UNITED
STATES


SECURITIES
AND EXCHANGE
COMMISSION


Washington,
D.C. 20549





FORM 10-Q





(Mark
One)





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





For
the quarterly period ended May 31, 2008





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





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





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


Large
      accelerated filer o
            Accelerated
      filer ýNon-accelerated
      filer o
            Smaller
      reporting company o





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





As of
July 10, 2008, there were 21,379,792 shares of the Registrant’s common stock,
$0.001 par value per share, outstanding.











BSD
MEDICAL CORPORATION


FORM
10-Q





FOR
THE QUARTER ENDED MAY 31, 2008








PART
      I - Financial InformationItem
      1.
            Financial
      StatementsCondensed
      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
            13Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            20Item
      4.
            Controls
      and Procedures
            21PART
      II - Other InformationItem
      1A.
            Risk
      Factors
            21Item
      6.
            Exhibits
            22Signatures
            
            23








2





PART
I - FINANCIAL INFORMATION




Item
1.  Financial Statements.




BSD
      MEDICAL CORPORATIONCondensed
      Balance Sheets(Unaudited)ASSETS
            
            May
      31,
              2008
            
            
            August
      31,
              2007Current
      assets:Cash
      and cash equivalents
            
            $
            277,503
            
            
            $
            416,540Investments
            
            
            15,316,993
            
            
            
            19,090,118Accounts
      receivable, net of allowance for doubtful
              accounts
      of $20,000
            
            
            480,374
            
            
            
            203,267Related
      party trade accounts receivable
            
            
            183,064
            
            
            
            488,200Income
      tax receivable
            
            
            2,833,956
            
            
            
            1,759,995Inventories,
      net
            
            
            1,561,923
            
            
            
            1,510,067Deferred
      tax asset
            
            
            -
            
            
            
            387,000Other
      current assets
            
            
            124,999
            
            
            
            127,003Total
      current assets
            
            
            20,778,812
            
            
            
            23,982,190Property
      and equipment, net
            
            
            1,456,649
            
            
            
            271,077Patents,
      net
            
            
            38,108
            
            
            
            19,373Deferred
      tax asset
            
            
            -
            
            
            
            69,000$
            22,273,569
            
            
            $
            24,341,640LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            252,986
            
            
            $
            235,676Accrued
      liabilities
            
            
            472,601
            
            
            
            633,090Customer
      deposits
            
            
            84,800
            
            
            
            214,638Deferred
      revenue – current portion
            
            
            38,399
            
            
            
            26,115Total
      current liabilities
            
            
            848,786
            
            
            
            1,109,519Deferred
      revenue – net of current portion
            
            
            59,094
            
            
            
            48,333Total
      liabilities
            
            
            907,880
            
            
            
            1,157,852Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.001 par value; 10,000,000 shares
              authorized,
      no shares issued and outstanding
            
            
            -
            
            
            
            -Common
      stock; $.001 par value, 40,000,000 shares
              authorized,
      21,377,792 and 21,297,446 shares issued
            
            
            21,378
            
            
            
            21,298Additional
      paid-in capital
            
            
            27,289,632
            
            
            
            26,373,637Treasury
      stock, 24,331 shares at cost
            
            
            (234
            )
            
            
            (234
            )Other
      comprehensive loss
            
            
            (1,282,933
            )
            
            
            (360,760
            )Accumulated
      deficit
            
            
            (4,662,154
            )
            
            
            (2,850,153
            )Total
      stockholders’ equity
            
            
            21,365,689
            
            
            
            23,183,788$
            22,273,569
            
            
            $
            24,341,640See
      accompanying notes to condensed financial statements








3





BSD
      MEDICAL CORPORATIONCondensed
      Statements of Operations(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedMay
      31,
              2008
            
            
            May
      31,
              2007
            
            
            May
      31,
              2008
            
            
            May
      31,
              2007Revenues:Sales
            
            $
            725,810
            
            
            $
            432,123
            
            
            $
            1,846,052
            
            
            $
            1,258,808Sales
      to related parties
            
            
            189,207
            
            
            
            521,053
            
            
            
            1,932,345
            
            
            
            1,019,680Total
      revenues
            
            
            915,017
            
            
            
            953,176
            
            
            
            3,778,397
            
            
            
            2,278,488Operating
      costs and expenses:Cost
      of sales
            
            
            309,276
            
            
            
            200,620
            
            
            
            713,724
            
            
            
            703,006Cost
      of related party sales
            
            
            66,570
            
            
            
            279,911
            
            
            
            694,062
            
            
            
            650,097Research
      and development
            
            
            481,692
            
            
            
            451,721
            
            
            
            1,252,914
            
            
            
            1,292,578Selling,
      general and administrative
            
            
            1,368,451
            
            
            
            1,400,170
            
            
            
            4,196,516
            
            
            
            4,287,870Total
      operating costs and expenses
            
            
            2,225,989
            
            
            
            2,332,422
            
            
            
            6,857,216
            
            
            
            6,933,551Loss
      from operations
            
            
            (1,310,972
            )
            
            
            (1,379,246
            )
            
            
            (3,078,819
            )
            
            
            (4,655,063
            )Other
      income (expense):Interest
      and investment income
            
            
            226,692
            
            
            
            331,579
            
            
            
            771,680
            
            
            
            1,044,249Other
            
            
            (41,020
            )
            
            
            180,384
            
            
            
            (151,933
            )
            
            
            106,048Total
      other income (expense)
            
            
            185,672
            
            
            
            511,963
            
            
            
            619,747
            
            
            
            1,150,297Loss
      before income taxes
            
            
            (1,125,300
            )
            
            
            (867,283
            )
            
            
            (2,459,072
            )
            
            
            (3,504,766
            )Income
      tax benefit
            
            
            336,071
            
            
            
            232,645
            
            
            
            647,071
            
            
            
            1,295,672Net
      loss
            
            
            (789,229
            )
            
            
            (634,638
            )
            
            
            (1,812,001
            )
            
            
            (2,209,094
            )Other
      comprehensive income (loss) –
              unrealized
      gain (loss) on investments,net
      of income tax
            
            
            545,841
            
            
            
            (26,974
            )
            
            
            (922,173
            )
            
            
            123,925Net
      comprehensive loss
            
            $
            (243,388
            )
            
            $
            (661,612
            )
            
            $
            (2,734,174
            )
            
            $
            (2,085,169
            )Loss
      per common share:Basic
            
            $
            (0.04
            )
            
            $
            (0.03
            )
            
            $
            (0.09
            )
            
            $
            (0.10
            )Diluted
            
            $
            (0.04
            )
            
            $
            (0.03
            )
            
            $
            (0.09
            )
            
            $
            (0.10
            )Weighted
      average number of shares
              outstanding:Basic
            
            
            21,359,000
            
            
            
            21,135,000
            
            
            
            21,325,000
            
            
            
            21,071,000Diluted
            
            
            21,359,000
            
            
            
            21,135,000
            
            
            
            21,325,000
            
            
            
            21,071,000See
      accompanying notes to condensed financial statements








4





BSD
      MEDICAL CORPORATIONCondensed
      Statements of Cash Flows(Unaudited)





Nine
      Months EndedMay
      31,
              2008
            
            
            May
      31,
              2007Cash
      flows from operating activities:Net
      loss
            
            $
            (1,812,001
            )
            
            $
            (2,209,094
            )Adjustments
      to reconcile net loss to net cash used
              in
      operating activities:Depreciation
      and amortization
            
            
            88,955
            
            
            
            70,111Stock-based
      compensation
            
            
            574,413
            
            
            
            673,678Stock
      issued for services
            
            
            61,195
            
            
            
            -Provision
      for doubtful accounts
            
            
            -
            
            
            
            83,700Loss
      on disposition of property and equipment
            
            
            1,153
            
            
            
            2,577Gain
      on sale of investment in TherMatrx
            
            
            -
            
            
            
            (202,223
            )Decrease
      (increase) in:Receivables
            
            
            28,029
            
            
            
            187,530Income
      tax receivable
            
            
            (900,000
            )
            
            
            (1,068,164
            )Inventories
            
            
            (51,856
            )
            
            
            80,576Deferred
      tax assets
            
            
            244,000
            
            
            
            (181,000
            )Other
      current assets
            
            
            2,004
            
            
            
            (104,478
            )Increase
      (decrease) in:Accounts
      payable
            
            
            17,310
            
            
            
            (33,788
            )Accrued
      liabilities
            
            
            (160,489
            )
            
            
            (101,616
            )Customer
      deposits
            
            
            (129,838
            )
            
            
            -Deferred
      revenue
            
            
            23,045
            
            
            
            (153,241
            )Income
      taxes payable
            
            
            -
            
            
            
            (1,500,000
            )Net
      cash used in operating activities
            
            
            (2,014,080
            )
            
            
            (4,455,432
            )Cash
      flows from investing activities:Sale
      of investments
            
            
            3,062,952
            
            
            
            3,046,812Purchase
      of property and equipment
            
            
            (1,273,449
            )
            
            
            (63,006
            )Increase
      in patents
            
            
            (20,966
            )
            
            
            -Proceeds
      from sale of investment in TherMatrx
            
            
            -
            
            
            
            202,223Net
      cash provided by investing activities
            
            
            1,768,537
            
            
            
            3,186,029Cash
      flows from financing activities:Proceeds
      from the sale of common stock
            
            
            106,506
            
            
            
            229,706Net
      decrease in cash and cash equivalents
            
            
            (139,037
            )
            
            
            (1,039,697
            )Cash
      and cash equivalents, beginning of period
            
            
            416,540
            
            
            
            2,179,094Cash
      and cash equivalents, end of period
            
            $
            277,503
            
            
            $
            1,139,397See
      accompanying notes to condensed financial statements








5





BSD
MEDICAL CORPORATION


Notes
to Condensed Financial Statements


(Unaudited)





Note
1.  Basis of Presentation




The
accompanying unaudited condensed balance sheets of BSD Medical Corporation (the
“Company”) as of May 31, 2008 and August 31, 2007, the related unaudited
condensed statements of operations for the three months and nine months ended
May 31, 2008 and 2007, and the related unaudited condensed statements of cash
flows for the nine months ended May 31, 2008 and 2007 have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”).  The condensed financial
statements do not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial
statements.  These condensed financial statements should be read in
conjunction with the notes thereto, and the financial statements and notes
thereto included in our annual report on Form 10-K for the year ended August 31,
2007.





All
adjustments (consisting only of normal recurring adjustments) necessary for the
fair presentation of our financial position as of May 31, 2008 and August 31,
2007, our results of operations for the three months and nine months ended May
31, 2008 and 2007, and our cash flows for the nine months ended May 31, 2008 and
2007 have been included.  The results of operations for the three
months and nine months ended May 31, 2008 may not be indicative of the results
for the year ending August 31, 2008.





Note
2.  Recent Accounting Pronouncements





In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation (“FIN”) 48, Accounting for Uncertainty in Income
Taxes.  FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
This Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. We adopted this Interpretation on September
1, 2007, with no material impact on our financial statements.





On May 9, 2008, the FASB issued
Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted
Accounting Principles.  This statement is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities.  The statement establishes that the GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP.  This statement
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.  We
do not believe the implementation of this statement will have any impact on our
financial statements.








6





In March 2008, the FASB issued SFAS No.
161, Disclosures about
Derivative Instruments and Hedging Activities.  This statement
changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows.  This
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, or our fiscal year beginning
September 1, 2009, with early application encouraged.  This statement
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption.  We currently are unable to determine what impact
the future application of this pronouncement may have on our financial
statements.





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





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





In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115. This statement permits entities to choose to measure
many financial instruments and certain other items at fair
value.  Most of the provisions of SFAS No. 159 apply only
to entities that elect the fair value option.  However, the amendment
to SFAS No. 115 Accounting for
Certain Investments in Debt and Equity Securities applies to all entities
with available-for-sale and trading securities.SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007, or our fiscal year beginning September 1,
2008.  Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of SFAS No. 157, Fair Value Measurements. We
have not elected early adoption of this statement, and do not expect the
adoption of this statement will have a material impact on our financial
statements.





In
September 2006, the FASB issued SFAS Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.  This new
standard will require employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements.  We adopted SFAS
No. 158 on September 1, 2007, with no material impact on our financial
statements since we currently do not sponsor a defined benefit pension or
postretirement plan within the scope of the standard.








7





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value,
and requires enhanced disclosures about fair value measurements.  SFAS
No. 157 requires companies to disclose the fair value of their financial
instruments according to a fair value hierarchy as defined in the
standard.  Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities.  In February 2008, the FASB issued
FASB Staff Position (FSP) No. FAS 157-2, which delays by one year the effective
date of SFAS No. 157 for certain types of non-financial assets and non-financial
liabilities.  As a result, SFAS No. 157 will be effective for
financial statements issued for fiscal years beginning after November 15, 2007,
or our fiscal year beginning September 1, 2008, for financial assets and
liabilities carried at fair value on a recurring basis, and on September 1,
2009, for non-recurring non-financial assets and liabilities that are recognized
or disclosed at fair value.  We are currently unable to determine the
impact on our financial statements of the application of SFAS No. 157 on
September 1, 2008, for financial assets and liabilities carried at fair value on
a recurring basis.  Similarly, we are currently unable to determine
the impact on our financial statements of the application of SFAS No. 157 on
September 1, 2009, for non-recurring non-financial assets and liabilities that
are recognized or disclosed at fair value.





In March 2006, the FASB issued SFAS No.
156, Accounting for Servicing
of Financial Assets to simplify accounting for separately recognized
servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
Additionally, SFAS No. 156 applies to all separately recognized servicing assets
and liabilities acquired or issued after the beginning of an entity’s fiscal
year that begins after September 15, 2006, although early adoption is
permitted.  We adopted SFAS No. 156 on September 1, 2007, with no
material impact on our financial statements.





In February 2006, the FASB issued SFAS
No. 155, Accounting for
Certain Hybrid Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
No. 155 allows financial instruments that have embedded derivatives to be
accounted for as a whole (eliminating the need to bifurcate the derivative from
its host) if the holder elects to account for the whole instrument on a fair
value basis. SFAS No. 155 also clarifies and amends certain other provisions of
SFAS No. 133 and SFAS No. 140. This statement is effective for all financial
instruments acquired or issued in financial years beginning after September 15,
2006. We adopted SFAS No. 156 on September 1, 2007, with no material impact on
our financial statements.





On December 21, 2006, the FASB
issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 00-19-2,
Accounting for Registration
Payment Arrangements, which requires an issuer to account for a
contingent obligation to transfer consideration under a registration payment
arrangement in accordance with FASB Statement No. 5, Accounting for Contingencies
and FASB Interpretation 14, Reasonable Estimation of the Amount
of Loss.  Registration payment arrangements are frequently
entered into in connection with issuance of unregistered financial instruments,
such as equity shares or warrants. A registration payment arrangement
contingently obligates the issuer to make future payments or otherwise transfer
consideration to another party if the issuer fails to file a registration
statement with the SEC for the resale of specified financial instruments or
fails to have the registration statement declared effective within a specific
period. The FSP requires issuers to make certain disclosures for each
registration payment arrangement or group of similar
arrangements.  The FSP is effective immediately for registration
payment arrangements and financial instruments entered into or modified after
the FSP's issuance date.  For previously issued registration payment
arrangements and financial instruments subject to those arrangements, the FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2006.  We adopted this standard on September 1,
2007, with no material impact on our financial statements.








8





EITF No.
07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities,was issued in June
2007.  The EITF reached a consensus that nonrefundable payments for
goods and services that will be used or rendered for future research and
development activities should be deferred and capitalized.  Such
amounts should be recognized as an expense as the related goods are delivered
and the related services are performed.  Entities should continue to
evaluate whether they expect the goods to be delivered or services to be
rendered.  If the entity does not expect the goods to be delivered or
services to be rendered, the capitalized advance payment should be charged to
expense.  This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2007, our fiscal year
beginning September 1, 2008, and interim periods within those fiscal
years.  Earlier application is not permitted.  Entities are
required to report the effects of applying this pronouncement prospectively for
new contracts entered into on or after the effective date of this
pronouncement.  We currently are unable to determine what impact the
future application of this pronouncement may have on our financial
statements.





Note
3.  Net Income (Loss) Per Common Share




The
computation of basic earnings per common share is based on the weighted average
number of shares outstanding during the period.  The computation of
diluted earnings per common share is based on the weighted average number of
shares outstanding during the period plus the weighted average common stock
equivalents which would arise from the exercise of stock options outstanding
using the treasury stock method and the average market price per share during
the period.  When common stock equivalents are anti-dilutive, they are
not included.  During the three months and nine months ended May 31,
2008, 1,107,612 and 1,054,984 common stock equivalents related to stock options
were not included in the computation due to their anti-dilutive effect,
respectively, because of the Company’s net loss.  Similarly, during
the three months and nine months ended May 31, 2007, 1,224,696 and 1,310,551
common stock equivalents related to stock options were not included in the
computation due to their anti-dilutive effect.





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





Three
      Months Ended
            
            
            Nine
      Months EndedMay
      31,
            
            
            May
      31,
            
            
            May
      31,
            
            
            May
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Weighted
      average number of shares
              outstanding
      – basic
            
            
            21,359,000
            
            
            
            21,135,000
            
            
            
            21,325,000
            
            
            
            21,071,000Dilutive
      effect of stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Weighted
      average number of shares
              outstanding
      – diluted
            
            
            21,359,000
            
            
            
            21,135,000
            
            
            
            21,325,000
            
            
            
            21,071,000








9





Note
4.  Inventories





Inventories
consist of the following:




May
      31,
              2008
            
            
            August
      31,
              2007Parts
      and supplies
            
            $
            805,293
            
            
            $
            835,498Work-in-process
            
            
            742,824
            
            
            
            610,846Finished
      goods
            
            
            53,806
            
            
            
            103,723Reserve
      for obsolete inventory
            
            
            (40,000
            )
            
            
            (40,000
            )Inventories,
      net
            
            $
            1,561,923
            
            
            $
            1,510,067





Note
5.  Property and Equipment





Property
and equipment consist of the following:




May
      31,
              2008
            
            
            August
      31,
              2007Equipment
            
            $
            1,033,609
            
            
            $
            962,162Furniture
      and fixtures
            
            
            298,576
            
            
            
            298,576Leasehold
      improvements
            
            
            17,420
            
            
            
            17,420Building
            
            
            956,000
            
            
            
            -Land
            
            
            244,000
            
            
            
            -2,549,605
            
            
            
            1,278,158Less
      accumulated depreciation
            
            
            (1,092,956
            )
            
            
            (1,007,081
            )Property
      and equipment, net
            
            $
            1,456,649
            
            
            $
            271,077





When the lease on the Company’s office,
production and research facilities expired in November 2007, the Company
exercised its option to purchase the building and land for a total purchase
price of $1,200,000.





Note
6.  Related Party Transactions




During
the three months ended May 31, 2008 and 2007, we had sales of $189,207 and
$521,053, respectively, to an entity controlled by a significant stockholder and
member of the Board of Directors.  These related party transactions
represent approximately 21% and 55% of total sales for each respective
three-month period.




During
the nine months ended May 31, 2008 and 2007, we had sales of $1,932,345 and
$1,019,680, respectively, to this entity.  These related party
transactions represent approximately 51% and 45% of total sales for each
respective nine-month period.




At May
31, 2008 and August 31, 2007, receivables included $183,064 and $488,200,
respectively, from this entity.





10





Note
7.  Stock-Based Compensation





We have a
stock-based employee plan and a director option plan which are described more
fully in Note 11 in our 2007 Annual Report on Form 10-K.  As of May
31, 2008, we had approximately 1,503,000 shares of common stock reserved for
future issuance under the stock option plans.




The
Company accounts for stock-based compensation in accordance with SFAS No.
123(R), Share Based
Payments.Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on
the value of the award granted using the Black-Scholes option pricing model, and
recognized over the period in which the award vests.  The stock-based
compensation expense for the three-month and nine-month periods ended May 31,
2008 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
              May
      31, 2008
            
            
            Nine
      Months Ended
              May
      31, 2008Cost
      of sales
            
            $
            21,148
            
            
            $
            63,444Research
      and development
            
            
            35,125
            
            
            
            95,745Selling,
      general and administrative
            
            
            153,046
            
            
            
            415,224Total
            
            $
            209,319
            
            
            $
            574,413





Stock-based
compensation expense for the three-month and nine-month periods ended May 31,
2007 of $204,734 and $673,678, respectively, has been included in selling,
general and administrative expenses.




During
the nine months ended May 31, 2008, we granted 384,457 options to our directors
and employees, 302,457 options with one fifth vesting each year for the next
five years, and 82,000 options with one third vesting each year for the next
three years. These grants account for $308,138 of the total stock-based
compensation expense for the nine months ended May 31, 2008.




Unrecognized
stock-based compensation expense expected to be recognized over the estimated
weighted-average amortization period of 2.21 years is approximately $2,314,000
at May 31, 2008.




Our weighted-average assumptions used
in the Black-Scholes valuation model for equity awards with time-based vesting
provisions granted during the nine months ended May 31, 2008 are shown
below:




Expected
      volatility
            64.19%Expected
      dividends
            0%Expected
      term
            6.25
      YearsRisk-free
      interest rate
            3.91%





The
expected volatility rate was estimated based on the historical volatility of our
common stock.   The expected term was estimated based on
historical experience of stock option exercise and forfeiture.  The
risk-free interest rate is the rate provided by the U.S. Treasury for Daily
Treasury Yield Curve Rates commonly referred to as “Constant Maturity Treasury”
rate in effect at the time of grant with a remaining term equal to the expected
option term.




A summary
of the time-based stock option awards as of May 31, 2008, and changes during the
nine months then ended, is as follows:







11




Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Weighted-
              Average
              Remaining
              Contract
      Term
              (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at August 31, 2007
            
            
            1,795,853
            
            
            $
            2.31Granted
            
            
            384,457
            
            
            
            5.57Exercised
            
            
            (76,515
            )
            
            
            1.81Forfeited
      or expired
            
            
            -
            
            
            
            -Outstanding
      at May 31, 2008
            
            
            2,103,795
            
            
            $
            2.92
            
            
            
            6.63Exercisable
      at May 31, 2008
            
            
            1,411,086
            
            
            $
            1.85
            
            
            
            5.53
            
            $7,977,415





The
weighted-average grant-date fair value of stock options granted during the nine
months ended May 31, 2008 was $3.50.





Note
8.  Supplemental Cash Flow Information





The Company paid no amounts for
interest during the nine months ended May 31, 2008 and 2007.  The
Company paid $8,929 and $1,798,676 for income taxes during the nine months ended
May 31, 2008 and 2007.





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





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





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





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





During
the nine months ended May 31, 2007, the Company had the following non-cash
financing and investing activities:





·
            Recorded
      an increase in additional paid-in capital of $47,449 and a decrease to
      income taxes payable of $47,449 related to the tax benefit from the
      exercise of stock options.





·
            Increased
      other comprehensive income and increased investments by
      $123,924.





·
            Transferred
      deferred compensation of $247,700 to additional paid-in
      capital.





·
            Decreased
      income taxes payable and decreased income tax receivable by
      $39,946.





·
            Increased
      common stock and decreased additional paid-in capital by
    $50.







12





Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.




This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this report contain forward-looking statements
that involve risks and uncertainties.  Forward-looking statements can
also be identified by words such as “anticipates,” “expects,” “believes,”
“plans,” “predicts,” and similar terms.  Forward-looking statements
are not guarantees of future performance and our actual results may differ
significantly from the results discussed in the forward-looking
statements.  Factors that might cause such differences include, but
are not limited to those discussed in the subsection entitled “Forward-Looking
Statements” below.  The following discussion should be read in
conjunction with our financial statements and notes thereto included in this
report.   We assume no obligation to revise or update any
forward-looking statements for any reason, except as required by
law.




General




BSD
Medical Corporation develops, manufactures, markets and services medical systems
that deliver precision-focused radio frequency (RF) or microwave energy into
diseased sites of the body, heating them to specified temperatures as required
by a variety of medical therapies.  Our business objectives are to
commercialize our products developed for the treatment of cancer and to further
expand our developments to treat other diseases and medical
conditions.  Our product line for cancer therapy has been created to
offer hospitals and clinics a complete solution for thermal treatment of cancer
as provided through microwave/RF systems.




While our
primary developments to date have been cancer treatment systems, we also
pioneered the use of microwave thermal therapy for the treatment of symptoms
associated with enlarged prostate, and we are responsible for much of the
technology that created a new medical industry using that therapy.  In
accordance with our strategic plan, we subsequently sold our interest in
TherMatrx, Inc., the company established to commercialize our technology for
treating enlarged prostate symptoms, to provide funding that we can utilize for
commercializing our systems used in the treatment of cancer and in pursuing
other business objectives.




In spite
of the advances in cancer treatment technology, according to the American Cancer
Society, over 40% of cancer patients continue to die from the disease in the
United States.  Commercialization of our systems used to treat cancer,
including the BSD-2000 and BSD-500 families of systems and the new
MicroThermX-100 microwave thermal ablation system, is our most immediate
business objective.  Our BSD-2000 and BSD-500 cancer treatment systems
are used to treat cancer with heat while boosting the effectiveness of radiation
and chemotherapy through a number of biological mechanisms.  Our
MicroThermX-100 system is used to treat cancers with heat
alone.  Current and targeted cancer treatment sites for our systems
include cancers of the prostate, breast, head, neck, bladder, cervix,
colon/rectum, esophagus, liver, brain, bone, stomach and lung, and general
pelvic and abdominal tumors.  Our cancer treatment systems have been
used to treat thousands of patients throughout the world, and have been
recognized, including the 2005 Frost & Sullivan “Technology Innovation of
the Year Award” for cancer therapy devices.




Our
BSD-2000 systems are used to non-invasively treat cancers located deeper in the
body, and are designed to be companions to the estimated 7,500 linear
accelerators used to treat cancer through radiation and in combination with
chemotherapy treatments.  Our BSD-500 systems treat cancers on or near
the body surface and those that can be approached through body orifices such as
the throat, the rectum, etc., or through interstitial treatment in combination
with interstitial radiation (brachytherapy).  BSD-500 systems can be
used as companions to our BSD-2000 systems and the estimated 2,500 brachytherapy
systems installed, as well as with chemotherapy treatments.  The
MicroThermX-100 system is used to treat cancers that can be destroyed with heat
alone.







13





Based on
our management team’s knowledge of the market, we believe that the fully
saturated potential market for these developed cancer therapy systems is in
excess of $5 billion.  We also project an after-market opportunity
based on service agreements that equates to approximately 15% of the purchase
price of our systems per year.  We believe that the replacement cycle
for our systems, based on advances in software, hardware and other components,
will average 5-7 years. We estimate our financial model in the higher production
environment of established commercial sales could achieve a 60% gross margin on
systems and an 80% gross margin on service agreements and disposable applicators
used with our MicroThermX-100 system, although there is no assurance that these
results will be obtained.




We have
received United States Food and Drug Administration, or FDA, approval to market
our commercial version of the BSD-500, and in March 2006, we completed a
submission for FDA approval to sell the BSD-2000 in the United
States.  In August 2007, we successfully concluded a pre-approval and
quality system inspection by the FDA.  In December 2007, we received a
letter from the FDA denying our application for pre-market approval of the BSD
2000 and providing guidance regarding amendments needed to make the BSD-2000
submission approvable.  We have subsequently met with the FDA to
clarify its requirements and are currently seeking to satisfy these
requirements.  In April 2008, we submitted a 510(k) premarket
notification to the FDA for the MicroThermX-100 system, and are currently
working with the FDA in an effort to satisfy the requirements of that
submission.  We have designed our cancer therapy systems such that
together they are capable of providing treatment for most solid tumors located
virtually anywhere in the body.




On April
22, 2008 we changed the listing of our stock from the American Stock Exchange
(AMEX) to the NASDAQ Stock Exchange (NASDAQ), and our stock now trades under the
NASDAQ symbol “BSDM.”




Critical Accounting Policies
and Estimates




The
following is a discussion of our critical accounting policies and estimates that
management believes are material to an understanding of our results of
operations and which involve the exercise of judgment or estimates by
management.




Revenue
Recognition.  Revenue from the sale of cancer treatment systems
is recognized when a purchase order has been received, the system has been
shipped, the selling price is fixed or determinable, and collection is
reasonably assured.  Most system sales are F.O.B. shipping point;
therefore, shipment is deemed to have occurred when the product is delivered to
the transportation carrier.  Most system sales do not include
installation.  If installation is included as part of the contract,
revenue is not recognized until installation has occurred, or until any
remaining installation obligation is deemed to be perfunctory.  Some
sales of cancer treatment systems may include training as part of the
sale.  In such cases, the portion of the revenue related to the
training, calculated based on the amount charged for training on a stand-alone
basis, is deferred and recognized when the training has been
provided.  The sales of our cancer treatment systems do not require
specific customer acceptance provisions and do not include the right of return,
except in cases where the product does not function as warranted by
us.  We provide a reserve allowance for estimated
returns.  To date, returns have not been significant.




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.







14





Inventory
Reserves.  We periodically review our inventory levels and
usage, paying particular attention to slower-moving items.  If
projected sales for fiscal 2008 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 BSD-500 and
BSD-2000 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
within two years to offset income taxes previously paid, we record an income tax
receivable and a current income tax benefit.







15




Results of
Operations




Three
Months Ended May 31, 2008 Compared to the Three Months Ended May 31,
2007




Revenues.  Total
revenues for the three months ended May 31, 2008 were $915,017, compared to
$953,176 for the three months ended May 31, 2007, a decrease of $38,159, or
approximately 4%.  The decrease in total revenues was due to a
decrease in the volume of sales to related parties, as further discussed
below.  Our revenues can fluctuate significantly from period to period
because our sales, to date, have been based upon a relatively small number of
systems, the sales price of each being substantial enough to greatly impact
revenue levels in the periods in which they occur.  Sales of a few
systems can cause a large change in our revenue from period to
period.




Related Party
Sales.  We had $189,207, or approximately 21%, of our revenues
in the three months ended May 31, 2008 from
sales to related parties as compared to $521,053 or approximately 55%, in the
three months ended May 31,
2007.  Related party sales for all periods presented were to
Medizin-Technik GmbH.  Dr. Gerhard Sennewald, one of our stockholders
and directors, is also a stockholder, executive officer and director of
Medizin-Technik.  These sales for the three months ended May 31, 2008
consisted of product sales of $166,313, probes of $6,225 and other revenues of
$16,669.  These sales for the three months ended May 31, 2007
consisted of product sales of $468,875, probes of $8,700 and other revenues of
$43,478.  Sales to Medizin-Technik may fluctuate significantly from
period to period because our sales, to date, have been based upon a relatively
small number of systems, the sales price of each being substantial enough to
greatly impact revenue levels in the periods in which they
occur.  Sales of a few systems can cause a large change in our revenue
from period to period.




Non-Related Party
Sales.  In the three months ended May 31, 2008, we
had $725,810 or approximately 79% of our revenues from sales to unrelated
parties, as compared to $432,123, or approximately 45%, for the three months
ended May 31,
2007.  These sales for the three months ended May 31, 2008
consisted of product sales of $703,000, service contracts of $13,975, probes of
$1,800 and other revenues of $7,035.  By comparison, non-related party
sales for the three months ended May 31, 2007 consisted of product sales of
$410,000, service contracts of $12,763, probes of $3,300 and other revenues of
$6,060.




Gross
Profit.  Gross profit for the three months ended May 31, 2008
was $539,171 or 59% of total product sales as compared to $472,645 or 50%, of
total product sales for the three months ended May 31, 2007.  The
increase in gross profit in the current year quarter resulted from more product
sales, which have a higher gross profit.




Research
and Development Expenses.Research and development expenses were $481,692
for the three months ended May 31, 2008, as
compared to $451,721, for the three months ended May 31, 2007, an
increase of $29,971, or approximately 7%.




Selling General and Administrative
Expenses.  Selling, general and administrative expenses
decreased to $1,368,451 in the three months ended May 31, 2008, from $1,400,170
for the three months ended May 31, 2007, a decrease of $31,719, or approximately
2%.  This decrease was primarily due to a reduction in compensation
expense related to the issuance of stock options charged to selling, general and
administrative expenses in the current year, partially offset by an increase in
professional fees.




Interest and Investment
Income.  Interest and investment income decreased to $226,692
for the three months ended May 31, 2008 as compared to $331,579 for the three
months ended May 31, 2007 due primarily to lower levels of cash and investments
in the current quarter.  At May 31, 2008, however, we had an
unrealized loss on investments of $1,282,933 reported as other comprehensive
loss.







16





Income Tax
Benefit.  We reported an income tax benefit of $336,071 and
$232,645 for the three months ended May 31, 2008 and 2007, respectively, which
primarily represents an increase to our income tax receivable resulting from our
ability to carry-back our taxable loss in the current period to offset income
taxes previously paid.




Net Loss.  During
the three months ended May 31, 2008, we
had a net loss of $789,229, as compared to a net loss of $634,638 in the three
months ended May 31,
2007.  Our net loss in the third quarter of the current fiscal
year increased $154,591 compared to the net loss in the third quarter of the
prior year, primarily due to the decrease in total revenues, a decrease in
interest and investment income, and an increase in other expense, partially
offset by a decrease in our total operating costs and expenses in the current
year.




Nine
Months Ended May 31, 2008 Compared to the Nine Months Ended May 31
2007




Revenues.  Total
revenues for the nine months ended May 31, 2008 were $3,778,397, compared to
$2,278,488, for the nine months ended May 31, 2007, an increase of $1,499,909,
or approximately 66%.  The increase in total revenues was due to an
increase in the volume of sales to both non-related parties and related parties,
as further discussed below.




Related Party
Sales.  We had $1,932,345, or approximately 51%, of our
revenues in the nine months ended May 31, 2008 from
sales to related parties as compared to $1,019,680, or approximately 45%, in the
nine months ended May 31,
2007.  Related party sales for all periods presented were to
Medizin-Technik.  These sales for the nine months ended May 31, 2008
consisted of product sales of $1,849,024, probes of $25,650 and other revenues
of $57,671.  These sales for the nine months ended May 31, 2007
consisted of product sales of $837,750, probes of $34,080 and other revenues of
$147,850.




Non-Related Party
Sales.  In the nine months ended May 31, 2008, we
had $1,846,052 or approximately 49% of our revenues from sales to unrelated
parties, as compared to $1,258,808, or approximately 55%, for the nine months
ended May 31,
2007.  These sales for the nine months ended May 31, 2008
consisted of product sales of $1,758,700, service contracts of $38,842, probes
of $16,247 and other revenues of $32,263.  By comparison, non-related
party sales for the nine months ended May 31, 2007 consisted of product sales of
$1,172,887, consulting services of $36,309, service contracts of $33,616, probes
of $3,300 and other revenue of $12,696.




Gross
Profit.  Gross profit for the nine months ended May 31, 2008
was $2,370,611, or 63% of total product sales as compared to $925,385 or 41%, of
total product sales for the nine months ended May 31, 2007.  The
increase in gross profit in the first nine months of the current year resulted
from more product sales, which have a higher gross profit.  In
addition, as sales volumes increase, we will more fully absorb our fixed
overhead costs, thus increasing our gross profit percentage.  The
gross margin percentage will also fluctuate from period to period depending on
the mix of revenues reported for the period.




Research
and Development Expenses.Research and development expenses were
$1,252,914 for the nine months ended May 31, 2008, as
compared to $1,292,578, for the nine months ended May 31, 2007, a
decrease of $39,664, or approximately 3%.




Selling General and Administrative
Expenses.  Selling, general and administrative expenses
decreased to $4,196,516 in the nine months ended May 31, 2008, from $4,287,870
for the nine months ended May 31, 2007, a decrease of $91,354, or approximately
2%.  This decrease was primarily due to a reduction in compensation
expense related to the issuance of stock options charged to selling, general and
administrative expenses in the current year, partially offset by an increase in
professional fees.







17





Interest and Investment
Income.  Interest and investment income decreased to $771,680
for the nine months ended May 31, 2008 as compared to $1,044,249 for the nine
months ended May 31, 2007 due primarily to lower levels of cash and investments
in the current year.  At May 31, 2008, however, we had an unrealized
loss on investments of $1,282,933 reported as other comprehensive
loss.




Income Tax
Benefit.  For the nine months ended May 31, 2008, we reported
an income tax benefit of $647,071, which was comprised of a current income tax
benefit of $815,071, partially offset by a deferred income tax provision of
$168,000.  The current income tax benefit of $815,071 represents an
increase to our income tax receivable resulting from our ability to carry-back
our taxable loss in the current period to offset income taxes previously paid,
partially offset by payments of state income taxes.  The deferred
income tax provision of $168,000 resulted primarily from our recording a 100%
valuation allowance against our deferred tax assets as of May 31,
2008.  In recording the valuation allowance, we were unable to
conclude that it is more likely than not that our deferred tax assets 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 within two years to offset income taxes
paid.  For the nine months ended May 31, 2007, we reported an income
tax benefit of $1,295,672, which was comprised of a current income tax benefit
of $1,114,672 and a deferred income tax benefit of $181,000.




Net Loss.  During
the nine months ended May 31, 2008, we
had a net loss of $1,812,001, as compared to a net loss of $2,209,094 in the
nine months ended May 31,
2007.  Our net loss in the first nine months of the current
fiscal year decreased $397,093 compared to the net loss in the first nine months
of the prior year, primarily due to the increase in total revenues, a decrease
in total operating costs and expenses, partially offset by a decrease in
interest and investment income, and an increase in other expense in the current
year.




Liquidity and Capital
Resources




Since
inception through May 31, 2008, we have generated an accumulated deficit of
$4,662,154.  We have historically financed our operations through
research grants, licensing of technological assets, issuance of common stock and
the sale of investments in spin-off operations.  As of May 31, 2008,
we had cash, cash equivalents and investments totaling $15,594,496 as compared
to cash, cash equivalents and investments totaling $19,506,658 as of August 31,
2007.  The recorded value of our investments at May 31, 2008 has been
reduced by an unrealized loss of $1,282,933.




During
the nine months ended May 31, 2008, we used cash of $2,014,080 in operating
activities, primarily as a result of our net loss of $1,812,001, increase in
income tax receivable of $900,000, increase in inventories of $51,856, and
decrease in accrued liabilities of $160,489 and customer deposits of $129,838,
partially offset by a decrease in deferred tax assets of $244,000.  By
comparison, net cash used in operating activities was $4,455,432 during the nine
months ended May 31, 2007, which included a reduction of income taxes payable of
$1,500,000.




Net cash
provided by investing activities for the nine months ended May 31, 2008 was
$1,768,537, resulting from the sale of investments of $3,062,952, partially
offset by the purchase of property and equipment of $1,273,449, primarily the
acquisition of our office facility, and the purchase of a patent for
$20,966.  For the nine months ended May 31, 2007, net cash provided by
investing activities was $3,186,029, resulting from the sale of investments of
$3,046,812, additional proceeds from the sale of investment in TherMatrx of
$202,223, partially offset by the purchase of property and equipment of
$63,006.







18





Net cash
provided by financing activities consisted of proceeds from the sale of common
stock through the exercise of stock options of $106,506 in the nine months ended
May 31, 2008 and $229,706 for the nine months ended May 31, 2007.




We expect
to incur additional expenses related to the commercial introduction of our
systems, due to additional participation at trade shows, expenditures on
publicity, additional travel, increased sales salaries and commissions and other
related expenses. In addition, we anticipate that we will incur increased
expenses related to seeking governmental and regulatory approvals for our
products and continued expenses related to corporate governance and compliance
with the Sarbanes-Oxley Act of 2002, during the remainder of fiscal
2008.




We
believe we can cover any cash requirements with cost cutting or available
cash.  If we cannot cover any such cash shortfall with cost cutting or
available cash, we would need to obtain additional financing.  We
cannot be certain that any financing will be available when needed or will be
available on terms acceptable to us.  If we raise equity capital our
stockholders will be diluted.  Insufficient funds may require us to
delay, scale back or eliminate some or all of our programs designed to
facilitate the commercial introduction of our systems or entry into new
markets.




As of May
31, 2008, we have no significant commitments for the purchase of property and
equipment.




We
believe that our current cash and cash equivalents, investments, and expected
cash provided from operating activities will be sufficient to fund our
operations for the next twelve months.






FORWARD-LOOKING
STATEMENTS




With the
exception of historical facts, the statements contained in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which reflect our current expectations and
beliefs regarding our future results of operations, performance and
achievements.  These statements are subject to risks and uncertainties
and are based upon assumptions and beliefs that may or may not
materialize.  These forward-looking statements include, but are not
limited to, statements concerning:




·
            our
      belief about the market opportunities for our
  products;




·
            our
      anticipated financial performance and business
  plan;




·
            our
      expectations regarding the commercialization of the BSD-2000, BSD 500 and
      MicroThermX-100 systems;




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




·
            our
      expectations that in a higher production environment of established
      commercial sales we could achieve a 60% gross margin on system sales and
      an 80% gross margin on service agreements and disposable applicators used
      with our MicroThermX-100 system;




·
            our
      belief concerning the market potential for developed cancer therapy
      systems;




·
            our
      expectations related to the after-market opportunity for service
      agreements;







19





·
            our
      expectations related to the replacement cycle for our
    systems;




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




·
            our
      expectations and efforts regarding FDA approvals relating to the BSD-2000
      and MicroThermX-100 systems;




·
            our
      belief that our technology has application for additional approaches to
      treating cancer and for other medical
purposes;




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




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




·
            our
      belief that we can cover any cash shortfall with cost cutting or available
      cash; and




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




We wish
to caution readers that the forward-looking statements and our operating results
are subject to various risks and uncertainties that could cause our actual
results and outcomes to differ materially from those discussed or anticipated,
including the factors set forth in the Items entitled “Risk Factors” included in
our Annual Report on Form 10-K for the year ended August 31, 2007 and in this
Form 10-Q, 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 Disclosure About Market
Risk.




A
significant portion of the Company’s cash equivalents and short-term investments
bear variable interest rates that are adjusted to market
conditions.  Changes in market rates will affect interest earned and
potentially the market value of the principal of these
instruments.  The Company does not utilize derivative instruments to
offset the exposure to interest rate changes.  Significant changes in
interest rates may have a material impact on the Company’s investment income,
but not on the Company’s consolidated results of operations.





The Company does have significant sales
to foreign customers and is therefore subject to the effects that changes in
foreign currency exchange rates may have on demand for its products and
services.  The Company does not utilize derivative instruments to
offset the exposure to changes in foreign currency exchange rates.  To
minimize foreign exchange risk, the Company’s export sales are transacted in
United States dollars.





20





Item
4.   Controls and Procedures.




Evaluation
of disclosure controls and procedures.





As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our management including our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation, the principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in applicable rules and forms and
that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, in a
manner that allows timely decisions regarding required disclosure.





Changes
in internal controls over financial reporting.





There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.








PART
II – OTHER INFORMATION




Item
1A.   Risk Factors.




In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Item 1A – “Risk Factors” in our annual report
on Form 10-K for the year ended August 31, 2007, which could materially affect
our business, financial condition or future results of
operations.  The information presented below updates those risk
factors and should be read in conjunction with the risk factors and information
disclosed in that Form 10-K.  The risks discussed in our annual report
on Form 10-K, as updated in this report, are not the only risks facing
us.  Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or results of operations.




We have not yet received FDA marketing
approval for our BSD-2000 Hyperthermia System or FDA marketing clearance for our
MicroThermX-100 system, which are necessary for us to commercially market these
systems in the U.S.




We have
not yet received FDA marketing approval for our BSD-2000 Hyperthermia System or
FDA marketing clearance for our MicroThermX-100 system.  Obtaining
these approvals from the FDA is necessary for us to commercially market these
systems in the United States.  Obtaining approvals is a lengthy and
expensive process.  On December 31, 2007, we received a letter from
the FDA denying our application for pre-market approval of the BSD 2000 and
providing guidance regarding amendments needed to make the BSD-2000 submission
approvable.  We have subsequently met with the FDA to clarify its
requirements and are currently seeking to satisfy these
requirements.  In April 2008, we submitted a 510(k) premarket
notification to the FDA for the MicroThermX-100 system, and are currently
working with the FDA in an effort to satisfy the requirements of that
submission.  We may not be able to obtain these approvals on a timely
basis, if at all, and such failure could harm our business prospects
substantially. Further, even if we are able to obtain the approvals we seek from
the FDA, the approvals granted might include significant limitations on the
indicated uses for which the products may be marketed, which restrictions could
negatively impact our business.







21




Item
6.   Exhibits.




The
following exhibits are filed as part of this report:




Exhibit No.
            
            Description of Exhibit31.1
            
            Certification
      of Principal Executive Officer Required Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certification
      of 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











22





SIGNATURES








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






BSD
      MEDICAL CORPORATIONDate:
      July 10, 2008
            /s/ Hyrum A.
      MeadHyrum
      A. MeadPresident
      (Principal Executive Officer)Date:
      July 10, 2008
            /s/ Dennis P.
      GaugerDennis
      P. GaugerChief
      Financial Officer (Principal Accounting
Officer)




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