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, 2003

                         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 2200 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:  $2,572,682

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 28, 2003, was
$28,529,666.

As of November 28, 2003, there were 19,675,632 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]



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                                     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, receipt of FDA approvals,
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 2004 and our belief that our current working capital and cash from
operations will be sufficient to fund our anticipated operations for fiscal
2004. 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 in which we have ownership. For convenience, the terms "company," "BSD,"
"we" and "our" refer to BSD Medical Corporation.

         The focus of our cancer therapy business is to develop and
commercialize systems that can provide hyperthermia treatment for cancerous
tumors that occur anywhere in the body. To accomplish this, we have developed
systems capable of treating both superficial and deep tumors through a variety
of techniques and approaches. These systems consist of two families of products,
the BSD-500 and the BSD-2000.

         In October 2003 we announced that we had received FDA approval for a
new operating system, allowing us to launch the commercial market introduction
of a new family of six systems (the BSD-500i-4, BSD-500s-4, BSD-500c-4,
BSD-500i-8, BSD-500s-8 and BSD-500c-8) to treat cancer patients using
superficial and interstitial hyperthermia. We have also obtained CE Mark
certification required to export these systems to Europe. In addition to
treating melanoma, recurring breast cancer and other cancers requiring
superficial therapy, these new systems are used as companions to brachytherapy
systems that treat cancer through interstitial radiation. There are over 1,500
brachytherapy systems installed providing a target customer base for our
systems. The new systems have been six years in planning and development,
inspired by a 1996 publication of a Johns Hopkins Hospital study in CANCER,
which demonstrated the practical and effective use of interstitial hyperthermia
in treating cancer (CANCER, June 1, 1966, pp. 2363-2370). Numerous other studies
have supported this conclusion. The new systems are commercially designed for
treatment of cancer patients using superficial and interstitial hyperthermia
therapy. They are compact, portable and ergonomically engineered for use in a
demanding hospital environment.

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         Our BSD-2000 family of systems employs an advanced phased array of
microwave antennae used to focus on and treat tumors located deep in the body.
It has not been submitted for FDA Pre-Market Approval (PMA). The phase III
clinical trial through which we intend to seek a PMA for this system has already
been completed, and we are well underway in developing the commercial version of
the BSD-2000 that we intend to use as the basis of the FDA submission.

         In addition to systems for treating cancer, we have also developed a
system used in the therapy of a major benign condition. 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 this filing we have reported that the rapid growth of TherMatrx has
resulted in sales in excess of $13 million and a net income in excess of $1.5
million in only its second full fiscal year since the FDA approval. 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 and 2003, 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 1,334,100 new cancer cases will be
diagnosed and that 556,500 Americans will die from cancer during 2003 (up from
555,500 cancer deaths in 2002). 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.

         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.

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         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
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
development as the world's most advanced system for deep hyperthermia therapy.

         In the opening address of a past 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

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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,
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. The BSD-500c-4 and BSD-500c-8 provide both
superficial and interstitial hyperthermia treatments using four or eight channel
generators. 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).

         In October 2003 we announced that we had received FDA approval for a
new operating system, allowing us to launch the commercial market introduction
of this new family of six systems. Our FDA approval (described as a Pre-Market
Approval, or PMA, the standard FDA approval required to market Class III medical
devices) for the BSD-500 family of systems is applicable to the marketing of all
six configurations of the BSD-500 in the United States. We have also certified
the BSD-500 systems for the CE Mark, which is required for export into some
European countries. Obtaining FDA approval and CE Mark for the new BSD-500
operating systems were major milestones in our ongoing objectives.

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         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.

         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, University of Erlangen (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.

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         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 Gro(beta)hadern 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
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, 2003,
TherMatrx accounted for $1,454,943, or approximately 56.55%, 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. Medizin-Technik was a significant
customer for us in fiscal 2003 with sales of $517,979 or 20.13% of revenue.

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Medizin-Technik GmbH. 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.

         We have 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. 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. Our agreement with
Nucletron can be terminated by either party upon written notice to the other
party within thirty days prior to termination. Three months prior to the renewal
date of the agreement (which extends until May 1, 2004), 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

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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.
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.

         General hyperthermia reimbursement has been approved in the United
States, Germany, Holland, Switzerland and Japan. 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.

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         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
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.

                                       10
<PAGE>

         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
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.

                                       11
<PAGE>

         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.

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 six patents in
the United States and two 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 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.

                                       12
<PAGE>

         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, 2003, and August 31, 2002, we
expended $676,867 and $603,137 respectively for research and development,
representing 26.30% and 22.56% of total revenues. Research and Development
expenditures increased in 2003 due to costs associated with the development of
the BSD-2000/3D/MR system, the continued enhancements of our BSD-500 systems and
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 28, 2003, BSD had 26 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 exceeded
our revenue, resulting in continuing losses and an accumulated deficit of
$20,486,107 at August 31, 2003. In fiscal 2003 we recorded a Net Loss of
$570,285. Our Net Loss was primarily due from a write-off of a significant
receivable of approximately $300,000 to bad debt expense, an increase to
inventory reserve of $90,000 and lower overall sales .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. To become profitable 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.

                                       13
<PAGE>

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.

We depend upon TherMatrx as our largest customer.

         For the year ended August 31, 2003, TherMatrx accounted for $1,454,943,
or approximately 56.55%, 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 2003, 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.
We sold one BSD-500 to Nucletron during FYE 2003.

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.

                                       14
<PAGE>

         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.

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 our 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.

                                       15
<PAGE>

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.

ITEM 3.  LEGAL PROCEEDINGS

         There are no legal proceedings pending against or being taken by BSD
Medical Corporation.

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 2002 and
2003. 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, 2001................          .90            .90
        February 28, 2002................         1.16           1.10
        May 31, 2002.....................         1.00            .95
        August 31, 2002..................          .66            .66

        November 30, 2002................          .42            .42
        February 29, 2003................          .65            .60
        May 31, 2003.....................          .45            .45
        August 31, 2003..................          .80            .78

         As of November 19, 2003, there were approximately 592 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, receipt of FDA approvals, 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 2004 and our belief that our
current working capital and cash from operations will be sufficient to fund our
anticipated operations for fiscal 2004. 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.

                                       17
<PAGE>

General
-------

         BSD develops, manufactures and markets microwave systems used in the
treatment of cancer. Our microwave systems are used in cancer treating therapies
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, 2003, had an accumulated deficit
of $20,486,107. We recorded net loss for fiscal 2003 of $570,285.

         We derived $1,907,585, or 74.14% of our revenue in fiscal 2003 from
sales to related parties. Approximately $1,391,443 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 $517,979 was for one BSD-2000 system and 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 2003, we derived $652,780, or 25.38% of our revenue from
sales of our BSD hyperthermia systems, including one BSD-2000 systems and two
BSD-500 system. The remaining revenue in fiscal 2003 of approximately $528,110
was generated from the sale of consumable devices used with our hyperthermia
systems of $103,366, billable labor of $20,863, service contracts of $65,731 and
royalty revenue of $338,500. 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
2004, we currently anticipate sales of our BSD-500 and BSD-2000 systems to be a
greater percentage of total revenue. We recorded a net loss of $550,165 on
revenue of $589,855 in the fourth quarter of fiscal 2003.

         Cost of sales for the year ended August 31, 2003, included raw material
and labor costs. For the year ended August 31, 2003, we increased our reserve
for potential inventory impairment by $90,000, resulting in a total inventory
reserve of $140,000 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.


                                       18
<PAGE>

Recent Developments
-------------------

         On  November  28,  2003,  we  completed  the  sale of an  aggregate  of
1,820,000  shares of our  common  stock to three  institutional  investors.  The
shares of common stock were sold for cash consideration of $1.10 per share, or a
total of $2,002,000,  pursuant to the terms of the Securities Purchase Agreement
entered into by and among the investors and our company as of November 28, 2003.
These shares were issued in a private placement  transaction pursuant to Section
4(2) and Regulation D under the Securities Act of 1933, as amended.  As provided
in  the  Securities  Purchase  Agreement,  we  also  agreed  to  cause  a  shelf
registration  statement covering the resale of these shares to be filed no later
than 60 days after the closing of the private  placement.  We estimate  that our
net proceeds  from the  transaction,  after paying a commission to our placement
agent,  T.R.  Winston & Company,  LLC, and legal other  expenses  related to the
transaction,  will be approximately  $1,850,000. We also have agreed to issue to
our placement  agent a three-year  warrant to purchase up to 91,000 shares at an
exercise  price  per  share of  $1.80 as  provided  in the  Securities  Purchase
Agreement.

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, 2003, we had recorded a reserve
for potential inventory impairment of $140,000. 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 $90,000 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 2004 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.

                                       19
<PAGE>

         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, 2003 was approximately $67,000, or
approximately 14.23% of the total outstanding receivables. Bad debt expense for
the fiscal year was approximately $300,000. This resulted from a sale of
BSD-2000 that was recorded in FYE 2002 to a customer that was determined to be
uncollectible in the fourth quarter of 2003. 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, with the exception of the above mentioned bad debt. 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.

Results of Operations: Comparison of Fiscal Years ended August 31, 2003 and 2002
--------------------------------------------------------------------------------

         Revenue. Revenue for fiscal 2003 was $2,572,682 compared to $2,672,472
for fiscal 2002, a decrease of $99,790, or approximately 3.73%. This decrease
was mainly due to a decrease in sales to TherMatrx. Product sales decreased to
$2,234,182 in 2003 from $2,672,472 in 2002 a decrease of $438,290 or 16.4%.

         Related Party Revenue. We derived $1,907,585, or 74.14% of our revenue
in fiscal 2003 from sales to related parties as compared to $1,854,714, or 69.4%
in fiscal 2002. Approximately $1,391,443 of such related party revenue in fiscal
2003 was from the sales of thermotherapy systems, component products and
contract services to TherMatrx. There was also a payment for royalty revenue of
$63,500 paid to BSD Medical Corp. by Thermatrx that is included in total
revenue. During fiscal 2002, sales to TherMatrx were approximately $1,781,000.
The remaining related party revenue of approximately $517,979 in fiscal 2003 was
for one BSD-2000 system and 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 2002, we had
sales of approximately $74,000 to Medizin-Technik. The significant increase in
sales to Medizin-Technik in fiscal 2003 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 2003, we derived approximately
$601,597, or 23.38% of our total revenue as compared to approximately $817,758,
or 30.59% in fiscal 2002 through non-related party sales. Our non-related party
revenue consisted of sales of two BSD-500 systems in fiscal 2003 for
approximately $203,386, consumable devices of $36,617, billable labor of
$20,863, service contracts of $65,731 and royalty revenue of $275,000.

         Cost of Sales Cost of sales for fiscal 2003 was $1,227,377 compared to
$1,114,846 for fiscal 2002, an increase of $112,531, or approximately 10.09%.
This increase resulted primarily from charges to cost of sales due to the
increase in our reserve for obsolete inventory of $90,000. Cost of sales for
fiscal 2003 to unrelated parties decreased to $94,619 from $302,431 primarily
because of the decrease in sales to unrelated customers. Cost of sales to
related parties in fiscal 2003 increased to $1,132,758 from $812,415 in fiscal
2002 primarily because of the change in product mix and an increase in related
party sales. During fiscal 2003, approximately 74% of the related party cost of
sales were to TherMatrx and 26% were to Medizin-Technik. The products sold to
TherMatrx generally require less cost per unit to manufacture than the BSD-2000
and BSD-500 systems.

                                       20
<PAGE>

         Gross Profit. Gross profit for fiscal 2003 was $1,227,377 or 54.93% of
total product sales and related service, compared to $1,557,626, or 58.28% of
total product sales in fiscal 2002. The decrease in gross profit as a percentage
of total product sales was primarily because of decreases in sales of higher
margin hyperthermia system products in fiscal 2003.

         Research and Development Expenses. Research and development expenses
for fiscal 2003 were $676,867 compared to $603,137 for fiscal 2002, an increase
of $73,730, or 12.22%. Research and development expenses in fiscal 2003 related
primarily to development of commercial version of BSD-2000/3D/MR hyperthermia
system and to our BSD-500 systems.

         Inventory Impairment Expense. We recorded an inventory impairment
charge in fiscal 2003 of $90,000 increasing our total inventory reserve at
August 31, 2003 to $140,000.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2003 were $1,241,561 compared to $1,667,042
in fiscal 2002, a decrease of $425,481, or approximately 25.52%. This decrease
was primarily due to less compensation expense of $717,000 related to the
issuance to employees and directors of options to purchase TherMatrx stock in
fiscal 2002. This was offset by higher bad debt expense of $300,394 and
increased legal fees and lower administrative and regulatory costs and special
promotion costs.

         Other Income. Other income for fiscal 2003 was $2,838 compared to
$722,198 in fiscal 2002, a decrease of $719,360. The gain in 2002 was a result
of the issuance to employees and directors of options to purchase TherMatrx
shares. This issuance of options resulted in compensation expense and a
corresponding obligation of $717,000. The TherMatrx shares issued upon exercise
of the options had a net book value of $0, therefore the use of such shares to
settle the obligation related to the options resulted in a gain of $717,000. The
net effect of the gain on the transfer of the TherMatrx shares and the
compensation expense related to the options issued was $0.

         Net Loss. In fiscal 2003 we had a net loss of $570,285 as compared to
net income in fiscal of $9,645. The net loss was primarily caused be an increase
in bad debt expense of $300,394, an increase in inventory reserve of $90,000 and
lower overall sales for fiscal 2003.

         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.

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

         Since inception, we have generated an accumulated deficit of
$20,486,107. We have historically financed our operations through sale of
technology assets, issuance of common stock, and cash from operations. We used
$227,298 in cash from operating activities in fiscal 2003 compared to cash
generated of $19,800 in fiscal 2002. This was a result of our net loss of
$570,285 for fiscal 2003 compared to net income of $9,645 in 2002 offset by an

                                       21
<PAGE>

increase in accounts payable of $217,447 in 2003 compared to a reduction in
accounts payable in fiscal 2002. Accrued expenses decreased by $133,066
primarily as a result of a decrease in customer deposits as orders were shipped.
Our investing activities resulted in net cash used of $60,599 relating to the
purchase of certain property and equipment. Cash provided by financing
activities totaled $2,000 reflecting proceeds from the issuance of common stock
in connection with the exercise of outstanding stock options.

         At August 31, 2003, our working capital was $447,678 and our cash and
cash equivalents totaled $136,003. 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 2004 related to the BSD-500 and BSD-2000 systems.

         On  November  28,  2003,  we  completed  the  sale of an  aggregate  of
1,820,000  shares of our  common  stock to three  institutional  investors.  The
shares of common stock were sold for cash consideration of $1.10 per share, or a
total of $2,002,000,  pursuant to the terms of the Securities Purchase Agreement
entered into by and among the investors and our company as of November 28, 2003.
These shares were issued in a private placement  transaction pursuant to Section
4(2) and Regulation D under the Securities Act of 1933, as amended.  As provided
in  the  Securities  Purchase  Agreement,  we  also  agreed  to  cause  a  shelf
registration  statement covering the resale of these shares to be filed no later
than 60 days after the closing of the private  placement.  We estimate  that our
net proceeds  from the  transaction,  after paying a commission to our placement
agent,  T.R.  Winston & Company,  LLC, and legal other  expenses  related to the
transaction,  will be approximately  $1,850,000. We also have agreed to issue to
our placement  agent a three-year  warrant to purchase up to 91,000 shares at an
exercise  price  per  share of  $1.80 as  provided  in the  Securities  Purchase
Agreement.

         Our ability to continue 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, anticipated cash flow from future operations, and
funding obtained on November 28, 2003 will be sufficient to fund our anticipated
operations for fiscal 2004, 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 future access to equity capital through the public
equity market may be constricted. If cash from operations is not sufficient to
fund our cash needs along with our capital funding obtain on November 28, 2003,
our ability to grow revenue and profits and generate cash would be constricted
and we may not be able to continue operating.

ITEM 7.  FINANCIAL STATEMENTS

                                       22
<PAGE>
BSD MEDICAL CORPORATION
Financial Statements
August 31, 2003 and 2002

<PAGE>



                                                         BSD MEDICAL CORPORATION
                                                   Index to Financial Statements

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





                                                                            Page
                                                                            ----

Independent Auditor's Report                                                F-1


Balance Sheet                                                               F-2


Statement of Operations                                                     F-3


Statement of Stockholders' Equity                                           F-4


Statement of Cash Flows                                                     F-5


Notes to Financial Statements                                               F-6



<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, 2003, and the related statements of operations, stockholders' equity,
and cash flows for the years  ended  August 31, 2003 and 2002.  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, 2003,  and the results of its operations and cash flows for the years
ended  August  31,  2003  and  2002 in  conformity  with  accounting  principles
generally accepted in the United States of America.



TANNER + CO.




Salt Lake City, Utah
September 29, 2003


                                                                             F-1

<PAGE>


                                                         BSD MEDICAL CORPORATION
                                                                   Balance Sheet

                                                                 August 31, 2003
--------------------------------------------------------------------------------

        Assets
        ------

Current assets:
   Cash and cash equivalents                                      $     136,003
   Receivables, net                                                      60,844
   Related party receivables                                            342,878
   Inventories                                                          802,473
   Other current assets                                                  43,238
                                                                  --------------

        Total current assets                                          1,385,436

Property and equipment, net                                             141,294
Patent, net of amortization of $5,043                                    26,885
                                                                  --------------

                                                                  $   1,553,615
                                                                  --------------

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

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

Current liabilities:
   Accounts payable                                               $     280,068
   Accrued expenses                                                     614,470
   Current portion of deferred revenue                                   43,220
                                                                  --------------

        Total current liabilities                                       937,758

Deferred revenue                                                         40,900
                                                                  --------------

        Total liabilities                                               978,658
                                                                  --------------

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 17,839,633 shares                    17,840
   Additional paid-in capital                                        21,070,874
   Deferred compensation                                                (27,416)
   Accumulated deficit                                              (20,486,107)
   Treasury stock, at cost                                                 (234)
                                                                  --------------

        Total stockholders' equity                                      574,957
                                                                  --------------

                                                                  $   1,553,615
                                                                  --------------



--------------------------------------------------------------------------------
See accompanying notes to financial statements.                              F-2

<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                         Statement of Operations

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



                                                   2003            2002
                                              ----------------------------------

Revenues:
   Sales                                      $       326,597   $       817,758
   Sales to related parties                         1,907,585         1,854,714
   Revenue from royalties in arrears                  275,000                 -
   Other revenue - related party                       63,500                 -
                                              ----------------------------------

                                                    2,572,682         2,672,472
                                              ----------------------------------

Costs and expenses:
   Cost of sales                                       94,619           302,431
   Cost of sales to related parties                 1,132,758           812,415
   Research and development                           676,867           603,137
   Selling, general, and administrative             1,241,561         1,667,042
                                              ----------------------------------

                                                    3,145,805         3,385,025
                                              ----------------------------------

        Operating loss                               (573,123)         (712,553)
                                              ----------------------------------

Other income (expense):
   Gain on transfer of equity interest in
     affiliate to related parties                           -           717,000
   Interest income                                      2,838             5,198
                                              ----------------------------------

                                                        2,838           722,198
                                              ----------------------------------

        Net (loss) income                     $      (570,285)  $         9,645
                                              ----------------------------------

Income (loss) per common share -
  basic and diluted                           $         (0.03)  $             -
                                              ----------------------------------

Weighted average shares - basic                    17,805,000        17,699,000
                                              ----------------------------------

Weighted average shares - diluted                  17,805,000        17,932,000
                                              ----------------------------------

--------------------------------------------------------------------------------
See accompanying notes to financial statements.                              F-3
<PAGE>

<TABLE>
<CAPTION>

                                                                                                      BSD MEDICAL CORPORATION
                                                                                            Statement of Stockholders' Equity

                                                                                         Years Ended August 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------




                                       Common Stock      Additional    Deferred                  Treasury Stock
                                    -------------------   Paid-in      Compen-    Accumulated   ----------------
                                     Shares     Amount    Capital      sation      Deficit      Shares    Amount     Total
                                    -----------------------------------------------------------------------------------------

<S>                                 <C>        <C>      <C>           <C>       <C>              <C>     <C>      <C>
Balance, September 1, 2001          17,602,619 $ 17,603 $ 20,969,196  $ (25,097)$ (19,925,467)   24,331  $  (234) $ 1,036,001

Common stock issued for:
  Cash                                 109,633      110       34,492          -             -         -        -       34,602
  Services                              27,264       27       23,973          -             -         -        -       24,000
  Options                               16,812       17          (17)         -             -         -        -            -

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

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

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

Balance August 31, 2002             17,756,328   17,757   21,037,457    (26,274)  (19,915,822)   24,331     (234)   1,112,884

Common stock issued for:
  Cash                                  20,000       20        1,980          -             -         -        -        2,000
  Services                              38,106       38       23,962          -             -         -        -       24,000
  Warrants                              25,199       25          (25)         -             -         -        -            -

Amortization of deferred
  compensation                               -        -            -      6,358             -         -        -        6,358

Deferred compensation                        -        -        7,500     (7,500)            -         -        -            -

Net loss                                     -        -            -          -      (570,285)        -        -     (570,285)
                                    -----------------------------------------------------------------------------------------

Balance August 31, 2003             17,839,633 $ 17,840 $ 21,070,874  $ (27,416)$ (20,486,107)   24,331  $  (234) $   574,957
                                    -----------------------------------------------------------------------------------------



-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements                                                                            F-4

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                                  BSD MEDICAL CORPORATION
                                                                  Statement of Cash Flows

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




                                                                  2003           2002
                                                              ---------------------------
<S>                                                           <C>            <C>
Cash flows from operating activities:
  Net (loss) income                                           $  (570,285)   $      9,645
  Adjustments to reconcile net (loss) income to net cash
    (used in) provided by operating activities:
      Provision for doubtful accounts                             284,393          42,403
      Provision for inventory write-off                            90,000          30,000
      Depreciation and amortization                                48,678          48,965
      Deferred gain on sale of building                           (15,275)        (61,416)
      Amortization of deferred compensation                         6,358           8,636
      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
        Receivables                                                 9,614          55,173
        Inventories                                               (85,743)       (109,095)
        Other current assets                                      (24,901)         16,767
      Increase (decrease) in:
        Accounts payable                                          217,447         (51,121)
        Accrued expenses                                         (133,066)         40,043
        Deferred revenue                                          (78,518)        (49,513)
                                                              ---------------------------

            Net cash (used in) provided by
            operating activities                                 (227,298)         19,800
                                                              ---------------------------

Cash flows from investing activities:
  Purchase of property and equipment                              (60,599)        (22,532)
  Purchase of patent license                                            -         (18,000)
                                                              ---------------------------

            Net cash used in
            investing activities                                  (60,599)        (40,532)
                                                              ---------------------------

Cash flows from financing activities-
  proceeds from issuance of common stock                            2,000          34,602
                                                              ---------------------------

Increase (decrease) in cash and cash equivalents                 (285,897)         13,870

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

Cash and cash equivalents, end of year                        $   136,003    $    421,900
                                                              ---------------------------


-----------------------------------------------------------------------------------------
See accompanying notes to financial statements                                        F-5

</TABLE>

<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements

                                                        August 31, 2003 and 2002
--------------------------------------------------------------------------------

1.   Organization       Organization
     of                 BSD Medical  Corporation  (the Company) was incorporated
     Significant        in the State of  Delaware  on July 3, 1986.  The Company
     Accounting         develops,  produces,  markets, and services systems used
     Policies           for the  treatment of cancer and other  diseases.  These
                        systems 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
                        are 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 sales
                        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.

--------------------------------------------------------------------------------
                                                                             F-6
<PAGE>


                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization       Patents
     of                 Patents are carried at cost and are being amortized over
     Significant        17 years.
     Accounting
     Policies           Income Taxes
     Continued          The Company  accounts  for income  taxes using the asset
                        and  liability  method.  Under the  asset and  liability
                        method,   deferred  tax  assets  and   liabilities   are
                        recognized for the future tax consequences  attributable
                        to differences  between the financial statement carrying
                        amounts of  existing  assets and  liabilities  and their
                        respective   tax   bases.   Deferred   tax   assets  and
                        liabilities   are  measured   using  enacted  tax  rates
                        expected  to apply to  taxable  income  in the  years in
                        which those  temporary  differences  are  expected to be
                        recovered or settled.  The effect on deferred tax assets
                        and  liabilities  of a change in tax rates is recognized
                        in income in the  period  that  includes  the  enactment
                        date.

                        Income (Loss) Per Common Share
                        The  computation of basic income (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  to  purchase
                        1,275,303 shares and 1,258,901 shares of common stock at
                        prices  ranging  from  $.10  to  $1.76  per  share  were
                        outstanding  at August 31, 2003 and 2002,  respectively.
                        Options  outstanding during the fiscal year ended August
                        31, 2003 were not included in the calculation of diluted
                        earnings   per   share    because   their   effect   was
                        anti-dilutive.

--------------------------------------------------------------------------------
                                                                             F-7
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization       Income (Loss) Per Common Share - Continued
     of                 The  shares  used in the  computation  of the  Company's
     Significant        basic and diluted income (loss) per share are reconciled
     Accounting         as follows:
     Policies
     Continued                                        2003           2002
                                                 -------------------------------

     Weighted average number of shares
        outstanding - basic                            17,805,000    17,699,000
     Dilutive effect of stock options                           -       233,000
                                                 -------------------------------

     Weighted average number of shares
        outstanding, assuming dilution                 17,805,000    17,932,000
                                                 -------------------------------

                        Stock-Based Compensation
                        The  Company  accounts  for  stock  options  granted  to
                        employees   under  the   recognition   and   measurement
                        principles of APB Opinion No. 25,  Accounting  for Stock
                        Issued to Employees,  and related  Interpretations,  and
                        has adopted the disclosure-only  provisions of Statement
                        of  Financial   Accounting  Standards  (SFAS)  No.  123,
                        "Accounting for Stock-Based Compensation".  Accordingly,
                        no   compensation   cost  has  been  recognized  in  the
                        financial statements, as all options granted under those
                        plans had an exercise price equal to or greater than the
                        market value of the underlying  common stock on the date
                        of grant.  Had the  Company's  options  been  determined
                        based  on  the  fair  value   method,   the  results  of
                        operations  would  have  been  reduced  to the pro forma
                        amounts indicated below:

                                                       Years Ended August 31,
                                                 -------------------------------
                                                     2003           2002
                                                 -------------------------------

 Net income (loss) - as reported                 $    (570,285)  $        9,645

 Deduct total stock based employee
   compensation expense determined under
   fair value based method for all awards,
   net of related tax effects                         (123,770)        (126,225)
                                                 -------------------------------

 Net loss - pro forma                                 (694,055)        (116,580)
                                                 -------------------------------

 Basic and diluted loss per share - as           $        (.03)  $            -
 reported
                                                 -------------------------------

 Basic and diluted loss per share - pro forma    $        (.04)  $            -
                                                 -------------------------------


--------------------------------------------------------------------------------
                                                                             F-8
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


1.   Organization       The fair value of each option  grant is estimated on the
     of                 date of grant  using the  Black-Scholes  option  pricing
     Significant        model with the following assumptions:
     Accounting
     Policies
     Continued                                        2003            2002
                                                 -------------------------------

     Expected dividend yield                     $           -   $            -
     Expected stock price volatility                       122%             143%
     Risk-free interest rate                               4.3%             4.3%
     Expected life of options                          5 years           5 years

                        The  weighted  average  fair  value of  options  granted
                        during the years  ended  August  31,  2003 and 2002 were
                        $.57 and $.73, 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.

                        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. 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 include 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.

--------------------------------------------------------------------------------
                                                                             F-9
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization       Concentration of Credit Risk
     of                 Financial   instruments  that  potentially  subject  the
     Significant        Company  to   concentration   of  credit  risk  consists
     Accounting         primarily of trade receivables.  In the normal course of
     Policies           business,  the  Company  provides  credit  terms  to its
     Continued          customers.  Accordingly,  the Company  performs  ongoing
                        credit   evaluations  of  its  customers  and  maintains
                        allowances  for possible  losses.  During the year ended
                        August 31, 2003,  the Company  wrote off a receivable of
                        approximately  $346,000. This receivable was recorded as
                        a sale in fiscal year 2002 and resulted in a significant
                        write-off in the fourth quarter of 2003.

                        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.

                        Use  of  Estimates  in  the   Preparation  of  Financial
                        Statements
                        The  preparation  of financial  statements in conformity
                        with  accounting  principles  generally  accepted in the
                        United  States of America  requires  management  to make
                        estimates  and  assumptions  that  affect  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.

2.   Detail of          Details of certain  balance sheet  accounts as of August
     Certain            31, 2003, are as follows:
     Balance
     Sheet
     Accounts           Receivables:
                          Trade receivables                      $      455,093
                          Less allowance for doubtful
                            accounts                                    (67,371)
                                                                 ---------------

                                                                 $      403,722
                                                                 ---------------

                        Inventories:
                          Parts and supplies                     $      385,825
                          Work-in-process                               556,648
                          Reserve for obsolete inventory               (140,000)
                                                                 ---------------

                                                                 $      802,473
                                                                 ---------------

--------------------------------------------------------------------------------
                                                                            F-10
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


2.   Detail of          Accrued expenses:
     Certain              Customer deposits                      $      272,132
     Balance              Accrued loss in equity affiliate              136,467
     Sheet                Accrued vacation                               96,254
     Accounts             Accrued payroll and taxes                      67,232
     Continued            Other accrued expenses                         42,385
                                                                 ---------------

                                                                 $      614,470
                                                                 ---------------

3.   Property           Property and equipment consists of the following:
     and
     Equipment            Equipment                              $      680,630
                          Furniture and fixtures                        297,741
                                                                 ---------------

                                                                        978,371

                          Less accumulated depreciation                (837,077)
                                                                 ---------------

                                                                 $      141,294
                                                                 ---------------

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 required  monthly payments
                        of $6,533 through  November 2002.  During the year ended
                        August 31, 2003, 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.

--------------------------------------------------------------------------------
                                                                            F-11
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


4.   Deferred           Future  minimum  payments  at August  31,  2003,  are as
     Gain               follows:
     and
     Operating              Years Ending August 31,                Amount
     Lease                  -----------------------                ------
     Continued
                                  2004                           $       82,320
                                  2005                                   82,320
                                  2006                                   82,320
                                  2007                                   82,320
                                  2008                                   20,580
                                                                 --------------

                                                                 $      349,860
                                                                 --------------

                        Annual  rent  expense  on this  operating  lease for the
                        years  ended  August  31,  2003  and  2002  amounted  to
                        approximately $67,000 and $17,000, net of sale-leaseback
                        gain.

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

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

                                  2004                           $       43,220
                                  2005                                   40,900
                                                                 ---------------

                                                                         84,120

                                  Less current portion                  (43,220)
                                                                 ---------------

                                  Long-term deferred revenue     $       40,900
                                                                 ---------------


--------------------------------------------------------------------------------
                                                                            F-12
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


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

                                                      Years Ended August 31,
                                                 -------------------------------
                                                     2003            2002
                                                 -------------------------------

                        Income tax benefit
                          (expense) at
                          statutory rate         $     198,000   $       (3,000)
                        Expiration of net
                          operating loss
                          carryforwards                (19,000)               -
                        Change in valuation
                          allowance                   (179,000)           3,000
                                                 -------------------------------

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

                        Deferred tax assets  (liabilities)  are comprised of the
                        following:


                        Net operating loss carryforwards         $    1,843,000
                        General business and AMT credit
                          carryforwards                                 170,000
                        Accrued expenses and deposits                   128,000
                        Deferred revenue                                 29,000
                        Inventory reserve                                48,000
                        Allowance for bad debts and reserves             17,000
                        Depreciation                                    (21,000)
                        Deferred compensation expense                    (9,000)
                                                                 ---------------

                                                                       2,205,000

                        Valuation allowance                          (2,205,000)
                                                                 ---------------

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



--------------------------------------------------------------------------------
                                                                            F-13
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

6.   Income               At August 31, 2003,  the  Company  has  net  operating
     Taxes                losses (NOL) as follows:
     Continued
                          Expiration Date                               NOL
                          ---------------                        ---------------

                                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
                                2019                                    731,000
                                                                 ---------------

                                                                 $    5,174,000
                                                                 ---------------

                        At  August  31,  2003,  the  Company  has  Research  and
                        Experimentation   Tax  Credits  (RETC)  and  Alternative
                        Minimum Tax Credits (AMTC) as follows:

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

                              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.


--------------------------------------------------------------------------------
                                                                            F-14
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


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.

                        The  Company's  1998 Director  Stock Plan  authorizes an
                        annual  compensation  of  $12,000  to each  non-employee
                        director.  The annual  compensation  may be satisfied by
                        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.

--------------------------------------------------------------------------------
                                                                            F-15
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


7.   Stock              A schedule of the options and warrants are as follows:
     Options and
     Warrants
     Continued                                                    Price Per
                                       Options     Warrants       Share
                                    -----------------------------------------

 Outstanding at September 1, 2001       1,306,434       87,133  $ .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         1,258,901            -    .10 to 1.76
      Granted                              75,000            -            .56
      Exercised                           (58,598)           -     .10 to .65
      Forfeitures                               -            -
                                    -----------------------------------------

 Outstanding at August 31, 2003         1,275,303            -  $ .10 to 1.76
                                    -----------------------------------------

                        The following table summarizes  information  about stock
                        options and warrants outstanding at August 31, 2003:


                      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      430,703         2.41 $        .13      415,703 $         .12
     .37-1.11      794,600         7.65          .61      427,780           .58
         1.76       50,000         7.82         1.76       50,000          1.76
 -------------------------------------------------------------------------------

 $   .10-1.76    1,275,303         5.23 $        .49      893,483 $         .43
 -------------------------------------------------------------------------------

8.   Foreign            During  the years  ended  August  31,  2003 and 2002 the
     Customer           Company   had  sales  of   $1,391,443   and   $1,844,500
     and Major          (including $63,500 in royalty  revenues),  respectively,
     Customer           to TherMatrx,  an  unconsolidated  affiliate of which it
                        owns  approximately  30%.  During the years ended August
                        31,  2003 and 2002 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  $518,000 and $74,000,  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.



--------------------------------------------------------------------------------
                                                                            F-16
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


9.   Related Party      At   August   31,   2003,   accrued   expenses   include
     Transactions       approximately $272,132, due to an entity controlled by a
     Not otherwise      significant  stockholder  and  member  of the  Board  of
     disclosed          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,  2003,   accounts   receivable  includes
                        approximately  $38,225, due from an entity controlled by
                        a  significant  stockholder  and  member of the Board of
                        Directors. Accounts receivable also include $304,653 due
                        from TherMatrx at August 31, 2003.

10.  Supplemental       Actual amounts paid for interest and income taxes are as
     Cash Flow          follows:
     Information
                                                           Years Ended
                                                            August 31,
                                                 -------------------------------
                                                      2003            2002
                                                 -------------------------------

                        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  that was  offset by $15,000 of
                        accrued commissions payable related to the receivable.


--------------------------------------------------------------------------------
                                                                            F-17
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

11.  Significant        The  Company  has  an  approximate  30%  interest  in an
     Unconsolidated     unconsolidated affiliate (TherMatrx) at August 31, 2003.
     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.

                        Summarized  financial  information  for the  significant
                        unconsolidated  affiliate of the  Company,  at September
                        30, 2003 and 2002 (the affiliate's fiscal year runs from
                        October 1, through September 30) are as follows:

                                                      2003            2002
                                                 -------------------------------
                        Result for year:
                          Gross revenue            $  13,298,422  $   7,714,313
                          Gross profit             $   9,589,803  $   4,484,253
                          Net income (loss)        $   1,520,190  $  (1,875,003)

                        Year-end financial
                         position
                          Current assets           $   6,313,746  $   4,337,756
                          Non-current assets       $   2,335,232  $   2,549,626
                          Current liabilities      $   1,913,453  $   1,672,047
                          Non-current liabilities  $     474,748  $     474,748


--------------------------------------------------------------------------------
                                                                            F-18
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


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, 2003 and 2002, were $1,000. Royalty expense amounted
                        to approximately  $5,000 and $11,000 for the years ended
                        August 31, 2003 and 2002, respectively.

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, 2003
                        and 2002 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.



--------------------------------------------------------------------------------
                                                                            F-19
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


14.  Recent             In April 2002, the FASB issued SFAS No. 145,  Rescission
     Accounting         of SFAS Nos.  4, 44, and 64,  Amendment  of SFAS 13, and
     Pronounce-         Technical  Corrections as of April 2002 (SFAS 145). This
     ments              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 adoption of SFAS No. 145 by the
                        Company did not have a material  impact on the Company's
                        financial position or operations.

                        In June 2002,  the FASB issued SFAS No. 146,  Accounting
                        for Costs  Associated  with Exit or Disposal  Activities
                        (SFAS 146). This standard addresses financial accounting
                        and reporting for costs associated with exit or disposal
                        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.  The
                        adoption  of SFAS No. 146 by the  Company did not have a
                        material impact on the Company's  financial  position or
                        operations.


--------------------------------------------------------------------------------
                                                                            F-20
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

14.  Recent             In  December   2002,   the  FASB  issued  SFAS  No.  148
     Accounting         "Accounting for Stock-Based Compensation--Transition and
     Pronounce-         Disclosure--an  amendment  of FASB  Statement  No. 123,"
     ments              which is  effective  for all fiscal  years  ending after
     Continued          December  15, 2002.  SFAS No. 148  provides  alternative
                        methods of transition for a voluntary change to the fair
                        value  based  method  of  accounting   for   stock-based
                        employee  compensation  under  SFAS  No.  123  from  the
                        intrinsic value based method of accounting prescribed by
                        Accounting  Principles  Board  Opinion  No. 25. SFAS 148
                        also changes the  disclosure  requirements  of SFAS 123,
                        requiring a more  prominent  disclosure of the pro-forma
                        effect of the fair value based method of accounting  for
                        stock-based  compensation.  The adoption of SFAS No. 148
                        by the  Company  did not have a  material  impact on the
                        Company's financial position or operations.

                        In January 2003, the FASB issued  Interpretation No. 46,
                        "Consolidation  of Variable  Interest  Ethics"  (FIN No.
                        46),   which   addresses   consolidation   by   business
                        enterprises of variable  interest  entities.  FIN No. 46
                        clarifies  the   application   of  Accounting   Research
                        Bulletin No. 51, "Consolidated Financial Statements", to
                        certain  entities in which equity  investors do not have
                        the characteristics of a controlling  financial interest
                        or do not have sufficient  equity at risk for the entity
                        to   finance   its   activities    without    additional
                        subordinated  financial support from other parties.  FIN
                        No. 46 applies immediately to variable interest entities
                        created after January 31, 2003, and to variable interest
                        entities  in which an  enterprise  obtains  an  interest
                        after that date.  It applies in the first fiscal year or
                        interim  period   beginning  after  June  15,  2003,  to
                        variable  interest entities in which an enterprise holds
                        a variable  interest that it acquired before February 1,
                        2003.  The  Company  does not  expect  to  identify  any
                        variable interest entities that must be consolidated. In
                        the event a variable interest entity is identified,  the
                        Company does not expect the  requirements  of FIN No. 46
                        to have a material impact on its financial  condition or
                        results of operations.


--------------------------------------------------------------------------------
                                                                            F-21
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

14.  Recent             In November 2002, the FASB issued Interpretation No. 45,
     Accounting         "Guarantor's  Accounting and Disclosure Requirements for
     Pronounce-         Guarantees,    Including    Indirect    Guarantees    of
     ments              Indebtedness  of  Others"  (FIN  No.  45).  FIN  No.  45
     Continued          requires  certain  guarantees  to be  recorded  at  fair
                        value,  which is  different  from  current  practice  to
                        record a  liability  only  when a loss is  probable  and
                        reasonably estimable, as those terms are defined in FASB
                        Statement No. 5, "Accounting for Contingencies". FIN No.
                        45 also  requires  the Company to make  significant  new
                        disclosures    about    guarantees.    The    disclosure
                        requirements of FIN No. 45 are effective for the Company
                        in the first  quarter of fiscal year 2003.  FIN No. 45's
                        initial recognition and initial  measurement  provisions
                        are  applicable  on a  prospective  basis to  guarantees
                        issued or modified after December 31, 2002. The adoption
                        of FIN No.  45 did not  have a  material  impact  on the
                        Company's financial  position,  results of operations or
                        cash flows.

                        In April 2003, the FASB issued SFAS No. 149,  "Amendment
                        of Statement 133 on Derivative  Instruments  and Hedging
                        Activities." SFAS No. 149 amends and clarifies financial
                        accounting  and  reporting for  derivative  instruments,
                        including  certain  derivative  instruments  embedded in
                        other   contracts    (collectively    referred   to   as
                        derivatives)  and for hedging  activities under SFAS No.
                        133, "Accounting for Derivative  Instruments and Hedging
                        Activities".  This  Statement is effective for contracts
                        entered  into or  modified  after  June 30,  2003,  with
                        certain  exceptions,   and  for  hedging   relationships
                        designated after June 30, 2003, with certain exceptions,
                        and for hedging relationships  designated after June 30,
                        2003. Management is currently evaluating the effect that
                        the  adoption of SFAS No. 149 may have,  but believes it
                        will  not  have a  material  effect  on its  results  of
                        operations and financial position.


--------------------------------------------------------------------------------
                                                                            F-22
<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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


14.  Recent             In May 2003,  the FASB issued SFAS No. 150,  "Accounting
     Accounting         for Certain Financial  Instruments with  Characteristics
     Pronounce-         of both  Liabilities  and  Equity."  This new  statement
     ments              changes the accounting for certain financial instruments
     Continued          that, under previous guidance, issuers could account for
                        as equity or  classifications  between  liabilities  and
                        equity in a section  that has been  known as  "mezzanine
                        capital." It requires that those certain  instruments be
                        classified as liabilities in balance sheets. Most of the
                        guidance  in SFAS  150 is  effective  for all  financial
                        instruments entered into or modified after May 31, 2003.
                        Management anticipates that the adoption of SFAS No. 150
                        may have a material impact on the Company's consolidated
                        financial statements if in the future the Company issues
                        mandatorily redeemable preferred stock. Such mandatorily
                        redeemable  preferred  stock,   previously  included  as
                        "mezzanine capital", would be included as a liability in
                        accordance with SFAS 150.

15.  Subsequent         On November 28, 2003, the Company  completed the sale of
     Event              an  aggregate  of  1,820,000  shares of common  stock to
                        three  institutional  investors.  The  shares  of common
                        stock  were  sold for cash  consideration  of $1.10  per
                        share,  or a total of $2,002,000,  pursuant to the terms
                        of the Securities Purchase Agreement entered into by and
                        among the  investors  and the Company as of November 28,
                        2003.  These  shares were issued in a private  placement
                        transaction  pursuant to Section  4(2) and  Regulation D
                        under  the  Securities  Act  of  1933,  as  amended.  As
                        provided  in  the  Securities  Purchase  Agreement,  the
                        Company  also  agreed  to  cause  a  shelf  registration
                        statement  covering  the  resale  of these  shares to be
                        filed no later  than 60 days  after the  closing  of the
                        private  placement.  The Company  estimates that the net
                        proceeds from the transaction, after paying a commission
                        to the placement agent, T.R. Winston & Company, LLC, and
                        legal other expenses related to the transaction, will be
                        approximately $1,850,000. The Company also has agreed to
                        issue to the  placement  agent a  three-year  warrant to
                        purchase up to 91,000  shares at an  exercise  price per
                        share of $1.80 as  provided in the  Securities  Purchase
                        Agreement.


--------------------------------------------------------------------------------
                                                                            F-23


<PAGE>

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

         None.


ITEM 8A. CONTROLS AND PROCEDURES

Disclosure controls are procedures that are designed with an objective of
ensuring that information required to be disclosed in our periodic reports filed
with the Securities and Exchange Commission, such as this Annual Report on Form
10-KSB, is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission. Disclosure controls are
also designed with an objective of ensuring that such information is accumulated
and communicated to our management, including the chief executive officer and
chief financial officer, in order to allow timely consideration regarding
required disclosures.

The evaluation of our disclosure controls by the principal executive officer and
principal financial officer included a review of the controls' objectives and
design, the operation of the controls, and the effect of the controls on the
information presented in this annual report. Our management, including the chief
executive officer and chief financial officer, does not expect that disclosure
controls can or will prevent or detect all errors and all fraud, if any. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Also, projections of any evaluation of the disclosure controls and
procedures to future periods are subject to the risk that the disclosure
controls and procedures may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

Based on their review and evaluation as of a date within 90 days of the filing
of this Form 10-KSB, and subject to the inherent limitations all as described
above, our principal executive officer and principal financial officer has
concluded that our disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective,
provided, however, our principal executive officer and principal financial
officer 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. They are not aware of any significant changes in
our disclosure controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.


                                       23
<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)           56       Chairman of the Board, Senior Vice President,          1986
                                           and Chief Technology Officer

Hyrum A. Mead, MBA(1)             56       President and Member of the Board of Directors         1999

Gerhard W. Sennewald, Ph.D.       67       Member of the Board of Directors                       1994

J. Gordon Short, M.D.             72       Member of the Board of Directors                       1994

Michael Nobel, Ph.D.              63       Member of the Board of Directors                       1997

Dixie Toolson Sells               53       Vice President of Regulatory Affairs                   1987

Ray Lauritzen                     53       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

                                       24
<PAGE>

design of microwave treatment systems for tumors, including the development of
external phased array antenna technology to focus radiated microwave energy deep
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
officers, directors and greater than 10% stockholders to furnish us with copies

                                       25
<PAGE>

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 2003, 2002 and 2001.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

-----------------------------------------------------------------------------------------------------
                                                                              Long-Term Compensation
                                                  Annual Compensation               Awards
                                           ----------------------------------------------------------
                                                                              Securities Underlying
  Name and Principal Position      Year        Salary ($)        Bonus ($)     Options / SARs (#)
=====================================================================================================
<S>                               <C>        <C>                 <C>                <C>
Paul Turner,                      2003       $145,000            $400                    -
Chairman of the Board, Senior     2002       $145,000            $400               45,000(1)
Vice President, Chief             2001       $145,000            $400                    -
Technology Officer
-----------------------------------------------------------------------------------------------------
Hyrum A. Mead,                    2003       $125,000            $400                    -
President, Director               2002       $125,000         $30,000               45,000(1)
                                  2001       $125,000            $400                    -
-----------------------------------------------------------------------------------------------------
</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.

         There were no stock options granted to Messrs. Turner and Mead during
fiscal 2003.

         No shares of stock options were exercised during fiscal year 2003 by
Messrs. Turner and Mead.

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

                                       26
<PAGE>

years and expire in 10 years 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 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 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. 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 April 26, 2003 they were paid $2,000
in cash and awarded 6,452 shares of BSD `s common stock for services for the six
months prior to March 1, 2003. On October 22, these directors were awarded
25,000 options to purchase BSD Medical Corporations restricted common stock at
$.64 per share. They were also paid $2,000 in cash and awarded 5,333 shares of
restricted common stock for their services for the six month period prior to
September 1, 2003.

                  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

                                       27
<PAGE>

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
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 19, 2003, 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 28, 2003. 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 20,367,584 shares of common stock outstanding
as of November 28, 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.

                                       28
<PAGE>
                                                            Common Stock
                                                         Beneficially Owned
                                                       -----------------------
Title of Class    Name of Beneficial Owner             Shares          Percent
--------------------------------------------------------------------------------
                      Officers and Directors

 Common Stock     Dr. Gerhard W. Sennewald(1)          6,771,814        33.24%

 Common Stock     Paul F. Turner(2)                    1,995,871         9.79%

 Common Stock     Hyrum A. Mead(3)                       280,000         1.37%

 Common Stock     Dr. J. Gordon Short(4)                 217,635         1.06%

 Common Stock     Dr. Michael Nobel(5)                   155,635          *

                      Holders of More Than 5%

 Common Stock     John E. Langdon(6)                   1,295,010         6.35%

 Common Stock     All Executive Officers and           9,420,955        46.25%
                  Directors as a Group
                  (5 persons)(7)

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

(1)  Includes 90,000 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 200,000 shares subject to options.

(4)  Includes 110,000 shares subject to options.

(5)  Includes 75,000 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 655,953 shares subject to options.

         We have two equity compensation plans, our 1998 Employee Stock Option
Plan and our 1998 Director Stock Plan, both 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:

                                       29
<PAGE>
<TABLE>
<CAPTION>


                      EQUITY COMPENSATION PLAN INFORMATION

------------------------------- ---------------------------- ------------------------- -------------------------------
                                 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>

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, 2003, TherMatrx accounted for
$1,391,443, or approximately 54.08%, 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:

                                       30
<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.

4.2           Emerson Securities Purchase Agreement

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.

21            Subsidiary List

31.1          Certification of Chief Executive Officer of BSD pursuant to Rule
              13a-14.

31.2          Certification of Chief Financial Officer of BSD pursuant to Rule
              13a-14

32.1          Certification of Chief Executive Officer attached pursuant to 18
              U.S.C. Section 1350, as adopted pursuant to Section 906 of the
              Sarbanes Oxley Act of 2002

32.2          Certification of the Chief Financial Officer 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.


                                       31
<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 1, 2003              By:  /s/ Hyrum A. Mead
                                       -----------------------------------------
                                       Hyrum A. Mead
                                       President and Member of the Board of
                                       Directors (principal executive officer)


Date: December 1, 2003              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 1, 2003              By:  /s/ Paul F. Turner
                                       -----------------------------------------
                                       Paul F. Turner
                                       Chairman of the Board, Senior Vice
                                       President and Chief Technology Officer


Date: December 1, 2003              By:  /s/ Hyrum A. Mead
                                       -----------------------------------------
                                       Hyrum A. Mead
                                       President and Member of the Board of
                                       Directors (principal executive officer)


Date: December 1, 2003              By:  /s/ Gerhard W. Sennewald
                                       -----------------------------------------
                                       Dr. Gerhard W. Sennewald
                                       Member of the Board of Directors


Date: December 1, 2003              By:  /s/ J. Gordon Short
                                       -----------------------------------------
                                       Dr. J. Gordon Short
                                       Member of the Board of Directors


Date: December 1, 2003              By:  /s/ Michael Nobel
                                       -----------------------------------------
                                       Dr. Michael Nobel
                                       Member of the Board of Directors


                                       32