208,396, or
approximately 98%, in the three months ended November 30, 2008.




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




Three
      Months Ended
              November
      30,Non-Related
      Parties
            
            2009
            
            2008Product
      sales
            
            $
            245,000
            
            
            $
            1,179,040Consumable
      devices
            
            
            -
            
            
            
            2,402Service
      contracts
            
            
            23,585
            
            
            
            15,641Other
            
            
            4,310
            
            
            
            11,313Total
            
            $
            272,895
            
            
            $
            1,208,396







Three
      Months Ended
              November
      30,Related
      Parties
            
            2009
            
            
            2008Product
      sales
            
            $
            110,175
            
            
            $
            -Consumable
      devices
            
            
            8,250
            
            
            
            19,463Service
      contracts
            
            
            -
            
            
            
            -Other
            
            
            34,883
            
            
            
            3,705Total
            
            $
            153,308
            
            
            $
            23,168




Total
revenues for the three months ended November 30, 2009 were $426,203 compared to
$1,231,564 for the three months ended November 30, 2008, a decrease of $805,361,
or 65%.  The overall decrease in revenues in the first quarter of the
current fiscal year is due primarily to a significant decrease in non-related
party sales, partially offset by an increase in related party
sales.  We sold only one hyperthermia system in the three months ended
November 30, 2009 to non-related parties compared to five hyperthermia systems
in the three months ended November 30, 2008.  We had no sales of
hyperthermia systems to related parties in the three months ended November 30,
2009 and 2008.




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 $48,836,
or 11% of total sales, for the three months ended November 30, 2009, and
$608,912, or 49%, for the three months ended November 30, 2008.  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.




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 November 30,
2009 was $377,367 compared to $622,652 for the three months ended November 30,
2008, a decrease of $245,285, or 39%.  This decrease resulted
primarily from fewer product sales in the current fiscal year.  As
discussed above, in total, we sold four fewer hyperthermia systems in the three
months ended November 30, 2009 than we did in the three months ended November
30, 2008.


19




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 $543,427
for the three months ended November 30, 2009 compared to $507,223, for the three
months ended November 30, 2008, an increase of $36,204, or approximately
7%.  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 remained fairly constant in the first quarter of the current fiscal
year compared to the first quarter of last fiscal year.  Selling,
general and administrative expenses were $1,459,395 for the three months ended
November 30, 2009 compared to $1,510,307 for the three months ended November 30,
2008, a decrease of $50,912, or approximately 3%.




Other
Income (Expense) and Income Tax Provision




Interest and
Investment Income:  Interest and investment income was $3,209
for the three months ended November 30, 2009 compared to $258,732 for the three
months ended November 30, 2008.  The decrease in interest and
investment income in the current fiscal year resulted primarily from lower
levels of cash and investments compared to the prior fiscal
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.




Income Tax
Provision:  We recorded no income tax provision or benefit for
income taxes during the three months ended November 30, 2009.  The
income tax provision for the three months ended November 30, 2008 was $249,000
comprised of a current provision of $20,000 and a deferred tax provision of
$229,000.  The deferred tax provision of $229,000 in the three months
ended November 30, 2008 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.


20




Liquidity and Capital
Resources




Since
inception through November 30, 2009, we have generated an accumulated deficit of
$18,620,695 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 November 30, 2009, we had cash and cash
equivalents of $5,933,675, comprised primarily of money market
funds.




During
the three months ended November 30, 2009, we used cash of $1,845,084 in
operating activities, primarily as a result of our net loss of $1,946,573,
decreased by non cash expenses totaling $333,353, including depreciation and
amortization, and stock-based compensation.  Net cash used in
operating activities also included an increase in inventories of $248,151, an
increase in other current assets of $48,621 and a decrease in accrued
liabilities of $154,383, partially offset by a decrease in receivables of
$42,273, increase in accounts payable of $140,670 and increase in deferred
revenue of $36,348.




By
comparison, net cash used in operating activities was $916,620 during the three
months ended November 30, 2008, primarily as a result of our net loss of
$1,433,145 decreased by non cash expenses totaling $343,949, including
depreciation and amortization, stock-based compensation, and stock issued for
services.  Net cash used in operating activities also included an
increase in inventories of $236,241, decrease in customer deposits of $119,729,
and decrease in deferred revenue of $8,307, partially offset by a decrease in
receivables of $40,712, decrease in income tax receivable of $249,000, decrease
in other current assets of $24,506, and an increase in accounts payable of
$309,068.




Net cash
used in investing activities for the three months ended November 30, 2009 was
$13,179, resulting from the purchase of property and equipment.  For
the three months ended November 30, 2008, net cash used by investing activities
was $234,823, resulting from the purchase of property and equipment of $18,185
and the purchase of investments of $216,638.




No net
cash was provided by or used in financing activities for the three months ended
November 30, 2009 and 2008.




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.


21




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




As of
November 30, 2009, we had no significant commitments for the purchase of
property and equipment.




We had no
off balance sheet arrangements as of November 30, 2009.




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.


22





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;·
            our
      expectations that the disposable applicator to be used in conjunction with
      the MTX-180 represents a significant ongoing revenue stream;·
            our
      expectations regarding FDA approvals relating to the BSD-2000
      system;·
            our
      belief that as sales volume increases (decreases) we will increase
      (decrease) our gross profits percentage because certain fixed
      manufacturing costs are included in our cost of sales;




23





·
            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.








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.


24





PART
II – OTHER INFORMATION




Item
1A.   Risk Factors




In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Item 1A – “Risk Factors” in our Annual Report
on Form 10-K for the year ended August 31, 2009, which could materially affect
our business, financial condition or future results of operations.




Item
6.      Exhibits




The
following exhibits are filed as part of this report:




Exhibit
      No.
            
            Description
      of Exhibit10.1
            
            Third
      Amended and Restated 1998 Director Stock Plan31.1
            
            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








25


SIGNATURES








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




BSD
      MEDICAL CORPORATIONDate:    January
      14, 2010
            /s/
      Harold R. WolcottHarold
      R. WolcottPresident
      (Principal Executive Officer)Date:    January
      14, 2010
            /s/
      Dennis P. GaugerDennis
      P. GaugerChief
      Financial Officer (Principal Accounting
Officer)









26


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