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


                                   FORM 10-KSB


(Mark One)

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

For the Fiscal Year Ended August 31, 2006

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

For the transition period from ____________ to ____________

Commission file number 0-10783

                             BSD MEDICAL CORPORATION
                 (Name of Small Business Issuer in its Charter)


                   Delaware                                    75-1590407
        (State or Other Jurisdiction of                     (I.R.S. Employer
        Incorporation or Organization)                    Identification No.)

    2188 West 2200 South Salt Lake City, UT                      84119
   (Address of Principal Executive Offices)                     (Zip Code)

                                 (801) 972-5555
                           (Issuer's Telephone Number)

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

       Title Of Each Class             Name Of Each Exchange On Which Registered
       -------------------             -----------------------------------------
  Common Stock, $0.001 par value                American Stock Exchange

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

Check whether the issuer is not required to file reports pursuant to Section 13
or Section 15(d) of the Exchange Act. [ ]

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
<PAGE>

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, 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]

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

State the issuer's revenues for its most recent fiscal year: $2,898,402.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.): $58,488,953 as of November 20, 2006.

State the number of shares outstanding of each of issuers classes of common
equity, as of the latest practicable date: 21,040,186 shares of common stock,
par value $0.001, as of November 20, 2006.

Documents Incorporated by Reference: None.

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




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<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
         -----------------------

Overview
--------

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

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

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

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

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<PAGE>

         Based on our management team's knowledge of the market, we believe that
the fully saturated potential market for these developed cancer therapy systems
is in excess of $5 billion. We also project an after-market opportunity based on
service agreements that equates to approximately 15% of the purchase price of
our systems per year. We believe that the replacement cycle for our systems,
based on advances in software, hardware and other components, will average 5-7
years. Our financial model in the higher production environment of established
commercial sales is to achieve a 60% gross margin on systems and an 80% gross
margin on service agreements and disposable applicators used with our
MicroThermX 100 system.

         We have received United States Food and Drug Administration, or FDA,
approval to market our commercial version of the BSD-500, and in March 2006, we
completed a submission for FDA approval to sell the BSD-2000 in the United
States. We anticipate submitting our MicroThermX 100 system for FDA approval
during our fiscal 2007 year. We have designed our cancer therapy systems such
that together they are capable of providing treatment for most solid tumors
located virtually anywhere in the body.

         Although we have not entered these markets, we also believe that our
technology has application for additional approaches to treating cancer and for
a number of other medical purposes, including the treatment of such conditions
as psoriasis, arthritis, fibroids, hemorrhoids, menorrhagra (excessive menstrual
bleeding), benign tumors and cysts. We believe our technology is also applicable
to treating special medical problems such as sleep apnea and for certain
cosmetic uses. Our mission is to develop the full spectrum of medical uses for
our special competence in precision-focused RF/microwave systems, and to broadly
apply the utilization of our technology to treat cancer and benign diseases and
conditions.

         On June 9, 2005, our common stock began trading on the American Stock
Exchange ("AMEX") under the symbol "BSM."

The Sale of TherMatrx
---------------------

         One of our important contributions to the advancement of medical
therapy has been our pioneering work in developing a new treatment for
conditions associated with enlargement of the prostate that afflicts most men as
they age. As the prostate enlarges it constricts urine flow. The condition is
known medically as benign prostatic hyperplasia or BPH. We developed a
technology that allows men to be treated for BPH through an outpatient procedure
as an alternative to surgery or a lengthy regimen of medication.

         We determined early in our planning that we would treat our development
of BPH therapy as a spin-off business with the intent of providing funding for
our primary business objectives. As a result, we introduced the opportunity to
investment groups and subsequently on October 31, 1997 entered into an agreement
with investors Oracle Strategic Partners, L. P. and Charles Manker. Together we
established a new company, TherMatrx, Inc. TherMatrx received capital from these
investors to conduct clinical trials, and after obtaining FDA approval in July
2001, the funding to commercialize the development. We were compensated for
providing manufacturing, regulatory and engineering support to assure the
success of the new company.

                                       4
<PAGE>

         On July 15, 2004, TherMatrx, Inc. was sold to American Medical Systems
Holdings, Inc. (AMS). Our part of the total proceeds from this sale was
approximately 25%. A portion of the payout from the sale was based on
contingency payments. By the close of fiscal 2006, we had concluded the receipt
of contingency payments from the TherMatrx sale; the payout to us, including
contingency payments, being approximately $33.5 million.

Our Contributions to Cancer Therapy
-----------------------------------

         Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society estimates that 1,399,790 new cancer cases will be
diagnosed and that 564,830 Americans will die from cancer during 2006. Now
outpacing even heart disease, cancer has become the 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 to other parts of the body.

         Our cancer treatment systems have been developed to both kill cancer
directly with heat and to increase the effectiveness of the primary cancer
treatment used with it. 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 organ
              of the body.

         Some cancers, such as certain cancers of the liver, prostate, bone
metastases and even lung cancer can be killed using heat alone. For these
treatments we have developed the MicroThermX 100 thermal ablation system that is
used to kill cancerous tumors at high temperatures as a stand-alone therapy. The
treatment of many cancers is generally prescribed with one or more of the
primary cancer therapies noted above. 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. We have engineered systems
designed to increase the effectiveness of these cancer treatments through the
use of precision-focused RF/microwave energy to selectively heat cancer,
creating "hyperthermia" in cancerous tumors. Hyperthermia is an emerging cancer
therapy that both kills cancer cells directly and has been shown to be a potent
additive treatment in making certain of the major existing cancer therapies more
effective for some cancers.

         Hyperthermia therapy has been shown to substantially improve the
results from cancer treatments for a variety of tumors. Completed randomized
clinical trials in which the effectiveness of radiation therapy combined with
hyperthermia therapy was compared with the results of radiation therapy alone in
cancer treatment produced the following results: 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 versus 46% local
control for the patients who received both hyperthermia and radiation therapy.
For recurrent breast cancer, the complete response rate (complete disappearance

                                       5
<PAGE>

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.

         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 into the tumor. Our hyperthermia therapy systems
precisely deliver microwave energy to elevate the temperature of tumors, usually
between 40 degrees C and 45 degrees C (104 degrees F to 113 degrees F). 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.

         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.

         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 by
speeding gene production (heat mediated gene therapy). Hyperthermia may play a
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 helps prevent 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 of cancer as bleeding, pain and
infection.

         Since the founding of the Company, we have 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

                                       6
<PAGE>

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

         We have developed various technologies for heating cancerous tumors,
depending on their location in the body. Through our developments, cancers such
as melanomas or recurrent breast cancer located near the surface of the body can
be treated with superficial cancer treatment applicators and systems. Cancers
that can be accessed through natural body orifices, or that are accessible
through catheters inserted into the tumor as part of invasive radiation
techniques (such as used to treat prostate cancer or head and neck cancer) can
be treated with tiny, inserted antennae that we have developed to deliver
focused microwave energy into the cancerous tissue. We have also developed
systems to non-invasively treat cancers located deep in the body by focusing
electromagnetic energy on the cancer through a cylindrical applicator that
surrounds the body. This cylindrical applicator contains an array of multiple
antennae that focus radio frequency energy, and therefore heat, on the tumor.
Temperature levels for treatments are monitored through small temperature
sensors, and some of our systems can be interfaced with magnetic resonance
imaging, or MRI, so that the treatment in progress can be observed, and
temperatures can be monitored through images colorized to depict gradation of
temperature levels (thermography).

         Our BSD-500 is used to treat cancers located near the surface of the
body, or areas that can be accessed using inserted antennae. The BSD-500 comes
in several versions, depending on the customer requirements. The BSD-2000 is
used to non-invasively treat deep cancers. This system also comes in several
versions, including models with three dimensional, or 3D, steering of
electromagnetic energy, as well as the ability to be integrated with MRI.

         The BSD-500 has received FDA approval. In addition, the system has gone
through an extensive revision, and has obtained two major FDA supplements to
this approval that have been necessary to allow its commercial introduction.

         The BSD-2000 does not currently have FDA approval except as an
investigational device, however, the phase III clinical trial that we will use
to apply for the FDA approval has been concluded and published in a major
journal. Formal submission for FDA approval of the BSD-2000 was made in March
2006. We sought and obtained regulatory approval for the sale of the BSD-2000 in
the People's Republic of China during 2005.

         The MicroThermX 100 thermal ablation system was announced in 2006 and
does not yet have FDA approval. Submission for FDA approval is expected during
2007, with a potential for obtaining a general FDA approval for the MicroThermX
100 during 2007.

         Nearly all of our sales of cancer therapy systems over recent past
periods have been to cancer research institutions for use in conducting clinical
trials with our equipment. As a company, we are now in the early stages of
marketing the new commercial version of the BSD-500. Obtaining FDA approval for
the BSD-2000 would greatly contribute to our sales efforts by providing the
additional technology required for the treatment of solid tumors located
virtually anywhere in the body.

                                       7
<PAGE>

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

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

         o    Thermal ablation destroys cancer at high temperatures through
              focused microwave energy.

         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.

         MicroThermX 100. Our MicroThermX 100 has been developed to treat
cancerous tissue percutaneously, laparoscopically or surgically. The MicroThermX
100 utilizes precision-guided microwave energy to ablate cancerous tissue. The
MicroThermX 100 includes a computer driven control system, temperature sensors
and a disposable applicator. The system is currently being prepared for FDA
510(k) clearance. The advanced features and capabilities of the MicroThermX 100,
were made possible by our years of research, design and development in the
discipline of thermal medicine technology, supported by leading research centers
throughout the world (see reference to these in the section for the BSD-2000).

         Disposable applicators for the MicroThermX 100 are used to treat
different types of tumors, and are especially designed according to the method
by which they will be used in treatment, whether by surgeons or interventional
radiologists.

         BSD-500 Systems. Our BSD-500 systems are used to deliver either
superficial or interstitial hyperthermia therapy or both. There are four
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-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

                                       8
<PAGE>

microwave energy to the tumor, and a generator that creates the needed microwave
energy for the treatment. Additionally, the systems include a variety of
applicators, depending on each system configuration. Non-invasive superficial
applicators are used for superficial hyperthermia treatments. For interstitial
hyperthermia treatments, the system may include up to 24 tiny microwave
heat-delivering antennae that are inserted into catheters used in the standard
practice for internal radiation therapy (called brachytherapy).

         We have received FDA approval through FDA supplements for
implementation of a new operating system and other commercial upgrades, allowing
us to commercially introduce this new family of four systems. Our primary FDA
approval (described as a pre-market approval, or PMA, the standard FDA approval
required to market Class III medical devices in the United States) for the
BSD-500 family of systems is applicable to the marketing of all four
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.

         BSD-2000. The BSD-2000 family of products includes 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 of energy within
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 from the
FDA for commercial marketing in the United States, but the BSD-2000 has obtained
an investigational device exemption, or IDE, for sale in the United States for
research purposes only. We have also certified the BSD-2000 family for the CE
Mark required for export into certain European countries and have obtained
regulatory approval for the sale of the BSD-2000 in the People's Republic of
China. We are engaged in the extensive process of preparing an FDA submission
requesting a PMA for the BSD-2000 based on clinical data we have already
obtained. 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 will be obtained through our submissions.

         Development of the BSD-2000, the BSD-2000/3D and the BSD-2000/3D/MR has
required 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

                                       9
<PAGE>

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 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 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.

         We installed and tested the first BSD-2000/3D/MR system 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. We installed a second BSD-2000/3D/MR system 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 the 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 provided we interface the system with an MRI system that also is
approved in Europe.

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

         Our target market includes clinics, hospitals and institutes in which
cancer is treated, whether in the Unites States or international markets.

         In September 2004, we entered into an agreement with Dalian Orientech
Co. LTD to assist us in obtaining regulatory approval for the sale of the
BSD-2000 in the People's Republic of China, and thereafter to act as our
distributor for the sale of the BSD-2000 in that country. We subsequently

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<PAGE>

obtained Chinese regulatory approval during 2005, allowing the distributor to
begin to market in that country, opening the way for BSD-2000 systems to be sold
and installed in hospitals in China.

         In August 2006, we engaged Richter7 as a public relations agency.
Richter7 has broad experience in the medical and healthcare industry. They have
worked with companies such as Medtronic, Ultradent, Myriad Genetics, Siemens,
Stryker/Howmedica and others to build awareness and recognition of new products
in the marketplace.

         Anticipating an expanding need for present and future sales and
marketing, especially with the potential FDA approval for the BSD-2000 and the
MicroThermX 100, we hired Brian Ferrand, a seasoned Vice President of Sales, in
September 2005, and have increased our sales, marketing and marketing support
organization to ten people. The primary mission of this group is to provide
sales and pre-market preparation for our systems.

         Medizin Technik is our exclusive distributor of hyperthermia systems in
Germany, Austria and Switzerland and to certain medical institutions in Belgium
and the Netherlands. Medizin Technik is required to use best efforts to sell our
product within its territory. Due to the limited number of systems that are sold
through this relationship, we do not have pre-negotiated price terms with
Medizin Technik. If Medizin Technik identifies a potential customer, it will
negotiate the price of a hyperthermia system with us, purchase the system, and
resell the system to the customer on terms it negotiates with the customer. Our
distributorship agreement with Medizin Technik runs from year-to-year and may be
terminated by either party by providing written notice to the other party before
December 31 and automatically terminates upon the occurrence of certain events,
including the retirement or death of Dr. Sennewald. Dr. Sennewald is a director
and shareholder of BSD and of Medizin Technik.

         Our sales and marketing strategy involves three main components:

         o    promoting acceptance by the scientific community and
              cancer-treating healthcare professionals of hyperthermia therapy;

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

         o    working to continuously improve third-party reimbursement for
              medical services performed with our products.

         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.BSDMedical.com, and our materials are also posted on many other sites. We
have developed promotional materials for our products, including product
brochures, patient brochures and newsletters. We also participate actively in
trade shows and scientific symposia, make public presentations delivered by our
scientific staff and by scientists and researchers using our systems, and we
actively participate in a variety of medical associations. We are co-sponsors of
the annual international BSD Users' Conference in Europe and are sponsors of the
Society of Thermal Medicine and the American Society of Therapeutic Radiation
and Oncology (ASTRO) in the United States.

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<PAGE>

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 payors, 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. 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.

         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 and cancer therapies, FDA approvals, know-how and
reputation in the industry are key competitive factors. Currently, only a few
companies besides BSD have received FDA approval to manufacture and sell
hyperthermia therapy systems within the United States, including U.S.
Labthermics and Celsion Corporation. Celsion has been principally involved with
clinical trials related to thermotherapy, hyperthermia and related fields,
however Celsion has announced the transformation of its company from a medial
device company to a biopharmaceutical, solely focused on the development of
drugs for the treatment of cancer. Labthermics produces ultrasound-based
systems, which compete with our microwave hyperthermia systems, however
Labthermics is not currently active in the sale of products in our industry.
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,

                                       12
<PAGE>

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 have significantly
greater resources than we do.

         Although we have not currently entered the thermal ablation market with
cancer treatment systems, we anticipate that future competitors in that market
will include RadioTherapeutics, a division of Boston Scientific Corporation,
Valleylab, a division of Tyco Healthcare, which is a division of Tyco
International, and Rita Medica. Microsulis Limited is developing microwave
technologies for tumor ablation, but is not commercially active in selling tumor
ablation systems at this time.

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

         We provide a 12-month warranty and record a liability for the warranty
following installation on all cancer treatment systems and a 90-day limited
warranty on individual components. We install and service the hyperthermia
systems we sell to domestic customers. In addition, we or our consultants
provide technical and clinical training to our customers. 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. Our manufacturing facility is ISO 9001-1994 certified and
follows FDA quality systems regulations. 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
multiple sources on a timely basis.

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

         The manufacturing and marketing of medical devices involves 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


                                       13
<PAGE>

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, we cannot assume 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, and comparable foreign agencies. 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.

         Although our MicroThermX 100 system will be filed for FDA approval as a
510(k) submission, most of our hyperthermia treatment systems, including the
BSD-500 and the BSD-2000 and related products, have required or require
pre-market approval from the FDA instead of the simpler 510(k) approval.
Pre-market approval requires that we demonstrate that the medical device is safe
and effective. To do this, we conduct either laboratory and/or clinical testing.
The FDA will grant approval of the product if it determines there is reasonable
assurance that the medical device is safe and effective. FDA approval must be
obtained before commercial distribution of the product. We intend to continue to
make improvements in and to our existing products. Significant product changes
must be submitted to the FDA under investigational device exemptions, or IDEs,
or under pre-market approval 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. A PMA submission was made to the
FDA for the BSD-2000 in March 2006.

         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 with regulatory
requirements imposed on us.

         After we receive FDA approval to distribute a medical device, we
continue to have ongoing responsibilities under the Federal Food, Drug, and
Cosmetic Act and FDA regulations. The FDA reviews design and manufacturing
practices, labeling, record-keeping, and required reporting of adverse
experiences. All medical devices must be manufactured in accordance with
regulations specified in the FDA Quality System regulations, or QSR, and in
compliance with the ISO and other applicable standards. In complying with these
regulations, we must continue to expend time, money and effort in the areas of

                                       14
<PAGE>

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. If the FDA were to assert that we are not in
compliance with applicable laws or regulations, or that any of our medical
devices are ineffective or pose an unreasonable risk to patient health, the FDA
could seize our medical devices, ban such medical devices, or order a recall,
repair, replacement or refund of such devices, and require us to notify health
care professionals and others that the devices present unreasonable risk of
substantial harm to the public. The FDA may also impose operating restrictions,
restrain certain violations of law, and assess civil or criminal penalties
against us. The FDA can also recommend prosecution to the Department of Justice.
Certain regulations are subject to administrative interpretation and we cannot
assure that future interpretations made by the FDA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us.

         International sales of medical devices are subject to FDA export
requirements. We have obtained export approvals for all countries into which we
have delivered products. This includes countries in Western Europe and much of
Eastern Europe and many Asian countries.

         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 would have
a material adverse effect on our financial condition and results of operations.

         In addition to FDA regulations, certain U.S. health care laws apply
when a claim for reimbursement for one of our medical devices is submitted to
Medicare, Medicaid, or other federal health care programs. For instance, federal
law prohibits the filing of false or improper claims for federal payments. In
addition, federal law prohibits the payment of anything of value for the purpose
of inducing referrals of business reimbursable under a federal health care
program. Other federal laws prohibit physicians from making referrals for
certain services and items payable under certain federal programs if the
physician has a financial relationship with the entity providing the service or
item.

         All of these laws are subject to evolving interpretations. If the
federal government were to conclude that we are not in compliance with any of
these health care laws, we could be subject to substantial criminal and civil
penalties, and could be excluded from participation as a supplier to
beneficiaries in federal health care programs.

         The Federal Communications Commission, or FCC, regulates the
frequencies of microwave and radio frequency 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

                                       15
<PAGE>

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 five patents
in the United States and eight patents outside the United States. In addition,
five initial patents were assigned to TherMatrx, for which we obtained a
license, four subsequent patents were obtained and assigned to TherMatrx, and we
obtained one patent license from the National Institutes of Health. Three new
U.S. patent applications are pending. We believe that our patents represent the
early pioneering and dominant patents in this field.

         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.

         We 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 integration of magnetic resonance with hyperthermia systems,
including our BSD-2000/3D/MR system, and is based on a patent obtained by NIH in
early research of the concept. The license agreement requires an annual payment
of $1,000, plus $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 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 our enhancements 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.

         We cannot assure that the patents presently issued to us will be of
significant value to us in the future or will be held valid upon judicial
review. Successful litigation against these patents by a competitor would 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, we cannot assure that others will
not develop, acquire or patent technologies similar to ours or that such secrecy
will not be breached.

                                       16
<PAGE>

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

         Research and development expenses for fiscal 2006 were $1,251,956
compared to $859,614 for fiscal 2005, an increase of $392,342, or 46%. Research
and development expenses in fiscal 2006 related to the following:

         o    completion of our commercial version of the BSD-2000 with complete
              modernization of the computer system

         o    addition of the Sigma Ellipse phased array applicator

         o    a complete new design of the BSD-2000 patient support system

         o    enhancements to the BSD 500 and 2000 systems including language
              translations to German and Chinese

         o    development of various spiral array applicator systems to
              compliment the BSD-500

         o    completion of regulatory certifications of the improvements of the
              BSD-500 and BSD-2000 systems

         o    PMA filing for the BSD-2000 system

         o    development of the first model of the MicroThermX 100 microwave
              ablation system

         o    development of new microwave ablation disposable applicators and
              technical research to evaluate the various treatment sites and
              diseases suitable for the application of the MicroThermX 100.

         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 costs, 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 August 31, 2006, we had 39 employees; 36 of whom 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.

                                       17
<PAGE>

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

         Our future operating results are highly uncertain. Before deciding to
invest in BSD Medical or to maintain or increase your investment, you should
carefully consider the risks described below, in addition to the other
information contained in this annual report on Form 10-KSB. If any of these
risks actually occur, our business, financial condition or results of operations
could be seriously harmed. In that event, the market price for our common stock
could decline and you may lose all or part of your investment.

         We have a history of significant operating 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
$8,751,454 at August 31, 2005. In fiscal 2006, we recorded a net profit of
$9,249,496 which eliminated the accumulated deficit and resulted in positive
retained earnings of $498,042.

         Our net profit was primarily due to the sale of our ownership in
TherMatrx, to American Medical Systems Holdings, Inc., or AMS. Substantially all
revenues from this sale have now been received with no significant future
revenues expected. 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 have been unable to do this in the past and we may
be unable to do so in the future, and therefore may never achieve profitability.

         Our hyperthermia therapy products may not achieve market acceptance
which could limit our future revenue and ability to achieve profitability.

         To date, hyperthermia therapy has not gained wide acceptance by
cancer-treating physicians. We believe this is due in part to the lingering
impression created by 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 payors to make our
products commercially viable, and we believe that reimbursement rates have not
been adequate to stimulate strong interest in adopting hyperthermia as a new
cancer therapy. If our sales and marketing efforts to promote hyperthermia
therapy acceptance in the medical community fail, or our efforts to improve
third-party reimbursement rates for hyperthermia therapy are not successful,
then our future revenue from sales of our products may be limited, and we may
never be able to obtain profitable recurring operations.

         Sales of our product could be significantly reduced if government,
private health insurers and other third-party payors do not provide sufficient
coverage or reimbursement.

         Our success in selling our products will depend in large part on the
extent to which reimbursement for the costs of our products and related
treatments are available from government health agencies, private health
insurers and other third-party payors. Despite the existence of general

                                       18
<PAGE>

reimbursement policies, local medical review policies may differ for public and
private insurance payors, which may cause payment to be refused for some
hyperthermia treatments. Private payors also may refuse to pay for hyperthermia
treatments.

         Medical reimbursement rates are unpredictable and we cannot predict the
extent to which our business may be affected by future legislative and
regulatory developments. Future health care legislation or regulation may limit
our business or impose additional delays and costs on our business and
third-party reimbursement may not be adequate to cover our costs associated with
producing and selling our products.

         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 by existing therapies and as a result of therapy innovations
by others. If our products are rendered obsolete, our revenue will decline, we
may never achieve profitability, and we may not be able to continue in business.

         Some of the medical institutions to which we have sold in the past have
not been able to pay for their equipment, and some of our sales have therefore
become substantial bad debts, a risk that could continue into the future.

         A limited number of our customers have been developing clinics, and
these customers have been particularly vulnerable to financial difficulties that
can cause them to be unable to pay for equipment that they have purchased. If we
choose to accept higher risk sales opportunities to clinics in the future, we
will be subject to these customer credit risks that could lower future net sales
due to bad-debt write offs, resulting in losses in future periods and
potentially lowering the value of your stock. While we attempt to provide for
foreseeable doubtful accounts, we cannot assure you that this provision will
always be adequate to cover our credit risks.

         Increasing sales of our hyperthermia systems depends on our ability to
successfully expand our sales distribution channels; we have had failures with
the productivity of new channels of distribution in the past. Expanding our
channels of distribution will also significantly increase our sales expenses,
which could negatively impact our financial performance.

         We believe that the success of our efforts to increase sales of our
hyperthermia systems in the future depends on our ability to successfully expand
our sales distribution channels. Historically, we have sometimes failed in
establishing successful new sales channels.

         We anticipate that the success of our multi-year plan for selling
hyperthermia systems will require expanding our sales and marketing organization
through a combination of direct sales people, distributors and internal and
external marketing expertise. However, as we pursue our marketing plan, there
can be no assurance that we will be successful in securing reliable channels of
distribution to meet our plan through expanded sales. Recruiting and training

                                       19
<PAGE>

new distribution channels can take time and considerable expense. We project
that sales and marketing expenses will increase substantially in the future as
compared to past years. This added expense could have an adverse effect on our
future financial performance that is greater than any potential increases in
sales.

         In addition, there can be no assurance that our channels of
distribution that have been successful in the past will be successful in the
future. We have derived most of our revenue from sales in Europe through our
distributor Medizin-Technik, GmbH, which also purchases equipment components and
parts from us. Medizin-Technik is controlled by Dr. Sennewald, one of our
directors. The loss or ineffectiveness of Medizin-Technik as a distributor and
significant customer could result in lower revenue.

         We are subject to government regulations that can delay our ability to
sell our products and cause us to incur substantial expenses.

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

         We have not yet received pre-market approval for our BSD-2000 systems.
Obtaining these pre-market approvals from the FDA is necessary for us to
commercially market these systems in the United States. Obtaining approvals is a
lengthy and expensive process. We may not be able to obtain these approvals on a
timely basis, if at all, and such failure could harm our business prospects
substantially. Further, even if we are able to obtain the approvals we seek from
the FDA, the approvals granted might include significant limitations on the
indicated uses for which the products may be marketed, which restrictions could
negatively impact our business.

         After a product is approved for commercial distribution by the FDA, we
have ongoing responsibilities under the Federal Food, Drug, and Cosmetic Act and
FDA regulations, including regulation of our manufacturing facilities and
processes, labeling and record-keeping, and reporting of adverse experiences and
other information. Failure to comply with these ongoing requirements could
result in the FDA imposing operating restrictions on us, enjoining or
restraining certain violations, or imposing civil or criminal penalties on us.

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

         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 reduce our ability to be competitive and generate sales and profitability.

                                       20
<PAGE>

         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. Failure to successfully protect our rights in litigation could
reduce our ability to be competitive and generate sales and profitability.

         A product liability settlement could exceed our ability to pay.

         The manufacturing and marketing of medical devices involves 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. Our product liability
insurance does not cover intended injury, injury or damage resulting from the
intoxication of any person, payment of workers' compensation benefits, injury of
our own employee, injury or damage due to war, damage to property that we own,
damage to our work, loss of use of property, patent infringements, pollution
claims, interest payments, depreciation of property, or injury or damage
resulting from asbestos inhalation. We are responsible to pay the first $10,000
resulting from any claim up to a maximum of $50,000 in one year. We cannot
assure you that our product liability insurance will provide adequate coverage
against potential claims that might be made against us. If we were to be subject
to a claim in excess of our coverage or to a claim not covered by our insurance
and the claim succeeded, we would be required to pay the claim from our limited
resources, which would reduce our limited capital resources and liquidity and
reduce capital we could otherwise use to obtain approvals for and market our
products. In addition, liability or alleged liability could harm our business by
diverting the attention and resources of our management and by damaging our
reputation.

         We are dependent upon key personnel, some of whom would be difficult to
replace.

         Our success will be largely dependent upon the efforts of Paul F.
Turner, our Chairman of the Board, Senior Vice President, and Chief Technology
Officer, Hyrum A. Mead, our President, and Dixie T. Sells, our Vice President of
Regulatory Affairs, and other key employees. We do not maintain key-person
insurance on any of these employees. Our future success also will depend in
large part upon our ability to identify, attract and retain other highly
qualified managerial, technical and sales and marketing personnel. Competition
for these individuals is intense. The loss of the services of any of our key
personnel, the inability to identify, attract or retain qualified personnel in
the future or delays in hiring qualified personnel could make it more difficult
for us to manage our business and meet key objectives such as the sale of our
products and the introduction of new products.

         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. Because
of the limitations of our market and volatility of the market price of our
stock, investors may face difficulties in selling shares at attractive prices

                                       21
<PAGE>

when they want to. The average daily trading volume for our stock has varied
significantly from week to week and from month to month, and the trading volume
often varies widely from day to day. The following factors could impact the
market for our stock and cause further volatility in our stock price:

         o    announcements of new technological innovations;

         o    FDA and other regulatory developments;

         o    changes in third-party reimbursements;

         o    developments concerning proprietary rights;

         o    third parties receiving FDA approval for competing products; and

         o    market conditions generally for medical and technology stocks.

         Our directors and executive officers own a sufficient number of shares
of our capital stock to control our company, which could discourage or prevent a
takeover, even if an acquisition would be beneficial to our stockholders.

         Our directors and executive officers own approximately 46% of our
outstanding voting power. Accordingly, these stockholders, individually and as a
group, may be able to influence the outcome of stockholder votes involving the
election of directors, the adoption or amendment of provisions in our
certificate of incorporation and bylaws and the approval of certain mergers or
other similar transactions, such as a sale of substantially all of our assets.
Such control by existing stockholders could have the effect of delaying,
deferring or preventing a change in control of our company.

         Anti-takeover provisions in our certificate 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. The increased difficulties
faced by a third party who wishes to acquire us could adversely affect our stock
price.

ITEM 2.  DESCRIPTION OF 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. 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 beginning December 1,
2002. Thereafter, the purchase price increases by $50,000 each year, and the

                                       22
<PAGE>

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. Our lease on this building expires in
November of 2007.

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

         The Company's Annual Meeting of Shareholders was held on February 13,
2006. Of the 20,519,632 shares of common stock outstanding and entitled to vote
at the meeting, 14,096,138 shares were present, either in person or by proxy.
The following proposals were submitted to a vote of security holders at the
meeting;

1.       To elect six members of the Board of Directors to serve until the next
         annual meeting of the Company and their successors have been duly
         appointed and are qualified.

2.       To approve and ratify an amendment to the 1998 Director Stock Plan to
         extend the term of the plan and to increase the compensation paid to
         directors under the plan.

3.       To ratify the selection of Tanner LC as the Company's independent
         registered public accounting firm for the fiscal year ending August 31,
         2006.

         The above proposals were approved and the results of the voting are
         summarized in the following table:

                     Proposal             For     Against   Withheld   Abstain
                     --------             ---     -------   --------   -------

1.       Elect Board of Directors:

         o   Paul F. Turner           14,019,420       --    76,718        --
         o   Hyrum A. Mead            14,027,420       --    68,718        --
         o   Gerhard W. Sennewald     14,018,820       --    77,318        --
         o   Steven G. Stewart        14,062,120       --    34,018        --
         o   Michael Nobel            14,070,120       --    26,018        --
         o   Douglas P. Boyd          14,062,120       --    34,018        --

2.       Approve and ratify an        13,930,382  163,906        --    23,350
         amendment to the 1998
         Director Stock Plan

3.       Ratify selection of          14,076,780    8,335        --    11,023
         Tanner LC as independent
         registered public
         accounting firm

                                       23
<PAGE>

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
        ------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------

         On July 9, 2005, the American Stock Exchange approved the listing for
BSD Medical Corporation and the shares began trading on that day under the
symbol "BSM". The following table sets forth the high and low bid transactions,
as provided by the OTC Bulletin Board and AMEX for the quarters in fiscal year
2005 and 2006. 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, 2004..............              1.85           1.25
         February 28, 2005...............             2.70           1.70
         May 31, 2005.....................            3.00           2.15
         August 31, 2005..................            6.63           2.20
         November 30, 2005..............              9.47           4.25
         February 28, 2006...............             5.78           4.10
         May 31, 2006.....................            7.13           4.40
         August 31, 2006..................            6.15           4.40

         As of August 31, 2006, there were approximately 542 holders of record
of our common stock. We have not paid any cash dividends on our common stock
since our inception.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
         ---------------------------------------------------------

         This Management's Discussion and Analysis or Plan of Operation and
other parts of this annual report on Form 10-KSB contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed in the
subsections entitled "Forward-Looking Statements" and "Factors That May Affect
Future Results and Financial Condition" below and the subsection entitled "Risk
Factors" above. The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto included in this annual
report on Form 10-KSB. All information presented herein is based on our fiscal
year ended August 31, 2006. We assume no obligation to revise or update any
forward-looking statements for any reason, except as required by law.

                                       24
<PAGE>

General
-------

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

         On July 15, 2004 TherMatrx, Inc. was sold to American Medical Systems
Holdings, Inc. (AMS). Our part of the total proceeds from this sale was
approximately 25%. A portion of the payout from the sale was based on
contingency payments. By the close of fiscal 2006 we had received the last of
the contingency payments from the TherMatrx sale. The total payout to us,
including contingency payments, was approximately $33.5 million.

         Our accumulated deficit since inception decreased from $8,751,454 as of
August 31, 2005, to positive retained earnings of $498,042 as of August 31, 2006
due to net income for fiscal 2006 of $9,249,496 as compared to a net income of
$3,321,692 in fiscal 2005. The primary reason for the net income in fiscal 2006
and fiscal 2005 was the income generated from the sale of our ownership in
TherMatrx.

         We recognize revenue from the sale of cancer treatment systems, the
sale of parts and accessories related to the cancer treatment systems, the sale
of software license rights, providing manufacturing services, training, and
service support contracts. Product sales were $2,706,214 and $1,844,321 for the
years ended August 31, 2006 and 2005, respectively. Service revenue was $192,188
and $176,783 for the years ended August 31, 2006 and 2005, respectively.

         We derived $689,086, or 24%, of our revenue in fiscal 2006 from sales
to related parties. All of the related party revenue was for the sale of the
BSD-2000 and BSD-500 systems 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 2006, we derived $2,209,316, or 76%, of our total revenue as
compared to $1,033,632, or 51%, in fiscal 2005 from non-related party sales. Our
fiscal 2006 non-related party revenue consisted of sales of BSD-500 and BSD-2000
systems for approximately $1,902,175. The balance of our non-related party
revenue consisted of consumable devices of $126,896, service contracts of
$18,245, billable labor of $17,250 and consulting revenue of $144,750.

         Cost of sales for the year ended August 31, 2006 included raw material
and labor costs. Research and development expenses include expenditures for new
product development and development of enhancements to existing products.

                                       25
<PAGE>

Critical Accounting Policies and Estimates
------------------------------------------

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

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

         Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract, which approximates recognizing it as it is earned.

         Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms for non-related parties as with related parties. Sales to
distributors are recognized in the same manner as sales to end-user customers.
Deferred revenue and customer deposits payable include amounts from service
contracts as well as cash received for the sales of products, which have not
been shipped.

         Inventory Reserves. As of August 31, 2005, we had recorded a reserve
for potential inventory impairment of $80,000. During fiscal 2006, we reduced
our inventory reserve from $80,000 to $40,000. In addition to the reduction of
inventory reserve we also wrote off $24,003 in obsolete inventory. We
periodically review our inventory levels and usage, paying particular attention
to slower-moving items. If projected sales for fiscal 2007 do not materialize or
if our hyperthermia systems do not receive increased market acceptance, we may
be required to increase the reserve for inventory in future periods.

         Product Warranty. We provide product warranties on our BSD-500 and
BSD-2000 systems. These warranties vary from contract to contract, but generally
consist of parts and labor warranties for one year from the date of sale. To
date, expenses resulting from such warranties have not been material. We record
a warranty expense at the time of each sale. This reserve is estimated based on
prior history of service expense associated with similar units sold in the past.

         Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to

                                       26
<PAGE>

make required payments. This allowance is a significant estimate and is
regularly evaluated by us for adequacy by taking into consideration factors such
as past experience, credit quality of the customer base, age of the receivable
balances, both individually and in the aggregate, and current economic
conditions that may affect a customer's ability to pay. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

Results of Operations: Comparison of Fiscal Years ended August 31, 2006 and 2005
--------------------------------------------------------------------------------

         Revenue. Total revenue for fiscal 2006 was $2,898,402 compared to
$2,021,104 for fiscal 2005, an increase of $877,298, or 43%. The increase in
total revenue was primarily due to an increase in sales of our BSD-2000 and BSD
500 systems during fiscal 2006. Product sales increased to $2,706,214 in fiscal
2006 from $1,844,321 in fiscal 2005, an increase of $861,893, or 47%. Service
revenue increased to $192,188 in fiscal 2006 as compared to $176,783 in fiscal
2005 primarily due to an increase in consulting revenue. Our revenue can
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of systems, the sales price of each
being substantial enough to greatly impact revenue levels in the periods in
which they occur.

         Related Party Revenue. We derived $689,086, or 24%, of our total
revenue in fiscal 2006 from sales to related parties as compared to $987,472, or
49%, in fiscal 2005. All of the related party revenue in fiscal 2006 was for
BSD-2000 and BSD-500 systems and various component parts sold to
Medizin-Technik. Sales to Medizin-Technik may fluctuate significantly depending
on Medizin-Technik's anticipated sales and ability to place orders in Europe.
Since the sale of our ownership in TherMatrx we no longer consider TherMatrx a
related party.

         Non-related Party Revenue. In fiscal 2006, we derived $2,209,316, or
76%, of our total revenue as compared to $1,033,632, or 51%, in fiscal 2005 from
non-related party sales. Our fiscal 2006 non-related party revenue consisted of
sales of BSD-500 and BSD-2000 systems for $1,902,175. The balance of our
non-related party revenue consisted of consumable devices of $126,896, service
contracts of $18,245, billable labor of $17,250 and consulting revenue of
$144,750.

         Cost of Sales. Cost of sales for fiscal 2006 was $1,716,640 compared to
$1,320,110 for fiscal 2005, an increase of $396,530 or 30%. This increase
resulted primarily from higher sales in fiscal 2006. Cost of sales to related
parties in fiscal 2006 decreased to $371,214 from $644,980, in fiscal 2005
primarily due to the decrease in related party sales. During fiscal 2006 and
2005 all of the related party costs were attributable to sales to
Medizin-Technik.

         Gross Profit. Gross profit for the fiscal year ending August 31, 2006
was $1,181,762, or 41%, as compared to $700,994, or 35%, of total product sales
for the fiscal year ended August 31, 2005. The increase in gross profit margin
was primarily due to production efficiencies obtained from a higher volume of
hyperthermia system sales in the fiscal year ended August 31, 2006.

                                       27
<PAGE>

         Research and Development Expenses. Research and development expenses
for fiscal 2006 were $1,251,956 compared to $859,614 for fiscal 2005, an
increase of $392,342, or 46%. Research and development expenses in fiscal 2006
related to the following:

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

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

         o    completion of regulatory certifications of the improvements of the
              BSD-500 and BSD-2000 systems

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

         o    and development of new microwave ablation disposable applicators

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

         Inventory Impairment Expense. As of August 31, 2005, we had recorded a
reserve for potential inventory impairment of $80,000. During fiscal 2006, we
reduced our inventory reserve from $80,000 to $40,000. In addition to the
reduction of inventory reserve we also wrote off $24,003 in obsolete inventory.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2006 were $5,028,957 as compared to
$2,135,076 in fiscal 2005, an increase of $2,893,881, or 136%. This increase was
primarily due to increases in sales and marketing expense, and overall higher
payroll and employee benefits in fiscal 2006 as compared to fiscal 2005.

         Interest Income. Interest income increased to $1,301,341 in fiscal 2006
as compared to $362,462 in fiscal 2005 due to increased investments, including
cash, generated from the sale of TherMatrx.

         Other Income. Other income for fiscal 2006 was $18,256,306 compared to
$6,555,926 in fiscal 2005. This income resulted almost entirely from a gain
recognized on the sale of TherMatrx in fiscal 2006 and 2005.

         Provision for Income Taxes. Income tax expense increased to $5,209,000
for fiscal 2006 from $1,303,000 in fiscal 2005.

                                       28
<PAGE>

         Net Profit/ Loss. In fiscal 2006, we had after-tax net income of
$9,249,496 as compared to after tax net income in fiscal 2005 of $3,321,692. The
increase in after-tax net profit related to the sale of our interest in
TherMatrx.

         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 demand for thermotherapy systems and component parts supplied by
us to TherMatrx, 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 described elsewhere, 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 accumulated retained earnings of
$498,042. We have historically financed our operations through cash from
operations, research grants, licensing of technological assets and issuance of
common stock. As of August 31, 2006, we had cash and available for sale
securities of $24,735,200 as compared to cash and available for sale securities
of $13,527,197 as of August 31, 2005.

         We used $6,883,132 of cash in operating activities in fiscal 2006
compared to cash used of $2,723,482 in fiscal 2005. This was primarily a result
of gains on the sale of our TherMatrx shares of $18,016,272 and net income of
$9,249,496. In addition, in fiscal 2006 accounts receivable increased by
$922,163, accounts payable increased by $252,583, inventories increased by
$231,911, income tax payable increased by $2,271,469 and accrued expenses
increased by $296,737. Our investing activities resulted in net cash provided of
$7,729,216 relating to the proceeds of our sale in TherMatrx of $18,016,272
offset by purchase of investments of available for sale securities of
$10,073,884 and the purchase of certain property and equipment of $213,172. Cash
flows from financing activities consisted of proceeds from the exercise of stock
options of $424,336.

         Based upon our financial performance in fiscal 2006, we believe our
$24,735,200 in cash and available for sale securities at August 31, 2006,
together with the funds generated from operations, will be sufficient to fund
our working capital and capital resources needs for at least the next 12 months.

         On July 15, 2004 TherMatrx, Inc. was sold to American Medical Systems
Holdings, Inc. (AMS). Our part of the total proceeds from this sale was 25%. A
portion of the payout from the sale was based on contingency payments. By the
close of our fiscal year for 2006 we had received the last of the contingency
payments from the TherMatrx sale. The total payout to us, including contingency
payments, was approximately $33.5 million.

         We expect to incur additional expenses related to the commercial
introduction of our BSD-2000 and MicroThermx systems, which will precede any
revenue from the sale of such systems. We project that our sales and marketing

                                       29
<PAGE>

expenses in fiscal 2007 will be consistent with fiscal 2006 to support the
commercial introduction of the BSD-2000 and MicroThermx systems.

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

         The Company has no off balance sheet arrangements as August 31, 2006.

                           FORWARD-LOOKING STATEMENTS

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

         o    our belief about the market opportunities for our products;

         o    our anticipated financial performance and business plan;

         o    our expectations regarding the commercial introduction of the
              BSD-2000 and MicroThermx systems;

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

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

         o    our belief that FDA approval for the BSD-2000 system would greatly
              contribute to our sales efforts;

         o    our development or acquisition of new technologies;

         o    our belief that our technology has application for numerous other
              medical purposes;

         o    the amount of expenses we will incur for the commercial
              introduction of the BSD-2000 and MicroThermx systems;

                                       30
<PAGE>

         o    the expectation that our need present and future sales and
              marketing forces will expand;

         o    our belief that we can acquire materials and parts from multiple
              sources on a timely basis;

         o    our belief that our current working capital and cash from
              operations will be sufficient to fund our working capital and
              capital resources needs for fiscal 2006; and

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

         We wish to caution readers that the forward-looking statements and our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated, including the factors set forth in the section entitled "Risk
Factors" included elsewhere in this report. We also wish to advise readers not
to place any undue reliance on the forward-looking statements contained in this
report, which reflect our beliefs and expectations only as of the date of this
report. We assume no obligation to update or revise these forward-looking
statements to reflect new events or circumstances or any changes in our beliefs
or expectations, other than as required by law.

ITEM 7.  FINANCIAL STATEMENTS
         --------------------


BSD MEDICAL CORPORATION

Financial Statements
As of August 31, 2006 and for the Years Ended August 31, 2006 and 2005

Together with Report of Independent Registered Public Accounting Firm


                                       31
<PAGE>



                                                         BSD MEDICAL CORPORATION
                                                   Index to Financial Statements

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




                                                                         Page

Report of Independent Registered Public Accounting Firm                   F-1


Balance Sheet                                                             F-2


Statements of Income                                                      F-3


Statements of Stockholders' Equity                                        F-4


Statements of Cash Flows                                                  F-5


Notes to Financial Statements                                             F-6



<PAGE>
                                                REPORT OF INDEPENDENT REGISTERED
                                                          PUBLIC ACCOUNTING FIRM






To the Board of Directors and Stockholders
of BSD Medical Corporation


We have audited the accompanying  balance sheet of BSD Medical  Corporation (the
Company)  as  of  August  31,  2006,  and  the  related  statements  of  income,
stockholders'  equity,  and cash flows for the years  ended  August 31, 2006 and
2005.  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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
consideration  of  internal  control  over  financial  reporting  as a basis for
designing audit  procedures that are appropriate in the  circumstances,  but not
for the purpose of expressing an opinion on the  effectiveness  of the Company's
internal  control  over  financial  reporting.  Accordingly,  we express no such
opinion. An audit also includes examining,  on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   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, 2006,  and the results of its  operations  and its cash flows for the
years ended August 31, 2006 and 2005 in conformity with U.S.  generally accepted
accounting principles.



Salt Lake City, Utah
November 29, 2006


                                                                             F-1

<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                                   Balance Sheet

                                                                 August 31, 2006
--------------------------------------------------------------------------------

        Assets
        ------

Current assets:
  Cash and cash equivalents                                      $    2,179,094
  Investments                                                        22,556,106
  Receivables, net of allowance for doubtful
    accounts of $20,000                                               1,186,800
  Related party trade receivables                                       261,543
  Inventories, net                                                    1,366,264
  Deferred tax asset                                                    178,000
  Other current assets                                                  120,277
                                                                 ---------------

        Total current assets                                         27,848,084

Property and equipment, net                                             303,034
Note receivable                                                         137,500
Patent, net of amortization of $10,678                                   21,250
                                                                 ---------------

                                                                 $   28,309,868
                                                                 ---------------

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

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

Current liabilities:
  Accounts payable                                               $      365,396
  Accrued liabilities                                                   545,113
  Income taxes payable                                                1,539,946
  Deferred revenue - current portion                                     17,912
                                                                 ---------------

        Total current liabilities                                     2,468,367
                                                                 ---------------

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

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.001 par value; 10,000,000
    authorized, no shares issued and outstanding                              -
  Common stock, $.001 par value; 40,000,000 shares
    authorized; 21,023,668 shares issued and
    outstanding                                                          21,024
  Additional paid-in capital                                         25,452,231
  Deferred compensation                                                (247,700)
  Treasury stock, at cost                                                  (234)
  Other comprehensive loss                                              (99,362)
  Retained earnings                                                     498,042
                                                                 ---------------

        Total stockholders' equity                                   25,624,001
                                                                 ---------------

                                                                 $   28,309,868
                                                                ---------------


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

<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                            Statements of Income

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


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

Revenues:
  Sales                                         $   2,209,316    $    1,033,632
  Sales to related parties                            689,086           987,472
                                                --------------------------------

                                                    2,898,402         2,021,104
                                                --------------------------------

Costs and expenses:
  Cost of sales                                     1,399,426           675,130
  Cost of sales to related parties                    317,214           644,980
  Research and development                          1,251,956           859,614
  Selling, general, and administrative              5,028,957         2,135,076
                                                --------------------------------

                                                    7,997,553         4,314,800
                                                --------------------------------

        Operating loss                             (5,099,151)       (2,293,696)
                                                --------------------------------

Other income (expense):
  Gain on sale of equity interest                  18,016,272         6,551,087
  Interest income                                   1,301,341           362,462
  Other                                               240,034             4,839
                                                --------------------------------

                                                   19,557,647         6,918,388
                                                --------------------------------

        Income before income taxes                 14,458,496         4,624,692

Income tax provision                               (5,209,000)       (1,303,000)
                                                --------------------------------

        Net income                              $   9,249,496    $    3,321,692
                                                --------------------------------

Income per common share - basic                 $        0.45    $         0.16
                                                --------------------------------

Income per common share - diluted               $        0.42    $         0.15
                                                --------------------------------

Weighted average shares - basic                    20,766,000        20,198,000
                                                --------------------------------

Weighted average shares - diluted                  22,174,000        21,453,000
                                                --------------------------------

--------------------------------------------------------------------------------
See accompanying notes to financial statements.                              F-3

<PAGE>
<TABLE>
<CAPTION>

                                                                                                        BSD MEDICAL CORPORATION
                                                                                             Statements of Stockholders' Equity

                                                                                           Years Ended August 31, 2006 and 2005
-------------------------------------------------------------------------------------------------------------------------------




                                                                       Other Com-  (Accumulated
                             Common Stock      Additional    Deferred  prehensive    Deficit)     Treasury Stock
                          ------------------    Paid-in       Compen-    Income      Retained     ---------------
                           Shares    Amount     Capital       sation     (loss)      Earnings     Shares   Amount    Total
                          -----------------------------------------------------------------------------------------------------
<C>                     <C>         <C>       <C>           <C>         <C>      <C>               <C>     <C>     <C>
Balance, September 1,
2004                    19,945,982  $ 19,946  $ 23,201,020  $  (27,808) $      - $ (12,073,146)    24,331  $ (234) $ 11,119,778

Common stock issued
 for:
  Cash                     391,188       391        74,914           -         -             -          -       -        75,305
  Services                  27,900        28        44,972           -         -             -          -       -        45,000

Stock options issued
  for services                   -         -        96,500           -         -             -          -       -        96,500

Income tax benefit
  from exercise of
  stock options                  -         -       272,945           -         -             -          -       -       272,945

Amortization of
deferred compensation            -         -             -       9,508         -             -          -       -         9,508

Increase in other
comprehensive income             -         -             -           -    36,939             -          -       -        36,939

Deferred compensation            -         -        15,750     (15,750)        -             -          -       -             -

Net income                       -         -             -           -         -     3,321,692          -       -     3,321,692
                        -------------------------------------------------------------------------------------------------------

Balance August 31,
2005                    20,365,070    20,365    23,706,101     (34,050)   36,939    (8,751,454)    24,331    (234)   14,977,667

Common stock issued
for:
  Cash                     644,991       645       423,691           -         -             -          -       -       424,336
  Services                  13,607        14        48,457           -         -             -          -       -        48,471

Income tax benefit
  from exercise of
  stock options                  -         -       972,282           -         -             -          -       -       972,282

Amortization of
deferred compensation            -         -             -      88,050         -             -          -       -        88,050

Decrease in other
comprehensive income             -         -             -           -  (136,301)            -          -       -      (136,301)

Deferred compensation            -         -       301,700    (301,700)        -             -          -       -             -

Net income                       -         -             -           -         -     9,249,496          -       -     9,249,496
                        -------------------------------------------------------------------------------------------------------

Balance, August 31,
2006                    21,023,668  $ 21,024  $ 25,452,231  $ (247,700) $(99,362)  $   498,042     24,331  $ (234) $ 25,624,001
                        -------------------------------------------------------------------------------------------------------




-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements                                                                              F-4
</TABLE>

<PAGE>

                                                         BSD MEDICAL CORPORATION
                                                        Statements of Cash Flows

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

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

Cash flows from operating activities:
  Net income                                    $   9,249,496    $    3,321,692
  Adjustments to reconcile net income to
    net cash used in operating activities:
     Provision for doubtful accounts                  (22,500)           42,500
     Depreciation and amortization                     86,860            76,991
     Gain on sale of investment in TherMatrx      (18,016,272)       (6,551,087)
     Gain on sale of property                               -            (1,050)
     Amortization of deferred compensation             88,050             9,508
     Stock issued for services                         48,471           141,500
     Decrease (Increase) in:
       Receivables                                   (922,163)         (286,876)
       Note receivable                               (137,500)                -
       Inventories                                   (231,911)         (393,937)
       Deferred tax asset                             (74,000)          725,000
       Other current assets                            12,464           (81,675)
     Increase (decrease) in:
       Accounts payable                               252,583            13,682
       Income tax payable                           2,271,469           513,704
       Accrued liabilities                            296,737          (175,539)
       Deferred revenue                               228,084           (39,895)
       Deferred tax liability                         (13,000)          (38,000)
                                                --------------------------------

        Net cash used in
        operating activities                       (6,883,132)       (2,723,482)
                                                --------------------------------

Cash flows from investing activities:
  Proceeds from sale of investment in
    TherMatrx                                      18,016,272         6,551,087
  Purchase of investments                         (10,073,884)      (12,581,584)
  Proceeds from sale of property                            -             1,050
  Purchase of property and equipment                 (213,172)         (110,856)
                                                --------------------------------

        Net cash provided by (used in)
        investing activities                        7,729,216        (6,140,303)
                                                -------------------------------

Cash flows from financing activities-
  proceeds from issuance of common stock              424,336            75,305
                                                --------------------------------

Increase (decrease) in cash and cash
  equivalents                                       1,270,420        (8,788,480)

Cash and cash equivalents, beginning of year          908,674         9,697,154
                                                --------------------------------

Cash and cash equivalents, end of year          $   2,179,094    $      908,674
                                                --------------------------------


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

<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements

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

1.   Organization      Organization
     and               BSD Medical Corporation (the Company) was incorporated in
     Significant       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 held
                       an interest in TherMatrx until July 15, 2004. On July 15,
                       2004,  TherMatrx,  Inc.  was  sold  to  American  Medical
                       Systems  Holdings,  Inc. (AMS). The Company's part of the
                       total  proceeds from this sale was  approximately  25%. A
                       portion  of  the  payout  from  the  sale  was  based  on
                       contingency  payments.  By the close fiscal year 2006 the
                       Company had received the last of the contingency payments
                       from the TherMatrx sale. The total payout to the Company,
                       including contingency  payments,  was approximately $33.5
                       million.

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

                       Investments
                       Investment with scheduled  maturities  greater than three
                       months,  but not greater  than one year,  are recorded as
                       short-term   investments.   Management  classified  these
                       investments at August 31, 2006 as available-for sale. The
                       short-term  investments are recorded at fair value,  with
                       net  unrealized   gains  and  losses  reported  as  other
                       comprehensive  income in the statements of  stockholders'
                       equity.  Realized  gains and losses are  included  in the
                       statements of income.

                       Trade Accounts Receivable
                       Trade accounts receivable are carried at original invoice
                       amount less an  estimate  made for  doubtful  receivables
                       based on a review of all outstanding amounts on a monthly
                       basis.  Management  estimates an  allowance  for doubtful
                       accounts by  identifying  troubled  accounts and by using
                       historical  experience  applied to an aging of  accounts.
                       Trade  accounts  receivable  are  written off when deemed
                       uncollectible. Recoveries of trade receivables previously
                       written off are recorded when  received.  Interest is not
                       charged on trade receivables that are outstanding  beyond
                       their due date.


--------------------------------------------------------------------------------
                                                                             F-6
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization      Inventories
     and               Parts and supplies inventories are stated at the lower of
     Significant       cost or market. Cost is determined using the average cost
     Accounting        method.  Work-in-process and finished goods are stated at
     Policies          the  lower  of the  accumulated  manufacturing  costs  or
     Continued         market.  Provisions,  when  required,  are made to reduce
                       excess and obsolete  inventories  to their  estimated net
                       realizable value. The provision was $40,000 at August 31,
                       2006.

                       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
                       following estimated useful lives of the assets.

                               Equipment                              2-5 years
                               Furniture and fixtures                   5 years
                               Leasehold improvements                  10 years

                       Leasehold  improvements  are depreciated over the shorter
                       of their  estimated  useful life or the remaining term of
                       the lease.  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 had an  ownership  interest in  TherMatrx,  a
                       corporate   joint   venture   that  is   engaged  in  the
                       manufacture and sale of medical  devices.  The investment
                       was  accounted  for on the equity  method of  accounting.
                       Because the Company's percent share of accumulated losses
                       in TherMatrx  had exceeded  its  original  investment  no
                       asset was recorded on the balance sheet. On July 15, 2004
                       TherMatrx,  Inc.  was sold to  American  Medical  Systems
                       Holdings,  Inc.  (AMS).  The Company's  part of the total
                       proceeds from this sale was approximately  25%. A portion
                       of the  payout  from the sale  was  based on  contingency
                       payments.  By the close of fiscal  year 2006 the  Company
                       had received the last of the  contingency  payments  from
                       the  TherMatrx  sale.  The total  payout to the  Company,
                       including contingency  payments,  was approximately $33.5
                       million.

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


--------------------------------------------------------------------------------
                                                                             F-7
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization      Warranty Reserve
     and               The Company provides limited  warranties to its customers
     Significant       for products sold.  Estimated future warranty obligations
     Accounting        are  accrued  each  period.  As of August 31,  2006,  the
     Policies          accrued  warranty  reserve  was  approximately   $31,000.
     Continued         During the fiscal  years ended  August 31, 2006 and 2005,
                       total   warranty   expense  was   $24,763  and   $21,662,
                       respectively.

                       Income Taxes
                       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 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 and warrants to
                       purchase  1,809,051 and 2,122,934  shares of common stock
                       at  prices  ranging  from $.37 to $5.76 and $.10 to $2.54
                       per share were  outstanding  at August 31, 2006 and 2005,
                       respectively.

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

                                                     2006              2005
                                                --------------------------------
                       Weighted average number
                         of shares outstanding
                         - basic                   20,766,000        20,198,000
                       Dilutive effect of stock
                         options                    1,408,000         1,255,000
                                                --------------------------------

                       Weighted average number
                         of shares outstanding,
                         assuming dilution         22,174,000        21,453,000
                                                --------------------------------


--------------------------------------------------------------------------------
                                                                             F-8
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization      Stock-Based Compensation
     and               The  Company   accounts  for  stock  options  granted  to
     Significant       employees   under   the   recognition   and   measurement
     Accounting        principles  of APB Opinion No. 25,  Accounting  for Stock
     Policies          Issued to Employees, and related Interpretations, and has
     Continued         adopted the  disclosure-only  provisions  of Statement of
                       Financial    Accounting   Standards   (SFAS)   No.   123,
                       "Accounting for Stock-Based  Compensation".  Accordingly,
                       compensation   costs  are  recognized  in  the  financial
                       statements  for options  granted  with an exercise  price
                       less than the market value of the underlying common stock
                       on the date of grant.  During the years ended  August 31,
                       2006 and 2005, the Company recognized $88,050 and $9,508,
                       respectively,   related  to  stock  options   granted  to
                       employees  with an  exercise  price  less than the market
                       value of the underlying  common stock.  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,
                                                --------------------------------
                                                     2006             2005
                                                --------------------------------

Net income - as reported                        $   9,249,496    $    3,321,692

Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects                                            88,050             9,508

Deduct: total stock based employee compensation
  expense determined under fair value based
  method for all awards, net of related tax
  effects                                            (749,586)         (504,839)
                                                --------------------------------

Net income - pro forma                          $   8,587,960    $    2,826,361
                                                --------------------------------
Earnings per share:
  Basic - as reported                           $         .45    $          .16
                                                --------------------------------
  Basic - pro forma                             $         .41    $          .14
                                                --------------------------------

  Diluted - as reported                         $         .42    $          .15
                                                --------------------------------
  Diluted  - pro forma                          $         .39    $          .13
                                                --------------------------------



--------------------------------------------------------------------------------
                                                                             F-9
<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                                       2006              2005
                                                --------------------------------

                       Expected dividend yield  $           -    $            -
                       Expected stock price
                          volatility                68% - 76%         71% - 83%
                       Risk-free interest rate    4.0% - 5.0%       3.3% - 4.1%
                       Expected life of options   3 - 5 years       3 - 5 years

                       The weighted average fair value of options granted during
                       the years  ended  August 31, 2006 and 2005 were $3.50 and
                       $1.97, respectively.

                       Revenue Recognition
                       The Company  recognizes  revenue  from the sale of cancer
                       treatment  systems,  the  sale of parts  and  accessories
                       related  to the  cancer  treatment  systems,  the sale of
                       software   license   rights,    providing   manufacturing
                       services,   providing   training,   and  service  support
                       contracts.  Product sales were $ 2,706,214 and $1,844,321
                       for  the  years   ended   August   31,   2006  and  2005,
                       respectively.  Service  revenue was $192,188 and $176,783
                       for  the  years   ended   August   31,   2006  and  2005,
                       respectively.

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


--------------------------------------------------------------------------------
                                                                            F-10
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization      Revenue Recognition - Continued
     of                Revenue  from  the sale of  software  license  rights  is
     Significant       recognized when a valid purchase order has been received,
     Accounting        the software  license has been delivered to the customer,
     Policies          the  selling   price  is  fixed  or   determinable,   and
     Continued         collection is reasonably  assured.  Delivery is deemed to
                       have occurred if diskettes  have been shipped,  or if the
                       software has been delivered  electronically  by email. To
                       date,  the sale of software  license  rights has not been
                       material.

                       Revenue from  manufacturing  services is recorded when an
                       agreement with the customer exists for such services, the
                       services have been provided, and collection is reasonably
                       assured.

                       Revenue  from  training  services  is  recorded  when  an
                       agreement with the customer exists for such training, the
                       training  services have been provided,  and collection is
                       reasonably assured.

                       Revenue from service support contracts is recognized on a
                       straight-line basis over the term of the contract,  which
                       approximates recognizing it as it is earned.

                       The Company's revenue  recognition policy is the same for
                       sales to both related  parties and  non-related  parties.
                       The Company provides the same products and services under
                       the same terms for  non-related  parties as with  related
                       parties.

                       Sales to  distributors  are recognized in the same manner
                       as sales to end-user customers.

                       Deferred  revenue and customer  deposits  payable include
                       amounts from service  contracts as well as cash  received
                       for the sales of products, which have not been shipped.

--------------------------------------------------------------------------------
                                                                            F-11
<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.

                       The  Company   has  cash  in  the  bank  and   short-term
                       investments  that 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.

                       Advertising and Promotion
                       Advertising  and promotion  costs,  which are principally
                       included in sales  expenses,  are  expensed as  incurred.
                       Advertising  and  promotion   expense  was  approximately
                       $758,000 and $103,000 for the years ended August 31, 2006
                       and 2005, respectively.

                       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.

                       Comprehensive Income (loss)
                       Comprehensive  income  (loss)  consists of net income and
                       net  unrealized  gains  and  losses  from  the  Company's
                       investments  classified as  available-for  sale, which is
                       reported on the accompanying  statements of stockholders'
                       equity as a component of other comprehensive income.

                       Reclassifications
                       Certain amounts in the prior year have been  reclassified
                       to conform with the current year presentation.


--------------------------------------------------------------------------------
                                                                            F-12
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

2.   Detail of         Details  of certain  balance sheet  accounts as of August
     Certain           31,  2006,  are as follows:
     Balance
     Sheet             Receivables:
     Accounts
                        Trade receivables - non-related party    $    1,076,006
                        Other receivables                                 8,000
                        Accrued interest receivable                     122,794
                        Less allowance for doubtful accounts            (20,000)
                                                                 ---------------

                                                                 $    1,186,800
                                                                 ---------------
                       Inventories:
                        Parts and supplies                       $      711,552
                        Work-in-process                                 641,608
                        Finished goods                                   53,104
                        Reserve for obsolete inventory                  (40,000)
                                                                 ---------------

                                                                 $    1,366,264
                                                                 ---------------
                       Accrued liabilities:
                        Accrued vacation                         $      192,203
                        Accrued taxes payable                            60,311
                        Customer deposits                               100,000
                        Other accrued expenses                          192,599
                                                                 ---------------

                                                                 $      545,113
                                                                 ---------------

3.   Investments       As of August  31,  2006,  investments  consist  of mutual
                       funds. All investments at August 31, 2006 were considered
                       available-for-sale  securities.  As of August  31,  2006,
                       investments  had a cost of  $22,655,468,  fair  value  of
                       $22,556,106  and  unrealized  losses  of  $99,362.  As of
                       August 31, 2005,  investments  had a cost of $12,581,584,
                       fair  value  of  $12,618,523  and  unrealized   gains  of
                       $36,939.  No realized gains or losses on investments were
                       recorded in the years ended August 31, 2006 and 2005.


--------------------------------------------------------------------------------
                                                                            F-13
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

4.   Property              Property and equipment consists of the following:
     and
     Equipment             Equipment                             $      997,053
                           Furniture and fixtures                       298,597
                           Leasehold improvements                        17,420
                                                                 ---------------

                                                                      1,313,070

                           Less accumulated depreciation             (1,010,036)
                                                                 ---------------

                                                                 $      303,034
                                                                 ---------------

                       Depreciation  expense for the years ended August 31, 2006
                       and 2005 totaled $84,982 and $75,113, respectively.

5.   Note              During  the year  ended  August  31,  2006,  the  Company
     Receivable        entered into a sales  agreement with one of its customers
                       with  extended  payment  terms.  These terms  allowed for
                       $137,500 of the purchase price to be due within two years
                       from the date of the sale.  Accordingly,  this amount has
                       been recorded as non-current and interest  imputed on the
                       amount calculated at market rates.

6.   Patent            The Company has one patent  recorded  net of  accumulated
                       amortization.   The  patent  is  being   amortized  on  a
                       straight-line  basis over its estimated  useful life with
                       an amortization period of 17 years.  Amortization expense
                       was $1,878 for each of the years  ended  August 31,  2006
                       and 2005.  For each of the next five years,  amortization
                       expense  relating  to the patent is expected to be $1,878
                       per year.

--------------------------------------------------------------------------------
                                                                            F-14
<PAGE>
                                                        BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

7.   Operating         The  Company  renewed its  building  lease in November of
     Lease             2002  for  five  years,   which   includes   payments  of
                       approximately  $82,000 per year,  adjusted  annually  for
                       increases  in the cost of  living  based on the  Consumer
                       Price Index for Urban Consumers.

                       Future  minimum lease payments at August 31, 2006, are as
                       follows:

                           Years Ending August 31,
                                                                      Amount
                                                                 ---------------
                                2007                             $       92,174
                                2008                                     23,213
                                                                 ---------------

                                                                 $      115,387
                                                                 ---------------

                       Annual rent expense on this operating lease for the years
                       ended  August 31, 2006 and 2005  amounted to $ 89,393 and
                       $86,400, respectively.

8.   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 of August  31,  2006,  the  Company  had  $235,412  of
                       deferred revenue.

9.   Major             The   Company   had  the   following   customer   revenue
     Customers         concentrations  for the years  ended  August 31, 2006 and
                       2005:

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

                       Customer A                      45.48%            29.84%
                       Customer B                      23.77%            48.55%
                       Customer C                      10.38%                *

                       *Sales to customers were less than 10%.


--------------------------------------------------------------------------------
                                                                            F-15
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

10.  Income            The components of the income tax (provision)  benefit are
     Taxes             as follows:

                                                       Years Ended August 31,
                                                --------------------------------
                       Current:
                            Federal             $  (4,606,000)   $     (452,000)
                            State                    (690,000)         (164,000)
                                                --------------------------------

                                                   (5,296,000)         (616,000)
                                                --------------------------------
                       Deferred:
                            Federal                    87,000          (687,000)
                                                --------------------------------

                                                $  (5,209,000)   $   (1,303,000)
                                                --------------------------------

                       The  income  tax  (provision)  benefit  differs  from the
                       amount computed at federal statutory rates as follows:

                                                       Years Ended August 31,
                                                --------------------------------
                                                     2006              2005
                                                --------------------------------
                       Income tax benefit
                         (expense) at           $  (5,393,000)   $   (1,711,000)
                         statutory rate
                       Change in estimate of
                         use of net operating
                         loss carryforwards                 -           284,000
                       Research and development
                          tax credits                 190,000            76,000
                       Other                           (6,000)           48,000
                                                --------------------------------
                                                $  (5,209,000)   $   (1,303,000)
                                                --------------------------------

                       Deferred tax assets  (liabilities)  are  comprised of the
                       following at August 31, 2006:

                       Accruals and reserves                     $       96,000
                       Deferred revenue                                  80,000
                       Depreciation                                     (55,000)
                       Deferred compensation expense                     57,000
                                                                 ---------------

                                                                 $      178,000
                                                                 ---------------

--------------------------------------------------------------------------------
                                                                            F-16
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

11.  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 was amended in
                       February of 2006 to provide an annual retainer of $30,000
                       to each  non-employee  director with the exception of the
                       Audit Committee  Chairman who is to receive $35,000.  The
                       annual  compensation  plan  calls for  payment to be made
                       twice a year with each payment  consisting  of $15,000 in
                       cash and $15,000 in common  stock,  with the exception of
                       the Audit Committee Chairman who is to receive $20,000 in
                       cash and  $15,000  in  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  30,000
                       options each year at an exercise price 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-17
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

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

Outstanding at September 1, 2004        2,334,553     102,980   $  .10 to 2.54

     Granted                              225,000           -     1.20 to 2.54
     Exercised                           (401,619)          -       .10 to .66
     Forfeitures                          (35,000)          -              .10
                                    ------------------------------------------

Outstanding at August 31, 2005          2,122,934     102,980      .10 to 2.54
     Granted                              364,368           -     2.44 to 5.76
     Exercised                           (588,251)   (102,980)    .10 to .2.54
     Forfeitures                          (90,000)          -      .54 to 4.92
                                    ------------------------------------------

Outstanding at August 31, 2006          1,809,051           -   $  .37 to 5.76
                                    ------------------------------------------

                       The following table  summarizes  information  about stock
                       options and warrants outstanding at August 31, 2006:

                          Options and Warrants           Options and Warrants
                              Outstanding                    Outstanding
                 ---------------------------------------------------------------
                                Weighted
                                 Average
                                Remaining    Weighted                 Weighted
      Range of                 Contractual   Average                  Average
      Exercise      Number        Life       Exercise      Number     Exercise
       Prices     Outstanding    (Years)      Price     Exercisable    Price
    ----------------------------------------------------------------------------

    $     .37-81     411,348      3.86     $     .65       393,230   $     .65
       1.11-2.74   1,168,335      7.83          1.44       808,827        1.31
       2.75-5.76     229,368      9.42          5.14        26,820        5.11
    ----------------------------------------------------------------------------

    $   .37-5.76   1,809,051      7.13     $    1.72     1,228,877   $    1.18
    ----------------------------------------------------------------------------

12.  Foreign           During  the years  ended  August 31,  2006 and 2005,  the
     Customer          Company had sales to a European  entity  controlled  by a
     and Major         significant  stockholder  and  member  of  the  Board  of
     Customer          Directors   of  the  Company  of  $689,086  and  $987,472
                       respectively.

--------------------------------------------------------------------------------
                                                                            F-18
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

13.  Related Party     At August 31, 2006, accounts receivable includes $261,543
     Transactions      due  from  an   entity   controlled   by  a   significant
     Not otherwise     stockholder and member of the Board of Directors.
     disclosed

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

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

                        Income taxes            $   2,576,605    $      351,354
                                                --------------------------------

                       During the year ended August 31, 2006, the Company:

                           o    Had other comprehensive loss of $136,301.

                           o    Recorded deferred compensation of $301,700.

                           o    Recorded  an  increase  in  additional  paid  in
                                capital of $972,282 and  corresponding  decrease
                                to  income  taxes  payable  related  to the  tax
                                benefit from the exercise of stock options.

                       During the year ended August 31, 2005, the Company:

                           o    Had other comprehensive income of $36,939.

                           o    Recorded deferred compensation of $15,750.

                           o    Recorded  an  increase  in  additional  paid  in
                                capital of $272,945 and a corresponding decrease
                                to  income  taxes  payable  related  to the  tax
                                benefit  from the  exercise  of  stock  options.

--------------------------------------------------------------------------------
                                                                            F-19
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

15.  Commitments       The  Company  has  an  employment   agreement   with  the
     and               President of the Company. The agreement provides that the
     Contingencies     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.  There was  approximately  $3,500 in accrued
                       royalties as of August 31, 2006. Royalty expense amounted
                       to  approximately  $6,180 and $4,710 for the years  ended
                       August 31, 2006 and 2005, respectively.

16.  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, 2006 and
                       2005  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-20
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

17.  Recent            In December  2004,  the  Financial  Accounting  Standards
     Accounting        Board  ("FASB")  issued  Financial   Accounting  Standard
     Pronounce-        ("SFAS") No. 123(R), Share-Based Payment, an amendment of
     ments             FASB  Statements No. 123 and 95. SFAS No. 123(R) replaces
                       SFAS No. 123,  Accounting for  Stock-Based  Compensation,
                       and supersedes  APB Opinion No. 25,  Accounting for Stock
                       Issued to Employees. This statement requires companies to
                       recognize  the  fair  value of stock  options  and  other
                       stock-based   compensation  to  employees   prospectively
                       beginning  with fiscal periods  beginning  after December
                       15, 2005. This means that the Company will be required to
                       implement  SFAS  No.  123(R)  no later  than the  quarter
                       beginning   September  1,  2006.  The  Company  currently
                       measures stock-based  compensation in accordance with APB
                       Opinion   No.  25  as   discussed   above.   The  Company
                       anticipates  adopting the modified  prospective method of
                       SFAS No.  123(R) on September 1, 2006.  The impact on the
                       Company's  financial  condition or results of  operations
                       will  depend on the  number  and  terms of stock  options
                       outstanding  on the  date of  change,  as well as  future
                       options  that  may  be  granted.   However,  the  Company
                       believes  the  adoption  of SFAS  No.  123(R)  may have a
                       material effect on the Company's  financial  position and
                       results of operations.

                       The FASB has issued Statement No. 154, Accounting Changes
                       and Error  Corrections.  This new  standard  replaces APB
                       Opinion No. 20,  Accounting  Changes,  and FASB Statement
                       No. 3, Reporting  Accounting Changes in Interim Financial
                       Statements.  Among other  changes,  SFAS No. 154 requires
                       that  a  voluntary  change  in  accounting  principle  be
                       applied  retrospectively  with all prior period financial
                       statements  presented  on the new  accounting  principle,
                       unless it is  impracticable  to do so.  SFAS No. 154 also
                       provides that (1) a change in method of  depreciating  or
                       amortizing a long-lived  nonfinancial  asset be accounted
                       for as a  change  in  estimate  (prospectively)  that was
                       effected  by a change in  accounting  principle,  and (2)
                       correction  of  errors  in  previously  issued  financial
                       statements  should  be  termed a  "restatement."  The new
                       standard  is  effective   for   accounting   changes  and
                       correction of errors made in fiscal years beginning after
                       December 15,  2005.  Early  adoption of this  standard is
                       permitted for accounting changes and correction of errors
                       made in fiscal years  beginning  after June 1, 2005.  The
                       Company anticipates adopting SFAS No. 154 on September 1,
                       2006,  and  does not  believe  the  adoption  of this new
                       accounting pronouncement will result in a material impact
                       on  the  Company's   financial  position  or  results  of
                       operations.

--------------------------------------------------------------------------------
                                                                            F-21
<PAGE>
                                                         BSD MEDICAL CORPORATION
                                                   Notes to Financial Statements
                                                                       Continued

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

17.  Recent            In July 2006, the FASB issued FIN 48, entitled Accounting
     Accounting        for  Uncertainty  in Income  Taxes.  FIN 48 clarifies the
     Pronounce-        accounting for uncertainty in income taxes  recognized in
     ments             financial  statements  in  accordance  with SFAS No. 109,
     Continued         entitled Accounting for Income Taxes. This Interpretation
                       prescribes  a  recognition   threshold  and   measurement
                       attribute for the  financial  statement  recognition  and
                       measurement  of a tax  position  taken or  expected to be
                       taken in a tax return.  FIN 48 also provides  guidance on
                       derecognition,  classification,  interest and  penalties,
                       accounting in interim periods, disclosure and transition.
                       We   are   currently    evaluating    the   impact   this
                       Interpretation  will  have on our  financial  statements.
                       This  Interpretation  will be effective in the  Company's
                       financial   statements  for  the  fiscal  year  beginning
                       September 1, 2007.

                       In September 2006, the FASB issued SFAS No. 157, entitled
                       Fair Value Measurements. SFAS No. 157 defines fair value,
                       establishes  a framework for  measuring  fair value,  and
                       requires   enhanced    disclosures   about   fair   value
                       measurements. SFAS No. 157 requires companies to disclose
                       the fair value of their financial  instruments  according
                       to a fair value  hierarchy  as  defined in the  standard.
                       Additionally,  companies are required to provide enhanced
                       disclosure regarding financial  instruments in one of the
                       categories  [level 3], including a reconciliation  of the
                       beginning and ending  balances  separately for each major
                       category  of  assets  and  liabilities.  SFAS No.  157 is
                       effective  for  financial  statements  issued  for fiscal
                       years  beginning  after  November 15,  2007,  and interim
                       periods  within those fiscal  years.  We believe that the
                       adoption of SFAS No. 157 will not have a material  impact
                       on the financial statements.


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

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

         None.

ITEM 8A. CONTROLS AND PROCEDURES
         -----------------------

         Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that
evaluation, the principal executive officer and principal financial officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.

         During the fourth fiscal quarter, there has been no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) or
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

ITEM 8B. OTHER INFORMATION
         -----------------

         None.


                                       32
<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 executive officers serve at the pleasure of the
Board of Directors. There are no family relationships among any of our directors
or officers.

        Name                     Age           Position
------------------------------- ------ -----------------------------------------
Paul F. Turner, MSEE(1)          59    Chairman of the Board, Senior Vice
                                       President, and Chief Technology Officer

Hyrum A. Mead, MBA(1)            59    President and Member of the Board of
                                       Directors

Gerhard W. Sennewald, Ph.D.      70    Member of the Board of Directors

Michael Nobel, Ph.D.             66    Member of the Board of Directors

Douglas P. Boyd, Ph.D.           65    Member of the Board of Directors

Steven G. Stewart                58    Member of the Board of Directors
_______________

(1) Executive officers of BSD.

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

                                       33
<PAGE>

         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.

         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 that 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.

         Douglas P. Boyd, Ph.D. currently serves as Chairman of the Board of XLR
Medical, Inc., as CEO of TeleSecurity Sciences, Inc., as Managing Director of
Imaging Technology Ventures, Inc., and on the Board of Directors of Imaging
Technology Group, Inc., TechniScan, Inc. and Health Address, Inc. He is
internationally known as an expert in radiology and computed tomography ("CT")
imaging systems, and has pioneered the development of fan-beam CT scanners,
Xenon detector arrays and EBT scanners. Dr. Boyd has been awarded 13 U.S.
patents. He is an Adjunct Professor of Radiology at the University of
California, San Francisco, has published more than 100 scientific papers and is
a frequent speaker at universities and symposia.

         Steven G. Stewart, CPA, served as Chief Financial Officer for
Headwaters, Inc. (a New York Stock Exchange Company) from July 1998 until
October 2005 when he became the Treasurer and subsequently the Director of
Financial Affairs. Previously, Mr. Stewart served as a business assurance
partner for PricewaterhouseCoopers LLP (formerly Coopers & Lybrand LLP), and as
an audit partner with Ernst & Young (formerly Arthur Young), including service
as the Salt Lake City office Director of High Technology and Entrepreneurial
Services. Mr. Stewart's involvement with Headwaters is part-time now and will be
through March 2009 when he will fully retire from Headwaters.

         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
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, 2006 our
executive officers, directors, and greater than 10% stockholders complied with
all applicable filing requirements.

                                       34
<PAGE>

COMPOSITION OF THE BOARD

         The Board of Directors of the Company currently consists of six
directors. Directors are elected at each annual meeting of stockholders to serve
until the next annual meeting of stockholders or until their successors are duly
elected and qualified. There are no family relationships among any of the
Company's directors, officers or key employees.

Affirmative Determinations Regarding Director Independence

         The Board of Directors has determined each of the following directors
to be an "independent director" as such term is defined in Section 121A of the
Rules of the American Stock Exchange:

                                                  Douglas P. Boyd
                                                  Steven G. Stewart
                                                  Michael Nobel

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

         During fiscal year 2006, the Company's Board of Directors met four
times and no director attended fewer than 75% of meetings of the Board or any of
the Board committees of which a director was a member.

         The Board of Directors has formed the following committees:

         The Audit Committee. The Audit Committee, which held four meetings
during fiscal year 2006, is responsible for reviewing and monitoring the
Company's financial statements and internal accounting procedures, recommending
the selection of independent auditors by the Board, evaluating the scope of the
annual audit, reviewing audit results, consulting with management and the
Company's independent auditor prior to presentation of financial statements to
stockholders and, as appropriate, initiating inquiries into aspects of the
Company's internal accounting controls and financial affairs. The Board of
Directors has adopted a written audit committee charter.

         The members of the Audit Committee are Messrs. Sennewald, Boyd, Stewart
and Nobel. Mr. Stewart is currently serving as the audit committee chairman and
financial expert. All members of the Audit Committee are independent directors,
except Mr. Sennewald.

         The Nominating Committee. The Company does not have a standing
nominating committee. Each director participates in decisions relating to making
the Company's nominations for directors. The Board of Directors believes that,
considering the size of the Company and the Board of Directors, nominating
decisions can be easily made on a case-by-case basis and there is no need for
the added formality of a nominating committee. Based on criteria established by
the American Stock Exchange relating to director independence, Messrs. Stewart,
Boyd and Nobel are the Company's only independent directors.

         The Board of Directors does not have an express policy with regard to
the consideration of any director candidates since the Board believes that it
can adequately evaluate nominees on a case-by-case basis. The Board has not
previously received any recommendations for director candidates from

                                       35
<PAGE>

stockholders, and has not adopted a formal process for considering director
candidates who may be recommended by stockholders. However, the Company's policy
is to give due consideration to any and all such candidates, and in evaluating
director nominees, the Board considers the appropriate size of the Board, the
needs of the Company, the skills and experience of its directors, and a
candidate's familiarity with the Company's industry. The Company does not pay
fees to any third parties to assist it in identifying potential nominees.

         Although the Company does not have a formal policy regarding attendance
by directors at the Company's Annual Meeting, it encourages directors to attend.
The Board will give consideration during the upcoming year to establishing a
formal policy so as to maximize attendance by directors, taking into account the
directors' schedules and the timing requirements of applicable law.

         The Compensation Committee. The Company does not have a standing
compensation committee. The independent directors of the Board act as a
committee on compensation issues.

COMMUNICATIONS WITH DIRECTORS

         The Company has not adopted a formal process for stockholder
communications with the Board. Nevertheless, the Company has tried to ensure
that the views of stockholders are heard by the Board or individual directors,
as applicable, and that appropriate responses are provided to stockholders in a
timely manner. The Company believes its responsiveness to stockholder
communications to the Board has been good.

EXECUTIVE OFFICERS

         The following table presents information as of August 31, 2006
regarding the current executive officers of the Company:

       Name                      Age                 Position
       ----                      ---                 --------

Paul F.  Turner, MSEE            59    Chairman of the Board, Senior VP and
                                       Chief Technology Officer

Hyrum A.  Mead, MBA              59    President

         Information on the business background of Paul F. Turner and Hyrum A.
Mead is set forth above under the caption "Election of Directors."

SIGNIFICANT EMPLOYEES

         In addition to the officers and directors identified above, the Company
expects the following individuals to make significant contributions to the
Company's business during fiscal 2007:

       Name                      Age                 Position
       ----                      ---                 --------
Dixie Toolson Sells              56    Vice President of Regulatory Affairs

Ray Lauritzen                    56    Vice President of Field Service

                                       36
<PAGE>

Brian L. Ferrand                 51    Vice President of Sales

Richard A. White                 51    Vice President of Business Development

         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.

         Brian L. Ferrand, joined BSD Medical as Vice President of Sales in
2005. Previously, Mr. Ferrand served as Vice President of Sales and as a
corporate officer of Merit Medical Systems, Inc. (a company traded on NASDAQ)
from 1993 until October 2004. Previously Mr. Ferrand served as Director of Sales
(1992-1993) and as a National Sales Manager (1991-1992) for Merit Medical. Merit
Medical Systems is a producer of medical products used in Cardiology and
Radiology sold on a worldwide basis.

         Richard A. White, joined BSD Medical in 2004, and serves as Vice
President of Business Development, looking for growth opportunities for the
company, as well as overseeing the marketing and reimbursement efforts. Richard
has been deeply involved in business development and growth since obtaining his
degree in international business at The Garvin School of International
Management "Thunderbird" in 1980. He has played a key role in the founding of
new companies, has led a national sales organization selling large capital
equipment in power control systems and served as International Sales Manager for
Merit Medical Systems, a leading manufacturer and marketer of products used in
diagnostic and interventional cardiology and radiology procedures.

CODE OF ETHICS

         We have adopted a Code of Ethics that applies to all employees,
including our principal executive officers. Our Code of Ethics is available on
our website (www.bsdmc.com) on our investor information webpage. We intend to
post amendments to or waivers from our Code of Ethics (to the extent applicable
to our chief executive officer, principal financial officer or principal
accounting officer) on our website.

                                       37
<PAGE>

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 2006, 2005, and 2004.
<TABLE>
<CAPTION>

                                                      SUMMARY COMPENSATION TABLE

-------------------------------------- ------- ----------------------------- -------------------------------
                                               Annual Compensation           Long-Term Compensation Awards
-------------------------------------- ------- --------------- ------------- -------------------------------
<S>                                    <C>     <C>             <C>           <C>
Name and Principal Position            Year    Salary ($)      Bonus ($)     Securities Underlying Options
                                                                             / SARs (#)
-------------------------------------- ------- --------------- ------------- -------------------------------
Paul Turner,                           2006    $172,160        $500          300,000 (1)
Chairman of the Board, Senior Vice     2005    $155,000        $500
President, Chief Technology Officer    2004    $149,990        $400
-------------------------------------- ------- --------------- ------------- -------------------------------
Hyrum A. Mead,                         2006    $181,660        $500          400,000 (1)
President, Director                    2005    $165,000        $500
                                       2004    $148,325        $400
-------------------------------------- ------- --------------- ------------- -------------------------------
</TABLE>

(1) There were no stock options granted to Messrs. Turner or Mead in fiscal 2006
and 2005. There were stock options granted to Messrs. Turner of 300,000 and Mead
of 400,000 during fiscal 2004 for BSD Medical Common Stock.

         In fiscal 2006 Mr. Mead exercised 15,252 options and none were
exercised by Mr. Turner. In fiscal 2005, Mr. Turner exercised 180,953 stock
options and Mr. Mead exercised 25,000 stock options. No stock options were
exercised during fiscal year 2004 by Messrs. Turner and Mead.

         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.

COMPENSATION OF DIRECTORS

         During fiscal 2006 we revised our 1998 Director Stock Option Plan to
provide an annual retainer in the amount of $30,000 to each non-employee
director other than the Chair of the Audit Committee, who is to receive $35,000.
Of the Annual Retainer, a cash payment of $15,000 is to be paid in cash and the
balance is to be paid in the form of restricted shares of our common stock to
each Non-Employee Director, other that the Chair of the Audit Committee, who is
to receive a cash payment of $20,000, payable in equal installments on March 1
and September 1 of each year in which each Non-Employee Director continues to
serve as a member of the Board. The portion of the annual retainer that is paid
in restricted stock will be determined by reference closing price for the Common
Stock on the day of the payment. Each non-employee director will receive an
annual option to purchase 30,000 restricted shares of our common stock at a
purchase price calculated with respect to the Annual Retainer. The options vest
ratably over 5 years and expire in 10 years.

                                       38
<PAGE>

         For the period of September 1, 2003 through February 28, 2004 these
directors were compensated with payments of $5,000 in cash and issued common
stock in the amount of 3,546 shares. For the period March 1, 2004 through August
31, 2004, the directors were paid $5,000 in cash and issued 3,571 shares of
common stock. For the period September 1, 2004 to February 28, 2005 the
directors were compensated with payments of $5,000 in cash and issued 2,183
shares of restricted common stock and for the period March 1, 2005 to August 31,
2005 they were issued $5,000 in cash and 2,049 shares of restricted stock for
their services with the exception of Douglas Boyd who was issued a prorated
payment of $3,050 in cash and 1,250 shares of common stock based on his start
date on the Board of Directors of May 12, 2005. On September 20, 2005 these
directors were issued a stock option grant of 25,000 shares based on a strike
price of $2.44 per share for their services for FYE 2006. On March 1, 2006 each
non-employee director received a cash payment of $7,500 and 1,531 shares of
restricted stock for their services from September 1, 2005 to February 28, 2006,
other than the Audit Committee Chair who received a pro-rated payment of $2,659
in cash, 543 shares of restricted stock and a stock option grant of 16,368
shares at a strike price of $5.76 per share. On September 1, 2006 these
directors were issued a stock option grant of 30,000 shares based on a strike
price of $4.77 per share for their services for fiscal 2007. Each director was
paid for their services from March 1, 2006 to August 31, 2006 with a cash
payment of $7,500 and 1,572 shares of restricted stock, other than the Audit
Committee Chair, who received a cash payment of $10,000 and 1,572 restricted
stock.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2006 AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                  Number of Shares
                                                                     Underlying                Value of Unexercised
                                                               Unexercised Options at         In-the-Money Options at
                                                                  August 31, 2005                 August 31, 2005
                                                             ------------ --------------    ------------- --------------
                        Shares Acquired        Value
                          on Exercise         Realized       Exercisable  Unexercisable     Exercisable   Unexercisable
                        -----------------    -----------     ------------ --------------    ------------- --------------
<S>                     <C>                  <C>             <C>          <C>               <C>           <C>
Paul F.  Turner,                                             200,000      100,000           $700,000      $350,000
Chairman of the
Board, Sr. VP and
Chief Technology
Officer

Hyrum A.  Mead,         14,000               $63,140         546,415      133,333           $2,056,640    $466,665
President
</TABLE>

EMPLOYMENT CONTRACTS

         We entered into an employment agreement with Mr. Mead dated August 10,
1999. This agreement provides that Mr. Mead shall receive an annual base salary
of $125,000, which shall be reviewed annually by the Board of Directors. The
agreement provides that if Mr. Mead is involuntarily terminated, Mr. Mead will
receive severance compensation for a period of six months, including an
extension of all benefits and perquisites. The severance amount shall include
six months 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

                                       39
<PAGE>

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 October 24, 2006, 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 20, 2006, 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 21,040,116 shares of common stock outstanding
as of November 20, 2006. Except as otherwise noted, the address of each person
listed on the following table is 2188 West 2200 South, Salt Lake City, Utah
84119.

                                       40
<PAGE>
                                                               Common Stock
                                                            Beneficially Owned
                                                            -------------------
Title of Class          Name of Beneficial Owner            Shares      Percent
--------------          ------------------------            ------      -------
                         Officers and Directors

Common Stock       Dr. Gerhard W. Sennewald (1)            6,903,051      32.65%
Common Stock       Paul F. Turner (2)                      2,085,342       9.81%
Common Stock       Hyrum A. Mead (3)                         655,402       3.03%
Common Stock       Dr. Michael Nobel (4)                     244,170       1.15%
Common Stock       Douglas P. Boyd (5)                         9,353           *
Common Stock       Steven G. Stewart                           2,115           *

                             Holders of More Than 5%

Common Stock       John E. Langdon (6)                     1,295,010       6.15%
Common Stock       All Executive Officers and Directors    9,899,433      45.16%
                   as a Group (5 persons) (7)

-------------------------
* Less than 1%

(1)      Includes 100,000 shares subject to options. Does not include 500,000
         shares held by Dr. Sennewald's spouse, for which he disclaims
         beneficial ownership.

(2)      Includes 200,000 shares subject to options.

(3)      Includes 546,415 shares subject to options.

(4)      Includes 25,000 shares subject to options.

(5)      Includes 5,000 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 876,415 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:

                                       41
<PAGE>

EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>

------------------------------- ---------------------------- ---------------------------- ----------------------------
                                Number of Securities to be    Weighted-Average Exercise      Number of Securities
                                                                                            Remaining Available for
                                                                                             Future Issuance Under
                                  Issued Upon Exercise of       Price of Outstanding       Equity Compensation Plans
                                   Outstanding Options,         Options, Warrants and        (Excluding Securities
                                    Warrants and Rights                Rights              Reflected in Column (a))
                                            (a)                          (b)                          (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
<S>                                      <C>                             <C>                         <C>
Equity Compensation Plans                1,809,051                       1.72                        729,429
Approved by Security Holders
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity Compensation Plans not                    -                          -                              -
Approved by Security Holders
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total                                    1,809,051                      $1.72                       729,429
------------------------------- ---------------------------- ---------------------------- ----------------------------

</TABLE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

         Medizin-Technik GmbH. 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. We had revenue of $689,086 in fiscal 2006 from the sale of
systems and various component parts sold to Medizin-Technik. During fiscal 2005,
we had sales of $987,472 to Medizin-Technik. Dr. Gerhard W. Sennewald, one of
our directors and significant stockholders, is the President and Chief Executive
Officer of Medizin-Technik and its sole stockholders. Management believes the
terms of the transactions with Medizin-Technik were arms length and fair to the
Company.

ITEM 13. EXHIBITS
         --------

The following exhibits are incorporated herein by reference as indicated:

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

      3.1         Amended and Restated Certificate of Incorporation.
                  Incorporated by reference to Exhibit 3.1 of the BSD Medical
                  Corporation Annual Report Form 10-KSB, filed December 1, 2003.

      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.

                                       42
<PAGE>

      4.2         Emerson Securities Purchase Agreement. Incorporated by
                  reference to Exhibit 4.1 of the BSD Medical Corporation Annual
                  Report on Form 10-KSB, filed December 1, 2003.

      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 Annual Report on
                  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 Current Report on 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 Annual Report
                  on 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. Incorporated by reference to Exhibit 21 of
                  the BSD Medical Corporation Annual Report on Form 10-KSB filed
                  December 1, 2003.

      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.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
         ---------------------------------------

         The following table presents fees for professional services rendered by
Tanner LC for the audit of our annual financial statements for the fiscal years
ended August 31, 2006 and August 31, 2005 and fees billed for other services
rendered by Tanner LC during those periods.


                                       43
<PAGE>
                                           Fiscal 2006    Fiscal 2005

Audit Fees(1)                                $75,500        $52,619
Audit-Related Fees(2)                          6,265          5,902
Tax Fees(3)                                        -         23,075
All Other Fees(4)                                  -          1,560
Total                                        $81,765        $83,156
_________________________

(1)      Audit Fees consist of fees billed for the annual audits and quarterly
         reviews.
(2)      Audit-Related Fees consist of fees billed for various SEC filings and
         accounting research.
(3)      Tax Fees consist of fees billed for tax consultation and assistance in
         the preparation of tax returns.
(4)      All Other Fees consist of fees for edgarization of SEC filings and
         miscellaneous fees.

Pre-Approval Policies
---------------------

         The Audit Committee pre-approved all audit, audit-related and non-audit
services performed by our independent auditors and subsequently reviewed the
actual fees and expenses paid to Tanner LC. The Audit Committee has determined
that the fees paid to Tanner LC for non-audit services are compatible with
maintaining Tanner LC's independence as our auditors.

                                       44
<PAGE>
                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                       BSD MEDICAL CORPORATION


Date:  November 29, 2006               By:    /s/ Hyrum A. Mead
                                       ----------------------------------------
                                       Hyrum A. Mead
                                       President and Member of the Board of
                                       Directors (principal executive officer)


Date:  November 29, 2006               By:    /s/ Dennis Bradley
                                       ----------------------------------------
                                       Dennis Bradley
                                       Controller (principal financial and
                                       accounting officer)

         In accordance with the Exchange Act, 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:  November 29, 2006               By:      /s/ Paul F. Turner
                                       ----------------------------------------

                                       Paul F. Turner
                                       Chairman of the Board, Senior Vice
                                       President and Chief Technology Officer


Date:  November 29, 2006               By:      /s/ Hyrum A. Mead
                                       ----------------------------------------
                                       Hyrum A. Mead
                                       President and Member of the Board of
                                       Directors (principal executive officer)


Date:  November 29, 2006               By:      /s/ Gerhard W. Sennewald
                                       ----------------------------------------
                                       Dr. Gerhard W. Sennewald
                                       Member of the Board of Directors


                                       45
<PAGE>


Date:  November 29, 2006               By:      /s/ Steven G. Stewart
                                       ----------------------------------------
                                       Steven G. Stewart
                                       Member of the Board of Directors


Date:  November 29, 2006               By:      /s/ Michael Nobel
                                       ----------------------------------------
                                       Dr. Michael Nobel
                                       Member of the Board of Directors


Date:  November 29, 2006               By:      /s/ Douglas P. Boyd
                                       ----------------------------------------
                                       Dr. Douglas P. Boyd
                                       Member of the Board of Directors



                                       46