U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB


               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   For the Quarterly Period Ended May 31, 2006

                         Commission file number 0-10783


                             BSD MEDICAL CORPORATION


              Delaware                                  75-1590407
----------------------------------        -------------------------------------
      (State of Incorporation)             (IRS Employer Identification Number)

        2188 West 2200 South
        Salt Lake City, Utah                              84119
----------------------------------        -------------------------------------
(Address of principal executive offices)             (Zip Code)

Issuer's telephone number:  (801) 972-5555

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

As of July 10, 2006, there were 21,021,668 shares of the Registrant's common
stock, $0.001 par value per share, outstanding.

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]

<PAGE>

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                             BSD MEDICAL CORPORATION
                             Condensed Balance Sheet
                                   (Unaudited)


                                 Assets                           May 31,
                                 ------                            2006
                                                             ------------------
Current assets:
    Cash and cash equivalents                               $          542,446
    Available-for-sale securities                                   27,273,927
    Receivables, net of allowance for
      doubtful accounts of $42,500                                     603,309
    Related party receivables                                          341,873
    Inventories, net                                                 1,518,210
    Deferred tax asset                                                 215,000
    Other current assets                                               133,769
                                                             ------------------
           Total current assets                                     30,628,534
                                                             ------------------

Property and equipment, net                                            306,923
Patents, net                                                            21,720
                                                             ------------------
                                                            $       30,957,177
                                                             ==================

                  Liabilities and Stockholders' Equity
                  ------------------------------------
Current liabilities:
    Accounts payable                                        $          523,951
    Accrued expenses                                                   469,431
    Income taxes payable                                             4,266,602
    Deferred revenue                                                    17,546
                                                             ------------------

           Total current liabilities                                 5,277,530
                                                             ------------------


           Total liabilities                                         5,277,530
                                                             ------------------

Stockholders' equity:
    Preferred stock, $.001 par value;
        10,000,000 authorized, no shares
        issued and outstanding                                              -
    Common stock, $.001 par value; authorized
      40,000,000 shares; issued 21,021,668
      shares and outstanding  20,997,357 shares                         21,022
    Additional paid-in capital                                      25,504,433
    Deferred compensation                                             (321,299)
    Common stock in treasury 24,311 shares, at cost                       (234)
    Other comprehensive loss                                           (78,366)
    Retained earnings                                                  554,091
                                                             ------------------

           Net stockholders' equity                                 25,679,647
                                                             ------------------

                                                            $       30,957,177
                                                             ==================

See accompanying notes to condensed financial statements

                                        1
<PAGE>


                             BSD MEDICAL CORPORATION


                       Condensed Statements of Operations
                                   (Unaudited)
                   Periods ended May 31, 2006 and May 31, 2005


<TABLE>
<CAPTION>

                                                           Three Months                        Nine Months
                                                          Ended May 31,                       Ended May 31,
                                                 ---------------------------------  ----------------------------------

                                                      2006              2005             2006               2005
                                                 ---------------   ---------------  ---------------   ----------------

<S>                                             <C>               <C>              <C>               <C>
Sales                                           $     264,050     $     321,843    $   1,004,272     $     799,129

Related party sales                                   448,721            43,370          669,041           539,431
                                                 ---------------   ---------------  ---------------   ----------------

           Total sales                                712,771           365,213        1,673,313         1,338,560
                                                 ---------------   ---------------  ---------------   ----------------

Costs and expenses:

    Cost of sales                                     167,464           267,600          680,918           566,949

    Cost of related party sales                       245,250            35,860          393,026           381,841

    Research and development                          380,623           270,803          945,527           645,683

    Selling, general, and administrative            1,329,282           504,923        3,553,103         1,343,619
                                                 ---------------   ---------------  ---------------   ----------------

           Total costs and expenses                 2,122,619         1,079,186        5,572,574         2,938,092
                                                 ---------------   ---------------  ---------------   ----------------

           Operating loss                          (1,409,848)         (713,973)      (3,899,261)       (1,599,532)

Other income (expense):

    Interest income                                   411,777            43,306          960,990           200,804

    Other income                                    5,935,315         5,460,462       17,750,601         6,555,391
                                                 ---------------   ---------------  ---------------   ----------------

           Total other income                       6,347,092         5,503,768       18,711,591         6,756,195
                                                 ---------------   ---------------  ---------------   ----------------


           Income before income taxes               4,937,244         4,789,795       14,812,330         5,156,663

Provision for income taxes                          1,949,621         1,841,000        5,506,785         1,841,000
                                                 ---------------   ---------------  ---------------   ----------------

           Net income                           $   2,987,623     $   2,948,795    $   9,305,545     $   3,315,663
                                                 =====================================================================

Net income per common and common
equivalent share,

    Basic                                      $          .14     $         .15   $          .45    $          .17
                                                 ---------------   ---------------  ---------------   ----------------

     Diluted                                   $          .13     $         .14   $          .42    $          .16
                                                 ---------------   ---------------  ---------------   ----------------

Weighted average number of shares outstanding,

    Basic                                          20,926,000        20,144,000       20,683,000        20,108,000
                                                 ---------------   ---------------  ---------------   ----------------

     Diluted                                       22,163,000        20,612,000       22,148,000        21,376,000
                                                 ---------------   ---------------  ---------------   ----------------

</TABLE>

See accompanying notes to condensed financial statements


                                       2
<PAGE>


                             BSD MEDICAL CORPORATION

                       Condensed Statements of Cash Flows
                                   (Unaudited)
                   Periods ended May 31, 2006 and May 31, 2005
<TABLE>
<CAPTION>

                                                                                              Nine Months
                                                                                                  Ended:
                                                                                ----------------------------------
                                                                                     May 31,          May 31,
                                                                                      2006            2005
                                                                                -----------------   --------------
<S>                                                                            <C>                 <C>
Cash flows from operating activities:
    Net Income                                                                 $     9,305,545     $    3,315,663
    Adjustments to reconcile net income to net cash used in
      operating activities:
       Depreciation and amortization                                                    64,195             45,106
       Gain on sale of investment in TherMatrx                                     (17,413,342)        (6,552,089)

       Gain on sale of property                                                              -             (1,050)
       Non-cash stock compensation expense                                              48,471             45,000
       Amortization of deferred compensation expense                                    75,950              9,508

       (Increase) decrease in:
           Receivables                                                                (335,760)          (258,015)
           Related party receivables                                                  (105,745)          (172,020)
           Inventories                                                                (383,857)          (336,319)
           Deferred tax asset                                                         (111,000)           708,000
           Other current assets                                                         (1,028)               336

       Increase (decrease) in:
           Accounts payable                                                            411,138             53,199
           Accrued expenses                                                            221,055           (136,875)
           Income taxes payable                                                      4,998,125          1,008,182
           Deferred revenue                                                             10,219            (30,785)
                Deferred tax liability                                                 (13,000)                 -
                                                                                -----------------   ---------------
              Net cash used in operating activities                                 (3,229,031)        (2,302,159)
                                                                                -----------------   ---------------
Cash flows from investing activities:
    Proceeds from sale of investment in TherMatrx                                   17,413,342          6,552,089
    Purchase of available-for-sale securities                                      (14,770,709)                 -
    Purchase of property and equipment                                                (194,866)          (100,994)
     Proceeds from sale of property and equipment                                            -              1,050
                                                                                -----------------   ---------------
              Net cash provided by investing activities                              2,447,767          6,452,145

                                                                                -----------------   ---------------
Cash flows from financing activities:
    Proceeds from issuance of common stock options                                     415,036             75,305
                                                                                -----------------   ---------------
              Net cash provided by financing activities                                415,036             75,305
                                                                                -----------------   ---------------
Change in cash and cash equivalents                                                                     4,225,291
                                                                                      (366,228)
Cash and cash equivalents, beginning of period                                                          9,697,154
                                                                                       908,674
                                                                                -----------------   ---------------
Cash and cash equivalents, end of period                                       $       542,446      $  13,922,445
                                                                                =================   ===============
</TABLE>


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


         o    The Company paid no cash for interest during the nine months ended
              May 31, 2006 and 2005 and $392,311 and $124,919 for income taxes
              during the nine months ended May 31, 2006 and 2005, respectively.

         o    The Company issued 349,368 and 75,000 stock options during the
              nine month periods ended May 31, 2006 and 2005, respectively,
              which resulted in an increase to deferred compensation of $363,200
              and $15,750, respectively.

         o    The Company had an income tax benefit from the exercise of stock
              options of $972,282 and $230,182 during the nine months ended May
              31, 2006 and 2005, 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 loss of $115,305 during the nine
              months ended May 31, 2006 on available-for-sale securities.


                                       3
<PAGE>


                             BSD MEDICAL CORPORATION
                     Notes to Condensed Financial Statements




Note 1.    Basis of Presentation

         The  accompanying  unaudited  condensed  financial  statements  of  BSD
Medical  Corporation  as of May 31, 2006 and for the three and nine months ended
May 31, 2006 and 2005,  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
financial  statements  do  not  include  all of the  information  and  footnotes
required by U.S. generally accepted accounting principles for complete financial
statements.  These financial  statements  should be read in conjunction with the
notes hereto,  and the financial  statements  and notes thereto  included in our
annual report on Form 10-KSB for the year ended August 31, 2005.

         All  adjustments  (consisting  only of  normal  recurring  adjustments)
necessary for the fair presentation of our financial position as of May 31, 2006
and our results of operations,  financial  position and changes  therein for the
three and nine  months  ended May 31,  2006 and 2005  have  been  included.  The
results of  operations  for the three and nine months ended May 31, 2006 may not
be indicative of the results for the year ending August 31, 2006.

Note 2.  Recent Accounting Pronouncements

         The Company  accounts for  stock-based  compensation  awards  issued to
employees  using  the  intrinsic  value  measurement  provisions  of  Accounting
Principles Board Opinion (APB) No. 25,  Accounting for Stock Issued to Employees
for Stock-Based  Compensation.  Accordingly,  no  compensation  expense has been
recorded for stock options  granted to employees  with exercise  prices  greater
than or equal to the fair  value of the  underlying  common  stock at the option
grant date.  On December 16, 2004,  the  Financial  Accounting  Standards  Board
(FASB) issued Statements of Accounting Standards (SFAS) No. 123R (revised 2004),
Share-Based Payment,  which eliminates the alternative of applying the intrinsic
value measurement  provisions of APB No. 25 to stock compensation  awards issued
to  employees.  The new  standard  requires  enterprises  to measure the cost of
employee services received in exchange for an award of equity  instruments based
on the grant-date fair value of the award. That cost will be recognized over the
period during which an employee is required to provide  services in exchange for
the award, known as the requisite service period (usually the vesting period).

         The Company has not yet  quantified the effects of the adoption of SFAS
123R,  but it is  expected  that the new  standard  will  result in  significant
stock-based compensation expense. The pro forma effects on net loss and net loss
per  common  share  if the  Company  had  applied  the  fair  value  recognition
provisions of the original SFAS 123 on stock  compensation  awards  (rather than
applying the intrinsic value measurement  provisions of APB 25) are disclosed in
Note 6 below.  Although the pro forma  effects of applying the original SFAS 123
may be indicative of the effects of adopting SFAS 123R,  the provisions of these
two statements differ in some important respects. The actual effects of adopting
SFAS 123R will be dependent on numerous factors  including,  but not limited to,
the  valuation  model  chosen by the Company to value  stock-based  awards,  the
assumed award  forfeiture rate, the accounting  policies adopted  concerning the
method of  recognizing  the fair  value of  awards  over the  requisite  service
period,  and the transition method (as described below) chosen for adopting SFAS
123R.

                                       4
<PAGE>

         SFAS 123R will be  effective  for the Company  beginning  September  1,
2006, and requires the use of either the Modified Prospective Application Method
or the Modified  Retrospective  Method.  Under the Modified  Prospective Method,
SFAS 123R is  applied  to new awards  and to awards  modified,  repurchased,  or
cancelled  after the effective  date.  Additionally,  compensation  cost for the
portion of awards for which the requisite service has not been rendered (such as
unvested  options)  that are  outstanding  as of the date of  adoption  shall be
recognized as the remaining  requisite  services are rendered.  The compensation
cost relating to unvested  awards at the date of adoption  shall be based on the
grant-date  fair value of those awards as calculated  for pro forma  disclosures
under the  original  SFAS 123.  Alternatively,  companies  may use the  Modified
Retrospective  Application Method. This method may be applied to all prior years
for which the original SFAS 123 was  effective or only to prior interim  periods
in the year of  initial  adoption.  If the  Modified  Retrospective  Application
Method is applied,  financial  statements for prior periods shall be adjusted to
give  effect  to the  fair-value-based  method  of  accounting  for  awards on a
consistent basis with the pro forma disclosures required for those periods under
the original SFAS 123.

         On April 15, 2005,  the SEC issued  Release No.  33-8568,  Amendment to
Rule 4-01(a) of Regulation S-X Regarding the Compliance  Date for SFAS 123R. The
amended rule permits calendar year  registrants  subject to oversight by the SEC
to implement  SFAS 123R at the  beginning  of its next fiscal year.  The Company
will implement SFAS 123R at the beginning of its next fiscal year  (September 1,
2006).

         In March 2005, the SEC issued Staff  Accounting  Bulletin (SAB) No. 107
Share-Based  Payment to simplify some of the  implementation  challenges of SFAS
123R. In particular,  SAB 107 provides supplemental  implementation  guidance on
SFAS  123R  including   guidance  on  valuation   methods,   classification   of
compensation  expense,  inventory  capitalization  of  share-based  compensation
costs, income tax effects,  disclosures in Management's  Discussion and Analysis
and several other issues. We will apply the principles of SAB 107 in conjunction
with the adoption of SFAS 123R.

         In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections,  which  replaces APB No. 20,  Accounting  Changes,  and SFAS No. 3,
Reporting Accounting Changes in Interim Financial  Statements.  SFAS 154 applies
to all voluntary changes in accounting  principle,  and changes the requirements
for  accounting  and  reporting  a change  in  accounting  principles.  SFAS 154
requires  retroactive  application to prior periods'  financial  statements of a
voluntary change in accounting  principle unless it is impractical to do so. APB
20 previously  required that most voluntary  changes in accounting  principle be
recognized  with a cumulative  effect  adjustment in net income of the period of
the change.  SFAS 154 is effective for accounting changes made in annual periods
beginning  after  December 15, 2005.  The Company will implement SFAS 154 at the
beginning of its next fiscal year  (September 1, 2006) and does not expect it to
have a material effect on its financial position,  results of operations or cash
flows.

                                       5
<PAGE>

Note 3.  Net Income 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.

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

<TABLE>
<CAPTION>

                                               Three   Months Ended                 Nine Months Ended
                                                    May   31,                             May 31,

                                            2006               2005               2006               2005
                                            ----               ----               ----               ----
<S>                                       <C>                 <C>              <C>                  <C>
Weighted average number of
   shares outstanding - basic             20,926,000          20,144,000       20,683,000           20,108,000
Dilutive effect of stock options           1,237,000             468,000        1,465,000            1,268,000
                                       -------------     ----------------   ----------------    ---------------
Weighted average number of
   shares outstanding - diluted           22,163,000          20,612,000       22,148,000           21,376,000
                                       ==============     ===============    ===============    ===============
</TABLE>


Note 4. Inventories

         Inventories consisted of the following as of May 31, 2006:


         Raw materials                                          $      810,728
         Work in process                                               787,482
         Reserve for obsolete inventory                                (80,000)
                                                                ---------------
                                                                $    1,518,210
                                                                ---------------

Note 5.    Related Party Transactions

         During the nine months ended May 31, 2006 and May 31, 2005, the Company
had sales of $669,041 and $539,431,  respectively,  to an entity controlled by a
significant  stockholder  and member of the Board of  Directors.  These  related
party  transactions   represent  39.98%  and  40.29%  of  total  sales  for  the
corresponding  period.  During the three  months  ended May 31, 2006 and May 31,
2005 the Company had related party sales of $448,721 and $43,370,  respectively,
which represent 62.95% and 11.87% of total sales for the corresponding period.


                                       6
<PAGE>


Note 6.  Stock-Based Compensation

         The Company  accounts for stock options  granted to employees under the
recognition and measurement principles of APB 25, Accounting for Stock Issued to
Employees,  and related  Interpretations,  and has  adopted the  disclosure-only
provisions  of  SFAS  No.  123,   Accounting   for   Stock-Based   Compensation.
Accordingly, the difference between the exercise price and the fair market value
of the stock on the grant date has been  recognized in the financial  statements
as expense. Had the Company's stock options been accounted for based on the fair
value method of SFAS No. 123, the results of operations  would have been reduced
to the pro forma amounts indicated below for the periods indicated below:
<TABLE>
<CAPTION>

                                                               Three Months Ended          Nine Months Ended
                                                                    May 31,                     May 31,
                                                                2006         2005          2006         2005
                                                            -------------------------------------------------

<S>                                                         <C>           <C>          <C>         <C>
Net income as reported                                      $ 2,987,623   $ 2,948,795  $ 9,305,545 $ 3,315,663

Add:  Stock based employee compensation expense included
in reported net income net of related tax effects           $         -             -       75,950       9,508

Deduct:  Total stock based employee compensation expense
determined under fair value based method for all awards,
net of related taxes                                        $    (6,377)      (50,926)    (177,175)   (347,460)
                                                            -------------------------------------------------
Net income - pro forma                                      $ 2,981,246   $ 2,897,869  $ 9,204,320 $ 2,977,711

Basic income per share as reported                          $       .14   $       .15  $       .45 $       .17
                                                            -------------------------------------------------
Diluted income per share as reported                        $       .13   $       .14  $       .42 $       .16

Basic income per share -  pro forma                         $       .14   $       .14  $       .44 $       .15
                                                            -------------------------------------------------
Diluted income per share - pro forma                        $       .13   $       .14  $       .42 $       .14
                                                            -------------------------------------------------
</TABLE>

         The fair value of each stock  option  granted for the nine months ended
May 31, 2006 and 2005 is estimated on the date of grant using the  Black-Scholes
option pricing model using the following assumptions:


                                                     2006             2005
                                           --------------------------------
Expected dividend yield                   $             - $              -
Expected stock price volatility                       75%              81%
Risk-free interest rate                              4.3%            3.32%
Expected life of options                       4.89 years          7 years

         The  weighted  average  fair value of options  granted  during the nine
months ended May 31, 2006 and 2005 was $3.53 and $1.97, respectively.

Note 7.  Gain on Sale of Investment in TherMatrx

         On  July  15,  2004,  the  Company's  investment  in an  unconsolidated
subsidiary  (TherMatrx) was sold to American  Medical  Systems,  Inc. (AMS). The
Company's  portion of the  initial  payment  from this sale,  received in fiscal
2004, was approximately $9 million,  with additional  payments contingent on the
quarterly sales of TherMatrx through the fourth calendar quarter of 2005. During
the quarter ended May 31, 2006, the Company received an additional  payment from
the sale of TherMatrx of  $5,863,222  to bring the total  received to date as of
May 31,  2006 to  $32,940,174.  This  amount is  recorded as a gain and has been
reflected as "other income" in the Statements of Operations.


Note  8.   Stockholders' Equity

         During the nine months  ended May 31,  2006,  656,598  shares of common
stock were issued for cash of $415,036 and services of $48,471.


                                       7
<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
subsections   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
-------

         We  develop,  manufacture,  market and  service  systems  that  deliver
precision-focused  radio frequency (RF) and microwave energy into diseased sites
of the body, heating them to specified  temperatures as required by a variety of
medical therapies.  Our business  objectives  currently are to commercialize our
products  developed  for the  treatment  of cancer  and to  further  expand  our
developments to treat other diseases and medical conditions.

         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
sold our interest in TherMatrx,  Inc., the company  established to commercialize
our technology to treat enlarged prostate  symptoms,  to provide funding that we
can utilize for  commercializing our systems used in the treatment of cancer and
in achieving  other  business  objectives.  We have received  approximately  $33
million in earnout payments from the TherMatrx sale through May 31, 2006.

         In spite of the advances in cancer  treatment  technology,  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 (the  BSD-2000 and BSD-500  families of  products) is our most  immediate
business  objective.  Our cancer therapy  systems are used in  combination  with
existing  cancer  treatments  to  kill  cancer  with  heat  while  boosting  the
effectiveness  of  radiation  and  chemotherapy  through a number of  biological
mechanisms.  Current and targeted cancer treatment sites for our systems include
cancers  of the  prostate,  breast,  chestwall,  head,  neck,  bladder,  cervix,
colon/rectum,  esophagus,  liver,  pancreas,  brain,  bone,  stomach  and  lung,
including soft tissue sarcoma, melanoma, carcinoma, and basal cell carcinoma.

         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  globally 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, to the estimated 2,500 brachytherapy
systems installed and with chemotherapy treatments.

         We have received FDA approval to market our  commercial  version of the
BSD-500  and have  applied for FDA  approval to sell the  BSD-2000 in the United
States.  We have designed our cancer  treatment  systems such that together they
are  capable of  providing  complementary  therapy for  treatment  of most solid
tumors located in the body.

                                       8
<PAGE>

         In this  report it will be noted that we have  substantially  increased
our  emphasis  on  marketing,   market  preparation  and  sales  efforts.   This
corresponds to our FDA submission for approval of the BSD-2000. Our objective is
to prepare the market for our systems. We have also increased our efforts in the
development of new products.

         We now have five outside  sales people in the United  States and a Vice
President  of Sales whose role is to prepare and develop  markets for our cancer
treatment  systems.  We  are  also  attending  major  trade  shows  as  well  as
advertising  in  journals  and  magazines.  On an  international  basis,  we are
formulating sales  distribution  relationships.  Multiple  supportive  marketing
efforts are also being used behind these initiatives.

         Our market research has shown that when patients are informed about our
cancer  therapy  there is a strong  propensity  for them to pursue it with their
physician.  We have therefore  initiated an internet  website program focused on
cancer   patients   and   caregivers.   This   website   can  be   accessed   at
www.treatwithheat.com.  In  conjunction  with the  patient  website,  a  patient
advisor  hotline  has been  created to allow  patients  to call and  discuss the
therapy.  We have also developed education materials that are sent to those that
request it. These  materials  better  prepare  patients to discuss the treatment
with their physicians.

         We are  completing a website  directed at the  physicians who currently
provide, or who are candidates to provide the therapy.  The primary objective of
this website is to provide physician training.

         We are  conducting  a public  relations  campaign  directed at national
press coverage via television and newspapers, as well as magazines and journals.
This campaign has already  reached out to more than 20 million  people in all 50
states, as well as internationally.

         To bring  further  patient  attention  to our cancer  therapy,  we have
developed  a special  website  focused  on cancer  patients  and their  need for
emotional support from family and friends. The "Hope Garden" allows patients and
supporters to "plant flowers" with messages of hope attached and then Emailed to
the patient.  The flower is then planted in the cyber-space garden where all can
view the  messages  of hope and  inspiration.  This  website  can be accessed at
www.flowersforhope.com.

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

         Our accumulated deficit since inception decreased from $8,751,454 as of
August 31, 2005 to a positive  retained  earnings of $554,091 as of May 31, 2006
due to a positive net income recorded during the nine months ended May 31, 2006.
We  recorded  after tax net income for the first nine  months of fiscal  2006 of
$9,305,545.

         We recognize  revenue from the sale of cancer  treatment  systems,  the
sale of parts and accessories related to the cancer treatment systems,  the sale
of software  license  rights,  providing  manufacturing  services,  training and
support  services.  Product sales were  $1,554,246  and  $1,189,824 for the nine
months ended May 31, 2006 and 2005,  respectively.  Service revenue was $119,067
and $148,736 for the nine months ended May 31, 2006 and 2005, respectively.

         During the nine month period ended May 31, 2006, we earned  $1,004,272,
or 61%, of our revenue from sales to unrelated parties. These revenues consisted
of  product  sales of  $886,954,  consulting  services  of $89,268  and  service
contracts of $28,050.

                                       9
<PAGE>

         Cost of sales for the period ended May 31, 2006  includes raw materials
and labor  costs of  $751,089  and  overhead  costs of  $322,855.  Research  and
development  expenses  include  expenditures  for new  product  development  and
development of enhancements to existing products.

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  for  non-related  parties  as with  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, 2006, we have a reserve for potential
inventory  impairment  recorded of $80,000. We periodically review our inventory
levels and usage, paying particular attention to slower-moving items.

         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 sale.  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 provide our customers with payment
terms that vary from contract to contract.  Our allowance for doubtful  accounts
at May 31, 2006 was $42,500.  Bad debt expense for the nine months ended May 31,
2006 was $0. We perform ongoing credit evaluations of our customers and maintain
allowances  for  possible  losses.   Allowance   estimates  are  recorded  on  a
customer-by-customer   basis  and  are  determined  based  on  the  age  of  the
receivable,  compliance  with payment  terms,  and prior  history with  existing
clients.

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

                                       10
<PAGE>


Three Months Ended May 31, 2006 Compared to the Three Months Ended May 31, 2005

         Revenue.  Revenue for the three  months ended May 31, 2006 was $712,771
compared to $365,213 for the three  months  ended May 31,  2005,  an increase of
$347,558,  or approximately 95%. The increase in total revenue was primarily due
to an increase in sales to related parties.

         We derived $448,721,  or approximately 63%, of our revenue in the three
months ended May 31, 2006 from sales to related  parties as compared to $43,370,
or 12%, in the three months ended May 31, 2005. All of the related party revenue
in the three months  ended May 31, 2006 was from sales of systems and  component
parts to Medizin-Technik GmbH. Dr. Gerhard Sennewald, one of our directors, is a
stockholder,  executive  officer  and a director of  Medizin0-Tehcnik.  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 the revenue from period to period.

         In the three months ended May 31, 2006, we derived $264,050, or 37%, of
our revenue from sales to unrelated  parties,  as compared to $321,843,  or 88%,
for the three months ended May 31, 2005.

         Gross Profit.  Gross profit for the three months ended May 31, 2006 was
$300,056,  or 42% as compared to $61,753,  or 17% of total product sales for the
three  months  ended May 31,  2005.  This  increase in gross  profit  margin was
attributed to the improved production efficiencies and higher sales.

         Selling  General  and  Administrative  Expenses.  Selling,  general and
administrative  expenses  increased to  $1,329,282 in the three months ended May
31, 2006,  up from $504,923 for the three months ended May 31, 2005, an increase
of $824,359,  or 163%.  This  increase was primarily due to an increase in sales
and  marketing  costs of $862,110  supporting  sales and  marketing  preparation
efforts as described above.

         Research and Development  Expenses.  Research and development  expenses
were  $380,623 for the three months ended May 31, 2006,  as compared to $270,803
for the three  months  ended May 31,  2005,  an  increase of  $109,820,  or 41%,
primarily due to an increase in payroll and  consulting  costs  associated  with
increased emphasis on the development of new products.

         Interest  income.  Interest income  increased to $411,777 for the three
months ended May 31, 2006, as compared to $43,306 for the three months ended May
31, 2005, due to the significantly higher levels of cash and  available-for-sale
securities resulting from the sale of our investment in TherMatrx.

         Net  income.  Net income for the three  months  ended May 31,  2006 was
$2,987,623 after an income tax expense of $1,949,621,  as compared to net income
of $2,948,795  for the three months ended May 31, 2005.  The increase in the net
income was  substantially  due to a payment of  $5,863,222  received  during the
period ended May 31, 2006, from the sale of our investment in TherMatrx, and the
increase in interest income.

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

Nine Months Ended May 31, 2006 Compared  to the Nine Months Ended May 31, 2005

         Revenue. Revenue for the nine months ended May 31, 2006 was $1,673,313,
compared to $1,338,560 for the corresponding  period in fiscal 2005, an increase
of $334,753 or  approximately  25%. The increase in total  revenue was primarily
due to an increase in sales to related and non-related parties.

         In the nine months ended May 31, 2006, we derived  $669,041,  or 40% of
our revenue, as compared to $539,431,  or 40% of our revenue, in the nine months
ended May 31,  2005,  from sales to related  parties.  All of the related  party
revenue in the nine months ended May 31, 2006, was from sales of BSD systems and

                                       11
<PAGE>

component parts to Medizin-Technik.  Dr. Gerhard Sennwald,  one of our directors
is a stockholder, executive officer and a director of Medizin-Tehcnik.  Sales to
Medizin-Technik  may  fluctuate  significantly  from period to period due to the
relatively high price of a BSD-2000 or BSD-500 system to the sales volume. Sales
increases of one or two systems can have a material effect on our revenue.

         In the nine months ended May 31, 2006, we derived $1,004,272, or 60% of
our revenue to sales to non-related parties compared to $799,129, or 60% for the
corresponding  period of fiscal 2005. Our fiscal 2006 non-related  party revenue
consisted  of  product  sales of  approximately  $ 886,954.  The  balance of our
non-related  party  revenue  consisted of consulting  services of  approximately
$89,268 and service contracts of approximately $28,050.

         Gross  Profit.  Gross profit for the nine months ended May 31, 2006 was
$599,369,  or 36% as compared to $389,770,  or 29% of sales in the corresponding
period in fiscal 2005.  The increase in gross profit margin was primarily due to
the efficiencies afforded through the increase of sales.


         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative expenses increased to $3,553,103 in the nine months ended May 31,
2006, from $1,343,619 for the  corresponding  period of fiscal 2005, an increase
of  $2,209,484,   or  165%.  Our  sales  and  marketing   costs  increased  from
approximately  $419,370 in the nine months  ended May 31, 2005 to  approximately
$2,065,728  in the nine  months  ended May 31, 2006 due to  increased  number of
sales people and to higher sales and marketing costs due to greater  emphasis on
sales and marketing as described  above in our management  discussion in Item 2.
Legal and accounting  costs  increased from  approximately  $113,498 in the 2005
period to approximately $193,537 in the 2006 period, reflecting the use of legal
counsel in preparation for the  shareholders  meeting and the review of the Form
10-QSB, 10-KSB and proxy statements, as well as fees incurred in connection with
tax  consulting  and  planning.   Shareholder  relations  costs  increased  from
approximately  $54,838 in the 2005 period to  approximately  $82,077 in the 2006
period  reflecting  costs  incurred in connection  with our annual  shareholders
meeting and the issuance of various press releases.  Consulting  costs increased
from  approximately  $109,713 to approximately  $171,959 from the 2005 period to
the 2006 period, respectively. This was due to the use of consultants in efforts
to file the FDA application for the BSD 2000.

         Research and Development  Expenses.  Research and development  expenses
were  $945,527 for the nine months  ended May 31, 2006,  as compared to $645,683
for the  corresponding  period in fiscal 2005, an increase of $299,844,  or 46%,
primarily due to an increase in payroll and  consulting  costs  associated  with
increased  emphasis on the development of new products and costs associated with
filing the FDA application for the BSD 2000.

         Interest  income.  Interest  income  increased  to $960,990 in the nine
months ended May 31, 2006 as compared $200,804 for the nine months ended May 31,
2005,  due to the higher levels of cash on hand  resulting  from the sale of our
shares in TherMatrx.

         Net income.  Net income  after taxes for the nine months  ended May 31,
2006,  was  $9,305,545  as  compared  with a net  income of  $3,315,663  for the
corresponding  period  of  fiscal  2005.  The  increase  in the net  income  was
significantly  due to  payments of  $17,413,342  during the 2006 period from the
sale of our shares in TherMatrx and the increase in interest income.

         Fluctuation  in  Operating  Results.  Our  results of  operations  have
fluctuated in the past and may fluctuate in the future from year to year as well
as from  quarter  to  quarter.  Revenue  may  fluctuate  as a result of  factors
relating to market  acceptance  of our cancer  therapy  systems,  changes in the
medical  capital  equipment  market,  changes  in order  mix and  product  order
configurations,   competition,   regulatory   developments  and  other  matters.
Operating  expenses  may  fluctuate  as a result  of the  timing  of  sales  and
marketing activities,  research and development and clinical trial expenses, and
general and  administrative  expenses  associated with our potential growth. For
these and other reasons  described  elsewhere,  our results of operations  for a
particular  period may not be  indicative  of  operating  results  for any other
period.

                                       12
<PAGE>

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

         Our accumulated deficit since inception decreased from $8,751,454 as of
August 31, 2005 to a positive  retained  earnings of $554,091 as of May 31, 2006
due to net  income  recorded  during  the nine  months  ended May 31,  2006.  We
recorded  after tax net  income  for the  first  nine  months of fiscal  2006 of
$9,305,545

         We have  received  additional  payments  and  expect to receive a final
payment as a result of the sale of our TherMatrx  shares. In accordance with the
purchase agreement,  we expect to receive a final adjustment payment in American
Medical System's third quarter which ends  approximately  September 30, 2006 for
cash collected on open receivables at the end of the earnout period.

         During  the nine  months  ended May 31,  2006,  we used  $3,229,031  in
operating  activities.  The cash used in  operating  activities  was  mainly the
result of the  exclusion of TherMatrx  gain, an increase in income taxes payable
of  $4,998,125,  an  increase in accounts  payable of  $411,138,  an increase in
accrued  expenses of $221,055,  an increase in accounts  receivable of $441,505,
and an increase in inventory of $383,857.  Our investing activities for the nine
months ended May 31, 2006 generated net cash of $2,447,767,  relating  mainly to
the  proceeds  received  from  the  sale  of  our  investment  in  TherMatrx  of
$17,413,342  offset  by  the  purchase  of   available-for-sale   securities  of
$14,770,709  and the  purchase of certain  property  and  equipment of $194,866.
Total cash  decreased  from  $908,674  at August 31, 2005 to $542,446 at May 31,
2006,  primarily  as a result  of cash used in  operations  and an  increase  in
investments.

         We expect to use the payments  from the sale of our  TherMatrx  shares,
including any contingent payments, for general corporate purposes, including the
sales  and  marketing  effort  for our FDA  approved  cancer  therapy  products,
supporting the FDA application for our cancer therapy products,  the development
of new  products  used in medical  therapy and the possible  acquisition  of new
companies or technology.

         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, during fiscal 2006 in excess of fiscal 2005.

         We believe our current cash and cash  equivalents  and securities  that
are  available for sale will be  sufficient  to finance our  operations  through
fiscal 2006.

                           FORWARD-LOOKING STATEMENTS

         With the exception of historical  facts,  the  statements  contained in
sections entitled  "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 anticipated financial performance and business plan;

         o    our  expectations  regarding the  commercial  introduction  of our
              systems;

         o    our  expectations and efforts  regarding  receipt of FDA approvals
              relating to the BSD-2000 system;

         o    our  technological  developments  for  the  BSD-500  and  BSD-2000
              systems;

                                       13
<PAGE>

         o    our  ability  to  successfully  develop  our  technology  for  new
              applications and the expense of such developments;

         o    our development or acquisition of new technologies;

         o    the  amount  of  expenses   we  will  incur  for  the   commercial
              introduction of our systems;

         o    our anticipation that we will incur increased  expenses related to
              seeking  governmental  and  regulatory  approvals for our products
              during fiscal 2006 in excess of fiscal 2005;

         o    our  expectation  that related party revenue will continue to be a
              significant portion of our total revenue;

         o    our  belief  that  sales of  BSD-500  and  BSD-2000  systems  will
              increase through our future sales and marketing efforts;

         o    our belief that payments  received in connection  with the sale of
              our  TherMatrx  shares  will  contribute  to  our  future  capital
              resources;

         o    our  anticipated  use of proceeds  from the sale of our  TherMatrx
              shares; and

         o    our belief that our current  cash,  investments  and cash received
              from  the  sale of our  TherMatrx  shares  will be  sufficient  to
              finance our operations through fiscal 2006.

         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 section  entitled "Risk
Factors"  included in our Annual Report on Form 10-KSB for the year ended August
31, 2005 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.   Controls and Procedures

         a. 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,  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.  We have
identified  deficiencies that existed in the design or operation of our internal
control over financial reporting.  The deficiencies relate to the preparation of
our provision for income taxes and related income tax footnote disclosures,  and
the  lack  of  formal   procedures   to  identify   and  apply  new   accounting
pronouncements and related disclosures.  These deficiencies were detected in the
review process and have been  appropriately  recorded and disclosed in this Form
10-QSB.  We are in the process of  improving  our  internal  control and related
disclosures  in an effort  to  remediate  these  deficiencies  through  improved
supervision and training of our accounting staff.  These  deficiencies have been
disclosed  to our audit  committee  and to our  auditors.  Additional  effort is
needed to fully remedy these  deficiencies  and we are continuing our efforts to
improve and strengthen our control  processes and  procedures.  Our  management,
audit committee, and directors will continue to work with our auditors and other
outside  advisors to ensure that our  controls and  procedures  are adequate and
effective.


         b. Changes in internal controls.

                                       14
<PAGE>

         During the fiscal  quarter  covered by this  report,  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.



                                       15
<PAGE>


PART II - OTHER INFORMATION

Item 1.       Legal Proceedings

         None.

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

         None.

Item 3.       Defaults Upon Senior Securities

         None.

Item 4.       Submission of Matters to a Vote of Security Holders

             None

Item 5.       Other Information

         None.

Item 6.       Exhibits

         The following exhibits are filed as part of this report:

    Exhibit No.     Description of Exhibit
    -----------     ----------------------
       31.1         Certification Required Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002

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

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

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

                                       16
<PAGE>


                                   SIGNATURES


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




                                       BSD MEDICAL CORPORATION



Date:    July 17, 2006                          /s/ Hyrum A. Mead
                                       --------------------------------------
                                       President (principal executive officer)

Date:    July 17, 2006                          /s/ Dennis E. Bradley
                                       ---------------------------------------
                                       Controller (principal financial officer)


                                       17