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

                                   FORM 10-KSB

                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                    For the Fiscal Year Ended August 31, 2002

                         Commission file number 0-10783

                             BSD MEDICAL CORPORATION
                 (Name of small business issuer in its charter)

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

       2188 West 200 South
       Salt Lake City, UT                                   84119
(Address of principal executive offices)                  (Zip Code)

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

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, $0.001 par value
                         ------------------------------
                                (Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

Issuer's revenues for its most recent fiscal year:  $2,672,472

The approximate aggregate market value of the issuer's common stock held by
non-affiliates, computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of November 1, 2002, was
$3,238,095.

As of November 1, 2002, there were 17,756,328 shares of the issuer's common
stock, par value $0.001, outstanding.

Documents Incorporated by Reference:  None

Transitional Small Business Disclosure Format:  Yes  [  ]   No  [X]



<PAGE>
                                     PART I


                           FORWARD LOOKING STATEMENTS

         Part I of this Annual Report on Form 10-KSB and in particular "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 related to our business. These
forward-looking statements include statements regarding our anticipated
financial performance, business prospects, technological developments, new
products, research and development efforts, and similar matters including our
expectation that related party revenue will continue to be a significant portion
of our total revenue and that sales of BSD-500 and BSD-2000 systems will be a
greater percentage of total revenue in fiscal 2003 and our belief that our
current working capital and cash from operations will be sufficient to fund our
anticipated operations for fiscal 2003. In addition terms such as "expect,"
"may," "should," "will," "anticipate," "believe," "intend," "estimate," "plan,"
"continue," "should," "potential," "will," "project," "likely" or similar
expressions or the negative of such expressions identify forward-looking
statements. These forward-looking statements involve risks, uncertainties and
other factors that could cause our actual results and achievements to be
materially different than those expressed or implied by our forward-looking
statements. These risks, uncertainties and other factors include those
identified in the section below entitled "Risks Related to our Business" in Part
I.

ITEM 1.  BUSINESS

Overview
--------

         BSD Medical Corporation develops, manufactures, markets and services
hyperthermia microwave systems used to treat cancer, the second leading cause of
death in the United States according to the National Cancer Society. Our
treatment systems precisely deliver microwave energy to elevate the temperature
of cancerous tumors, directly killing cancerous cells and significantly
enhancing the effectiveness of certain other cancer therapies. We also
manufacture products and supply services for TherMatrx, Inc., a medical device
company. For convenience, the terms "company," "BSD," "we" and "our" refer to
BSD Medical Corporation.

         We currently own approximately 30% of TherMatrx, which markets a
medical device that we developed for the treatment of benign prostatic
hyperplasia, or BPH. BPH results from enlargement of the prostate as men age,
and is a major health condition so prevalent that its symptoms affect over half
of men by age 60 and 90% of men by age 85, according to data presented in a Mayo
Clinic and Mayo Foundation study published in 1995 in the Archives of Internal
Medicine. TherMatrx received FDA approval to market its TMx-2000 thermotherapy
system for treating BPH in July 2001, and since then it has been aggressively
selling and marketing the TMx-2000. In addition to being a significant equity
owner of TherMatrx, we provide technical and regulatory support services for
TherMatrx on a consulting basis, and manufacture and test some of its products.
In fiscal 2002, TherMatrx was our largest customer.

Cancer and Hyperthermia Therapy
-------------------------------

         Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society projects that 1,284,900 new cancer cases will be
diagnosed and that 555,500 Americans will die from cancer during 2002 (up from
553,400 cancer deaths in 2001). Exceeded only by heart disease, cancer, as a
group of diseases, remains the second leading cause of death in the United
States. Cancer develops when abnormal cells in a part of the body begin to grow
out of control and spread, or mestastasize, to other parts of the body.

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<PAGE>

         The primary cancer therapies currently used include:

         o    Radiation therapy, which is treatment with high-energy rays to
              kill or shrink cancer cells. The radiation may come from outside
              of the body (external radiation) or from radioactive materials
              placed directly in a tumor (internal or implant radiation,
              sometimes called brachytherapy).

         o    Chemotherapy, which is treatment with drugs to destroy cancer
              cells.

         o    Surgery, which is the resection, or removal, of a tumor or other
              organ of the body.

Because cancer remains a significant cause of death, these three cancer
therapies are still grossly inadequate, and an enormous need for better
treatment is obvious. Hyperthermia is an emerging cancer therapy that both kills
cancer cells directly and has been shown to be a potent additive treatment
making certain of the major existing cancer therapies substantially more
effective. Research has also demonstrated that hyperthermia has the potential to
become a powerful complement for some of the most promising new cancer therapies
under development such as heat-alone thermal therapy, heat activation of gene
therapy, immunological therapies utilizing heat shock proteins, liposome
targeted delivery of chemotherapy, angiogenesis inhibitor therapy and magnetic
resonance guided interventional therapy.

         Cancerous tumors are uncontrolled growths of mutated cells that require
more energy to survive than do cells of normal tissue. As cancer cells grow
rapidly, they tend to outstrip their blood supply, leaving them oxygen starved,
since there is not enough blood to carry sufficient oxygen to these cells.
Oxygen starved cancer cells are resistant to radiation therapy because the
destructive power of radiation therapy depends heavily on tearing apart the
oxygen molecules located in cancer cells. When oxygen molecules are torn apart,
they form oxygen radicals that can attack and destroy cancer cell DNA. Blood
depletion also makes cancer resistant to chemotherapy, where blood transport is
required to deliver the drug. Our hyperthermia therapy systems precisely deliver
microwave energy to elevate the temperature of tumors, usually between
40(degree)C and 45(degree)C. The elevated temperatures draw blood to the tumor
as the body's natural response to the stimulus of heat. The increased blood
supply to the tumor improves delivery of drugs to tumors in chemotherapy. It
also delivers more oxygen to the tumor, increasing the effectiveness of
radiation therapy. Many clinical trials performed at major research institutions
in the United States and Europe, some of which are listed in the section below
entitled "Our Products and Services" under "BSD-2000," have shown strong
improvements in the results from both radiation therapy and chemotherapy when
hyperthermia is added to the treatment.

         While sensitizing tumors for more effective treatment from radiation
and/or chemotherapy, hyperthermia also destroys cancer cells directly through
damage to the plasma membrane, the cytoskeleton and the cell nucleus, and by
disrupting the stability of cellular proteins. Tumors with poor blood supply
systems lack the natural cooling capacity provided by efficient blood flow in
normal tissues, making them selectively susceptible to the cancer-destructive
effects of hyperthermia therapy. While temperatures between 40(degree)C and
45(degree)C are used to kill cancer cells in combination with radiation and
chemotherapy, higher temperature treatments, called "thermal therapy" or
"thermotherapy," are used when treatment of cancer is accomplished by heat
alone.

         Hyperthermia has other therapeutic uses. It can be used to shrink
tumors prior to surgery, potentially making resection easier or even possible.
Research has shown hyperthermia to be an activator for gene therapies, speeding
gene production (heat mediated gene therapy). Hyperthermia may play a key role
in the development of new anti-tumor vaccines that are based on the production
of heat shock proteins. Research has shown hyperthermia to be an angiogenesis
inhibitor, which means it prevents cancer from inducing growth of new blood
vessels to expand its blood supply. Hyperthermia could also become a follow-up
therapy for other angiogenesis inhibitors, used in the final destruction of
cancer cells depleted of blood by angiogenesis inhibitor therapy. Hyperthermia

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has been shown to improve a patient's quality of life. Even in situations where
there is no hope for survival, hyperthermia may provide benefits through
alleviation of such effects as bleeding, pain and infection.

         Since 1978, BSD has been heavily involved in developing technological
advances to expand the use of hyperthermia therapy for the treatment of cancer.
Our efforts have included joint work with many notable cancer research centers
in the United States and Europe. In past years funding for our research efforts
has been provided by such sources as the National Institutes of Health in the
United States and major European government agencies. In recent years, we have
focused our efforts in perfecting the technology required to precisely deliver
deep, non-invasive hyperthermia therapy for the treatment of pelvic and other
deep cancers and to demonstrate effective use of deep hyperthermia through
clinical trials. We believe that our BSD-2000 system has emerged from these
developments as the world's most advanced system for deep hyperthermia therapy.

         On April 21, 2001, in the opening address of the annual meeting of the
North American Hyperthermic Society (sponsored by the Radiologial Society of
North America), P. K. Sneed, M.D. of the University of California at San
Francisco summarized the results of completed randomized clinical trials in
which the effectiveness of radiation therapy combined with hyperthermia therapy
were compared with the results of radiation therapy alone in cancer treatment.
The summary of the report on these trials was that for melanoma, after two
years, local control (local regression or disappearance of the tumor) was 28%
for the control group of patients who received radiation therapy alone vs. 46%
local control for the patients who received both hyperthermia and radiation
therapy. For recurrent breast cancer, the complete response rate (complete
disappearance of the tumor) increased from 38% for those receiving radiation
therapy alone to 60% for those patients who received both hyperthermia and
radiation therapy. For glioblastoma (brain cancer), the two-year survival rate
for patients who received radiation therapy alone was 15%, compared to 31%
survival rate two years after treatment for those who received both hyperthermia
and radiation therapy. For advanced cervical cancer, the complete response rate
(disappearance of the tumor) rose from 57% for patients who received radiation
treatments alone to 83% for patients receiving both hyperthermia and radiation
therapy. The cervical cancer data was based on the condition of patients three
years after treatment.

Our Products and Services
-------------------------

         We have developed the technology and products required to approach
hyperthermia therapy through three different techniques, which collectively
allow cancer to be treated virtually anywhere in the body:

         o    Superficial hyperthermia non-invasively treats cancerous tumors
              located within a few centimeters of the surface of the body, such
              as melanoma and recurrent breast cancer.

         o    Internal or interstitial hyperthermia treats tumors in combination
              with internal radiation therapy by inserting tiny microwave
              antennae that deliver hyperthermic microwave energy to tumors
              through the same catheters used to deliver radioactive materials,
              or "seeds," to tumors for radiation therapy. This technique can be
              employed in treating prostate cancer, breast cancer, head and neck
              cancer and a variety of other cancer sites.

         o    Deep hyperthermia non-invasively treats tumors located deep within
              the body, including many problematic cancer sites located in the
              pelvis, abdomen and chest areas.

         BSD-500 Systems. Our BSD-500 systems are used to deliver either
superficial or interstitial hyperthermia therapy or both. There are six
configurations of the BSD-500. The BSD-500i-4 and BSD-500i-8 provide
interstitial hyperthermia treatment using four or eight channel generators,

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<PAGE>

respectively. Each channel can control three interstitial applicators. The
BSD-500s-4 and BSD-500s-8 provide superficial hyperthermia treatment using four
or eight channel generators, respectively. The BSD-500c-4 and BSD-500c-8 provide
both superficial and interstitial hyperthermia treatments using four or eight
channel generators, respectively. These systems include a touch screen display
monitor by which the operator controls the hyperthermia treatment, computer
equipment and software that controls the delivery of microwave energy to the
tumor, and a generator that creates the needed microwave energy for the
treatment. Additionally, the systems include a variety of applicators, depending
on each system configuration. Non-invasive superficial applicators are used for
superficial hyperthermia treatments. For interstitial hyperthermia treatments,
the system may include up to 24 tiny microwave heat-delivering antennae that are
inserted into catheters used in the standard practice for internal radiation
therapy (called brachytherapy).

         We have an FDA approval (described as a Pre-Market Approval, or PMA,
the standard FDA approval required to market Class III medical devices) that is
applicable to the marketing of all configurations of the BSD-500 in the United
States. We are currently enhancing our BSD-500 systems as compared to prior
products that have received FDA approval. When our enhancements are complete, we
will need to obtain PMA supplements from the FDA for these enhancements. As an
ISO 9001 approved manufacturer, we also self-certify our products for the CE
Mark, which is required for export into some European countries, and will take
the enhanced BSD-500 through this certification process ourselves. We estimate
that the PMA supplements and CE Mark certification will be accomplished without
delays or complications, but because of uncertainties inherent in these
processes, we cannot estimate with certainty when these product enhancements
will be complete, or whether we will obtain the necessary PMA supplements. Our
failure to complete our product enhancements or obtain the anticipated FDA
supplements would require us to continue to market only unenhanced products,
which would adversely affect our business opportunities anticipated by the
product enhancements. Our failure to certify our products for the CE Mark would
preclude our opportunity to sell the enhanced BSD-500 in certain European
countries and such other countries that require CE Mark certification.

         BSD-2000. The BSD-2000 family of products include the BSD-2000, the
BSD-2000/3D and the BSD-2000/3D/MR. These systems non-invasively deliver
hyperthermic microwave energy to cancerous tumors, including those located deep
within the body. These systems include a computer and software that control the
delivery of microwave energy to the tumor, a microwave energy generator, an
amplifier that boosts the microwave power, and a special applicator that
delivers the microwave energy to the patient lying in a prone position on a
specially designed support table. The BSD-2000 systems are able to direct, focus
and deliver microwave energy deep within the body by precisely "steering" the
energy to the tumor from an array of cylindrical antennae. The basic BSD-2000
has eight microwave antennae enabling this electronic steering within the
elliptical cross-section of the patient's body. The BSD-2000/3D has 24 microwave
antennae enabling additional electronic steering along the long axis of the
body. The 3D steering is particularly useful when implemented with a magnetic
resonance system that is capable of non-invasive 3D imaging showing the heated
regions, thus permitting the 3D steering to more accurately target the energy to
the tumor site.

         The BSD-2000 systems have not yet received Pre-Market Approval (PMA)
from the FDA for commercial marketing in the United States, but the BSD-2000 has
obtained an Investigational Device Exemption (IDE) for sale in the United States
for research purposes. We have also certified the BSD-2000 family for the CE
Mark required for export into certain European countries. We are in the
extensive process of preparing an FDA submission requesting a PMA for the
BSD-2000 based on clinical data we have already obtained. We intend to seek
approval for all of the family of BSD-2000 systems under this PMA through the
additional filing of either IDE or PMA supplements. While we believe that this
data has great merit and is worthy of submission, due to the inherent
uncertainties of the FDA approval process there can be no assurance that FDA
approval can be obtained through our submissions.

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<PAGE>

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

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

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

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

         The first BSD-2000/3D/MR system was installed and tested at a leading
German oncological research institution, the Clinic of Medical Oncology of the
Klinikum Grosshadern Medical School of Ludwigs-Maximilians-Universitat
Munchen, in Munich, Germany. The Medical School received funding from the
Stiftung Deutsche Krebshilfe e. V. (German Cancer Aid Foundation) for the system
order. A second BSD-2000/3D/MR has subsequently been installed at the Department
of Radiology of Charite University Medical School of Humboldt University in
Berlin, Germany, as part of a collaborative effort with Siemens Medical Systems.
The funding for purchase and development of these systems was provided by German
government and public foundation funds.

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

         Other Products and Services. In addition to our hyperthermia therapy
systems, we manufacture for, and supply treatment systems and related equipment
components to, other medical device companies, as described below.

         TherMatrx, Inc. We manufacture, assemble and test for TherMatrx, Inc.
its FDA-approved TMx-2000 thermotherapy system that treats benign prostatic
hyperplasia, or BPH, a condition associated with an enlarged prostate that
commonly affects men over age 50. We also supply TherMatrx with equipment

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components used for its TMx-2000 system, including probes, applicators and
temperature components. We also have provided regulatory compliance and other
consulting services to TherMatrx.

         In November 1997, we entered into an agreement with Oracle Strategic
Partners and Charles Manker to form TherMatrx as a jointly-owned private
company. In return for an equity interest in TherMatrx, we transferred four
patents related to the thermal treatment of BPH to TherMatrx. Currently, we own
approximately 30% of TherMatrx's outstanding common stock.

         TherMatrx's TMx-2000 system is a non-surgical, catheter-based therapy
that has been shown to provide safe and effective relief from BPH symptoms. The
treatment can be performed in a clinic or physician's office. The therapy avoids
the side effects and complications of surgery. TherMatrx obtained FDA approval
to begin marketing its products in July of 2001 and began aggressively marketing
the TMx-2000 shortly after receiving FDA approval

         In manufacturing, assembling and testing the TMx-2000 system and
supplying equipment components and providing consulting services to TherMatrx,
TherMatrx has become our largest customer. For the year ended August 31, 2002,
TherMatrx accounted for $1,781,000, or approximately 66.64%, of our revenue.
TherMatrx is under no contractual obligation to obtain from us products or
manufacturing, assembling, testing and other services, and is free to obtain
such products and services from another source at any time. We cannot assure you
that we will continue to provide such services to TherMatrx, and the loss of
TherMatrx as a customer could have a material adverse effect on our business.

         Medizin-Technik GmbH. Additionally, we supply equipment components to
Medizin-Technik GmbH located in Munich, Germany, which is a significant
distributor of our hyperthermia therapy systems in Europe. Medizin-Technik
purchases equipment which it installs and components to service our hyperthermia
therapy systems that it sells to its customers in Europe. The President and
Chief Executive Officer of Medizin-Technik is Dr. Gerhard W. Sennewald, a
director and significant stockholder of BSD. Although Medizin-Technik was not a
significant customer for us in fiscal 2002, it has been a significant customer
in prior years and we anticipate that it will be a significant customer for us
in the future. The loss of Medizin-Technik as a distributor and significant
customer could have a material adverse effect on our business. The distribution
rights of Medizin-Technik have been in place since the early 1980s.

Sales, Marketing and Distribution
---------------------------------

         In the United States, our target market includes clinics, hospitals and
institutes in which cancer is treated. In the international market we similarly
target cancer treatment centers in clinics, hospitals and institutes.

         On May 1, 2002, we entered into an agreement with Nucletron B.V., based
in the Netherlands, under which Nucletron became our exclusive worldwide sales
agent, except in Germany, Austria, Switzerland, Italy and China, for the version
of our BSD-500i interstitial hyperthermia therapy system that we are currently
in the process of enhancing. Nucletron is one of the leading providers of
high-dose internal radiation therapy throughout the world. Because our
interstitial hyperthermia therapy is typically administered in combination with
internal radiation therapy like Nucletron provides, we believe our relationship
with Nucletron will be strongly complementary. Nucletron has over 1,500
radiation therapy systems installed in cancer treatment centers throughout the
world, and we anticipate Nucletron will primarily target these customers as
prospective customers for the enhanced BSD-500i. Nucletron has already commenced
marketing our enhanced BSD-500i. However, it will be necessary for us to
complete the enhancements to the BSD-500i and obtain the CE Mark certification
and the PMA supplements or we will not be able to fulfill orders from Nucletron
for most of the world. While we estimate that we will be able to satisfy
Nucletron's delivery requirement, if we fail to complete these objectives, we
may lose the confidence of Nucletron as a reliable supplier. Our agreement with
Nucletron can be terminated by either party upon written notice to the other

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party within thirty days prior to termination. Three months prior to the renewal
date of the agreement (which extends until May 1, 2003), the parties may
negotiate the conditions of the extension of the agreement or the conversion of
the Agreement in a full distribution agreement. Nucletron has a first right of
refusal to obtain exclusive distribution rights to sell our BSD-500i in the same
territory in which it now acts as our sales agent if Nucletron performs
adequately under our current sales agent agreement.

         For our other products that deliver deep hyperthermia therapy,
including the BSD-2000 and related products, we sell our equipment direct in the
United States. We make international sales of these products through
distributing companies located in various foreign countries. Medizin-Technik,
described in the section entitled "Our Products and Services" above, is a
significant distributor of our hyperthermia therapy systems in part of Europe.

         Our sales and marketing strategy involves three main components:

         o    disseminating information about and marketing our company and our
              hyperthermia therapy systems to the scientific community,
              cancer-treating healthcare professionals, cancer patients and the
              general public;

         o    promoting acceptance by the scientific community cancer-treating
              healthcare professionals of hyperthermia therapy as a viable and
              effective therapy for treating cancer, either in combination with
              other therapies or as its own therapy; and

         o    working to continuously improve third-party reimbursement medical
              services performed with our products (see the section entitled
              "Third-Party Reimbursement" below).

         We disseminate information about our company and our hyperthermia
therapy systems by encouraging articles about hyperthermia therapy to be
published in scientific journals, periodicals and other publications, and
promoting dissemination of BSD information through television, radio and other
media outlets. We post information about our products on our web site,
www.bsdmc.com, and our materials are also posted on many other sites. We have
developed a variety of promotional materials for our products, including product
brochures, patient brochures and newsletters. We also participate actively in
trade shows and scientific symposia, make public presentations delivered by our
scientific staff and by scientists and researchers using our systems, and we
actively participate in a variety of medical associations. We are also
co-sponsors of the annual international BSD Users' Conference in Europe. We also
believe that the anticipated active marketing efforts of Nucletron will improve
dissemination of information about us and our products and improve acceptance of
our hyperthermia therapy systems, because Nucletron is well-established as an
industry leader in internal radiation therapy and has established relationships
with many cancer-treating healthcare professionals throughout the world.

Third-Party Reimbursement
-------------------------

         We view obtaining adequate third-party reimbursement arrangements as
essential to achieving commercial acceptance of our hyperthermia therapy
products. Our products are purchased primarily by clinics, hospitals and other
medical institutions that bill various third-party payers, such as Medicare,
Medicaid, other government programs and private insurance plans, for the health
care services provided to their patients using our products. Additionally,
managed care organizations and insurance companies directly pay for services
provided to their patients. The Center for Medicare and Medicaid Services, or
CMS, has established 23 billing codes that allow for third-party reimbursement
and can be used for or in combination with the delivery of hyperthermia therapy,
depending on the circumstances of the treatment. Appropriate codes apply to
billing for superficial and interstitial hyperthermia delivered using our
BSD-500 systems when used in combination with radiation therapy or chemotherapy.

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Codes also have been established for providing deep hyperthermia therapy.
Billing codes are available for both institutions and physicians.

         In November 1995, HCFA, the predecessor agency to CMS, authorized
Medicare reimbursement for all investigational therapies and devices for which
underlying questions of safety and effectiveness of that device type have been
resolved, based on categorization by the FDA. Our BSD-2000 system, which has
been given IDE status by the FDA, has been placed in this category by the FDA,
and thus may be reimbursed by Medicare.

         CMS has also provided billing codes for thermotherapy/thermal therapy
treatment of BPH. These billing codes apply to TherMatrx's TMx-2000 system
treatments of BPH.

         Medical reimbursement rates are unpredictable, and we cannot project
the extent to which our business may be affected by future legislative and
regulatory developments. There can be no assurance that future health care
legislation or regulation will not have a material adverse effect on BSD's
business, financial condition and results of operations, or that reimbursement,
existing or in the future, will be adequate for all customers.

Competition
-----------

         Competition in the medical products industry is intense. We believe
that established product lines, FDA approvals, know-how and reputation in the
industry are key competitive factors. Currently, only two other companies
besides BSD have received FDA approval to manufacture and sell hyperthermia
therapy systems within the United States: U.S. Labthermics and Celsion
Corporation (AMX: CLN, and formerly known as Cheung Labs). Celsion is
principally involved with clinical trials related to thermotherapy, hyperthermia
and related fields. Labthermics produces ultrasound based systems which compete
with our microwave hyperthermia systems. Several other companies have received
IDEs in the United States or other international clearance for certain
experimental hyperthermia systems designed to treat both malignant and benign
diseases. Additionally, other companies, particularly established companies that
currently manufacture and sell other cancer therapy systems, could potentially
become competitors (in that they are also engaged in cancer treatment
businesses), and they may have significantly greater resources than we do.

         BSD participates in the BPH market as an investor in TherMatrx. In the
BPH market, competitive companies offering products similar to TherMatrx's
products include Urologix and Dornier (which both have received Pre-Market
Approvals from the FDA for their treatment systems), VidaMed (which has 510(k)
clearance from the FDA) and other foreign manufacturers. These competitors have
significantly greater resources than TherMatrx and may be better positioned to
compete in TherMatrx's market. In addition to thermotherapy equipment made by
TherMatrx's competitors, there are other competitive treatments for BPH that are
currently being developed, clinically investigated and/or actively marketed.

Product Service
---------------

         We provide a 12-month warranty following installation on all cancer
treatment systems and a 90-day limited warranty on individual components. Our
employees install and service the hyperthermia systems it sells to domestic
customers. In addition, company personnel or consultants perform technical and
clinical training. Subsequent to the applicable warranty period, we offer our
domestic customers full or limited service contracts.

         Generally, our distributors install and service systems sold to foreign
customers and are responsible for managing their own warranty programs for their
customers, including labor and travel expenses. We provide warranties for the

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replacement and/or repair of parts for 12 months for systems sold
internationally through distributors and for 90 days for individual components.
Spare parts are generally purchased by the distributors and stored at the
distributors' maintenance facilities to allow prompt repair. Distributor service
personnel are usually trained at customer sites and at our facilities in Salt
Lake City, Utah.

Production
----------

         We manufacture and test our systems and products at our facilities in
Salt Lake City, Utah. This manufacturing facility is FDA compliant and ISO
9001-1994 certified. Some equipment components we purchase from suppliers are
customized to our specifications. Key factors in our manufacturing process are
assembly and testing. We purchase component parts and other materials from a
variety of suppliers. We do not depend on a single supplier for any item, and
believe we can acquire materials and parts from at least two sources on a timely
basis.

Product Liability Exposure
--------------------------

         The manufacturing and marketing of medical devices involve an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
liability insurance with coverage limits of $1 million. However, we cannot
assure you that our product liability insurance will provide adequate coverage
against potential claims that might be made against us. No product liability
claims are presently pending against us; however, there can be no assurance that
product liability claims will not be filed in the future or that such claims
will not exceed our coverage limits.

Government Regulation
---------------------

         The medical devices that we have developed and are developing are
subject to extensive and rigorous regulation by numerous governmental
authorities, principally by the United States Food and Drug Administration, or
FDA. Pursuant to the Federal Food, Drug and Cosmetic Act, as amended, the FDA
regulates and must approve the clinical testing, manufacture, labeling,
distribution, and promotion of medical devices in the United States.

         Most of our hyperthermia treatment systems, including the BSD-500 and
the BSD-2000 and related products, have required Pre-Market Approval from the
FDA instead of the simpler 510(k) approval, and we anticipate that our future
systems will similarly require Pre-Market Approval. Pre-Market Approval requires
clinical testing to assure safety and effectiveness prior to marketing and
distribution of medical devices. We intend to continue to make improvements in
and to our existing products and complete the current enhancements to our
BSD-500 systems. Significant product changes must be submitted to the FDA under
Investigational Device Exemptions (IDEs) or Pre-Market Approval (PMA)
supplements. As described in the Section entitled "Our Products and Services"
above, we have obtained a PMA for our BSD-500 systems and IDE status for our
BSD-2000 system. We have not yet engaged in the process of obtaining FDA
approval for our BSD-2000 systems.

         Various foreign countries in which our products are or may be sold,
have regulatory requirements that can vary widely from country to country. Sales
into the European Union, or EU, require compliance with the Medical Devices
Directive, or MDD, and require us to obtain the necessary certifications to have
a CE Mark affixed to our products. We have obtained necessary ISO certification
of our quality, development, and manufacturing processes, and we have
successfully completed the CE Mark testing and Annex II audit. This allows us to
certify our own products and to affix the CE Mark label on them. However, we
must maintain compliance with all current and future directives and requirements

                                       10
<PAGE>

to maintain ISO certification and to continue to affix the CE Mark, and there
can be no assurance that we will continue to maintain compliance.

         All medical devices must be manufactured in accordance with regulations
specified in the FDA Quality System, or QSR, regulations and in the ISO and
other applicable regulations. In complying with these regulations, we must
continue to expend time, money and effort in the areas of design control,
production, and quality control to ensure full compliance. The FDA's mandatory
Medical Device Reporting regulation requires us to provide information to the
FDA on death or serious injuries alleged to have been associated with the use of
our products, as well as information on product malfunctions that would likely
cause or contribute to a death or serious injury if the malfunctions were to
recur. In Europe, the MDD vigilance system regulations require that we, through
a representative in Europe, provide information to authorities on death or
serious injuries alleged to have been associated with the use of our products,
as well as information on product malfunctions that would likely cause or
contribute to a death or serious injury if the malfunctions were to recur.

         International sales of unapproved medical devices are subject to FDA
export requirements, unless these products have been previously approved by one
of the countries specified by the FDA. We have obtained export approvals for all
countries for which we have delivered products. This includes countries in
western Europe and much of eastern Europe and many Asian countries.

         Although we believe we are in material compliance with all applicable
manufacturing and marketing regulations of the FDA and other regulatory bodies
with respect to our existing products, a determination that we are in material
violation of such regulations could lead to the imposition of penalties,
including fines, recall orders, product seizures, and criminal sanctions. In
addition, current regulations depend heavily on administrative interpretation,
and there can be no assurance that future interpretations made by the FDA or
other regulatory bodies, with possible retroactive effect, will not adversely
affect us.

         International sales are subject to the regulatory and safety
requirements of the country into which the sale occurs. There can be no
assurance that all of the necessary approvals will be granted on a timely basis
or at all. Delays in receipt of or failure to receive such approvals could have
a material adverse effect on our financial condition and results of operations.

         The Federal Communications Commission, or FCC, regulates the
frequencies of microwave and radiofrequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The BSD-500 fixed frequency systems and applicators
emit 915 MHz for U.S. and some European installations and 433.92 MHz for some
European installations, which is approved by the FCC for medical applications.
Accordingly, these systems do not require shielding to prevent interference with
communications. Our BSD-2000 deep hyperthermia variable-frequency generators and
applicators require electromagnetic shielding. Ultrasound hyperthermia systems
can be operated without shielding because the applicators emit acoustic rather
than electromagnetic energy.

Patents, Licenses, and Other Rights
-----------------------------------

         Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the medical device industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. Our policy is to file patent applications to protect significant
technology, inventions and product improvements. We currently own nine patents
in the United States and three patents outside the United States. Four
additional patents were assigned to TherMatrx, for which BSD maintained a
license, and one patent license was obtained by us from University of California

                                       11
<PAGE>

San Francisco and another license was obtained by us from the National
Institutes of Health. A European patent for the BSD-2000/3D system has been
issued. We feel that our patents represent the early pioneering and dominant
patents in this field. These patents along with the advanced product development
and leadership in the field are key elements for our current and future market
position.

         In July 1979, we entered into an exclusive worldwide license for a
unique temperature probe called the Bowman Probe. The license will remain in
effect as long as the technology does not become publicly known as a result of
actions taken by the licensor. We pay royalties based upon our sales of the
Bowman Probe. The license agreement was amended and renewed in August 2000 and
is currently in effect.

         On October 21, 1999, we have also acquired from the University of
California San Francisco (UCSF) the exclusive patent license (U.S. Patent
4,825,880) for small microwave antennae that can be inserted into cancerous
tumors to destroy them from the inside. The innovative microwave antenna design
enables the therapeutic heating length to be tailored to match the tumor size.
This license requires payment of 2.5% of sales on licensed products sold and
payment of patent maintenance fees and other annual payments of $4,000 to
maintain the exclusive license. We remain current on these payments.

         BSD also acquired on December 13, 2001 a patent license from the
National Institutes of Health (NIH) for the U.S. Patent 5,284,114. This patent
is for the combination of magnetic resonance integrated hyperthermia systems,
including our BSD-2000/3D/MR system, and is based on a patent obtain by NIH in
early research of the concept. The license agreement requires annual payment of
$1,000, $4,000 per licensed product sold in the U.S., and $1,000 per licensed
product manufactured in the U.S. and sold outside the U.S. There is also to be a
single payment of $10,000 upon PMA or 510(k) FDA approval.

         On July 1, 2001, we further acquired the rights to all FDA approvals
and the rights to manufacture all cancer products formerly owned by Clini-Therm
Corp. These products are related to the hyperthermia therapy delivered by our
BSD-500 systems, the exclusive patent obtained from UCSF, and the enhancements
we are currently making to such systems involve incorporating some of the
Clini-Therm rights we acquired into such systems. This involved only a one-time
cash payment with no continuing costs.

         From time to time, we have had and may continue to have discussions
with other companies, universities and private individuals concerning the
possible granting of licenses covering technology and/or patents. There can be
no assurance that such discussions will result in any agreements. In the past,
we have granted non-exclusive practice licenses for a few selected patents to
three companies. One of these companies is no longer in business.

         There can be no assurance that the patents presently issued to us will
be of significant value to us or will be held valid upon judicial review.
Successful litigation against these patents by a competitor could have a
material adverse effect upon our business, financial condition and results of
operations. We believe that we possess significant proprietary know-how in our
hardware and software capabilities. However, there can be no assurance that
others will not develop, acquire or patent technologies similar to ours or that
secrecy will not be breached.

Research and Development
------------------------

         During the fiscal years ended August 31, 2002, and August 31, 2001, we
expended $603,137 and $590,433 respectively for research and development,
representing 22.56% and 26.54% of total revenues. Research and Development
expenditures increased in 2002 due to costs associated with the development of
the BSD-2000/3D/MR system, the continued enhancements of our BSD-500 systems and

                                       12
<PAGE>

the development of new products not yet announced. Technological changes play an
important part in the advancement of our industry. We intend to continue to
devote substantial sums to research and development. Research and development
efforts inherently involve risks and uncertainties that could aversely affect
our projections, outlook and operating results.

Company History
---------------

         BSD was originally incorporated under the laws of the State of Utah on
March 17, 1978. In July 1986, BSD was reincorporated in Delaware.

Employees
---------

         As of November 1, 2002, BSD had 28 employees; 23 of them were full time
employees. None of our employees is covered by a collective bargaining
agreement. We consider our relations with our employees to be satisfactory. We
depend upon a limited number of key management, manufacturing, and technical
personnel. Our future success will depend in part on our ability to retain these
highly qualified employees.

Risks Related to Our Business
-----------------------------

         The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our operations. The occurrence of any
of the following risks could harm our business. In that case, the trading price
of our common stock could decline, and investors may lose all or part of their
investment.

We have a history of significant losses and such losses may continue in the
future.

         Since our inception in 1978, our expenses have substantially exceed our
revenue, resulting in continuing losses and an accumulated deficit of
$19,915,822 at August 31, 2002. Although we were modestly profitable in fiscal
2002, recording net income of $9,645, we may continue to incur operating losses
in the future as we continue to incur costs to develop our products, protect our
intellectual property and expand our sales and marketing activities. Our net
income in fiscal 2002 resulted primarily from significantly increased sales to
TherMatrx, but there is no assurance that TherMatrx will maintain or increase
such sales in the future or continue to obtain manufacturing services and
components from us. We will need to increase significantly the revenues we
receive from sales of our hyperthermia therapy products to sustain and increase
our profitability on a quarterly or annual basis. We may be unable to do so, and
therefore may never achieve consistent profitability.

Our hyperthermia therapy products may not achieve market acceptance, which could
limit our future revenue.

         To date, hyperthermia therapy has not been widely accepted by
cancer-treating physicians as an effective treatment of cancer, either in
combination with other available therapies or alone. We believe this is
primarily due to the inability of early hyperthermia therapy technologies to
focus and control heat directed at specific tissue locations and conclusions
drawn in early scientific studies that hyperthermia was only marginally
effective. Additionally, market acceptance depends upon physicians and hospitals
obtaining adequate reimbursement rates from third-party payers to make our
products commercially viable. If our sales and marketing efforts to promote
hyperthermia therapy acceptance in the medical community fail, or third-party
reimbursement rates for hyperthermia therapy are not adequate to make our
products commercially viable, then our future revenue from sales of our products
may be limited, and we may never sustain profitable operations.

                                       13
<PAGE>

We depend upon TherMatrx as our largest customer.

         For the year ended August 31, 2002, TherMatrx accounted for $1,781,000,
or approximately 66.64%, of our net sales and has become our largest customer.
We manufacture, assemble and test TherMatrx's TMx-2000 system, and also supply
equipment components and provide consulting services to TherMatrx. TherMatrx is
under no contractual obligation to obtain from us products or manufacturing,
assembling, testing and other services, and it could seek to obtain such
products and services from another source at any time. We cannot assure you that
we will continue to provide such services to TherMatrx, and the loss of
TherMatrx as a customer could have a material adverse effect on our business.

We depend on distributors for international sales.

         Historically, our revenues outside the United States have been derived
from sales of hyperthermia therapy systems through third-party distributors. We
have derived most of our revenue from such sales in Europe from sales through
our distributor Medizin-Technik, GmbH, which also purchase equipment components
and parts from us. Medizin-Technik sold none of our hyperthermia therapy systems
in Europe in fiscal 2002, and we can provide no assurance that Medizin-Technik's
sales will improve in the future. The loss, or ineffectiveness, of
Medizin-Technik as a distributor and significant customer could have a material
adverse effect on our business.

Our relationship with Nucletron as our sales representative for our enhanced
BSD-500i system may fail to increase our revenue.

         We recently entered into an agreement with Nucletron B.V. under which
Nucletron became our exclusive sales agent in most of the world for the version
of our BSD-500i interstitial hyperthermia therapy system that we are currently
enhancing. Nucletron has already commenced marketing our enhanced BSD-500i, and
if we fail to complete our enhancements to the BSD-500i and obtain necessary CE
Mark certification and PMA supplements for such enhancements, then we will not
be able to fulfill orders from Nucletron. If we fail to complete these
objectives, we may lose the confidence of Nucletron as a reliable supplier, and
we will not increase our revenue as a result of our relationship with Nucletron.

Government regulation can have a significant impact on our business.

         Our research and development efforts, our pre-clinical tests and
clinical trials, and the manufacturing, marketing and labeling of our products
are subject to extensive regulation by the FDA and other international agencies.
The process of obtaining FDA and other required regulatory approvals is lengthy
and expensive.

         We are currently enhancing our BSD-500 systems, which enhancements will
require Pre-Market Approval supplements from the FDA, and we have not yet
receive FDA Pre-Market Approval for our BSD-2000 systems. Obtaining these
approvals will be necessary to commercially market these systems in the United
States. We may not be able to obtain these approvals on a timely basis, if at
all, and such failure could harm our business prospects significantly. Further,
even if we are able to obtain the approvals we seek, the approvals granted may
include significant limitations on the indicated uses for which the products can
be marketed, which restrictions could negatively impact our business.

Cancer therapy is subject to rapid technological change, and therapies that are
more effective than ours could render our technology obsolete.

         The treatment of cancer is currently subject to extensive research and
development. Many cancer therapies are being researched, and our products may be
rendered obsolete as a result of therapy innovations by others. If our products
are rendered obsolete, our business will be substantially impaired.

                                       14
<PAGE>

We depend on adequate protection of our patent and other intellectual property
rights.

         We rely on patents, trade secrets, trademarks, copyrights, know-how,
license agreements and contractual provisions to establish and protect our
intellectual property rights. Our success will substantially depend on our
ability to protect our intellectual property rights and maintain rights granted
to us through license agreements. Our intellectual property rights may only
afford us limited protection and may not adequately protect our rights or
remedies to gain or keep any advantages we may have over our competitors, which
could harm our business.

         In the past, we have participated in substantial litigation regarding
our patent and other intellectual property rights in the medical device
industry. We have previously filed lawsuits for patent infringement against
three of our competitors and subsequently settled all three of those lawsuits.
Additional litigation against other parties may be necessary in the future to
enforce our intellectual property rights, to protect our patents and trade
secrets, and to determine the validity and scope of our proprietary rights. This
litigation may require more financial resources than are available to us. We
cannot guarantee that we will be able to successfully protect or rights in
litigation.

The market for our stock is limited and our stock price may be volatile.

         The market for our common stock has been limited due to low trading
volume and the small number of brokerage firms acting as market makers.
Additionally, the price for our common stock and for other medical and high
technology companies has been volatile. Because of the limitations of our market
and volatility of the market price of our stock, investors may face difficulties
in reselling shares at attractive prices when they want to. Factors such as
announcements of new technological innovations, developments regarding
government regulation and third-party reimbursements, developments concerning
proprietary rights and market conditions generally for medical and high
technology stocks could impact the market for our stock and cause further
volatility in our stock price.

Anti-takeover provisions in our articles of incorporation may have a possible
negative effect on our stock price.

         Certain provisions of our certificate of incorporation and bylaws may
make it more difficult for a third party to acquire, or discourage a third party
from attempting to acquire, control of us. We have in place several
anti-takeover measures that could discourage or prevent a takeover, even if an
acquisition would be beneficial to our stockholders. Increased difficulties for
a third party to acquire us could adversely affect our stock price.

ITEM 2.  PROPERTIES

         Our office, production and research facilities are located in Salt Lake
City, Utah. The complete headquarters and production facility occupies
approximately 20,000 square feet. We have leased the building for an annual
rental expense of approximately $78,000 (see Note 4 to Financial Statements). In
November 2002, we renewed our lease for five years, which includes payments of
approximately $82,000 per year for five years adjusted annually for increases in
the cost of living based on the Consumer Price Index for Urban Consumers. We
have an option to purchase the building for $1,000,000 upon 60 days notice for
six years. Thereafter, the purchase price increases by $50,000 each year, and
the option expires at the end of the tenth year. The building lease is accounted
for as an operating lease for financial statement purposes. The building is
currently in good condition, is adequate for our needs, is suitable for all
company functions and provides room for future expansion. We believe that we
carry adequate insurance on the property.

                                       15
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         There are no legal proceedings pending against BSD. We have filed a
lawsuit against EDAP/Technomed, Inc. in the Third Judicial District Court
located in Salt Lake City, Utah, for non-compliance to a patent license
agreement for products used to treat benign prostate disease with microwave
heating. We are seeking a judgment ordering EDAP/Technomed to pay us amounts
owed pursuant the patent license agreement, plus attorneys' fees and costs,
penalties and other amounts.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


                                       16
<PAGE>

                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock trades publicly on the OTC Bulletin Board under the
symbol "BSDM." The following table sets forth the high and low bid transactions,
as provided by the OTC Bulletin Board, for the quarters in fiscal year 2001 and
2002. The amounts reflect inter-dealer prices, without retail mark-up, markdown
or commission, and may not represent actual transactions.

                                                         Bid
                                             ---------------------------
        Quarter Ended:                            High          Low
        ----------------------------------------------------------------

        November 30, 2000..............           .91           .78
        February 29, 2001..............          1.25          1.19
        May 31, 2001...................           .90           .90
        August 31, 2001................           .80           .80

        November 30, 2000..............           .90           .90
        February 29, 2002..............          1.16          1.10
        May 31, 2002...................          1.00           .95
        August 31, 2002................           .66           .66

         As of November 1, 2002, there were approximately 583 holders of record
of our common stock. We have not paid any cash dividends on our common stock
since our inception and we have no intention of declaring any common stock
dividends in the foreseeable future.

ITEM 6.  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         Part I of this Annual Report on Form 10-KSB and the following
discussion should be read in conjunction with our financial statements included
elsewhere in this Annual Report on Form 10-KSB and the "Risks Related to our
Business" set forth at the end of Part I. This Annual Report on Form 10-KSB
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 related to our business. These forward-looking
statements include statements regarding our anticipated financial performance,
business prospects, technological developments, new products, research and
development efforts, and similar matters including our expectation that related
party revenue will continue to be a significant portion of our total revenue and
that sales of BSD-500 and BSD-2000 systems will be a greater percentage of total
revenue in fiscal 2003 and our belief that our current working capital and cash
from operations will be sufficient to fund our anticipated operations for fiscal
2003. In addition terms such as "expect," "may," "should," "will," "anticipate,"
"believe," "intend," "estimate," "plan," "continue," "should," "potential,"
"will," "project," "likely" or similar expressions or the negative of such
expressions identify forward-looking statements. These forward-looking
statements involve risks, uncertainties and other factors that could cause our
actual results and achievements to be materially different than those expressed
or implied by our forward-looking statements. These risks, uncertainties and
other factors include those identified in the section entitled "Risks Related to
our Business" in Part I.

General
-------

         BSD develops, manufactures and markets microwave systems used in the
treatment of cancer. Our microwave systems are used in cancer treating therapies

                                       17
<PAGE>

that elevate the temperature of tumors or other targeted tissue to conditions
classified as either hyperthermia or thermal therapy (also called
thermotherapy), through precisely delivered microwave energy. We also own
approximately 30% of TherMatrx, Inc., a company engaged in the development and
marketing of a medical device designed to be used in the treatment of benign
prostatic hyperplasia. We supply thermotherapy systems, component parts and
contract manufacturing services to TherMatrx.

         Since our inception, we have been engaged in the development and
improvement of technology that can better accomplish cancer cure through
hyperthermia therapy. From our predecessor hyperthermia systems, our current
BSD-500 and BSD-2000 hyperthermia systems have emerged. We have also developed
enhancements to our BSD-2000 system including the BSD-2000/3D that is designed
to allow three dimensional steering of deep focused energy and heat to targeted
tumors and tissue and the BSD-2000/3D/MR that includes an interface for magnetic
resonance imaging. Our hyperthermia systems are sold with supporting software
and may also be sold with support services. Since inception, we have generated
substantial operating losses and at August 31, 2002, had an accumulated deficit
of $19,915,822. We recorded modest net income for fiscal 2002.

         We derived $1,854,714, or 69% of our revenue in fiscal 2002 from sales
to related parties. Approximately $1,781,000 of such related party revenue was
from manufacturing, assembling and testing thermotherapy systems for TherMatrx
and selling probes, applicators and temperature sensors and other components and
contract services to TherMatrx. The remaining related party revenue of
approximately $74,000 was for component parts sold to Medizin-Technik GmbH. Dr.
Gerhard Sennewald, one of our directors, is a stockholder, executive officer and
a director of Medizin-Technik GmbH.

         In fiscal 2002, we derived $630,000, or 24% of our revenue from sales
of our BSD hyperthermia systems, including two BSD-2000 systems and one BSD-500
system. One of the BSD-2000 systems was sold at the end of the fiscal year,
resulting in a significant portion of our total unrelated party revenue for the
fiscal year being recognized in the fourth fiscal quarter. We recorded net
income of $294,559 on revenue of $972,268 in the fourth quarter of fiscal 2002.
The remaining revenue in fiscal 2002 of approximately $188,000 was generated
from the sale of consumable devices used with our hyperthermia systems of
$84,000, billable labor of $25,000, and service contracts of $79,000. Our
ability to increase revenue depends primarily on our ability to continue to
provide hyperthermia or thermotherapy systems and components to TherMatrx and
Medizin-Technik and increase sales of our hyperthermia systems domestically and
internationally. We expect related party revenues to continue to be a
significant portion of total revenue as we continue to supply TherMatrx's
expected sales growth and continue to sell hyperthermia systems in Europe
through our distributor, Medizin-Technik. However, in fiscal 2003, we currently
anticipate sales of our BSD-500 and BSD-2000 systems to be a greater percentage
of total revenue. The remaining revenue in fiscal 2002 of approximately $188,000
was generated from the sale of consumable devices used with our hyperthermia
systems of $84,000, billable labor of $25,000, and service contracts of $79,000.

         Cost of sales for the year ended August 31, 2002, included raw material
and labor costs. For the year ended August 31, 2002, we increased our reserve
for potential inventory impairment by $30,000, resulting in a total inventory
reserve of $50,000 at year-end. Because of the level of usage of certain
inventory items, we estimated that such items on hand potentially exceeded the
estimated near-term usage. Consequently, we determined to increase our inventory
reserve. Research and development expenses include expenditures for new product
development and development of enhancements to existing products. Selling,
general and administrative costs for the reported period included a compensation
charge of $717,000 related to the grant to employees and directors of options to
purchase common shares of TherMatrx owned by us. A corresponding gain was
recorded in other income for the reported period upon the transfer of TherMatrx
shares as settlement of the compensation liability that resulted from the grant
of the options to purchase TherMatrx shares owned by us. The gain was a result
of the book value underlying such options, which was $0, and the recorded value
of the compensation.

                                       18
<PAGE>

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 is recognized when a valid purchase order
has been received, services have been performed or product has been delivered,
the selling price is fixed or determinable, and collectibility is reasonably
assured. Sales include revenue from systems with software products, software
license rights and service contracts. Software Revenue Recognition, generally
requires revenue earned on software arrangements involving multiple elements
such as software products, enhancements, post-contract customer support,
installation and training to be allocated to each element based on the relative
fair values of the elements. The revenue allocated to software products is
generally recognized upon delivery of the products. The revenue allocated to
post-contract customer support is generally recognized over the support period.
Revenue for products sold is recorded when products are delivered. Revenue from
long-term service contracts is recognized on a straight-line basis over the term
of the contract, which approximates recognizing it as it is earned. Deferred
revenue and customer deposits payable includes amounts from service contracts as
well as revenue from sales of products which have not been shipped. We estimate
collectibility of receivables based on numerous factors, including the credit
worthiness of the customer, prior payment history, and review of public
information.

         Inventory Reserves. As of August 31, 2002, we had recorded a reserve
for potential inventory impairment of $50,000. Due to the level of usage of
certain inventory items, we estimated that such items on hand potentially
exceeded the estimated near-term usage. As a result, we determined to increase
the inventory reserve by $30,000 in the fourth quarter. This estimate is
determined based on our forecasted sales and related inventory usage to fill
such sales orders as well as evaluation of technological enhancements that may
render inventory items obsolete in the near-term. We periodically review our
inventory levels and usage, paying particular attention to slower-moving items.
If projected sales for fiscal 2003 do not materialize or if our hyperthermia
systems do not receive increased market acceptance, we may be required to
increase the reserve for inventory in future periods.

         Product Warranty. We provide product warranties on our BSD-500 and
BSD-2000 systems. These warranties vary from contract to contract, but generally
consist of parts and labor warranties for one year from the date of 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. We perform ongoing credit evaluations
of our customers and maintain allowances for possible losses which, when
realized, have been within the range of management's expectations. Our allowance
for doubtful accounts at August 31, 2002 was approximately $67,000, or
approximately 13.5% of the total outstanding receivables. Bad debt expense for
the fiscal year was approximately $43,000. 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. To date, actual results have not differed materially from management's
estimates, however the non-payment of a receivable related to the sale of a
BSD-500 or BSD-2000 could have a material adverse impact on our results of
operations.

         Valuation of Options to Purchase Shares of TherMatrx Owned by Us. In
July 2002, we issued to certain employees and board members options to purchase
179,300 common shares of TherMatrx, or approximately 7% of our interest in
TherMatrx, at an exercise price of $.001 per share. In connection with the
issuance of these options, we recorded $717,000 of compensation expense. This

                                       19
<PAGE>

expense was computed based on the price per share for common stock issued in a
December 2001 private offering of TherMatrx shares in which 525,321 shares of
common stock were sold for $4.00 per share to existing TherMatrx stockholders
who elected to purchase shares in the offering. For accounting purposes, because
of the lack of other contemporaneous transaction data indicating the value of
these shares in July 2002, and to record a conservative estimate of compensation
expense, we recorded the value of each option at $4.00. We strongly caution our
investors not to infer any conclusions about our market value or the value of
our stock from our decision to use $4.00 per share for purposes of computing
compensation expense. We believe our lower trading price in 2002 resulted in a
market capitalization for our company at the time these options were issued that
reflects a valuation of our TherMatrx holdings by our investors at substantially
less than $4.00 per share. Because all of the options were exercised prior to
year-end, we also recorded a gain of $717,000 because the TherMatrx stock issued
to settle the compensation liability had a book value of $0. The gain is
reflected in the statement of operations as "Gain on transfer of equity interest
in affiliate to related parties." The exercise of these options reduced our
holdings in TherMatrx from 2,700,000 shares (32%) to 2,520,700 shares (30%).

Results of Operations: Comparison of Fiscal Years ended August 31, 2002 and 2001
--------------------------------------------------------------------------------

         Revenue. Revenue for fiscal 2002 was $2,672,472 compared to $2,224,379
for fiscal 2001, an increase of $448,093, or approximately 20%. This increase
was mainly due to a significant increase in sales to TherMatrx. Product sales
increased to $2,672,472 in 2002 from $2,196,269 in 2001, an increase of $476,203
or 21.68%.

         Related Party Revenue. We derived $1,854,714, or 69% of our revenue in
fiscal 2002 from sales to related parties as compared to $1,666,723, or 76% in
fiscal 2001. Approximately $1,781,000 of such related party revenue in fiscal
2002 was from the sales of thermotherapy systems, component products and
contract services to TherMatrx. During fiscal 2001, sales to TherMatrx were
approximately $332,000. The significant increase in fiscal 2002 sales to
TherMatrx was because of increased sales by TherMatrx of its medical device for
the treatment of benign prostatic hyperplasia following its receipt of FDA
approval in July 2001. The remaining related party revenue of approximately
$74,000 in fiscal 2002 was for various component parts sold to Medizin-Technik.
Dr. Gerhard Sennewald, one of our directors and stockholders, is a stockholder,
executive officer and a director of Medizin-Technik. During fiscal 2001, we had
sales of approximately $1,334,000 to Medizin-Technik. The significant decrease
in sales to Medizin-Technik in fiscal 2002 was due to the normal rise and fall
cycle associated with the sale of large-ticket item capital equipment.

         Non-related Party Revenue. In fiscal 2002, we derived approximately
$630,000, or 24% of our total revenue as compared to approximately $262,000, or
12% in fiscal 2001, from sales of our BSD hyperthermia systems to non-related
parties, including two BSD-2000 systems and one BSD-500 system in fiscal 2002.
One of the BSD-2000 systems was sold at the end of the fiscal year, resulting in
a significant portion of the total unrelated party revenue for the fiscal year
being recognized in the fourth fiscal quarter of 2002. The increase in
non-related party revenue was because we sold two BSD-2000 systems in the United
States to research facilities. Because the BSD-2000 system can only be sold in
the United States pursuant to an Investigational Device Exemption under FDA
regulations, sales in the United States may only be made to customers using the
system for research purposes only. Most sales outside the United States are sold
to customers of Medizin-Technik, our distributor. The remaining non-related
party revenue in fiscal 2002 of approximately $188,000 was from the sale of
consumable devices of $84,000, billable labor of $25,000, and service contracts
of $79,000.

         Cost of Sales. Cost of sales for fiscal 2002 was $1,084,846 compared to
$989,819 for fiscal 2001, an increase of $95,027, or approximately 10%. This
increase resulted primarily from the increase in sales to TherMatrx. Cost of
sales for fiscal 2002 to unrelated parties increased to $272,431 from $167,306
primarily because of the increase in sales of the BSD-2000 system. Cost of sales
to related parties in fiscal 2002 declined to $812,415 from $822,513 in fiscal
2001 primarily because of the change in product mix. During fiscal 2002, 96% of

                                       20
<PAGE>

the related party sales were to TherMatrx. The products sold to TherMatrx
generally require less cost per unit to manufacture than the BSD-2000 and
BSD-500 systems. During fiscal 2001, only 20% of the related party sales were to
TherMatrx whereas the remaining 80% were sales of the BSD-2000 to
Medizin-Technik.

         Gross Profit. Gross profit for fiscal 2002 was $1,587,626, or 59% of
total product sales compared to $1,234,560, or 55% of total product sales in
fiscal 2001. The increase in gross profit as a percentage of total product sales
was primarily because of increases in sales of higher margin hyperthermia system
products in fiscal 2002 accompanied by production efficiencies obtained from a
higher volume of hyperthermia system sales.

         Research and Development Expenses. Research and development expenses
for fiscal 2002 were $603,137 compared to $590,433 for fiscal 2001, an increase
of $12,704, or 2%. Research and development expenses in fiscal 2002 related
primarily to development work on our BSD-2000/3D/MR hyperthermia system and
enhancements to our BSD-500 systems.

         Inventory Impairment Expense. We recorded an inventory impairment
charge in fiscal 2002 of $30,000 increasing our total inventory reserve at
August 31, 2002 to $50,000.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2002 were $1,667,042 compared to $877,810 in
fiscal 2001, an increase of $789,232, or approximately 90%. Of this increase,
$717,700 was attributable to compensation expense recorded for the issuance of
options to purchase a portion of our TherMatrx common shares. This was offset by
lower administrative and regulatory costs and special promotion costs. We issued
to employees and board members options to purchase 179,300 shares of TherMatrx,
or approximately 7% of our interest in TherMatrx, at an exercise price of $.001
per share. In connection with the issuance of these options, we recorded
$717,000 of compensation expense based on the computed fair value of such
options. Because all of the options were exercised prior to year-end, we also
recorded a gain of $717,000 because the TherMatrx stock issued to settle the
compensation liability had a book value of $0. The gain is reflected in the
statement of operations as "Gain on transfer of equity interest in affiliate to
related parties." The exercise of these options reduced our holdings in
TherMatrx from 2,700,000 shares (32%) to 2,520,700 shares (30%).

         Other Income. Other income for fiscal 2002 was $722,198 compared to
$19,323 in fiscal 2001, an increase of $702,875. This increase resulted almost
entirely from a gain on transfer of equity interest in affiliate to related
parties as noted above.

         Net Income. Our net income for fiscal 2002 was $9,645 compared to a net
loss in fiscal 2001 of $214,360. This increase in net income resulted primarily
from significantly increased sales to TherMatrx. This gain was offset by the
related compensation expense noted above.

         Fluctuation in Operating Results. Our results of operations have
fluctuated in the past and may fluctuate in the future from year to year as well
as from quarter to quarter. Revenue may fluctuate as a result of factors
relating to the operating success of TherMatrx and its continued demand for
thermotherapy systems and component parts supplied by us, market acceptance of
our BSD hyperthermia 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, including those set forth in
"Risks of our Business" in Part I, our results of operations for a particular
period may not be indicative of operating results for any other period.

                                       21
<PAGE>

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

         Since inception, we have generated an accumulated deficit of
$19,915,822. We have historically financed our operations through sale of
technology assets, issuance of common stock, and cash from operations. We
generated $19,800 in cash from operating activities in fiscal 2002 compared to
cash used in operating activities of $226,192 in fiscal 2001. Cash flow from
operating activities improved in fiscal 2002 because of our net income in fiscal
2002 of $9,645 compared to a net loss in fiscal 2001 of $214,360 and a reduction
in accounts receivable of $55,173 in fiscal 2002 compared to an increase in
accounts receivable of $369,158 in fiscal 2001, offset by an increase in
inventory in fiscal 2002 of $109,095 compared to a decrease in inventory of
$177,467 in fiscal 2001. Our investing activities resulted in net cash used of
$40,532 relating to the purchase of certain property and equipment and a patent
license. Cash provided by financing activities totaled $34,602 reflecting
proceeds from the issuance of common stock in connection with the exercise of
outstanding stock options.

         At August 31, 2002, our working capital was $1,050,616 and our cash and
cash equivalents totaled $421,900. We have no bank debt and no credit facility.
Our contractual obligations and commercial commitments requiring capital
resources include building rent of $82,000 per year for five years adjusted
annually for increases in the cost of living based on the Consumer Price Index
for Urban Consumers. We expect to expend approximately $670,000 on research and
development in fiscal 2003 related to the BSD-500 and BSD-2000 systems.

         Our ability to fund our cash needs and grow our business depends on our
ability to generate cash flow from operations and capital from financing
activities. Our operating cash flow has fluctuated significantly in the past and
may continue to do so in the future. While we believe that our current working
capital and anticipated cash flow from future operations will be sufficient to
fund our anticipated operations for fiscal 2003, this belief is substantially
dependent on us successfully converting accounts receivable and inventory to
cash and increasing revenue. We cannot assure that cash from operations will be
sufficient to fund our cash needs. We will not likely be able to raise debt
financing from institutional sources in the foreseeable future, or at least not
on terms satisfactory to us. Our access to equity capital through the public
equity market is also constricted. We may not be able to raise capital through
private placements of equity securities on terms acceptable to us. If cash from
operations is not sufficient to fund our cash needs and debt or equity capital
is not available or at least not available on terms satisfactory to us, our
ability to grow revenue and profits and generate cash would be constricted and
we may not be able to continue operating.

                                       22
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS


                                                         BSD MEDICAL CORPORATION
                                                   Index to Financial Statements

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




                                                                       Page
                                                                       ----

Independent Auditor's Report                                           24


Balance Sheet                                                          25


Statement of Operations                                                26


Statement of Stockholders' Equity                                      27


Statement of Cash Flows                                                28


Notes to Financial Statements                                          29



                                       23
<PAGE>

                                                    INDEPENDENT AUDITORS' REPORT








To the Board of Directors and Stockholders
of BSD Medical Corporation


We have audited the balance sheet of BSD Medical Corporation (the Company) as of
August 31, 2002, and the related statements of operations, stockholders' equity,
and cash flows for the years  ended  August 31, 2002 and 2001.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of BSD Medical  Corporation as of
August 31, 2002,  and the results of its operations and cash flows for the years
ended  August  31,  2002  and  2001 in  conformity  with  accounting  principles
generally accepted in the United States of America.




                                        TANNER + CO.

Salt Lake City, Utah
September 25, 2002



                                       24
<PAGE>

<TABLE>
<CAPTION>

                                                                                   BSD MEDICAL CORPORATION
                                                                                             Balance Sheet

                                                                                           August 31, 2002
----------------------------------------------------------------------------------------------------------

              Assets
              ------
<S>                                                                                      <C>
Current assets:
     Cash and cash equivalents                                                           $         421,900
     Receivables, net                                                                              427,862
     Related party receivables                                                                     269,867
     Inventories                                                                                   806,730
     Other current assets                                                                           18,337
                                                                                         -----------------

                  Total current assets                                                           1,944,696

Property and equipment, net                                                                        127,495
Patent, net of amortization of $3,164                                                               28,764
                                                                                         -----------------

                                                                                         $       2,100,955
                                                                                         -----------------

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

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

Current liabilities:
     Accounts payable                                                                    $          62,621
     Accrued expenses                                                                              747,537
     Current portion of deferred revenue                                                            68,647
     Current portion of deferred gain on sale - leaseback                                           15,275
                                                                                         -----------------

                  Total current liabilities                                                        894,080
                                                                                         -----------------

Deferred revenue                                                                                    93,991
                                                                                         -----------------

                  Total liabilities                                                                988,071

Commitments and contingencies                                                                            -

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 and outstanding 17,756,328 shares                                             17,757
     Additional paid-in capital                                                                 21,037,457
     Deferred compensation                                                                         (26,274)
     Accumulated deficit                                                                       (19,915,822)
     Treasury stock, at cost                                                                          (234)
                                                                                         -----------------

                  Total stockholders' equity                                                     1,112,884
                                                                                         -----------------

                                                                                         $       2,100,955
                                                                                         -----------------


----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>


                                       25
<PAGE>


<TABLE>
<CAPTION>

                                                                                   BSD MEDICAL CORPORATION
                                                                                   Statement of Operations

                                                                                    Years Ended August 31,
----------------------------------------------------------------------------------------------------------


                                                                              2002             2001
                                                                        ----------------------------------
<S>                                                                     <C>                <C>
Revenues:
     Sales                                                              $        817,758   $       529,546
     Sales to related parties                                                  1,854,714         1,666,723
     Grants and licenses                                                               -            28,110
                                                                        ----------------------------------

                                                                               2,672,472         2,224,379
                                                                        ----------------------------------

Costs and expenses:
     Cost of sales                                                               272,431           167,306
     Cost of sales to related parties                                            812,415           822,513
     Impairment of inventory                                                      30,000                 -
     Research and development                                                    603,137           590,433
     Selling, general, and administrative                                      1,667,042           877,810
                                                                        ----------------------------------

                                                                               3,385,025         2,458,062
                                                                        ----------------------------------

                  Operating loss                                                (712,553)         (233,683)

Other income (expense):
     Gain on transfer of equity interest in affiliate
       to related parties                                                        717,000                 -
     Interest income                                                               5,198            19,323
                                                                        ----------------------------------

                  Net income (loss)                                     $          9,645   $      (214,360)
                                                                        ----------------------------------

Loss per common share - basic and diluted                               $              -   $          (.01)
                                                                        ----------------------------------

Weighted average shares - basic and diluted                                   17,932,000        17,545,000
                                                                        ----------------------------------


----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>


                                       26
<PAGE>

<TABLE>
<CAPTION>

                                                                                       BSD MEDICAL CORPORATION
                                                                             Statement of Stockholders' Equity

                                                                          Years Ended August 31, 2002 and 2001
--------------------------------------------------------------------------------------------------------------



                                 Common Stock         Additional   Deferred                   Treasury Stock
                           -------------------------   Paid-In      Compen-     Accumulated  -----------------
                              Shares       Amount      Capital      sation       Deficit     Shares     Amount
                           -----------------------------------------------------------------------------------
<S>                         <C>         <C>          <C>           <C>        <C>              <C>     <C>
Balance,
  August 31, 2000           17,479,692  $   174,797  $ 20,766,625  $ (13,897) $  (19,711,107)  24,331  $  (234)

Effect of change in par
  value of common stock              -     (157,317)      157,317          -               -        -        -

Common stock issued for:
  Cash                          63,765           64         6,313                          -        -        -
  Services                      21,405           21        23,979          -               -        -        -
  Options                       37,757           38          (38)          -               -        -        -

Amortization of deferred
  compensation                       -            -             -      3,800               -        -        -

Deferred compensation                -            -        15,000    (15,000)              -        -        -

Net loss                             -            -             -          -        (214,360)        -       -
                           ------------------------------------------------------------------------------------

Balance August 31, 2001     17,602,619       17,603    20,969,196    (25,097)    (19,925,467)  24,331     (234)

Common stock issued for:
  Cash                         109,633          110        34,492          -               -        -        -
  Services                      27,264           27        23,973          -               -        -        -
  Options                       16,812           17           (17)         -               -        -        -

Amortization of deferred
  compensation                       -            -             -      8,636               -        -        -

Deferred compensation                -            -         9,813     (9,813)              -        -        -

Net income                           -            -             -          -           9,645        -        -
                           ------------------------------------------------------------------------------------

Balance August 31, 2002     17,756,328  $    17,757  $ 21,037,457  $ (26,274) $  (19,915,822)  24,331  $  (234)
                           ------------------------------------------------------------------------------------



--------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>

                                       27
<PAGE>

<TABLE>
<CAPTION>

                                                                                   BSD MEDICAL CORPORATION
                                                                                   Statement of Cash Flows

                                                                                    Years Ended August 31,


                                                                              2002               2001
                                                                        ----------------------------------
<S>                                                                     <C>                <C>
Cash flows from operating activities:
     Net income (loss)                                                  $          9,645   $      (214,360)
     Adjustments to reconcile net income (loss) to net
       cash provided by (used in) operating activities:
         Provision for allowance of doubtful accounts                             42,403                 -
         Provision for inventory write-off                                        30,000                 -
         Depreciation and amortization                                            48,965            38,785
         Deferred gain on sale of building                                       (61,416)          (61,416)
         Amortization of deferred compensation                                     8,636             3,800
         Stock compensation expense                                               24,000            24,000
         Compensation expense resulting from options
           granted to purchase TherMatrx shares                                  717,000                 -
         Gain on issuance of options of TherMatrx shares
           as settlement of compensation                                        (717,000)                -
         Decrease (increase) in:
              Restricted certificate of deposit                                   15,313           (88,917)
              Receivables                                                         55,173          (369,158)
              Inventories                                                       (109,095)          177,467
              Other current assets                                                16,767            15,342
         Increase (decrease) in:
              Accounts payable                                                   (51,121)           52,205
              Accrued expenses                                                    40,043            29,933
              Deferred revenue                                                   (49,513)          166,127
                                                                        -----------------------------------

                  Net cash provided by (used in)
                  operating activities                                            19,800          (226,192)
                                                                        -----------------------------------

Cash flows from investing activities:
     Purchase of property and equipment                                          (22,532)         (103,649)
     Purchase of patent license                                                  (18,000)                -
                                                                        -----------------------------------

                  Net cash used in
                  investing activities                                           (40,532)         (103,649)
                                                                        -----------------------------------

Cash flows provided by financing activities-
     proceeds from issuance of common stock                                       34,602             6,377
                                                                        -----------------------------------

Increase (decrease) in cash and cash equivalents                                  13,870          (323,464)

Cash and cash equivalents, beginning of year                                     408,030           731,494
                                                                        -----------------------------------

Cash and cash equivalents, end of year                                  $        421,900   $       408,030
                                                                        -----------------------------------


-----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>

                                       28
<PAGE>



                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements

                                                        August 31, 2002 and 2001
--------------------------------------------------------------------------------

1.   Organization       Organization
     of                 BSD  Medical   Corporation   (the   Company)   develops,
     Significant        produces,  markets,  and  services  systems used for the
     Accounting         treatment of cancer and other  diseases.  These  systems
     Policies           are sold worldwide.  In addition,  the Company currently
                        has an  approximate  30%  interest  in  TherMatrx,  Inc.
                        (TherMatrx) a corporate joint venture that is engaged in
                        the manufacture and sale of medical equipment.

                        Cash and Cash Equivalents
                        Cash  and   cash   equivalents   consist   of  cash  and
                        investments  with original  maturities to the Company of
                        three months or less.

                        Inventories
                        Parts and supplies  inventories  are stated at the lower
                        of cost or market.  Cost is determined using the average
                        cost  method.  Work-in-process  and  finished  goods are
                        stated  at the  lower of the  accumulated  manufacturing
                        costs or market.

                        Property and Equipment
                        Property   and   equipment   are  stated  at  cost  less
                        accumulated depreciation.  Depreciation and amortization
                        is determined  using the  straight-line  method over the
                        estimated  useful lives of the assets.  Expenditures for
                        maintenance  and repairs are expensed  when incurred and
                        betterments are capitalized. Gains and losses on sale of
                        property and equipment are reflected in operations.

                        Investment in Joint Venture
                        The  Company  has  an   approximate   30%  ownership  in
                        TherMatrx,  a corporate joint venture that is engaged in
                        the  manufacture  and  sale  of  medical  devices.   The
                        investment  is  accounted  for on the  equity  method of
                        accounting.  Because  the  Company's  percent  share  of
                        accumulated   losses  in  TherMatrx   has  exceeded  its
                        original  investment no asset is recorded on the balance
                        sheet.  The Company has included in accrued  liabilities
                        $136,467 of potential obligations to TherMatrx, which it
                        incurred in a prior year.  No further  obligations  have
                        been  recognized  as the Company has not  guaranteed  or
                        otherwise   committed  to  provide   further   financial
                        funding.

                        Patents
                        Patents are carried at the cost and are being  amortized
                        over 17 years.

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


                                       29
<PAGE>



                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

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

                        Loss Per Common Share
                        The  computation of basic loss per common share is based
                        on the  weighted  average  number of shares  outstanding
                        during each year.

                        The computation of diluted  earnings per common share is
                        based  on  the   weighted   average   number  of  shares
                        outstanding  during  the  year,  plus the  common  stock
                        equivalents  that would arise from the exercise of stock
                        options and  warrants  outstanding,  using the  treasury
                        stock  method  and the  average  market  price per share
                        during  the  year.  Common  stock  equivalents  are  not
                        included in the diluted loss per share  calculation when
                        their effect is  anti-dilutive.  Options and warrants to
                        purchase 1,258,901 shares and 1,393,567 shares of common
                        stock at  prices  ranging  from  $.10 to $1.76 per share
                        were   outstanding   at  August   31,   2002  and  2001,
                        respectively.

                        Revenue Recognition
                        Revenue is recognized  when a valid  purchase  order has
                        been  received,  services have been performed or product
                        has  been  delivered,  the  selling  price  is  fixed or
                        determinable, and collectibility is reasonably assured.

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

                                       30
<PAGE>



                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


1.   Organization       Sales  includes   revenue  from  systems  with  software
     of                 products, software license rights and service contracts.
     Significant        Software revenue recognition, generally requires revenue
     Accounting         earned  on  software  arrangements   involving  multiple
     Policies           elements  such  as  software   products,   enhancements,
     Continued          post-contract   customer   support,   installation   and
                        training to be allocated  to each  element  based on the
                        relative  fair  values  of  the  elements.  The  revenue
                        allocated to software  products is generally  recognized
                        upon delivery of the products.  The revenue allocated to
                        post-contract  customer support is generally  recognized
                        over the support period. Sales for products are recorded
                        when  products are  delivered.  Revenue  from  long-term
                        service contracts is recognized on a straight-line basis
                        over  the  term  of  the  contract,  which  approximates
                        recognizing  it as it is earned.  Deferred  revenue  and
                        customer  deposits payable includes amounts from service
                        contracts  as well as  revenue  from  sales of  products
                        which have not been shipped.

                        Research and Development Costs
                        Research and development costs are expensed as incurred.

                        Concentration of Credit Risk
                        Financial   instruments  that  potentially  subject  the
                        Company  to   concentration   of  credit  risk  consists
                        primarily of trade receivables.  In the normal course of
                        business,  the  Company  provides  credit  terms  to its
                        customers.  Accordingly,  the Company  performs  ongoing
                        credit   evaluations  of  its  customers  and  maintains
                        allowances  for possible  losses which,  when  realized,
                        have been within the range of management's expectations.

                        The Company has cash in bank and short-term  investments
                        that, at times, may exceed federally insured limits. The
                        Company has not experienced any losses in such accounts.
                        The   Company   believes   it  is  not  exposed  to  any
                        significant   credit   risk  on  cash   and   short-term
                        investments.

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

                                       31
<PAGE>



                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


1.   Organization       Use  of  Estimates  in  the   Preparation  of  Financial
     of                 Statements
     Significant        The  preparation  of financial  statements in conformity
     Accounting         with generally accepted  accounting  principles requires
     Policies           management to make estimates and assumptions that affect
     Continued          the  reported  amounts  of assets  and  liabilities  and
                        disclosure of contingent  assets and  liabilities at the
                        date  of  the  financial  statements  and  the  reported
                        amounts of revenues  and expenses  during the  reporting
                        period.   Actual   results   could   differ  from  those
                        estimates.

                        Reclassification
                        Certain  amounts  for the year  ended  August  31,  2001
                        financial  statements have been  reclassified to conform
                        with classifications adopted in the current year.


2.   Detail of          Details of certain  balance sheet  accounts as of August
     Certain            31, 2002, are as follows:
     Balance
     Sheet
     Accounts           Receivables:
                          Trade receivables                  $        495,233
                          Less allowance for
                            doubtful accounts                         (67,371)
                                                             ----------------

                                                             $        427,862
                                                             ----------------

                        Inventories:
                          Parts and supplies                 $        490,248
                          Work-in-process                             366,482
                          Finished goods                                    -
                          Reserve for obsolete
                            inventory                                 (50,000)
                                                             ----------------

                                                             $        806,730
                                                             ----------------

                        Accrued expenses:
                          Customer deposits                  $        404,176
                          Accrued loss in equity affiliate            136,467
                          Accrued vacation                             99,518
                          Accrued payroll and taxes                    59,535
                          Other accrued expenses                       47,841
                                                             ----------------

                                                             $        747,537
                                                             ----------------

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

                                       32
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


3.   Property           Property and equipment consists of the following:
     and
     Equipment          Equipment                            $        620,031
                        Furniture and fixtures                        297,741
                                                             ----------------

                                                                      917,772
                        Less accumulated depreciation
                          and amortization                           (790,277)
                                                             ----------------

                                                             $        127,495
                                                             ----------------


4.   Deferred           During  the year  ended  August 31,  1998,  the  Company
     Gain               entered  into  a   sale-leaseback   transaction  on  its
     and                building.  The  sale-leaseback  resulted  in a  gain  of
     Operating          $325,513 of which  $307,000  was  deferred  and is being
     Lease              credited to income as rent expense  adjustments over the
                        term of the lease.  The lease requires  monthly payments
                        of $6,533 through  November  2002.  Subsequent to August
                        31, 2002,  the Company  renewed its lease for five years
                        which  includes  payments of  approximately  $82,000 per
                        year,  adjusted  annually  for  increases in the cost of
                        living  based on the  Consumer  Price  Index  for  Urban
                        Consumers.

                        Future  minimum  payments  at August  31,  2002,  are as
                        follows:

                        Years Ending August 31,                    Amount
                        -----------------------              ----------------

                                  2003                       $         15,275
                                                             ----------------

                                                             $         15,275
                                                             ----------------

                        Annual  rent  expense  on this  operating  lease for the
                        years  ended  August  31,  2001 and  2000,  amounted  to
                        approximately $17,000, net of sale-leaseback gain.


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

                                       33
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


5.   Long-Term          The Company has entered into certain  service  contracts
     Deferred           for  which  it has  received  payment  in  advance.  The
     Revenue            Company is recognizing  these service  revenues over the
                        life of the service agreements as follows:

                        Years Ending August 31,                    Amount
                        -----------------------             -----------------

                        2003                                 $         68,647
                        2004                                           50,771
                        2005                                           40,900
                        2006                                            2,320
                                                             ----------------

                                                                      162,638

                        Less current portion                          (68,647)
                                                             ----------------

                        Long-term deferred revenue           $         93,991
                                                             ----------------


6.   Income             The income tax benefit  differs from the amount computed
     Taxes              at federal statutory rates as follows:

                                                             Years Ended
                                                     ---------------------------
                                                             2002         2001
                                                     ---------------------------

                        Income tax (expense) benefit
                          at statutory rate             $  (3,000) $    73,000
                        Other                                   -       (9,000)
                        Change in valuation allowance       3,000      (64,000)
                                                        ------------------------

                                                        $       -  $        -
                                                        ------------------------


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


                                       34
<PAGE>

                                                       BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


6.   Income             Deferred tax assets  (liabilities) are  comprised of the
     Taxes              following:
     Continued
                        Net operating loss carryforwards     $      1,605,000
                        General business and AMT credit
                          carryforwards                               179,000
                        Accrued expenses and deposits                 173,000
                        Deferred revenue                               55,000
                        Inventory reserve                              17,000
                        Allowance for bad debts and reserves           23,000
                        Depreciation                                  (17,000)
                        Deferred compensation expense                  (9,000)
                                                             ----------------

                                                                    2,026,000

                        Valuation allowance                        (2,026,000)
                                                             ----------------

                                                             $              -
                                                             ----------------

                        At August 31, 2002, the Company has net operating losses
                        (NOL) as follows:

                        Expiration Date                             NOL
                        ---------------                       ---------------

                          2003                               $        247,000
                          2005                                      1,270,000
                          2007                                        190,000
                          2008                                         99,000
                          2009                                        671,000
                          2010                                        170,000
                          2012                                        838,000
                          2016                                        153,000
                          2018                                      1,052,000
                                                             ----------------

                                                             $      4,690,000
                                                             ----------------

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

                                       35
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


6.   Income             At  August  31,  2002,  the  Company  has  Research  and
     Taxes              Experimentation   Tax  Credit  (RETC)  and   Alternative
     Continued          Minimum Tax Credit (AMTC) as follows:

                        Expiration Date                 RETC            AMTC
                        ----------------             --------------------------

                          2003                       $     9,000   $        -
                          2004                            41,000            -
                          2005                                 -            -
                          No expiration date              72,000       57,000
                                                     --------------------------

                                                     $   122,000   $   57,000
                                                     --------------------------

                        The Company has  experienced  a greater  than 50 percent
                        change of ownership.  Consequently, use of the Company's
                        carryovers against future taxable income in any one year
                        may  be  limited   and  those   carryovers   may  expire
                        unutilized due to  limitations  imposed by the change of
                        ownership rules.

7.   Stock              Stock Options
     Options and        The Company's 1987 Employee Stock Option Plan authorizes
     Warrants           the  granting  of  incentive   options  to  certain  key
                        employees of the Company and nonqualified  stock options
                        to certain key  employees,  non-employee  directors,  or
                        individuals  who provide  services to the  Company.  The
                        Plan,  as amended,  provides for the granting of options
                        for an  aggregate  of 950,000  shares.  The options vest
                        according to a set schedule over a five-year  period and
                        expire  upon the  employee's  termination  or after  ten
                        years from the date of grant.

                        The Company's 1998 Employee Stock Option Plan authorizes
                        the granting of incentive  stock  options to certain key
                        employees and  non-employees who provide services to the
                        Company.  The Plan  provides for the granting of options
                        for an aggregate of 2,000,000  shares.  The options vest
                        subject to management's discretion.


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

                                       36
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

7.   Stock              The  Company's  1998 Director  Stock Plan  authorizes an
     Options and        annual  compensation  of  $12,000  to each  non-employee
     Warrants           director.  The annual  compensation  may be satisfied by
     Continued          issuing  common stock,  with the number of shares issued
                        calculated  by  dividing  the unpaid  compensation  by a
                        daily average of the preceding  twenty day closing price
                        of the Company's common stock. The Plan also grants each
                        non-employee  outside  director 25,000 options each year
                        at an exercise  price of 85% of the fair market value of
                        the common stock at the date the option is granted.  The
                        Plan allows for an aggregate  of 1,000,000  shares to be
                        granted.  The options  vest  according to a set schedule
                        over a five-year  period and expire upon the  director's
                        termination,  or after ten years from the date of grant.
                        For certain  options issued under this plan, the Company
                        has recorded as deferred  compensation the excess of the
                        market  value of common  stock at the date of grant over
                        the exercise price.

                        A schedule of the options and warrants are as follows:

                                                                Price Per
                                       Options     Warrants       Share
                                    -----------------------------------------

 Outstanding at August 31, 2000         1,281,668      135,664 $ .10 to 3.00
      Granted                              82,000            -   .75 to 1.11
      Exercised                          (105,765)           -           .10
                                    -----------------------------------------

 Outstanding at August 31, 2001         1,257,903      135,664   .10 to 3.00
      Granted                              75,000            -           .73
      Exercised                          (114,312)     (12,133)   .10 to .37
      Forfeitures                          (8,221)     (75,000)  .10 to 3.00
                                   -----------------------------------------

 Outstanding at August 31, 2002         1,210,370       48,531 $         .38
                                    -----------------------------------------

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

                                       37
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


7.   Stock              The Company has adopted the  disclosure-only  provisions
     Options and        of Statement of Financial  Accounting  Standards  (SFAS)
     Warrants           No.  123,   Accounting  for  Stock-Based   Compensation.
     Continued          Accordingly, no compensation cost has been recognized in
                        the financial statements for employees,  except when the
                        exercise price is below the market price of the stock on
                        the  date  of  grant.  Had  compensation  cost  for  the
                        Company's  stock option plans been  determined  based on
                        the fair  value at the grant date for awards in 2001 and
                        2000 consistent with the provisions of SFAS No. 123, the
                        Company's  approximate net loss and loss per share would
                        have been the pro forma amounts indicated below:

                                                       Years Ended
                                                        August 31,
                                              -------------------------------
                                                   2002           2001
                                              -------------------------------

                        Net income (loss) -
                          as reported             $    9,645   $    (214,360)
                        Net loss - pro forma      $ (116,580)  $    (386,993)
                        Loss per common share -
                          as reported             $        -   $        (.01)
                        Loss per common share -
                          pro forma               $        -   $        (.02)

                        The fair value of each option  grant is estimated in the
                        date of grant  using the  Black-Scholes  option  pricing
                        model with the following assumptions:

                                                                August 31,
                                                      --------------------------
                                                             2002          2001
                                                      --------------------------

                        Expected dividend yield           $     -    $       -
                        Expected stock price volatility       143%          148%
                        Risk-free interest rate               4.3%          5.6%
                        Expected life of options           5 years       5 years


                        The  weighted  average  fair  value of  options  granted
                        during the years  ended  August  31,  2002 and 2001 were
                        $.73 and $1.43, respectively.


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

                                       38
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


7.   Stock              The following table summarizes  information  about stock
     Options and        options and warrants outstanding at August 31, 2002:
     Warrants
     Continued         Options and Warrants             Options and Warrants
                           Outstanding                      Exercisable
             -------------------------------------------------------------------
                          Weighted
                             Average
                            Remaining    Weighted                   Weighted
   Range of                Contractual    Average                   Average
   Exercise     Number        Life       Exercise      Number       Exercise
    Prices    Outstanding    (Years)       Price     Exercisable     Price
 -------------------------------------------------------------------------------

 $    .10-.25      494,901         3.08 $        .13      464,901 $         .12
     .37-1.11      714,000         7.40          .61      256,800           .57
         1.76       50,000         7.82         1.76       50,000          1.76
 -------------------------------------------------------------------------------

 $   .10-1.76    1,258,901         5.72 $        .47      771,701 $         .38
 -------------------------------------------------------------------------------

8.   Foreign            During  the years  ended  August  31,  2002 and 2001 the
     Customer           Company   had   sales  of   $1,781,000   and   $332,000,
     and Major          respectively,  to TherMatrx, an unconsolidated affiliate
     Customer           of which it owns  approximately  30%.  During  the years
                        ended  August 31, 2002 and 2001 the Company had sales to
                        a   European   entity   controlled   by  a   significant
                        stockholder  and member of the Board of Directors of the
                        Company  of   approximately   $74,000  and   $1,334,000,
                        respectively.   The  Company  also  had  a  sale  to  an
                        unrelated   entity   of   approximately    $344,000   or
                        approximately  12.9% of total  sales for the year  ended
                        August 31, 2002.

9.   Related Party      At August 31, 2002 and 2001,  accrued expenses  includes
     Transactions       approximately $401,000 and $209,000,  respectively,  due
     Not otherwise      to an entity controlled by a significant stockholder and
     disclosed          member of the Board of Directors  and an  unconsolidated
                        affiliate.  These amounts represent deposits to purchase
                        product  from  the  Company  and will be  recognized  as
                        revenue when all  performance  and delivery  obligations
                        have been met.

                        At August 31, 2002 and 2001 accounts receivable includes
                        approximately  $81,000 and $592,000,  respectively,  due
                        from an entity  controlled by a significant  stockholder
                        and   member  of  the  Board  of   Directors.   Accounts
                        receivable  also  include  $189,000 and $61,000 due from
                        TherMatrx at August 31, 2002 and 2001, respectively.

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


                                       39
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

10.  Supplemental       Actual amounts paid for interest and income taxes are as
     Cash Flow          follows:
     Information                                    Years Ended
                                                    August 31,
                                         ----------------------------------
                                               2002            2001
                                         ----------------------------------

                        Interest expense     $       -       $         -
                                         ----------------------------------

                        Income taxes         $       -       $         -
                                         ----------------------------------

                        During  the year  ended  August 31,  2002,  the  Company
                        exchanged  a  restricted  CD  to  a  bank  for  accounts
                        receivable  of $73,604.  The  receivable  exchanged  was
                        allowed  for by  $57,403  which was offset by $15,000 of
                        accrued commissions payable related to the receivable.

11.  Significant        The  Company  has  an  approximate  30%  interest  in an
     Unconsolidated     unconsolidated affiliate (TherMatrx) at August 31, 2002.
     Affiliate          During  the year  ended  August  31,  2002  the  Company
                        compensated  certain  employees and directors by issuing
                        options to  purchase  179,300  shares of  TherMatrx,  or
                        approximately 2% of the Company's  interest in TherMatrx
                        at  $.001  per  share.  This  resulted  in  compensation
                        expense of  $717,000,  which is  included in general and
                        administrative  expenses in the  statement of operations
                        for  the  year  ended  August  31,  2002.   Because  the
                        TherMatrx   shares  used  to  settle  the   compensation
                        obligation  had a book  value of $0,  such  issuance  of
                        TherMatrx  shares upon exercise of the options  resulted
                        in a gain of  $717,000,  which is  reflected  as gain on
                        transfer  of  equity   interest  in   affiliate  in  the
                        statement  of  operations.  All of the  options had been
                        exercised as of August 31, 2002.

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

                                       40
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


11.  Significant        Summarized  financial  information  for the  significant
     Unconsolidated     unconsolidated  affiliate of the  Company,  at September
     Affiliate          30, 2002 and 2001 (the affiliate's fiscal year runs from
     Continued          October 1, through September 30) are as follows:

                                                            2002          2001
                                                       -------------------------
                        Result for year:
                          Gross revenue              $  7,714,313  $    150,190
                          Gross profit               $  4,484,253  $    101,426
                          Net loss                   $ (1,875,003) $ (2,391,685)

                        Year-end financial position
                          Current assets             $  4,337,756  $  2,369,682
                          Non-current assets         $  2,349,626  $  2,633,600
                          Current liabilities        $  1,672,047  $    488,976
                          Non-current liabilities    $    474,748  $          -


12.  Commitments        The  Company  has  an  employment   agreement  with  the
     and                President of the Company.  The  agreement  provides that
     Contingencies      the  President's  salary will be based upon a reasonable
                        mutual   agreement.   Additionally,   in  the   case  of
                        non-voluntary  termination,  the acting  president  will
                        receive  severance  pay for a six  month  period,  which
                        includes   an   extension   of  all   employee   rights,
                        privileges,  and benefits,  including medical insurance.
                        The six month  severance  pay would be the salary at the
                        highest  rate  paid  to the  president  prior  to such a
                        non-voluntary  termination.  The agreement also requires
                        the Company to pay the acting  president for any accrued
                        unused vacation and bonuses.

                        The Company  has an  exclusive  worldwide  license for a
                        unique   temperature   probe.   The   license   has   no
                        determinable life. The Company pays royalties based upon
                        its sales of this probe.  Royalties accrued as of August
                        31, 2002 and 2001, are approximately  $1,000 and $9,000,
                        respectively.  Royalty expense amounted to approximately
                        $11,000 and $9,000 for the years  ended  August 31, 2002
                        and 2001, respectively.

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

                                       41
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

13.  Fair Value of      None of the Company's financial instruments are held for
     Financial          trading  purposes.  The Company  estimates that the fair
     Instruments        value of all  financial  instruments  at August 31, 2002
                        and 2001, does not differ  materially from the aggregate
                        carrying values of its financial instruments recorded in
                        the accompanying balance sheet. The estimated fair value
                        amounts  have  been  determined  by  the  Company  using
                        available market  information and appropriate  valuation
                        methodologies.   Considerable  judgment  is  necessarily
                        required  in  interpreting  market  data to develop  the
                        estimates of fair value, and, accordingly, the estimates
                        are not  necessarily  indicative of the amounts that the
                        Company could realize in a current market exchange.

14.  Recent             In June 2001, the Financial  Accounting  Standards Board
     Accounting         issued Statement of Financial  Accounting  Standards No.
     Pronounce-         143, "Accounting for Asset Retirement Obligations." This
     ments              Statement addresses  financial  accounting and reporting
                        for  obligations   associated  with  the  retirement  of
                        tangible  long-lived  assets  and the  associated  asset
                        retirement   costs.  This  Statement  is  effective  for
                        financial  statements  issued for fiscal years beginning
                        after June 15, 2002. This Statement  addresses financial
                        accounting  and reporting for the disposal of long-lived
                        assets.  Management does not expect the adoption of SFAS
                        No. 143 to have a  significant  impact on the  financial
                        position or results of operations of the Company.

                        In August 2001, the Financial Accounting Standards Board
                        issued Statement of Financial  Accounting  Standards No.
                        144   "Accounting   for  the  Impairment  of  Long-Lived
                        Assets." This Statement addresses  financial  accounting
                        and  reporting for the  impairment of long-lived  assets
                        and  for  long-lived  assets  to be  disposed  of.  This
                        Statement  supercedes FASB Statement 121 and APB Opinion
                        No.  30.  This  Statement  retains  certain  fundamental
                        provisions of Statement  121,  namely;  recognition  and
                        measurement of the impairment of long-lived assets to be
                        held and used, and  measurement of long-lived  assets to
                        be disposed of by sale.  The Statement  also retains the
                        requirement   of  Opinion  30  to  report   discontinued
                        operations separately from continuing  operations.  This
                        Statement  also  amends  ARB  No.  51 to  eliminate  the
                        exception of consolidation for a temporarily  controlled
                        subsidiary.


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

                                       42
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


14.  Recent             The  provisions  of this  statement  are  effective  for
     Accounting         financial  statements  issued for fiscal years beginning
     Pronounce-         after December 15, 2001.  Management does not expect the
     ments              adoption of SFAS No. 144 to have a significant impact on
                        the  financial  position or results of operations of the
                        Company.

                        In April 2002, the FASB issued SFAS No. 145,  Rescission
                        of SFAS Nos.  4,44,  and 64,  Amendment  of SFAS 13, and
                        Technical  Corrections as of April  2002(SFAS 145). This
                        standard rescinds SFAS No. 4, Reporting Gains and Losses
                        from  extinguishment  of Debt,  and an amendment of that
                        Statement,  SFAS No. 64, Extinguishments of Debt Made to
                        Satisfy    Sinking-Fund    Requirements   and   excludes
                        extraordinary   item  treatment  for  gains  and  losses
                        associated with the  extinguishment  of debt that do not
                        meet the APB  Opinion No. 30,  Reporting  the Results of
                        Operations  --  Reporting  the  Effects of Disposal of a
                        Segment of a Business,  and  Extraordinary,  Unusual and
                        Infrequently  Occurring Events and Transactions (APB 30)
                        criteria.  Any  gain or loss on  extinguishment  of debt
                        that was  classified as an  extraordinary  item in prior
                        periods presented that does not meet the criteria in APB
                        30 for  classification as an extraordinary item shall be
                        reclassified.  SFAS 145 also amends SFAS 13,  Accounting
                        for  Leases  as well  as  other  existing  authoritative
                        pronouncements  to make various  technical  corrections,
                        clarify meanings,  or describe their applicability under
                        changed  conditions.  Certain  provisions  of  SFAS  are
                        effective for transactions  occurring after May 15, 2002
                        while others are  effective  for fiscal years  beginning
                        after May 15,  2002.  The Company has not  assessed  the
                        potential impact of SFAS 145 on its financial  condition
                        or results of operations.


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

                                       43
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


14.  Recent             In June 2002,  the FASB issued SFAS No. 146,  Accounting
     Accounting         for Costs  Associated  with Exit or Disposal  Activities
     Pronounce-         (SFAS 146). This standard addresses financial accounting
     ments              and reporting for costs associated with exit or disposal
     Continued          activities and replaces Emerging Issues Task Force Issue
                        No. 94-3,  Liability  Recognition  for Certain  Employee
                        Termination Benefits and Other Costs to Exit an Activity
                        (including  Certain Costs  Incurred in a  Restructuring)
                        (EITF  94-3).  SFAS 146  requires  that a liability  for
                        costs  associated  with an exit or disposal  activity be
                        recognized  when the  liability is incurred.  Under EITF
                        94-3, a liability for exit costs, as defined in EITF No.
                        94-3  were   recognized  at  the  date  of  an  entity's
                        commitment to an exit plan.  The  provisions of SFAS 146
                        are effective for exit or disposal  activities  that are
                        initiated by the Company after December 31, 2002.

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

                                       44
<PAGE>



ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         None.



                                       45
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The following table sets forth certain information concerning our
directors, executive officers and key employees. The directors have served in
their respective capacities since their election and/or appointment and will
serve until the next annual stockholders' meeting or until a successor is duly
elected, unless the office is vacated in accordance with our certificate of
incorporation or bylaws. The next annual meeting is tentatively scheduled to be
held April 25, 2003. The executive officers serve at the pleasure of the Board
of Directors. There are no family relationships among any of our directors or
officers.
<TABLE>
<CAPTION>
                                                                                          Initial Date as
                                                                                            Officer or
        Name                    Age                 Position                                 Director
---------------------------------------------------------------------------------------------------------

<S>                             <C>      <C>                                                    <C>
Paul F. Turner, MSEE(1)         55       Chairman of the Board, Senior Vice President,          1986
                                         and Chief Technology Officer

Hyrum A. Mead, MBA(1)           55       President and Member of the Board of Directors         1999

Gerhard W. Sennewald, Ph.D.     66       Member of the Board of Directors                       1994

J. Gordon Short, M.D.           71       Member of the Board of Directors                       1994

Michael Nobel, Ph.D.            62       Member of the Board of Directors                       1997

Dixie Toolson Sells             52       Vice President of Regulatory Affairs                   1987

Ray Lauritzen                   52       Vice President of Field Service                        1988
</TABLE>

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

     (1) Executive officers of BSD.

         Paul F. Turner, MSEE, has served as a director of BSD since 1994 and
currently serves as Chairman of the Board of Directors. Mr. Turner also has
served as the Senior Vice President and Chief Technology Officer of BSD since
August 1999. From October 1995 to August 1999, Mr. Turner also served as the
Acting President of BSD. From 1986 to October 1995, Mr. Turner served in various
capacities with BSD, including Staff Scientist, Senior Scientist, Vice President
of Research, and Senior Vice President of Research. Mr. Turner has led the
design of microwave treatment systems for tumors, including the development of
external phased array antenna technology to focus radiated microwave energy deep

                                       46
<PAGE>


into the central area of the body to treat deep tumors. He has also integrated
this novel technology with Magnetic Resonance Imaging (MRI) to non-invasively
monitor treatments within the patient's body.

         Hyrum A. Mead, MBA, has served as President and a director of BSD since
August 1999. Previously, he served five years as Vice President of Business
Development at ZERO Enclosures, a leading manufacturer in the
telecommunications, computer and aerospace enclosures industry and seven years
as President of Electro Controls, a manufacturer of computer controlled power
systems. Mr. Mead began his career in marketing with IBM where he was involved
with the introduction of many new products.

         Gerhard W. Sennewald, Ph.D., has served as a director of BSD since
1994. Dr. Sennewald has served as the President and Chief Executive Officer of
Medizin-Technik GmbH, of Munich, Germany, a firm which is engaged in the
business of distributing hyperthermia equipment and diagnostic imaging equipment
and services, from April 1985 to the present. In connection with his service to
Medizin-Technik GmbH, Dr. Sennewald has been BSD's key European representative
and distributor for 17 years and has been instrumental in obtaining the majority
of BSD's foreign sales. He also serves on the Board of Directors of TherMatrx,
Inc.

         J. Gordon Short, M.D., has served as a director of BSD since 1994. From
1978 to 2000, Dr. Short served as President of Brevis Corporation, a
privately-held medical products company which specializes in consumable
specialty supplies and in hand hygiene products, and from 1978 to the present,
Dr. Short has served as the Chairman of the Board of Brevis Corporation. From
1978 to 1982, Dr. Short served BSD as a Medical Director. In that capacity, he
participated in the initial development and establishment of certain of BSD's
products. He also previously served on BSD's Medical Advisory Board.

         Michael Nobel, Ph.D., has served as a director of BSD since January
1998. From 1991 to the present, Dr. Nobel has served as the Executive Chairman
of the MRAB Group, a privately-held company which provides diagnostic imaging
services. From 1995 to the present, Dr. Nobel has served as the Chairman of the
Board of the Nobel Family Society. From 1995 to the present, he also has served
as Chairman of the American Non-Violence Project Inc., and has served as a
consultant to Unesco in Paris and the United Nations Social Affairs Division in
Geneva. Dr. Nobel participated in the introduction of magnetic resonance imaging
as European Vice President for Fonar Corp.

         Dixie Toolson Sells has served as Vice President of Regulatory Affairs
of BSD since December 1994. Ms. Sells served as Administrative Director of BSD
from 1978 to 1984; as Director of Regulatory Affairs from 1984 to September
1987; and as Vice President of Regulatory Affairs from September 1987 to October
1993. In October 1993, Ms. Sells resigned as Vice President of Regulatory
Affairs, and she served as Director of Regulatory Affairs from October 1993 to
December 1994. In December 1994, Ms. Sells was re-appointed as Vice President of
Regulatory Affairs and was appointed as Corporate Secretary by the Board of
Directors. Ms. Sells also serves on the Board of Directors of the Intermountain
Biomedical Association. Ms. Sells resigned as Corporate Secretary of BSD in
March 2002.

         Ray Lauritzen served as Field Service Manager of BSD from 1982 to
January 1988 and has served as Vice President of Field Service Operations from
January 1988 to the present.

         Section 16(a) of the Securities Act of 1934 requires our directors,
executive officers, and any persons who own more than 10% of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. SEC regulation requires executive

                                       47
<PAGE>


officers, directors and greater than 10% stockholders to furnish us with copies
of all Section 16(a) forms they file. Based solely on our review of the copies
of such forms received by us, or written representations from certain reporting
persons, we believe that during the fiscal year ended August 31, 2002 our
executive officers, directors, and greater than 10% stockholders complied with
all applicable filing requirements.

ITEM 10.  EXECUTIVE COMPENSATION

         The following table sets forth certain information regarding all
compensation earned by Paul Turner, our Senior Vice President and Chief
Technology Officer, and Hyrum Mead, our President, for services rendered to us
during fiscal 2002, 2001 and 2000.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

------------------------------- ---------- ---------------------------------- ------------------------------------
                                                  Annual Compensation             Long-Term Compensation Awards
                                            ----------------- ---------------- -----------------------------------
                                                                                       Securities Underlying
Name and Principal Position        Year        Salary ($)        Bonus ($)               Options / SARs (#)
=============================== ========== ================= ================ ====================================
<S>                               <C>         <C>               <C>                        <C>
Paul Turner,                      2002        $145,000          $400                       45,000(1)
Chairman of the Board, Senior     2001        $145,000          $400                            -
Vice President, Chief             2000        $143,757          $100                            -
Technology Officer

------------------------------- ---------- ----------------- ---------------- ------------------------------------
Hyrum A. Mead,                    2002        $125,000          $30,000                    45,000(1)
President, Director               2001        $125,000          $400                            -
                                  2000        $125,000          $400                       200,000
------------------------------- ---------- ----------------- ---------------- ------------------------------------
</TABLE>

(1)  Represents options to purchase shares of TherMatrx common stock we owned on
     the date of grant. These options were granted by us in July 2002 and were
     exercised in the fourth quarter of fiscal 2002 at an exercise price per
     share of $0.001. We recognized a compensation expense related to these
     TherMatrx options computed using a value of $4.00 per share. The $4.00 per
     share value is based solely on the price per share for common stock sold by
     TherMatrx to existing TherMatrx stockholders in December 2001. For more
     information concerning these TherMatrx options, see the tables (and related
     footnotes) entitled "Option Grants in Last Fiscal Year" and "Aggregated
     Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values"
     below in this Annual Report on Form 10-KSB.

         The following table summarizes the grants of stock options to Messrs.
Turner and Mead during fiscal 2002.


                                       48
<PAGE>

<TABLE>
<CAPTION>

                      OPTION GRANTS IN LAST FISCAL YEAR(1)

---------------------- ------------------- ------------------- -------------- --------------------- --------------
        Name               Number of        Percent of Total    Exercise or     Expiration Date       Market Price
                           Securities       Options Granted     Base Price                            per Share on
                           Underlying       to Employees in      per Share                            the Date of
                        Options Granted       Fiscal Year                                                Grant
                            (shares)
====================== =================== =================== ============== ===================== ==============
<S>                          <C>                 <C>              <C>            <C>                    <C>
Paul Turner                  45,000(1)           25.09%           $0.001         July 26, 2007          $4.00(2)
---------------------- ------------------- ------------------- -------------- --------------------- --------------
Hyrum A. Mead                45,000(1)           25.09%           $0.001         July 26, 2007          $4.00(2)
---------------------- ------------------- ------------------- -------------- --------------------- --------------
</TABLE>

(1)  Represents options to purchase shares of TherMatrx common stock we owned on
     the date of grant. These options were granted by us in July 2002. All
     options were immediately exercisable upon grant and were exercised in the
     fourth quarter of fiscal 2002.

(2)  The $4.00 per share market price is the price per share used to calculate
     compensation expense as noted elsewhere in this Annual Report on Form
     10-KSB and is based solely on the price per share for common stock sold by
     TherMatrx to such existing TherMatrx stockholders who elected to purchase
     shares in a private placement offering in December 2001. TherMatrx is a
     privately-held company. There is no liquid market for TherMatrx common
     stock. No independent valuation of TherMatrx common stock was obtained
     which may have factored in minority stockholder and marketability
     discounts. For reasons set forth in the prior section entitled "Critical
     Accounting Policies and Estimates" under "Valuation of Options to Purchase
     Shares of TherMatrx Owned by Us," we do not believe that TherMatrx common
     stock could have been sold on the grant date to an arms-length buyer for
     $4.00 per share. We express no opinion as to the current value of TherMatrx
     common stock. We strongly caution investors not to infer any conclusions
     about our market value or the value of our stock from our decision to use
     $4.00 per share for purposes of computing compensation expense related to
     the grant of these options for TherMatrx shares.

         The following table summarizes the exercise of stock options during
fiscal year 2002 by Messrs. Turner and Mead, and the fiscal year-end value of
unexercised stock options held by each of them.
<TABLE>
<CAPTION>

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

--------------------------------------------------------------------------------------------------------------------
                         Shares                          Number of Securities             Value of Unexercised
                       Acquired on       Value          Underlying Unexercised             In-the-Money Options
      Name and          Exercise        Realized        Options at FY-end (#)                 at FY-end ($)
      Position             (#)            ($)        Exercisable    Unexercisable     Exercisable     Unexercisable
====================================================================================================================

<S>                   <C>             <C>               <C>             <C>             <C>                <C>
Hyrum A. Mead,        125,000(1)      $206,355(2)       120,000         200,000         $ 11,600            0
President

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

Paul F. Turner,        45,000(3)      $179,955(4)       180,953               0         $101,334            0
Sr. VP and Chief
Technology Officer
--------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       49
<PAGE>


(1)  Consists of 45,000 shares of TherMatrx common stock and 80,000 shares of
     our common stock. The 45,000 shares of TherMatrx common stock were
     purchased upon the exercise of an option to purchase shares of TherMatrx
     common stock we owned. The options were granted by us in July 2002 and were
     exercised in the fourth quarter of fiscal 2002.

(2)  Calculated by multiplying the 80,000 shares of BSD common stock purchased
     upon the exercise of the option by the difference between $0.70 and the
     exercise price of $0.37, and by multiplying the 45,000 shares of TherMatrx
     common stock purchased upon the exercise of the option by the difference
     between $4.00 and the exercise price of $0.001. This figure does not
     represent cash actually received by Mr. Mead in fiscal 2002. The $4.00 per
     share market price for the TherMatrx common stock is the price per share
     used to calculate compensation expense as noted elsewhere in this Annual
     Report on Form 10-KSB and is based solely on the price per share for common
     stock sold by TherMatrx to such existing TherMatrx stockholders who elected
     to purchase shares in a private placement offering in December 2001.
     TherMatrx is a privately-held company. There is no liquid market for
     TherMatrx common stock. No independent valuation of TherMatrx common stock
     was obtained which may have factored in minority stockholder and
     marketability discounts. For reasons set forth in the prior section
     entitled "Critical Accounting Policies and Estimates" under "Valuation of
     Options to Purchase Shares of TherMatrx Owned by Us," we do not believe
     that TherMatrx common stock could have been sold on the grant date to an
     arms-length buyer for $4.00 per share. We express no opinion as to the
     current value of TherMatrx common stock. We strongly caution investors not
     to infer any conclusions about our market value or the value of our stock
     from our decision to use $4.00 per share for purposes of computing
     compensation expense related to the grant of these options for TherMatrx
     shares.

(3)  Shares of TherMatrx common stock purchased upon the exercise of an option
     to purchase shares of TherMatrx common stock we owned. The options were
     granted by us in July 2002 and were exercised in the fourth quarter of
     fiscal 2002.

(4)  Calculated by multiplying the 45,000 shares of TherMatrx common stock
     purchased upon exercise of the option by the difference between $4.00 and
     the exercise price of $0.001. This figure does not represent cash actually
     received by Mr. Turner in fiscal 2002. The $4.00 per share market price is
     the price per share used to calculate compensation expense as noted
     elsewhere in this Annual Report on Form 10-KSB and is based solely on the
     price per share for common stock sold by TherMatrx to such existing
     TherMatrx stockholders who elected to purchase shares in a private
     placement offering in December 2001. TherMatrx is a privately-held company.
     There is no liquid market for TherMatrx common stock. No independent
     valuation of TherMatrx common stock was obtained which may have factored in
     minority stockholder and marketability discounts. For reasons set forth in
     the prior section entitled "Critical Accounting Policies and Estimates"
     under "Valuation of Options to Purchase Shares of TherMatrx Owned by Us,"
     we do not believe that TherMatrx common stock could have been sold on the
     grant date to an arms-length buyer for $4.00 per share. We express no
     opinion as to the current value of TherMatrx common stock. We strongly
     caution investors not to infer any conclusions about our market value or
     the value of our stock from our decision to use $4.00 per share for
     purposes of computing compensation expense related to the grant of these
     options for TherMatrx shares.

COMPENSATION OF DIRECTORS
-------------------------

         Our 1998 Director Stock Plan provides for annual compensation in the
amount of $12,000 for each non-employee director. Of this amount, $4,000 is to
be paid in cash and the balance is to be paid in the form of restricted shares
of our common stock. In addition to the annual compensation to directors, each
non-employee director will receive an annual option to purchase 25,000
restricted shares of our common stock at a purchase price of 85% of the fair
market value at the date the option is granted. The options vest ratably over 5
years and expire in 10 years. On September 1, 2000, we awarded Michael Nobel,
Gerhard W. Sennewald, and J. Gordon Short options to purchase 25,000 shares of
our restricted common stock at $1.11 per share. Each of these directors were
also paid $2,000 and awarded 3,053 shares of restricted common stock based on
service provided to us for the prior six months. On March 1, 2001, each of
Michael Nobel, Gerhard W. Sennewald, and J. Gordon Short were paid $2,000 and
awarded 4,082 shares of restricted common stock based on service provided to us

                                       50
<PAGE>


for the prior six months. On September 1, 2001, each of these directors were
awarded options to purchase 25,000 shares of our restricted common stock at
$0.66 per share. They were also each paid $2,000 and awarded 5,128 shares of
restricted common stock based on service provided to us for the prior six
months. On March 1, 2002, each of Michael Nobel, Gerhard W. Sennewald, and J.
Gordon Short were paid $2,000 and awarded 3,960 shares of restricted common
stock based on service provided to us for the prior six months. On November 4,
2002, each of these directors was issued 25,000 options to purchase our
restricted common stock at $0.54 per share. These directors were also paid
$2,000 and awarded 6,250 shares of our common stock for services provided to us
from March 1, 2002 to August 31, 2002.

         On July 26, 2002, we awarded Gerhard W. Sennewald, Michael Nobel and J.
Gordon Short options to purchase 30,000 shares, 10,000 shares and 10,000 shares,
respectively, of TherMatrx common stock we owned at an exercise price of $0.001
per share for services provided to us.

         Paul F. Turner and Hyrum A. Mead are the only members of the Board of
Directors who are employed by us. Messrs. Turner and Mead do not receive any
separate compensation for services performed as directors, except as described
below. In fiscal year 1999, we awarded Hyrum A. Mead options to purchase 200,000
shares of our restricted common stock at $0.37 per share under our 1998 Employee
Stock Option Plan. These options will expire on August 10, 2009. In fiscal year
2000, we awarded Hyrum A. Mead options to purchase 200,000 shares of our
restricted common stock at $0.81 per share under our 1998 Employee Stock Option
Plan. These options will expire on January 18, 2010. In addition, on July 26,
2002, we awarded each of Messrs. Turner and Mead options to purchase 45,000
shares of TherMatrx common stock we own at an exercise price of $0.001 per share
for services provided to us.

         On January 2, 1998, Mr. Turner also received directly from TherMatrx
options to purchase 50,000 shares of its common stock. The options granted total
less than 1% of the outstanding shares of common stock of TherMatrx.

         In determining to authorize and approve granting the options to
purchase shares of TherMatrx common stock to our directors and executive
officers as described above, our Board of Directors engaged in various
discussions concerning compensation and equity incentives provided to our
employees, officers and directors. In December 2001, our Board of Directors
authorized granting TherMatrx options to Messrs. Turner and Mead recognizing
that neither had received an increase in his annual base compensation for at
least the previous two years, and for other valuable services. Those options
were approved by directors other than Messrs. Turner and Mead. The TherMatrx
option granted to Dr. Gerhard W. Sennewald was authorized by the directors other
than him in January 2002 as consideration for serving as BSD's representative on
the TherMatrx board of directors, and for other roles in the development of
TherMatrx. Later in January 2002, the directors other than Dr. J. Gordon Short
and Dr. Michael Nobel authorized granting TherMatrx options to Messrs. Short and
Nobel as additional compensation for services rendered as directors of BSD. As
also described in this Annual Report on Form 10-KSB, all of these options were
issued in July 2002 and exercised during fiscal 2002.

EMPLOYMENT CONTRACTS
--------------------

         We entered into an employment agreement with Mr. Mead dated August 10,
1999. This agreement provides that Mr. Mead shall receive an annual base salary
of $125,000, which shall be reviewed annually by the Board of Directors. The
agreement provides that if Mr. Mead is involuntarily terminated, Mr. Mead will
receive severance compensation for a period of six months, including an
extension of all benefits and perquisites. The severance amount shall include
six month's of salary at the highest rate paid to Mr. Mead prior to termination
and an additional amount equal to all bonuses received by Mr. Mead during the
12-month period preceding termination (excluding any signing bonus received

                                       51
<PAGE>


during such period). The agreement also requires us to vest any options granted
to Mr. Mead for the purchase of our common stock, allowing a 90-day period for
Mr. Mead to exercise those options. Mr. Mead's agreement includes a
non-competition covenant prohibiting him from competing with us for one year
following his termination.

         We entered into an employment agreement with Mr. Turner dated November
2, 1988. The agreement provides that Mr. Turner's salary will be based upon a
reasonable mutual agreement. The agreement provides that if Mr. Turner's
employment is involuntarily terminated, he will receive severance pay for a
one-year period, which pay includes an extension of all of his rights,
privileges and benefits as an employee (including medical insurance). The one
year severance pay shall be equal to Mr. Turner's regular salary for the
12-month period immediately prior to the termination. The agreement also
requires us to pay Mr. Turner for any accrued unused vacation at the time of
termination. We are also obligated to pay Mr. Turner $1,000 (or the equivalent
value in stock options) for each newly issued patent obtained by us as a result
of Mr. Turner's efforts (Mr. Turner receives only $500 if multiple inventors are
involved). Mr. Turner's agreement includes a non-competition covenant
prohibiting him from competing with us for one year following his termination.
We may continue the non-competition period for up to four additional years by
notifying Mr. Turner in writing and by continuing the severance payments for the
additional years during which the non-competition period is extended.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

         The following table sets forth, as of November 1, 2002, the beneficial
ownership of our outstanding common stock by:

         o    each person (including any group) known to us to own more than 5%
              of any class of our common stock,

         o    each of our executive officers,

         o    each of our directors, and

         o    all executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. For purposes of calculating the percentages
shown in the table, each person listed is deemed to beneficially own any shares
issuable on the exercise of vested options and warrants held by that person that
are exercisable within 60 days after November 1, 2002. Except as indicated by
footnote, the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown beneficially owned by them. The
inclusion of any shares as beneficially owned does not constitute an admission
of beneficial ownership of those shares. The percentage calculation of
beneficial ownership is based on 18,277,281 shares of common stock outstanding
as of November 1, 2002. Except as otherwise noted, the address of each person
listed on the following table is 2188 West 2200 South, Salt Lake City, Utah
84119.


                                       52
<PAGE>

                                                            Common Stock
                                                          Beneficially Owned
Title of Class   Name of Beneficial Owner                Shares         Percent
--------------------------------------------------------------------------------
                           Officers and Directors
Common Stock    Dr. Gerhard W. Sennewald(1)              6,765,564       37.02%

Common Stock    Paul F. Turner(2)                        1,995,871       10.92%

Common Stock    Hyrum A. Mead(3)                           200,000        1.09%

Common Stock    Dr. J. Gordon Short(4)                     173,683           *

Common Stock    Dr. Michael Nobel(5)                       111,683           *

                           Holders of More Than 5%

Common Stock    John E. Langdon(6)                       1,295,010        7.09%

Common Stock    All Executive Officers and Directors     9,246,801       50.59%
                as a Group (5 persons)(7)

---------------
* Less than 1.0%.

(1)   Includes 85,000 shares subject to options. Does not include 500,000 shares
      held by Dr. Sennewald's spouse, for which he disclaims beneficial
      ownership.

(2)   Includes 180,953 shares subject to options.

(3)   Includes 120,000 shares subject to options.

(4)   Includes 85,000 shares subject to options.

(5)   Includes 50,000 shares subject to options.

(6)   Includes 351,862 shares owned directly by Mr. Langdon. The remaining
      shares are held in trusts for which Mr. Langdon is Trustee. Does not
      include 50,000 shares held by Mr. Langdon's spouse, for which he disclaims
      beneficial ownership. Mr. Langdon's address is: 2501 Parkview Drive, Suite
      500, Fort Worth, TX 76102.

(7)   Includes 520,953 shares subject to options.

         We have three equity compensation plans, our 1987 Employee Stock Option
Plan, 1998 Employee Stock Option Plan, and 1998 Director Stock Plan, all of
which were approved by our stockholders. Shown below on an aggregate basis is a
summary of equity compensation plan information with respect to our equity
compensation plans:


                                       53
<PAGE>


                      EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
------------------------------- ---------------------------- ------------------------- -------------------------------
                                 Number of Securities to         Weighted-Average           Number of Securities
                                  be Issued Upon Exercise        Exercise Price of         Remaining Available for
                                 of Outstanding Options,       Outstanding Options,     Future Issuance Under Equity
                                   Warrants and Rights         Warrants and Rights     Compensation Plans (Excluding
                                                                                          Securities Reflected in
                                                                                                Column (a))
Plan Category                             (a)                         (b)                          (c)
------------------------------- ---------------------------- ------------------------- -------------------------------
<S>                                      <C>                          <C>                        <C>
Equity Compensation Plans                1,258,901                    $0.47                      1,691,099
Approved by Security Holders
------------------------------- ---------------------------- ------------------------- -------------------------------
Equity Compensation Plans                    -                          -                            -
not Approved by Security
Holders
------------------------------- ---------------------------- ------------------------- -------------------------------
Total                                    1,258,901                    $0.47                      1,691,099
------------------------------- ---------------------------- ------------------------- -------------------------------
</TABLE>

         In July 2002, we issued to our employees and board members options to
purchase 179,300 shares of TherMatrx at an exercise price of $0.001 per share.
All options were immediately exercisable upon grant and were exercised in the
fourth quarter of fiscal year 2002. The exercise of these options reduced our
holdings in TherMatrx from 2,700,000 shares (32%) to 2,520,700 shares (30%).

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         TherMatrx, Inc. We manufacture, assemble and test for TherMatrx, Inc.
its TMx-2000 thermotherapy system and supply TherMatrx with equipment components
used for its TMx-2000 system. We also have provided regulatory compliance and
other consulting services to TherMatrx. TherMatrx has become our largest
customer, and for the year ended August 31, 2002, TherMatrx accounted for
$1,781,000, or approximately 66.64%, of our revenue. We currently own
approximately 30% of TherMatrx's outstanding common stock, and Dr. Gerhard W.
Sennewald, a director and significant stockholder of BSD, is also a director of
TherMatrx. In July 2002, we granted options to all of our directors and
employees to acquire shares of TherMatrx common stock and each has exercised
such options in fiscal 2002 as further described elsewhere in this Annual Report
on Form 10-KSB.

         Medizin-Technik GmbH. Additionally, we supply equipment components to
Medizin-Technik GmbH located in Munich, Germany, which is a significant
distributor of our products in Europe. Medizin-Technik purchases equipment which
it installs and components to service our hyperthermia therapy systems that it
sells to its customers in Europe. Dr. Gerhard W. Sennewald, our director and one
of our significant stockholders, is the President and Chief Executive Officer of
Medizin-Technik and a controlling stockholder of Medizin-Technik.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         The following exhibits are incorporated herein by reference as
indicated:

                                       54
<PAGE>


Exhibit
Number                             Description
-------                            ------------

3.1      Amended and Restated Certificate of Incorporation.

3.2      By-Laws. Incorporated by reference to Exhibit 3.2 of the BSD Medical
         Corporation Registration Statement on Form S-1, filed October 16, 1986.

4.1      Specimen Common Stock Certificate. Incorporated by reference to Exhibit
         4 of the BSD Medical Corporation Registration Statement on Form S-1,
         filed October 16, 1986.

10.1     Transfer of Trade Secrets Agreement dated December 7, 1979, among BSD
         Medical Corporation, Vitek, Incorporated and Ronald R. Bowman.
         Incorporated by reference to Exhibit 10.6 of the BSD Medical
         Corporation Registration Statement on Form S-1, filed October 16, 1986.

10.2     Second Addendum to Exclusive Transfer of Trade Secrets Agreement dated
         April 2, 1987. Incorporated by reference to Exhibit 10 of the BSD
         Medical Corporation Form 10-K, filed April 8, 1988.

10.3     License Agreement between BSD Medical Corporation and EDAP Technomed,
         Inc., dated July 3, 1996. Incorporated by reference to Exhibit 10 of
         Form 8-K, filed August 7, 1996.

10.4     Stock Purchase Agreement dated October 31, 1997, by and among
         TherMatrx, Inc., BSD Medical Corporation, Oracle Strategic Partners,
         L.P., and Charles Manker. Incorporated by reference to Exhibit 10.6 of
         the BSD Medical Corporation Form 10-KSB filed December 10, 1998.

10.5     BSD Medical Corporation 1998 Director Stock Plan. Incorporated by
         reference to Exhibit A of the BSD Medical Corporation Schedule 14A,
         filed July 27, 1998.

10.6     BSD Medical Corporation 1998 Stock Incentive Plan. Incorporated by
         reference to Exhibit B of the BSD Medical Corporation Schedule 14B,
         filed July 27, 1998.

16       Letter on changes in certifying accountant. Incorporated by reference
         to Exhibit 16 of the BSD Medical Corporation Form 8-K/A, filed
         September 23, 1997.

21       Subsidiary List.

99.1     Certification of the president of BSD pursuant to 18 U.S.C.ss.1350, as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2     Certification of the controller of BSD pursuant to 18 U.S.C.ss.1350, as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 (b)     Reports on Form 8-K

         None.


                                       55
<PAGE>


ITEM 14. CONTROLS AND PROCEDURES

         Under the supervision and with the participation of our management,
including our president and controller, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date (the
"Evaluation Date") within 90 days prior to the filing date of this report. Based
upon that evaluation, the president and controller concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us (or our consolidated
subsidiaries) required to be included in our periodic SEC filings; provided,
however, our president and controller have determined that we will need to
receive the audited financial statements of our unconsolidated subsidiary in a
more timely manner in the future and that review of our SEC filings by our
outside advisors will need to occur earlier in the process of preparing such
filings so such advisors can assist us in better understanding and satisfying
rapidly developing regulatory and disclosure requirements.

         There were no significant changes made in our internal controls during
the period covered by this report, or to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.


                                       56
<PAGE>


                                   SIGNATURES


         Pursuant to the requirements of Section 13 or 15(d) 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: December 13, 2002                 By: /s/ Hyrum A. Mead
                                        ----------------------------------------
                                            Hyrum A. Mead
                                            President and Member of the Board of
                                            Directors (principal executive
                                            officer)


Date: December 13, 2002                 By: /s/ Dennis Bradley
                                        ----------------------------------------
                                            Dennis Bradley
                                            Controller
                                            (principal financial and accounting
                                            officer)

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


Date: December 13, 2002                 By: /s/ Paul F. Turner
                                        ----------------------------------------
                                            Paul F. Turner
                                            Chairman of the Board, Senior Vice
                                            President and Chief Technology
                                            Officer


Date: December 13, 2002                 By: /s/ Hyrum A. Mead
                                        ----------------------------------------
                                            Hyrum A. Mead
                                            President and Member of the Board of
                                            Directors (principal executive
                                            officer)


Date: December 13, 2002                 By: /s/ Gerhard W. Sennewald
                                        ----------------------------------------
                                            Dr. Gerhard W. Sennewald
                                            Member of the Board of Directors


Date: December 13, 2002                 By: /s/ J. Gordon Short
                                            ------------------------------------
                                            Dr. J. Gordon Short
                                            Member of the Board of Directors


Date: December 13, 2002                 By: /s/ Michael Nobel
                                        ----------------------------------------
                                            Dr. Michael Nobel
                                            Member of the Board of Directors



                                       57
<PAGE>

                                 CERTIFICATIONS

         I, Hyrum A. Mead, certify that:

         1. I have reviewed this annual report on Form 10-KSB of BSD Medical
Corporation;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         (a) designed such disclosure controls and procedures to ensure that
         material information relating to the registrant, including its
         consolidated subsidiaries, is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

         (b) evaluated the effectiveness of the registrant's disclosure controls
         and procedures as of a date within 90 days prior to the filing date of
         this annual report (the "Evaluation Date"); and

         (c) presented in this annual report our conclusions about the
         effectiveness of the disclosure controls and procedures based on our
         evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

         (a) all significant deficiencies in the design or operation of internal
         controls which could adversely affect the registrant's ability to
         record, process, summarize and report financial data and have
         identified for the registrant's auditors any material weaknesses in
         internal controls; and

         (b) any fraud, whether or not material, that involves management or
         other employees who have a significant role in the registrant's
         internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:   December 13, 2002                   /s/ Hyrum A. Mead
                                            ------------------------------------
                                            Hyrum A. Mead
                                            President (principal executive
                                            officer)


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<PAGE>


         I, Dennis Bradley, certify that:

         1. I have reviewed this annual report on Form 10-KSB of BSD Medical
Corporation;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         (a) designed such disclosure controls and procedures to ensure that
         material information relating to the registrant, including its
         consolidated subsidiaries, is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

         (b) evaluated the effectiveness of the registrant's disclosure controls
         and procedures as of a date within 90 days prior to the filing date of
         this annual report (the "Evaluation Date"); and

         (c) presented in this annual report our conclusions about the
         effectiveness of the disclosure controls and procedures based on our
         evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

         (a) all significant deficiencies in the design or operation of internal
         controls which could adversely affect the registrant's ability to
         record, process, summarize and report financial data and have
         identified for the registrant's auditors any material weaknesses in
         internal controls; and

         (b) any fraud, whether or not material, that involves management or
         other employees who have a significant role in the registrant's
         internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date:   December 13, 2002                   /s/ Dennis Bradley
                                            ------------------------------------
                                            Dennis Bradley
                                            Controller
                                            (principal financial and accounting
                                            officer)



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