================================================================================


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                      ------------------------------------

                                    FORM 10-Q


     (Mark One)

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

         For the quarterly period ended May 31, 2007

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

            For the transition period from ___________ to ___________

                          Commission File No. 001-32526



                      ------------------------------------


                             BSD Medical Corporation
             (Exact Name of Registrant as Specified in Its Charter)

                   Delaware                                   75-1590407
        (State or other jurisdiction of                    (I.R.S. Employer
        incorporation or organization)                    Identification No.)

                              2188 West 2200 South
                           Salt 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 |X| No |_|

         Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one): Large Accelerated Filer |_| Accelerated Filer |_| Non-accelerated
Filer |X|

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

         As of July 16, 2007, there were 21,284,353 shares of the registrant's
common stock, $0.001 par value per share, outstanding.




<PAGE>

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.


                             BSD MEDICAL CORPORATION
                            Condensed Balance Sheets
                                   (Unaudited)

                                                    May 31,         August 31,
                                 Assets              2007              2006
                                 ------        --------------    ---------------
Current assets:
    Cash and cash equivalents                  $    1,139,397    $    2,179,094
    Investments                                    19,633,218        22,556,106
    Receivables, net                                  748,649         1,186,800
    Related party trade receivables                   565,964           261,543
    Income tax receivable                           1,075,667                 -
    Inventories, net                                1,285,688         1,366,264
    Deferred tax asset                                359,000           178,000
    Other current assets                              224,755           120,277
                                               --------------    ---------------
           Total current assets                    25,032,338        27,848,084

Property and equipment, net                           294,760           303,034
Note receivable                                             -           137,500
Patents, net                                           19,842            21,250
                                               --------------    ---------------
                                               $   25,346,940    $   28,309,868
                                               ================  ===============


                      Liabilities and Stockholders' Equity
                      ------------------------------------

Current Liabilities:
    Accounts payable                           $      331,608    $      365,396
    Accrued  liabilities                              443,497           545,113
    Income taxes payable                                    -         1,539,946
    Deferred revenue - current portion                 28,838            17,912
                                               --------------    ---------------

           Total current liabilities                  803,943         2,468,367

Deferred revenue - less current portion                53,333           217,500
                                               --------------    ---------------

           Total liabilities                          857,276         2,685,867
                                               --------------    ---------------

Commitments and contingencies

Stockholders' equity:
    Preferred stock, $.001 par value;
        10,000,000 authorized, no shares
        issued and outstanding                              -                 -
    Common stock, $.001 par value;
        40,000,000 shares authorized;
        21,279,353 and 21,023,668 shares
        issued  and outstanding                        21,280            21,024
    Additional paid-in capital                     26,155,108        25,452,231
    Deferred compensation                                   -          (247,700)
    Treasury stock , 24,331 shares at cost               (234)             (234)
    Other comprehensive income (loss)                  24,562           (99,362)
    Retained earnings (deficit)                    (1,711,052)          498,042
                                               --------------    ---------------

           Total stockholders' equity              24,489,664        25,624,001
                                               --------------    ---------------

                                               $   25,346,940    $   28,309,868
                                               ================  ===============



            See accompanying notes to condensed financial statements.



                                       1
<PAGE>
<TABLE>
<CAPTION>

                                       BSD MEDICAL CORPORATION
                                 Condensed Statements of Operations
                                             (Unaudited)


                                                       Three Months               Nine Months
                                                       Ended May 31,             Ended May 31,
                                              ---------------------------  --------------------------
                                                   2007          2006           2007          2006
                                              -------------  ------------  ------------  ------------
<S>                                           <C>            <C>           <C>           <C>
Sales                                         $     432,123  $    264,050  $  1,258,808  $  1,004,272
Related party sales                                 521,053       448,721     1,019,680       669,041
                                              -------------  ------------  ------------  ------------

           Total sales                              953,176       712,771     2,278,488     1,673,313
                                              -------------  ------------  ------------  ------------
Costs and expenses:
    Cost of sales                                   200,620       167,464       703,006       680,918
    Cost of related party sales                     279,911       245,250       650,097       393,026
    Research and development                        451,721       380,623     1,292,578       945,527
    Selling, general, and administrative          1,400,170     1,329,282     4,287,870     3,553,103
                                              -------------  ------------  ------------  ------------

           Total costs and expenses               2,332,422     2,122,619     6,933,551     5,572,574
                                              -------------  ------------  ------------  ------------

           Operating loss                        (1,379,246)   (1,409,848)   (4,655,063)   (3,899,261)
                                              -------------  ------------  ------------  ------------

Other income
    Interest income                                 331,579       411,777     1,044,249       960,990
    Other income (expense)                          180,384     5,935,315       106,048    17,750,601
                                              -------------  ------------  ------------  ------------

           Total other income                       511,963     6,347,092     1,150,297    18,711,591
                                              -------------  ------------  ------------  ------------
           Income (loss) before income taxes       (867,283)    4,937,244    (3,504,766)   14,812,330
Income tax (provision) benefit                      232,645    (1,949,621)    1,295,672    (5,506,785)
                                              -------------  ------------  ------------  ------------
           Net income (loss)                  $    (634,638) $  2,987,623  $ (2,209,094) $  9,305,545
                                              =============  ============  ============  ============

Net income (loss) per common share:
    Basic                                     $       (0.03) $       0.14  $      (0.10) $       0.45
                                              =============  ============  ============  ============
    Diluted                                   $       (0.03) $       0.13  $      (0.10) $       0.42
                                              =============  ============  ============  ============

Weighted average number of
shares outstanding:
    Basic                                        21,135,000    20,926,000    21,071,000    20,683,000
                                              =============  ============  ============  ============
    Diluted                                      21,135,000    22,163,000    21,071,000    22,148,000
                                              =============  ============  ============  ============

                      See accompanying notes to condensed financial statements.


</TABLE>

                                       2
<PAGE>
                             BSD MEDICAL CORPORATION
                       Condensed Statements of Cash Flows
                                   (Unaudited)

                                                           Nine Months
                                                          Ended May 31,
                                                  ------------------------------
                                                      2007             2006
                                                  ------------   ---------------

Cash flows from operating activities:
    Net income (loss)                             $ (2,209,094)  $    9,305,545
    Adjustments to reconcile net income (loss)
      to net cash used in operating activities:
       Provision for doubtful accounts                  83,700                -
       Depreciation and amortization                    70,111           64,195
       Loss on disposition of property and
         equipment                                     2,577                  -
       Stock compensation expense                      673,678           48,471
       Amortization of deferred compensation                 -           75,950
       Gain on sale of investment in TherMatrx        (202,223)     (17,413,342)
       (Increase) decrease in:
           Receivables                                 491,951         (335,760)
           Related party receivables                  (304,421)        (105,745)
           Income tax refund receivable             (1,068,164)               -
           Inventories                                  80,576         (383,857)
           Deferred tax asset                         (181,000)        (111,000)
           Other current assets                       (104,478)          (1,028)
       Increase (decrease) in:
           Accounts payable                            (33,788)         411,138
           Accrued expenses                           (101,616)         221,055
           Income taxes payable                     (1,500,000)       4,998,125
           Deferred revenue                           (153,241)          10,219
           Deferred tax liability                            -          (13,000)
                                                  ------------   ---------------

          Net cash used in operating
          activities                                (4,455,432)      (3,229,031)
                                                  ------------   ---------------

Cash flows from investing activities:
    Proceeds from sale of investment in
      TherMatrx                                        202,223       17,413,342
    (Purchase) sale of investments                   3,046,812      (14,770,709)
    Purchase of property and equipment                 (63,006)        (194,866)
                                                  ------------   ---------------

          Net cash provided by
          investing activities                       3,186,029        2,447,767
                                                  ------------   ---------------

Cash flows from by financing activities:
     Proceeds from sale of common stock                229,706          415,036
                                                  ------------   ---------------

Decrease in cash and cash equivalents               (1,039,697)        (366,228)
Cash and cash equivalents, beginning
  of period                                          2,179,094          908,674
                                                  ------------   ---------------

Cash and cash equivalents, end of
  period                                          $  1,139,397   $      542,446
                                                  ============   ===============

Supplemental Disclosure of Cash Flow Information
------------------------------------------------

         o    The Company paid no cash for interest during the nine months ended
              May 31, 2007 and 2006 and $1,798,676 and $392,311 for income taxes
              during the nine months ended May 31, 2007 and 2006, respectively.



                                       3
<PAGE>

         o    The Company  issued  349,368 stock options  during the nine months
              ended May 31,  2006,  which  resulted  in an  increase to deferred
              compensation of $363,200.

         o    The Company had an income tax benefit  from the  exercise of stock
              options of $47,449 and  $972,282  during the nine months ended May
              31, 2007 and 2006, respectively, which was recorded as an increase
              to  additional  paid-in  capital and a reduction  in income  taxes
              payable.

         o    The Company  had an  unrealized  gain of $123,924  during the nine
              months ended May 31, 2007 on  available-for-sale  securities.  The
              Company had an unrealized  loss of $115,305 during the nine months
              ended May 31, 2006 on available-for-sale securities.

         o    The  Company  transferred  deferred  compensation  of  $247,700 to
              additional  paid-in  capital  during the nine months ended May 31,
              2007.

         o    The Company  decreased  income taxes payable and decreased  income
              tax  receivable  by $39,946  during the nine months  ended May 31,
              2007.

         o    The  Company  increased  common  stock  and  decreased  additional
              paid-in capital by $50 during the nine months ended May 31, 2007.





            See accompanying notes to condensed financial statements






                                       4
<PAGE>

                             BSD MEDICAL CORPORATION
                     Notes to Condensed Financial Statements



Note 1.    Basis of Presentation

         The  accompanying  unaudited  condensed  balance  sheets of BSD Medical
Corporation  (the  "Company")  as of May 31,  2007 and August  31,  2006 and the
related unaudited  condensed  statements of operations and of cash flows for the
three months and nine months  ended May 31, 2007 and 2006 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 (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-KSB for the year ended August 31, 2006.

         All  adjustments  (consisting  only of  normal  recurring  adjustments)
necessary for the fair presentation of our financial position as of May 31, 2007
and August 31, 2006 and our results of  operations  and cash flows for the three
months  and nine  months  ended May 31,  2007 and 2006 have been  included.  The
results of  operations  for the three  months and nine months ended May 31, 2007
may not be indicative of the results for the year ending August 31, 2007.

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 are currently evaluating the impact this Interpretation will have
on our  financial  statements.  This  Interpretation  will be  effective  in the
Company's financial statements for the fiscal year beginning September 1, 2007.

         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.
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.  The  adoption  of this
statement is not expected to have a material  effect on the Company's  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.  The Company  anticipates
adopting  SFAS No. 158 on August 31, 2007,  and does not believe the adoption of
the new accounting standard will result in a material impact on the consolidated
financial statements of the Company since the Company currently does not sponsor
the defined  benefit  pension or  postretirement  plans  within the scope of the
standard.




                                       5
<PAGE>

         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.  SFAS No. 157 is  effective  for  financial
statements  issued for fiscal years  beginning  after  November  15,  2007,  and
interim  periods within those fiscal years. We believe that the adoption of SFAS
No. 157 will not have a material impact on the financial statements.

         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 do not expect our  adoption of this new  standard to
have a material impact on our financial position,  results of operations or cash
flows.

         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 do
not expect our  adoption of this new  standard to have a material  impact on our
financial position, results of operations or cash flows.

         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.
To the  extent  that we enter into  financing  arrangements  in the future  that
include  registration payment  arrangements,  the future application of this FSP
may have a material effect on our financial condition and results of operations.

         In June 2006, the FASB ratified  EITF,  No. 06-3,  How Taxes  Collected
from Customers and Remitted to Governmental  Authorities  Should Be Presented in
the Income  Statement  (That Is, Gross versus Net  Presentation).  EITF No. 06-3
requires that, for interim and annual reporting periods beginning after December


                                       6
<PAGE>

15, 2006, we disclose our policy related to the  presentation of sales taxes and
similar  assessments  related to our  revenue  transactions.  Early  adoption is
permitted.  We present  revenue net of sales taxes and any similar  assessments.
EITF No. 06-3 had no effect on our financial position and results of operations.

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, 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,  respectively,
because of the Company's net loss.

         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 Ended
                                       May 31,                   May 31,
                              --------------------------------------------------
                                  2007          2006        2007         2006
                                  ----          ----        ----         ----
 Weighted average
    number of shares
    outstanding - basic         21,135,000   20,926,000  21,071,000  20,683,000
 Dilutive effect of
    stock options                        -    1,237,000           -   1,465,000
                              --------------------------------------------------

 Weighted average
    number of shares
    outstanding - diluted       21,135,000   22,163,000  21,071,000  22,148,000
                              ==================================================

Note 4.  Inventories

         Inventories consist of the following:

                                                     May 31,        August 31,
                                                      2007            2006
                                                  ------------------------------

         Parts and supplies                       $   775,221     $   711,552
         Work-in-process                              550,467         641,608
         Finished goods                                     -          53,104
         Reserve for obsolete inventory               (40,000)        (40,000)
                                                  ------------------------------

         Inventories, net                         $ 1,285,688     $ 1,366,264
                                                  ==============================

Note 5.    Related Party Transactions

         During the three  months  ended May 31, 2007 and May 31,  2006,  we had
sales of $521,053  and  $448,721,  respectively,  to an entity  controlled  by a
significant  stockholder  and member of the Board of  Directors.  These  related
party  transactions  represent  55% and 63% of total  sales for each  respective
three-month period.

         During the nine  months  ended May 31,  2007 and May 31,  2006,  we had
sales of $1,019,680 and $669,041,  respectively,  to this related  party.  These
related  party  transactions  represent  45% and 40% of  total  sales  for  each
respective nine-month period.


                                       7
<PAGE>

At May 31, 2007 and August 31, 2006,  receivables  include $565,964 and $261,543
respectively, from this entity.

Note 6.  Stock-Based Compensation

         On September 1, 2006, we adopted SFAS No. 123 (R), Share-Based Payment,
which requires the measurement  and recognition of compensation  expense for all
share-based  payment awards made to employees and directors  including  employee
stock options.  In accordance with this standard,  we recognize the compensation
cost of all  share-based  awards on a  straight-line  basis  over the  requisite
service  period for the number of awards  that are  expected  to vest.  Prior to
September  1, 2006,  we  accounted  for those  plans under the  recognition  and
measurement  provisions of APB Opinion No. 25, and related  Interpretations,  as
permitted by SFAS No. 123.

         Our condensed financial statements as of May 31, 2007 and for the three
months  and  nine  months   ended  May  31,  2007  reflect  the  impact  of  the
implementation  of SFAS  123(R).  We  adopted  SFAS  123(R)  using the  modified
prospective  transition  method,  which  requires that  compensation  expense be
recognized  during the three months and nine months ended May 31, 2007 equal to:
(a) amortization  related to the compensation cost for all share-based  payments
granted prior to, but not yet vested as of September 1, 2006, based on the grant
date  fair  value  estimated  in  accordance  with the  original  provisions  of
Statement  123,  and (b)  amortization  related  to  compensation  cost  for all
share-based  payments  granted  subsequent  to September  1, 2006,  based on the
grant-date  fair value  estimated  in  accordance  with the  provisions  of SFAS
123(R). Results for prior periods have not been restated.

         We have two stock-based employee plans and a director option plan which
are described more fully in Note 11 in our 2006 Annual Report on Form 10-KSB. As
of May 31, 2007, we had  approximately  782,000  shares of common stock reserved
for future issuance under the stock option plans.

         The adoption of SFAS 123(R) had a significant  impact on our results of
operations.  Our  statements of operations  for the three months and nine months
ended May 31, 2007 include stock-based  compensation  expense from stock options
in selling,  general and  administrative  expenses  of  $204,734  and  $613,678,
respectively.

         During the nine months ended May 31, 2007, we granted  120,000  options
to our directors, with one fifth vesting each year for the next five years. This
grant accounts for $51,488 of the stock-based  compensation expense for the nine
months ended May 31, 2007.

         Unrecognized stock-based compensation expense expected to be recognized
over  the  estimated  weighted-average  amortization  period  of 1.39  years  is
approximately $1,261,000 at May 31, 2007.

         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, 2007 are shown below:

    Expected volatility                                      67.57%
    Expected forfeiture rate                                   0%
    Expected dividends                                         0%
    Expected term                                           5 Years
    Risk-free interest rate                                  4.68%

         The  expected  volatility  rate was  estimated  based on the  four-year
historical volatility of our common stock. The expected term was estimated based
on historical  experience of stock option exercise.  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.


                                       8
<PAGE>

         The following table illustrates the effect on net income and income per
share if we had applied the fair value  recognition  provisions of Statement 123
to options  granted under our stock option plans and the employee stock purchase
plan for the three months and nine months  ended May 31,  2006.  For purposes of
this  pro-forma  disclosure,  the  value of the  options  is  estimated  using a
Black-Scholes  option-pricing  model and  charged to expense  over the  options'
vesting periods.

                                                 Three Months       Nine Months
                                                    Ended              Ended
                                                 May 31, 2006       May 31, 2006
                                                -------------      -------------
   Net income - as reported                     $   2,987,623      $  9,305,545
Add: Stock-based employee
   compensation expense
   included in reported
   net income, net of
   related taxes
   tax effects                                              -            75,950
Deduct: Stock-based employee
   compensation expense
   determined under fair
   value based method for all
   awards, net of related taxes                        (6,377)         (177,175)
                                                -------------      -------------

Net income - pro forma                          $   2,981,246      $  9,204,320
                                                =============      =============

Income per common share - as reported:

     Basic                                      $         .14      $        .45
     Diluted                                    $         .13      $        .42

Income per common share - pro forma:
     Basic                                      $         .14      $        .44
     Diluted                                    $         .13      $        .42

         A summary of the time-based stock option awards as of May 31, 2007, and
changes during the nine months then ended, is as follows:

                                                      Weighted-
                                           Weighted-   Average
                                            Average   Remaining       Aggregate
                                           Exercise   Contract Term   Intrinsic
 Stock Option Awards             Shares      Price     (Years)          Value

 Outstanding at August 31,
   2006                         1,809,051  $    1.72
 Granted                          120,000       4.77
 Exercised                       (256,247)      1.18
 Forfeited or expired                   -          -
                                =========



  Outstanding at May 31, 2007   1,672,804  $    2.03
                                =========  =========

 Exercisable at May 31, 2007    1,308,022  $    1.39    6.11         $ 8,578,399
                                =========  =========   ============  ===========

         The  weighted-average  grant-date  fair value of stock options  granted
during the nine months ended May 31, 2007 was $2.87.

         Upon adoption of SFAS No. 123 (R) on September 1, 2006, we reclassified
the balance of deferred compensation of $247,700 to additional paid-in capital.


                                       9
<PAGE>

Note 7.  TherMatrx Sales Proceeds

         In April 2007, we received an additional  $202,223 in proceeds from the
sale of TherMatrx,  Inc. We previously reported that we had received the last of
the contingency payments from the sale. However,  pursuant to the performance of
certain  audit  procedures  requested  by the former  management  of  TherMatrx,
additional contingency payments were calculated and distributed.


                                       10
<PAGE>

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  consolidated  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 has  successfully  created a  substantial  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
substantial  funding that we can utilize for commercializing our systems used in
the treatment of cancer and in achieving other business objectives.

         In spite of the advances in cancer treatment  technology,  according to
the American Cancer Society over 40% of cancer patients continue to die from the
disease in the United States,  and cancer has now surpassed heart disease as the
number   one  killer   from  all   causes  of  death  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.



                                       11
<PAGE>

         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. Our financial model in the higher  production  environment of established
commercial  sales is to achieve a 60% gross  margin on systems  and an 80% gross
margin  on  service   agreements  and  disposable   applicators  used  with  our
MicroThermX 100 system.

         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.  We are currently  preparing our FDA submission for the  MicroThermX 100
system.  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.

         Our common stock trades on the American Stock Exchange (AMEX) under the
symbol "BSM."

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.

         Inventory  Reserves.  As of May 31, 2007, we had recorded a reserve for
potential inventory  impairment of $40,000. We periodically review our inventory
levels and  usage,  paying  particular  attention  to  slower-moving  items.  If
projected  sales  for  fiscal  2007 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.



                                       12
<PAGE>

         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.  As of August 31, 2006 we had a $20,000 balance in this
account.  During the nine months ended May 31, 2007, we analyzed our outstanding
accounts  receivables  and determined  that we should increase our allowance for
doubtful  accounts  by $83,700 to a balance of $103,700  at May 31,  2007.  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  - On  September  1, 2006 we adopted 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.  During the three months and nine months ended May 31,
2007, we recorded  compensation expense of $204,734 and $613,678,  respectively,
for stock  options  issued to directors and  employees.  The 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. Upon adoption of SFAS No. 123 (R) on September 1, 2006, we reclassified  the
balance of deferred compensation of $247,700 to additional paid-in capital.

Results of Operations
---------------------

Three Months Ended May 31, 2007 Compared to the Three Months Ended May 31, 2006

         Revenues.  Total  revenues for the three months ended May 31, 2007 were
$953,176,  compared to $712,771,  for the three  months  ended May 31, 2006,  an
increase of $240,405,  or approximately  34%. The increase in total revenues was
due to an increase in the volume of sales to both unrelated and 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 earned $521,053,  or approximately  55%, of our
revenues in the three months ended May 31, 2007 from sales to related parties as
compared to $448,721 or 63%, in the three months ended May 31, 2006. These sales
for the  three  months  ended  May 31,  2007  were to  Medizin-Technik  GmbH and
consisted of product sales of $468,875,  probes of $8,700 and other  revenues of
$43,478.  All of the related  party  revenues in the three  months ended May 31,
2006 was from sales of systems and component parts. Dr. Gerhard  Sennewald,  one
of  our  directors,  is a  stockholder,  executive  officer  and a  director  of
Medizin-Technik.  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.



                                       13
<PAGE>

         Non-Related  Party Sales.  In the three  months ended May 31, 2007,  we
earned  $432,123 or 45%, of our  revenues  from sales to unrelated  parties,  as
compared to $264,050,  or 37%,  for the three  months ended May 31, 2006.  These
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.  By  comparison,  these  sales for the three  months  ended May 31, 2006
consisted of product sales of $192,334,  consulting services of $46,896, service
contracts of $16,161, probes of $2,748 and other revenues of $5,911.

         Gross Profit.  Gross profit for the three months ended May 31, 2007 was
$472,645 or 50% of total  product sales as compared to $300,057 or 42%, of total
product  sales  for the  three  months  ended  May 31,  2006.  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.

         Selling  General  and  Administrative  Expenses.  Selling,  general and
administrative  expenses  increased to  $1,400,170 in the three months ended May
31, 2007,  from  $1,329,282 for the three months ended May 31, 2006, an increase
of $70,888 or  approximately  5%. This increase was primarily due to $204,734 in
compensation  expense  related to issuance of stock options.  We anticipate that
our selling, general and administrative expenses will continue at this increased
level at least in the short term.

         Research and Development  Expenses.  Research and development  expenses
were  $451,721 for the three months ended May 31, 2007, as compared to $380,623,
for the  corresponding  period  of fiscal  2006,  an  increase  of  $71,098,  or
approximately  19%. Research and development  expenses in the three months ended
May 31, 2007 increased due to expanded activities related to the following:

         o    Update of our  commercial  version of the BSD-2000  with  complete
              modernization  of the computer system,  including  addition of the
              Sigma Ellipse phased array applicator.

         o    Support for field  implementation  of a complete new design of the
              BSD-2000  patient support system,  enhancements to the BSD 500 and
              2000 systems  including  language  translations  of the  operating
              manuals to German and Chinese and  development  of various  spiral
              array applicator systems to compliment the BSD-500.

         o    Support for Premarket  Approval,  or PMA,  filing for the BSD-2000
              system,  development  of the first  model of the  MicroThermX  100
              microwave ablation system.

         o    Development of new microwave ablation disposable applicators.

         o    Technical  research to evaluate  the various  treatment  sites and
              diseases suitable for the application of the MicroThermX 100.

         Interest  Income.  Interest income  decreased to $331,579 for the three
months ended May 31, 2007 as compared to $411,777 for the three months ended May
31, 2006,  due to lower  levels of cash and  investments  in the current  fiscal
year.

         Net Income (Loss).  During the three months ended May 31, 2007 we had a
net loss of $634,638 after recording a tax benefit of $232,645 as compared to an
after tax net income of $2,987,623 in the corresponding  period of 2006. The net
income in the previous fiscal year was attributed  primarily to the gain on sale
of our investment in TherMatrx.

Nine Months Ended May, 2007 Compared to the Nine Months Ended May 31, 2006

         Revenues.  Total  revenues  for the nine months ended May 31, 2007 were
$2,278,488,  compared to $1,673,313,  for the nine months ended May 31, 2006, an
increase of $605,175,  or approximately  36%. The increase in total revenues was
due to an increase in the volume of sales to both unrelated and related parties,


                                       14
<PAGE>

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 earned $1,019,680, or approximately 45%, of our
revenues in the nine months ended May 31, 2007 from sales to related  parties as
compared to $669,041 or 40%, in the nine months ended May 31, 2006.  These sales
for the nine months ended May 31, 2007 were to Medizin-Technik  and consisted of
product sales of $837,750, probes of $34,080 and other revenues of $147,850. All
of the related  party  revenues  in the nine months  ended May 31, 2006 was from
sales of systems and component parts..  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 nine months  ended May 31,  2007,  we
earned  $1,258,808 or 45%, of our revenues from sales to unrelated  parties,  as
compared to  $1,004,272,  or 60%, for the nine months ended May 31, 2006.  These
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. By comparison,  these sales for the nine
months  ended May 31, 2006  consisted of product  sales of $886,954,  consulting
services of $89,268, and service contracts of $28,050.

         Gross  Profit.  Gross profit for the nine months ended May 31, 2007 was
$925,385 or 40% of total product sales,  as compared to $599,369 or 36% of total
product sales for the nine months ended May 31, 2006. As sales volume increases,
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.

         Selling  General  and  Administrative  Expenses.  Selling,  general and
administrative expenses increased to $4,287,870 in the nine months ended May 31,
2007,  from  $3,553,103  for the nine months ended May 31, 2006,  an increase of
$734,767 or approximately 21%. This increase was primarily due to an increase in
sales and marketing  costs  supporting new product sales and market  development
activities  and $613,678 in  compensation  expense  related to issuance of stock
options.  We anticipate that our selling,  general and  administrative  expenses
will continue at this increased level at least in the short term.

         Research and Development  Expenses.  Research and development  expenses
were  $1,292,578,  for the nine  months  ended  May 31,  2007,  as  compared  to
$945,527,  for the corresponding period of fiscal 2006, an increase of $347,051,
or approximately 37%. Research and development expenses in the nine months ended
May 31, 2007 increased due to expanded activities related to the following:

         o    Update of our  commercial  version of the BSD-2000  with  complete
              modernization  of the computer system,  including  addition of the
              Sigma Ellipse phased array applicator.

         o    Support for field  implementation  of a complete new design of the
              BSD-2000  patient support system,  enhancements to the BSD 500 and
              2000 systems  including  language  translations  of the  operating
              manuals to German and Chinese and  development  of various  spiral
              array applicator systems to compliment the BSD-500.

         o    Support for PMA filing for the BSD-2000 system, development of the
              first model of the MicroThermX 100 microwave ablation system.

         o    Development of new microwave ablation disposable applicators.

         o    Technical  research to evaluate  the various  treatment  sites and
              diseases suitable for the application of the MicroThermX 100.

         Interest  Income.  Interest income increased to $1,044,249 for the nine
months ended May 31, 2007, as compared to $960,990 for the nine months ended May
31, 2006, due to higher average levels of cash and  investments and higher rates
in the current fiscal year.

         Net Income  (Loss).  During the nine months ended May 31, 2007 we had a
net loss of $2,209,094  after  recording a tax benefit of $1,295,672 as compared
to an after tax net income of  $9,305,545 in the  corresponding  period of 2006.
The net income in the previous fiscal year was attributed  primarily to the gain
on sale of our investment in TherMatrx.

Liquidity and Capital Resources
-------------------------------

         Since inception  through May 31, 2007, we have generated an accumulated
deficit of $1,711,052. We have historically financed our operations through cash
from operations, research grants, licensing of technological assets, issuance of
common stock and sale of investments in spinoff operations.  As of May 31, 2007,
we had cash, cash equivalents and investments  totaling  $20,772,615 as compared
to cash, cash equivalents and investments  totaling $24,735,200 as of August 31,
2006.

         During the nine months ended May 31, 2007,  we used  $4,455,432 of cash
in operating  activities,  primarily as a result of our net loss of  $2,209,094,
decrease in income tax payable of $1,500,000,  increase in income tax receivable
of  $1,068,164,  and  deferred  tax asset of  $181,000,  offset by  decreases in
receivables  of $491,951  and in  inventories  of $80,576.  Cash  provided  from
investing  activities  resulted  from the  sale of  investments  of  $3,046,812,
additional  proceeds  from the sale of our  investment in TherMatrx of $202,223,
partially  offset by the  purchase of property and  equipment  of $63,006.  Cash
provided by financing  activities  consisted of proceeds  from exercise of stock
options of $229,706.

         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 corporate  governance  and  compliance  with the
Sarbanes-Oxley Act of 2002, during fiscal 2007.

         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, 2007, we have no significant commitments for the purchase
of property and equipment.

         The Company has no off balance sheet arrangements as of May 31, 2007.

         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.



                                       15
<PAGE>

                           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:

         o    our belief about the market opportunities for our products;

         o    our anticipated financial performance and business plan;

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

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

         o    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;

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

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

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

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

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

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

         o    our  expectations  related to the amount of expenses we will incur
              for the commercial  introduction  of the BSD-2000 and  MicroThermX
              100 systems;

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

         o    our  expectation  that our  selling,  general  and  administrative
              expenses will  continue at increased  levels at least in the short
              term;

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

         o    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.



                                       16
<PAGE>

         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  subsection  entitled
"Risks Related to Our Business" included in our Annual Report on Form 10-KSB for
the year ended  August 31, 2006 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.

         As of May 31, 2007, our investments  consist primarily of highly-liquid
mutual  funds,  which  are  considered   available-for-sale   securities.  These
investments  are not held for speculative or trading  purposes.  Our investments
may be exposed to market risk from changes in interest  rates and other security
market  conditions  that could impact our results of  operations  and  financial
position.  Changes in interest  rates or other  market  factors  may  materially
affect the investment income we earn on cash, cash equivalents and investments.

         We do not  have  material  foreign  operations  and are  not  currently
exposed to material risks from changes in foreign currency.

Item 4.   Controls and Procedures.

         Evaluation of disclosure controls and procedures.

         Under the  supervision  and with the  participation  of our management,
including our principal  executive officer and principal  financial officer,  we
evaluated  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  upon  that
evaluation,  the principal  executive  officer and principal  financial  officer
concluded  that for the  reasons  described  below,  as of the end of the period
covered  by this  report,  our  disclosure  controls  and  procedures  were  not
effective  and  adequately  designed to ensure that  information  required to be
disclosed  by us in the  reports  we file or submit  under the  Exchange  Act is
recorded,  processed,  summarized and reported within the time periods specified
in applicable rules and forms.

         In  connection  with the  completion  of its  review  of our  financial
statements for the fiscal quarter ended November 30, 2006,  Tanner LC identified
deficiencies  that existed in the design or  operation  of our internal  control
over financial reporting.  These deficiencies  included a lack of segregation of
duties in our  accounting  department  and a lack of controls over reporting and
accounting for deferred income taxes,  deferred  compensation and stock options.
These  deficiencies  have  been  disclosed  to our  audit  committee  and to our
auditors. During the nine months ended May 31, 2007, we have devoted substantial
efforts to fully remedy these deficiencies, including increasing the size of our
financial  department,  and hiring of more experienced financial management with
experience in accounting for deferred income taxes,  deferred  compensation  and
stock  options.  We are  continuing  our efforts to improve and  strengthen  our
control processes and procedures. Our management, audit committee, and directors
continue to work with our auditors and other outside advisors to ensure that our
controls and procedures are adequate and effective.

         Changes in internal controls over financial reporting.

         During the fiscal quarter covered by this report, with the exception of
the matters  described  above,  there has been no change in our internal control
over financial  reporting (as defined in Rule  13a-15(f) or 15d-15(f)  under the
Exchange  Act)  that  has  materially  affected,  or  is  reasonably  likely  to
materially affect, our internal control over financial reporting.


                                       17
<PAGE>

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 under the heading "Risks Related
to Our  Business" in Item 1 -  Description  of Business in our Annual  Report on
Form 10-KSB for the year ended August 31, 2006,  which could  materially  affect
our business,  financial  condition or future results of  operations.  The risks
discussed in our Annual  Report on Form 10-KSB are not the only risks facing our
Company. 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.

Item 6.       Exhibits.

         The following exhibits are filed as part of this report:

      Exhibit No.    Description of Exhibit
      ----------     -----------------------------------------------------------

         10.1        Independent  Contractor  Agreement  with  Dennis P.  Gauger
                     dated May 1, 2007.  (Incorporated  by  reference to Exhibit
                     10.1 of our Form 8-K filed May 2, 2007).

         31.1        Certification  of  Principal   Executive  Officer  Required
                     Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

         31.2        Certification  of  Principal   Financial  Officer  Required
                     Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

         32.1        Certification  of  Principal   Executive  Officer  Required
                     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

         32.2        Certification  of  Principal   Financial  Officer  Required
                     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002











                                       18
<PAGE>

                                   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 CORPORATION



Date:    July 16, 2007            /s/ Hyrum A. Mead
                                  ---------------------------------------------
                                  Hyrum A. Mead
                                  President (Principal Executive Officer)

Date:    July 16, 2007            /s/ Dennis P. Gauger
                                  ---------------------------------------------
                                  Dennis P. Gauger
                                  Chief Financial Officer (Principal Accounting
                                  Officer)














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