Overview

This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this annual report on Form 10-K 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 and the Item 1A "Risk Factors" above. The following discussion should be read in conjunction with our financial statements and notes thereto included in this annual report on Form 10-K. All information presented herein is based on our fiscal year ended August 31, 2009. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

We develop, manufacture, market and service 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.

In addition to revenues from the sale of our hyperthermia cancer treatment systems, we recognize revenue from the sale of parts and accessories related to our systems, the sale of consumable devices used with certain of our systems, training, service support contracts, and other miscellaneous revenues. System and product sales totaled $3,293,116, $4,631,713 and $2,520,818 for the years ended August 31, 2009, 2008 and 2007, respectively. Sales of consumable devices, service and other revenues totaled $243,371, $511,427 and $313,568 for the years ended August 31, 2009, 2008 and 2007, respectively.

As of August 31, 2009, we had no sales backlog.

Critical Accounting Policies

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

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

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

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

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

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

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

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

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 August 31, 2009, we have not had any sales of our MTX-180 system.

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 hyperthermia systems sold for the years ended August 31, 2009, 2008 and 2007:

                                          2009 2008 2007

                           BSD-500         7    10   8
                           BSD-2000        4    -    1
                           BSD-2000/3D     1    1    2
                           BSD-2000/3D/MR  -    2    -

                           Total           12   13   11

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 $603,000, or approximately 17%, of our total revenue in fiscal 2009 from sales to related parties, as compared to $2,809,132, or 55%, in fiscal 2008, and $1,385,332, or 49%, in fiscal 2007.

In fiscal 2009, we derived $2,933,487, or approximately 83%, of our total revenue from non-related parties, as compared to $2,334,008, or 45%, in fiscal 2008, and $1,449,054, or 51%, in fiscal 2007.

The following tables summarize the sources of our revenues for the years ended August 31, 2009, 2008 and 2007:

            Non-Related Parties      2009            2008            2007

            Product sales         $ 2,784,777     $ 2,218,700     $ 1,347,887
            Consumable devices          4,802          16,247          22,970
            Service contracts          78,763          56,968          41,338
            Other                      65,145          42,093          36,859

            Total                 $ 2,933,487     $ 2,334,008     $ 1,449,054




              Related Parties        2009           2008            2007

              Product sales        $ 508,339     $ 2,623,013     $ 1,172,930
              Consumable devices      54,200          38,550          47,902
              Service contracts            -               -               -
              Other                   40,461         147,569         164,500

              Total                $ 603,000     $ 2,809,132     $ 1,385,332

Total revenues for the year ended August 31, 2009 were $3,536,487 compared to $5,143,140 for the year ended August 31, 2008, a decrease of $1,606,653, or 31%. The overall decrease in revenues in the current fiscal year is due primarily to a significant decrease in related party sales, partially offset by an increase in non-related party sales. We sold two more hyperthermia systems in fiscal year 2009 to non-related parties than we did in fiscal year 2008. In addition, we did not sell any higher priced BSD-2000/3D/MR systems to related parties in the current fiscal year.

Total revenues for the year ended August 31, 2008 were $5,143,140 compared to $2,834,386 for the year ended August 31, 2007, an increase of $2,308,754, or 81%. The overall increase in revenues in fiscal year 2008 was due primarily to significant increases in both related party and non-related party sales. We sold two more hyperthermia systems in fiscal year 2008 to non-related parties than we did in fiscal year 2007. During the year ended August 31, 2008, we sold two higher priced BSD-2000/3D/MR systems to related parties, but did not sell any of these systems in the year ended August 31, 2007.

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 $1,614,269, or 46% of total sales, for fiscal year 2009, $3,058,891, or 59%, for fiscal year 2008, and $1,252,824, or 44%, for fiscal year 2007. The increase in gross profit in fiscal year 2008 compared to fiscal years 2009 and 2007, primarily resulted from the increase in product sales in fiscal 2008, for which our gross profit is higher than our other sources of revenue. In addition, as sales volume increases, we believe we will more fully absorb certain fixed operating costs that are included in cost of sales, thus increasing our gross profit percentage.

Operating Costs and Expenses: Comparison of Fiscal Years ended August 31, 2009 and 2008

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 fiscal 2009 was $1,922,218 compared to $2,084,249 for fiscal 2008, a decrease of $162,031, or 8%. This decrease resulted primarily from less product sales in fiscal 2009, particularly to related parties. In total, we sold one less hyperthermia system in fiscal 2009 than we did in fiscal 2008.

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 $2,043,268 for fiscal 2009 compared to $1,737,924, for fiscal 2008, an increase of $305,344, or approximately 18%. 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. See the discussion under "Research and Development" in Item 1, "Business" of this Annual Report.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $6,097,494 for fiscal 2009 compared to $5,573,311 in fiscal 2008, an increase of $524,183, or approximately 9%. The increase in selling, general and administrative expenses in the current fiscal year is due to severance payments made to our former president, higher non-cash stock option expense, and an increase in our board compensation due to the addition of a new director.

Operating Costs and Expenses: Comparison of Fiscal Years ended August 31, 2008 and 2007

Cost of Sales - Total cost of sales for fiscal 2008 was $2,084,249 compared to $1,581,562 for fiscal 2007, an increase of $502,687, or 32%. This increase resulted primarily from more product sales in fiscal 2008 to both non-related and related parties. 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.

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 $1,737,924 for the year ended August 31, 2008, as compared to $1,875,147, for the year ended August 31, 2007, a decrease of $137,223, or approximately 7%.

Selling General and Administrative Expenses - Selling, general and administrative expenses remained fairly constant, decreasing to $5,573,311 in the year ended August 31, 2008, from $5,762,217 for the year ended August 31, 2007, a decrease of $188,906, or approximately 3%.

Other Income (Expense) and Income Tax Benefit

Interest and Investment Income: Interest and investment income was $584,523, $1,046,313 and $1,133,125 for the years ended August 31, 2009, 2008 and 2007, respectively. 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.

Realized Loss on Investments: We sold 100% of our investments in mutual funds in March and May 2009. The investments had a total cost basis of $16,652,543 and we received total proceeds of $10,150,957, resulting in a realized loss of $6,501,586. We had no realized loss on investments in the prior fiscal years. As a result, at August 31, 2009, we had no investments, but cash and equivalents of $7,791,938, comprised primarily of money market funds.

Income Tax Benefit: The income tax benefit was $1,150,000, $961,000 and $1,865,000 for the years ended August 31, 2009, 2008 and 2007, respectively. The income tax benefit for each year represents an increase in our income tax receivable resulting from our ability to carry back our taxable loss in that year to offset income taxes previously paid, partially offset by a deferred tax provision in 2009 and 2008. As a result of the enactment of the American Recovery and Reinvestment Act of 2009 in February 2009, we are able to carry back current year operating losses and realized losses on investments to the extent of the remaining taxable income for our fiscal year 2005.

The deferred income tax provision of $229,000 and $168,000 in the years ended August 31, 2009 and 2008, respectively, resulted from our recording a valuation allowance against our deferred tax assets. In recording the valuation allowance, we were unable to conclude that it is more likely than not that our deferred tax assets, including our taxable loss and tax credit carry forwards, will be realized. In reaching this determination, we evaluated factors such as prior earnings history, expected future earnings and our ability to carry back reversing items to offset income taxes paid. As a result, we do not anticipate that we will record further income tax benefits from taxable losses and tax credits as a result of recording a 100% valuation allowance against the related deferred tax assets.

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 August 31, 2009, we have generated an accumulated deficit of $16,674,122. Included in this amount is a realized loss on investments of $6,501,586 recorded in the year ended August 31, 2009. The remainder of the accumulated deficit can be attributed to our operations, where our operating revenues have been insufficient to cover our operating expenses. We have historically financed our operations through cash from operations, research grants, licensing of technological assets, issuance of common stock and sale of investments in spinoff operations. As of August 31, 2009, we had liquidated 100% of our investments in mutual funds and had cash and cash equivalents of $7,791,938, comprised primarily of money market funds. At August 31, 2008, we had cash, cash equivalents and investments totaling $15,881,844.

During the year ended August 31, 2009, we used cash of $3,643,814 in operating activities, primarily as a result of our net loss of $11,384,870 decreased by non cash expenses of $1,357,778, including depreciation and amortization, and stock-based compensation, and realized loss on investments of $6,501,586. Net cash used in operating activities also included an increase in income tax receivable of $200,198, increase in inventories of $369,323, decrease in accrued liabilities of $37,698 and a decrease in customer deposits of $427,677, partially offset by a decrease in receivables of $846,589, decrease in other current assets of $19,293, increase in accounts payable of $5,300 and increase in deferred revenue of $45,406.

By comparison, net cash used in operating activities was $902,576 during the year ended August 31, 2008, primarily as a result of our net loss of $2,439,099 decreased by non cash expenses of $981,843, including depreciation and amortization, and stock-based compensation, and loss on disposition of property of $3,444. Net cash used in operating activities also included an increase in receivables of $485,755, decrease in accounts payable of $14,071, and decrease in accrued liabilities of $47,313, partially offset by a decrease in income tax receivable of $521,717, decrease in inventories of $84,914, decrease in deferred tax assets of $244,000, decrease in other current assets of $13,174, increase in customer deposits of $213,039, and an increase in deferred tax liability of $21,531.

Net cash provided by investing activities for the year ended August 31, 2009 was $10,041,100, resulting from the proceeds from the sale of investments of $10,150,957, partially offset by the purchase of investments of $23,935, the purchase of property and equipment of $36,478, and purchase of patents of $49,444. For the year ended August 31, 2008, net cash provided by investing activities was $1,722,206, resulting from the sale of investments of $4,988,760, partially offset by the purchase of investments of $1,954,490, the purchase of property and equipment of $1,291,098 and an increase in patents of $20,966.

No net cash was provided by or used in financing activities for the year ended August 31, 2009. Net cash provided by financing activities for the year ended August 31, 2008 consisted of proceeds of $158,482 from the sale of common stock through the exercise of stock options.

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 and income tax refunds receivable will be sufficient to fund our operations for the next twelve months.

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