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


                                  FORM 10 - KSB

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

                   For the Fiscal Year Ended August 31, 1998.

                         Commission file number 0-10783

                             BSD MEDICAL CORPORATION


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


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

Registrant's telephone number, including area code:  (801) 972-5555


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

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

   Title of Each Class                 Name of Each Exchange on Which Registered
----------------------------           -----------------------------------------
Common Stock, $.01 Par Value                        Over-the-Counter

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

     Issuer's revenues for its most recent fiscal year:  $1,437,917

     The   approximate   aggregate   market   value  of  Common  Stock  held  by
non-affiliates,  computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock,  as of December 2, 1998,  was
$2,227.572.

     As of December 2, 1998,  there were 16,370,052  shares of Common Stock with
$0.01 par value outstanding.

     Documents Incorporated by Reference:  None

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



BSD Medical Corporation 1998 10-KSB                                       Page 1


<PAGE>

                                     PART I
ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL
-------

     BSD  Medical  Corporation  (the  "Company")  was founded in 1978 by John E.
Langdon  to  continue  research  into  the  demonstrated  ability  of high  heat
(hyperthermia)  to destroy  cancer cells.  BSD  continued  this research and was
successful  in  developing  and  commercializing   hyperthermia  treatment  -  a
break-through  treatment for both cancerous and benign diseases.  The Company is
currently engaged in the development,  production,  marketing,  and servicing of
heat therapy  (hyperthermia/thermotherapy)  equipment. This equipment is used in
the  application,  monitoring  and  control  of  electromagnetic  (microwave  or
radiofrequency) or ultrasound  generated heat for the treatment of malignant and
benign diseases. BSD has 14 current U.S. patents (which cover all of its current
applications and products as well as additional applications and devices).

     BSD was the first Company to obtain full PreMarket approvals (PMA) from the
Food and Drug Administration  (FDA) for a hyperthermia cancer therapy system and
the first Company to obtain Investigational Device Exemption (IDE) approval from
the  FDA for  thermotherapy  systems  for  the  treatment  of  Benign  Prostatic
Hyperplasia (BPH). BSD has developed second and third generation equipment,  and
the Company's  systems,  depending  upon  configuration  and options,  have list
prices ranging from approximately $53,500 to $850,000.

     The Company was  incorporated  under the laws of the State of Utah on March
17,  1978.  On July 31, 1986,  pursuant to a Plan and  Agreement of Merger dated
July 11, 1986, the Company was merged into a Delaware corporation,  changing the
Company's state of incorporation from Utah to Delaware. The Delaware Corporation
was the surviving  company.  At the time of the 1986 merger, the total number of
shares of all  classes of stock which the Company  shall have the  authority  to
issue was increased to 30,000,000,  of which 10,000,000  shares are of $1.00 par
value  per  share  and are of a class  designated  Preferred  Stock and of which
20,000,000  shares are of $.01 par value per share and are of a class designated
Common Stock. There are currently no preferred shares outstanding.

BSD'S PRODUCTS/THERAPIES
------------------------

     HYPERTHERMIA  AS A CANCER  TREATMENT.  There  are more than  eight  million
Americans  alive today who have a history of cancer.  Over 83  million,  half of
American men and one-third of American women,  will  eventually  develop cancer.
Over 564,800  people are expected to die of cancer this year;  and the incidence
of cancer is continuing to grow.  The Company's  hyperthermia  equipment is used
both in an effort to cure cancer,  by destroying and  eliminating  cancer cells,
and,  where curing the cancer is not  possible,  as  palliative  treatment  (the
shrinking  of tumors  in order to reduce  the pain and  other  side  effects  of
cancer).  The  controlled  application  of high  heat  can be  used  to  destroy
cancerous  cells without  causing  serious damage to normal cells because of the
differential  heat  sensitivity  between  cancerous  and  normal  cells  and the
inability of solid tumors to dissipate heat as effectively as surrounding normal
cells. The Company's  hyperthermia  equipment can be used alone but is typically
used in conjunction with other therapies. Published, randomized clinical studies
using BSD's  equipment  have shown that the  addition of  hyperthermia  to other
cancer  therapies  (including  radiation  therapy,  chemotherapy,  and  surgery)
results in: increased tumor response; lower relapse rate; increased disease-free
survival  time;  and  improved  quality of life for the  patient - with  minimal
increase in side effects.

     Hyperthermia  has been  shown to double  the  effectiveness  of  radiation;
provide supra-additive  interactions with many chemotherapeutic  drugs; to cause
localized  toxicity  of heated  tumor  areas  (while  maintaining  low levels of
toxicity  to  non-heated  normal  tissues);  and to cause some  chemotherapeutic
agents that are not  effective  at normal  temperatures  to become  effective at
elevated  temperatures.  The use of  pre-surgical  hyperthermia  delivered using
BSD's  equipment  has been shown to obviate  the need for  amputation  of normal
tissues  in  some  sarcoma   patients.   BSD's   systems  have  also  been  used
pre-surgically  to reduce the size of the tumor  prior to surgery  and thus make
the tumor more easily resectable  (surgical removal) and increase the chances of
obtaining clear surgical tumor margins,  one of the most significant  prognostic
factors in recurrence.


                                                                          page 3
<PAGE>

     CANCER HYPERTHERMIA  PRODUCTS.  The Company's cancer hyperthermia  products
are designed to apply  electromagnetic  (i.e.,  microwave or  radiofrequency) or
ultrasonic  energy  to the  human  body in order  to  generate  temperatures  of
40(degree)C  to 60(degree)C  at the site of the tumor.  Thermometry  systems are
used to measure tumor and normal tissue  temperatures  during treatment in order
to assist in achieving and maintaining safe and optimal treatment  temperatures.
The  Company's  hyperthermia  systems are  designed to permit the  treatment  of
various tumor sizes, various tumor depths and various anatomical sites.

     Cancer Hyperthermia Systems. A hyperthermia system typically consists of an
integrated  computer  control  unit,  a fixed or variable  frequency  generator,
applicators,  and thermometry.  The Company's  computer  software is designed to
maximize the safety and effectiveness of the treatment.  The Company's  computer
software provides  accurate  treatment  planning,  monitoring,  and recall.  The
pre-treatment  planning capability utilizes the Company's proprietary algorithms
and software to allow the  physician to customize  hyperthermia  treatments  for
specific tumors. The Company's cancer  hyperthermia system product line includes
various systems designed to target specific markets.

     Cancer   Hyperthermia    Applicators.    Hyperthermia    applicators   emit
radiofrequency,  microwave or  ultrasonic  energy  directly  into the patient to
provide  tumor  heating.  The Company  has  developed  and  patented a number of
specially  designed  applicators for treating a particular tumor in a particular
location.

     Applicators   generally  fall  into  two   categories:   external   surface
applicators   (superficial   and  deep)  and   interstitial   (i.e.,   invasive)
applicators.  Microwave,  superficial,  external  applicators deliver externally
generated  heat to specific  sites on or slightly below the surface of the skin.
Deep phased array  radiofrequency  applicators provide externally generated heat
to deep-seated tumors by combining phase-aligned beams from multiple applicators
positioned around the body.  Ultrasound external  applicators  generally provide
deeper more focused heating than microwave external  applicators but are limited
by bone and air interfaces and patient pain.  Interstitial microwave applicators
are antennae that are  implanted  directly into the body for heating from within
the tumor itself.

     Thermometry.  The Company manufactures the BSD Thermistor Probe, as well as
other thermistor based thermometry  probes. The Company has an exclusive license
for the manufacture and  distribution of the BSD Thermistor  Probe.  The Company
also manufactures and sells specially developed thermistor probes for ultrasound
treatments.

     THERMOTHERAPY AS A BPH TREATMENT. On November 24, 1997, BSD entered into an
agreement  with  Oracle   Strategic   Partners  to  form   TherMatrx,   Inc.,  a
jointly-owned   company  that  would  initially  focus  on  minimally   invasive
treatments of urological  diseases,  specifically  Benign Prostatic  Hyperplasia
(BPH), a market that is currently estimated to exceed $3 billion annually in the
United States alone.

     The  partnership  allowed  Oracle  Strategic  Partners  to  invest up to $6
million in the venture,  with an initial $3 million investment on closing and an
additional  $3 million  contingent  upon the  achievement  of certain  milestone
parameters.  Charles Manker,  President and CEO of TherMatrx provided an initial
investment  of $250,000 in addition  to  Oracle's  investment  and will  provide
another $250,000 if milestone  funding is obtained from Oracle.  BSD contributed
certain assets that have  applicability in the urology market, and agreed not to
engage in BPH  business.  BSD  currently  has  fifty-four  percent  interest  in
TherMatrx,  thus,  the  financial  statements  for the two  companies  have been
consolidated  (see  Note 1 to  Financial  Statements).  Upon  completion  of the
milestone funding, and after exercise of all shares allocated for the Management
Stock Purchase  Plan,  the Company will retain a 30 percent  interest on a fully
diluted basis. As part of the agreement,  BSD is providing certain manufacturing
and consulting services, for which TherMatrx compensates the Company.


                                                                          page 4
<PAGE>


     TherMatrx's  corporate  headquarters are in Chicago.  Dr. Gerhard Sennewald
serves as BSD's representative on TherMatrx's Board of Directors.

MARKETING AND SALES
-------------------

     The Company markets its cancer hyperthermia products primarily to radiation
oncology  departments  in the U.S.  and to radiation  oncology and  chemotherapy
oncology  departments  outside  the U.S. In the U.S.,  the  Company  markets its
equipment directly using its own sales and marketing staff.  International sales
are generally  accomplished  through  distributing  companies located in various
foreign  countries.  The Company's  marketing  efforts include  participation at
trade shows and symposia and development of product brochures,  newsletters, and
other   promotional   materials.   The  Company  also   co-sponsors   an  annual
international BSD Users' Conference.

     Future  marketing  for current  cancer  products  may be expanded  into two
previously unexplored markets: surgical and chemotherapeutic oncology. These two
disciplines  control most cancer  patients  and  treatment  funds,  and clinical
evidence  of the  safety  and  efficacy  of  hyperthermia  in  conjunction  with
chemotherapy  and surgery has been  published.  The  Company  believes  that the
domestic  market will begin to slowly expand in the future  because of a renewed
interest in hyperthermia in the U.S. and evidence of increased  profits from the
addition of hyperthermia; however, there can be no assurance that an increase in
the U.S. market will occur.

     For  the  year  ended  August  31,  1998,   two  customers   accounted  for
approximately  56% and 12%,  respectively,  of BSD's  net  sales.  The loss of a
significant  customer could have a material  detrimental impact on the Company's
operations.

     THIRD-PARTY  REIMBURSEMENT/MEDICAL COST CONTAINMENT.  In the United States,
the Company's products are purchased  primarily by medical  institutions  (which
then  bill  various  third-party  payers,  such  as  Medicare,  Medicaid,  other
government  programs,  and private insurance plans, for the health care services
provided to their patients), or by managed care organizations which directly pay
for  services  provided to their  patients.  In December  1984,  the Health Care
Financing  Administration  ("HCFA" --- the agency  responsible for administering
the  Medicare and Medicaid  systems) and most of the private  medical  insurance
carriers in the U.S. approved reimbursement for hyperthermia in conjunction with
radiation   therapy  for  the  treatment  of  surface  and  subsurface   tumors.
Reimbursement  for services  rendered to Medicaid  beneficiaries  is  determined
pursuant to each state's  Medicaid  plan which is  established  by state law and
regulations, subject to requirements of Federal law and regulations.

     In  November  1995,  HCFA  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  FDA.  All  of  BSD's  investigational  (IDE)  equipment  and
protocols  have  been  placed  in  this  category  by the FDA  and  thus  may be
reimbursed by Medicare.

     Cost-containment  policies are impacting  the major cancer  markets such as
the U.S., Western Europe, and Japan, and these changes have negatively  impacted
the industry.  The Company is unable to predict the extent to which its business
may be affected by future legislative and regulatory developments.  There can be
no assurance that future health care reform  legislation or regulation  will not
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.  There can be no assurance that procedures  using the
Company's  products  will,  in  the  future,  be  considered  cost-effective  by
third-party payers, that reimbursement will be available or, if available,  that
payers'  reimbursement levels will not adversely affect the Company's ability to
sell its products.

                                                                          page 5
<PAGE>


COMPETITION
-----------

     Competition in the medical products industry is intense, both in the United
States and internationally. Some of the Company's competitors have significantly
greater   financial,   technical,   research   and   development,   engineering,
manufacturing, distribution, and sales and marketing resources than the Company.
Several   companies  have  received  IDEs  in  the  United  States  for  certain
experimental  hyperthermia  systems  designed to treat both malignant and benign
diseases.  In addition to BSD, four other companies have received FDA Pre-Market
Approval  for the  commercial  sale of certain  hyperthermia  equipment  for the
treatment  of  cancer  in  the  U.S.:  (Clinitherm  - no  longer  in  business);
Labthermics;  Celsion Corporation  (formerly Cheung Labs); and Cook Medical - no
longer in hyperthermia business.

     BSD  participates in the BPH market as an investor in TherMatrx,  Inc. (see
"Thermotherapy  as a BPH  Treatment",  Page 3). In the BPH  market,  competitive
companies  offering  products similar to TherMatrx's  products include EDAP TMS,
Urologix, and Dornier (which have PMA approval from the FDA), VidaMed (which has
510(k)  marketing  clearance  from the  FDA),  Thermal  Therapeutics,  and other
foreign   manufacturers.   In  addition  to  thermotherapy   equipment  made  by
competitors,  there are many other  competitive  treatments  for BPH  (including
various drug treatments,  surgical lasers, ultrasound ablation,  electro-cautery
surgery, stents,  transurethral incision of the prostate (T.U.I.P.), and balloon
dilation) which are currently being developed,  clinically  investigated  and/or
actively marketed.

     The Company  believes that other companies are considering or will consider
marketing   hyperthermia/thermotherapy   equipment  and  anticipates   increased
competition  both in the  United  States  and  internationally.  There can be no
assurance that others, including those with greater resources and more extensive
business  experience  than the  Company,  will not develop  products  that would
materially  adversely affect the ability of the Company to compete  effectively.
Further,  the treatment of disease with hyperthermia  equipment,  and with other
methods,  is subject to rapid  technological  change.  There can be no assurance
that other forms of  treatment  will not be  developed  which  could  render the
Company's hyperthermia systems obsolete.

     The  Company  expects to rely upon trade  secrets,  unpatented  proprietary
know-how and continuing technological innovation, as well as current patents and
new patent  applications,  in order to  maintain  and  improve  its  competitive
position.

PRODUCT SERVICE
---------------

     The Company  provides a 12-month  warranty  following  installation  on all
cancer treatment systems and a 90-day limited warranty on individual components.
BSD's  employees  install  and  service  the  hyperthermia  systems  it sells to
domestic  customers.  In  addition,  Company  personnel or  consultants  perform
technical and clinical training.  Subsequent to the applicable  warranty period,
the Company offers full or limited service contracts to its domestic customers.

     Generally,  the Company's  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.  The Company provides
parts  repair/replacement  warranties  for 12 months for systems 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 the Company's facilities in Salt Lake City.

PRODUCTION
----------

     The Company  produces and tests its products at its facilities in Salt Lake
City,  Utah.  The  Company's  manufacturing   operations  consist  primarily  of
component  assembly  and  testing.  Most  of  the  principal  components  of the
Company's systems are purchased from independent  suppliers and are modified, as
required,  by the  Company at its  facilities.  Some  purchased  components  are
modified by the supplier or are customized to the Company's specifications.  Key
factors  in  the  manufacturing  process  are  assembly  and  testing.   Certain
components and processes used in the manufacturing of the Company's products are

                                                                          page 6
<PAGE>

currently   provided  or  performed  by   single-source   vendors.   Any  supply
interruption or yield problems from these vendors would have a material  adverse
effect on the Company's  ability to manufacture  its products until a new source
of supply were qualified and, as a result,  could have a material adverse effect
on the Company's business, financial condition and results of operations.

     In order to provide outside financial support for manufacturing  operations
and diversify the Company's services, the Company is providing manufacturing and
testing services under contract to other companies.

RESEARCH AND DEVELOPMENT
------------------------

     During the fiscal  years ended August 31,  1997,  and August 31, 1998,  the
Company  expended  $432,394,  and  $878,511   respectively,   for  research  and
development,  representing  32.76%,  and 61.10% of total revenues.  Research and
Development  expenditures  increased in 1998 due to  expenditures  by TherMatrx,
which  is  conducting  a  clinical  trial  on the use of  thermotherapy  for the
treatment of BPH. $516,776 in research and development expenditures in 1998 were
attributable to TherMatrx, the Company's subsidiary.  Non-consolidated  research
and development  expenditures  during 1998 decreased to $361,735,  a decrease of
$70,659 or 16.34% as  compared to 1997,  due to  completion  of the  BSD-2000o3D
product line and near completion of the MR portion of this system.

     BSD has  developed  the  BSD-2000o3D  - a new  generation  of deep regional
hyperthermia equipment funded in part by Phase I and II grants received from the
National Cancer Institute  (Grant No. CA61515).  The BSD-2000o3D can be modified
for  integration  with a magnetic  resonance  imaging  system,  and  becomes the
BSD-2000o3D/MR system. The BSD-2000o3D System integrates three-dimensional (3D),
"steerable",  focused  deep  regional  hyperthermia  with  3D  patient  specific
treatment planning.  This system is targeted for the treatment of large and deep
tumors; i.e., recurrent breast,  sarcoma,  lung,  colorectal,  liver,  cervical,
bladder,  stomach,  and  prostate.  The  first  BSD-2000o3D/MR  system  has been
installed and tested at a leading German oncological  research institution - the
Clinic of Medical  Oncology of the Klinikum  Gro(beta)hadern  Medical  School of
Ludwigs-Maximilians-Universitat  Munchen,  Munich,  Germany.  The Medical School
received funding from the Stiftung Deutsche  Krebshilfe e. V. (German Cancer Aid
Foundation) for the system order.  (Over the past few years,  the Foundation has
contributed more than DM 11 million - $7.5 million U.S. - to this Institution to
develop the clinical  application  of regional deep  hyperthermia  combined with
chemotherapy  for the treatment of cancer  patients.) The  BSD-2000o3D  has been
used successfully for patient  treatments,  and initial  laboratory  testing has
demonstrated the ability to simultaneously heat and image with the MR portion of
this system.

     The BSD-2000o3D/MR  System was designed to provide simultaneous heating and
non-invasive  measurement of treatment  parameters;  such as tumor  temperature,
tumor response,  tissue heat damage,  tissue blood-flow,  tissue pathology,  and
other  chemical and  biological  changes in the tissue.  Non-invasive  treatment
monitoring   has  the  potential  to  optimize  tumor  heating  and  thus  tumor
destruction.  (Currently  available  hyperthermia  equipment requires the use of
invasive  temperature  monitoring to control  heating  delivery and to determine
treatment effectiveness, which limits the commercial and clinical applications.)
The development of reliable  non-invasive  thermometry is the next required step
in the field of hyperthermia and has the potential to significantly increase the
clinical applications and commercial potential of hyperthermia;  however,  there
can  be no  assurance  that  this  system  will  provide  reliable  non-invasive
thermometry.

     Technological  changes in the  treatment of disease in general,  and in the
hyperthermia  field in particular,  are frequent.  Thus, the Company  intends to
continue to devote  substantial  sums to research  and  development  in order to
improve  existing  products  and  develop  new  products.  The  Company  is also
currently in discussions with some  researchers and institutions  regarding heat
treatment products and treatments which might increase the clinical applications
for BSD's products, with a focus on deep regional hyperthermia and the treatment
of prostatic carcinoma and breast cancer.

PATENTS, INTELLECTUAL PROPERTY, LICENSING, AND ROYALTY AGREEMENTS
-----------------------------------------------------------------

     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.  The  Company's  policy is to file  patent  applications  to  protect
significant  technology,   inventions  and  product  improvements.  The  Company
currently has 14 patents in the United States and additional patents outside the
United States.  (Four patents were assigned to TherMatrx,  for which the Company
maintained a license.)  Other  hyperthermia  related  patents are pending in the
United  States,  Japan and  Europe,  and a European  patent for the  BSD-2000o3D
system was recently issued. There can be no assurance that the patents presently
issued or those applied for (if granted),  will be of  significant  value to the
Company  or will be held  valid  upon  judicial  review.  Successful  litigation
against these patents by a competitor  could have a material adverse effect upon
the  Company's  business,  financial  condition and results of  operations.  The
Company  believes  that it  possesses  significant  proprietary  know-how in its
hardware and software  capabilities.  There can be no assurance that others will
not develop,  acquire or patent technologies similar or superior to those of the
Company or that secrecy will not be breached.

     In July 1979, the Company entered into an exclusive worldwide license for a
unique  temperature  probe (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.  The Company pays  royalties  based upon its sales of the
Bowman  Probe.  The  license  agreement  was  amended and renewed in 1987 and is
currently in effect.

     On  September  15, 1996,  Medizintechnik  (a company  owned by Dr.  Gerhard
Sennewald,  a member of BSD's Board of Directors and a major  stockholder of the
Company)    obtained   a   worldwide   fully   paid   software    license   from
Konrad-Zuse-Zentrum   fur   Informationstechnik    (ZIB)   of   Berlin   for   a
three-dimensional  (3D) hyperthermia  treatment  planning software - HYPERPLAN -
developed  by ZIB.  On January 21,  1998,  BSD entered  into an  agreement  with
Medizintechnik wherein Medizintechnik  irrevocably assigned the worldwide rights
under the ZIB  software  license  agreement to BSD,  with the sole  exception of
Europe, where Medizintechnik  retained these rights itself. In consideration for
this  assignment of rights,  BSD agreed to supply,  at no charge,  one Sigma-Eye
applicator (not an MR compatible  version) to  Medizintechnik,  who will forward
this  applicator  to  Strahlenklinik  and  Poliklinik,  Virchow-Klinikum  of the
Humboldt-Universitat  of Berlin.  BSD also agreed to inform  Medizintechnik on a
regular  basis  about  software  sales to final  customers  and to pay timely to
Medizintechnik the software license fee (8% of the sales price for the HYPERPLAN
software or a minimum of DM 6,000) that,  under the terms of the ZIB  agreement,
is due to ZIB for each software sale.

     There  has  been   substantial   litigation   regarding  patent  and  other
intellectual  property rights in the medical device  industry.  In the past, the
Company  has  filed  lawsuits  for  patent  infringement  against  three  of its
competitors and subsequently settled all three of those lawsuits.

     From time to time, the Company has had and may continue to have discussions
with other  companies,  universities  and  private  individuals  concerning  the
possible granting of licenses covering  technology and/or patents.  There can be
no assurance that such discussions  will result in any agreements.  In the past,
BSD has granted  non-exclusive  practice  licenses for a few selected patents to
three companies.  One of these companies is no longer in business.  In 1994, BSD
issued a  non-exclusive  license to Urologix to  practice  some of its  patented
technology for cash payments and royalties on future sales; in 1996, the Company
terminated this license.  This license became part of a lawsuit that was settled
in May 1998.  The  license  is now fully  paid and  irrevocable  (see Note 15 to
Financial  Statements  and  Part I,  Item 3,  Urologix,  Inc.  vs.  BSD  Medical
Corporation).

     In July  1996,  BSD  entered  into a license  agreement  and  granted  EDAP
Technomed, Inc., now EDAP TMS S.A., a non-exclusive, non-transferable license of
certain rights to one of BSD's  patents.  As a result of this  transaction,  BSD
received a non-refundable license fee in the amount of $1,500,000 ($1,000,000 in
July 1996 and  $500,000  in  September  1996),  as well as the right to  receive
royalties  of 2.5%,  up to a  maximum  of  $3,500,000,  on the  sale of  certain
products.

                                                                          page 7
<PAGE>

GOVERNMENT REGULATION
---------------------

     The medical  devices that have been and are being  developed by the Company
are subject to  extensive  and  rigorous  regulation  by  numerous  governmental
authorities,  principally  by the  United  States  Food and Drug  Administration
(FDA).  Pursuant to the Federal  Food,  Drug and Cosmetic Act (the FD&C Act), as
amended,  the FDA regulates and must approve the clinical testing,  manufacture,
labeling,  distribution,  and promotion of medical devices in the United States.
This regulation has become stringent and the approval process expensive and time
consuming.  In  addition,  various  foreign  countries  in which  the  Company's
products are or may be sold, have regulatory requirements.

     The majority of the Company's  past and present  hyperthermia  systems have
required,  (and  future  systems,  if any,  would  likely  continue  to require)
Pre-Market  Approval  from  the FDA  instead  of the  simpler  510(k)  marketing
approval.  Pre-Market  Approval  requires  clinical testing to assure safety and
effectiveness  prior to  marketing  and  distribution  of medical  devices.  The
Company  intends  to  continue  to  make  improvements  in and  to its  existing
products.  Significant  product changes must be submitted to the FDA under IDEs,
510(k) PreMarket notifications or PMA supplements.

     All medical devices must be  manufactured  in accordance  with  regulations
specified in the FDA Quality System  Regulation  (QSR).  In complying with FDA's
QSR,  manufacturers  must continue to expend time, money and effort in the areas
of production and quality control to ensure full compliance.  The Medical Device
Reporting regulation requires that the Company provide information to the FDA on
death or serious  injuries  alleged to have been  associated with the use of its
products,  as well as product malfunctions that would likely cause or contribute
to death or  serious  injury if the  malfunctions  were to recur.  International
sales of  unapproved  medical  devices are  subject to FDA export  requirements,
unless these  products  have been  previously  approved by one of the  countries
specified by the FDA. Failure to comply with regulatory  requirements could have
a material  adverse effect on the Company's  business,  financial  condition and
results of  operations.  Although  the Company  believes  that it is in material
compliance with all applicable  manufacturing  and marketing  regulations of the
FDA and other  regulatory  bodies  with  respect  to its  existing  products,  a
determination  that the Company is in  material  violation  of such  regulations
could lead to the  imposition  of penalties,  including  fines,  recall  orders,
product  seizures,  and criminal  sanctions.  In addition,  current  regulations
depend heavily on administrative  interpretation,  and there can be no assurance
that future  interpretations  made by the FDA or other regulatory  bodies,  with
possible retroactive effect, will not adversely affect the Company.

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

     Sales into the  European  Union (EU) are now governed by the need to obtain
ISO certification and a CE Mark and to comply with all applicable directives. In
June 1998, the Medical Devices  Directives (MDD)  requirements  went into effect
for the EU.  Following  June no medical  products  could be  marketed  in Europe
without  obtaining  a  CE  Mark  and  thus   demonstrating   compliance  to  MDD
requirements.  The Company is in the process of obtaining ISO  certification  of
its  development  and  manufacturing  processes  and  obtaining  the testing and
certifications needed for compliance,  which will allow BSD to affix the CE Mark
approval. The Company anticipates successful completion of the ISO certification
process and CE Mark approval during fiscal year 1999.  However,  there can be no
assurance that BSD can obtain the CE Mark, and, if BSD is unable to obtain these
approvals,  it could have a significant  material effect on the Company's future
financial condition.

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

                                                                          page 8
<PAGE>

PRODUCT LIABILITY EXPOSURE
--------------------------

     The manufacturing and marketing of medical devices involve an inherent risk
of product liability.  Because the Company's products are intended to be used in
hospitals on patients who may be physiologically  unstable and severely ill, the
Company is exposed to potential product liability claims.  The Company presently
carries product liability insurance. However, there can be no assurance that the
product  liability  insurance will provide adequate  coverage against  potential
claims that might be made against the Company.  No product  liability claims are
presently pending against the Company;  however,  there can be no assurance that
product liability claims will not be filed in the future.

EMPLOYEES
---------

     As of August 31, 1998,  the Company had 23 employees;  18 of them were full
time  employees.  None of the  Company's  employees  is covered by a  collective
bargaining agreement.  The Company considers its relations with its employees to
be  satisfactory.  The  Company  is  dependent  upon  a  limited  number  of key
management, manufacturing, and technical personnel. The Company's future success
will depend in part upon its ability to retain these highly qualified employees.


ITEM 2.  PROPERTIES

     The office,  production and research  facilities of the Company are located
in Salt Lake City,  Utah.  The complete  headquarters  and  production  facility
occupies  approximately  20,000  square feet.  On December 5, 1997,  the Company
signed a new lease  agreement  (with a new owner) for the Company's  facilities.
The new owner paid  $700,000 to BSD for the  Company's  option to  purchase  the
building. As part of the agreement, the Company leases the building from the new
landlord for an annual rental  expense of $78,396.  The Company has an option to
purchase  the  building  after 18 months for  $775,000  (see Note 5 to Financial
Statements).  The  building  lease is accounted  for as an  operating  lease for
financial  statement purposes.  The building is currently in good condition;  is
adequate for the Company's  needs;  is suitable for all Company  functions;  and
provides  room for  future  expansion.  The  Company  believes  that it  carries
adequate insurance on the property.


ITEM 3.  LEGAL PROCEEDINGS

UROLOGIX, INC. VS. BSD MEDICAL CORPORATION, United States District Court for the
------------------------------------------
District of Minnesota, Civil Action No. 4-96-647.

     In June of 1996,  the  Company  advised  Urologix,  Inc.,  with whom it had
previously been involved in litigation  involving the alleged  infringement of a
BSD patent,  of  information  which the Company  believed  indicated a breach of
Urologix's  confidentiality  obligations under the Settlement Agreement that had
resolved the earlier suit;  the company  subsequently  terminated the Settlement
Agreement and the patent license granted to Urologix thereunder.

     On July 30, 1996,  Urologix filed a lawsuit  against the Company under seal
in the United  States  District  Court for the District of  Minnesota  seeking a
declaratory  judgment that Urologix had not breached the  Settlement  Agreement.
The Company  answered the Complaint and filed a counterclaim on August 20, 1996,
seeking  a  declaratory  judgment  that the  Settlement  Agreement  and  license
provided thereunder were properly terminated by the Company, based on Urologix's
breaches of the  confidentiality  provision and seeking  damages  caused by such
breaches.


                                                                          page 9
<PAGE>

     On May 26, 1998, Urologix,  Inc., BSD Medical  Corporation,  and TherMatrx,
Inc.  jointly  announced  that  they had  entered  into a  Settlement  Agreement
resolving their litigation.  Pursuant to the Settlement Agreement, Urologix paid
BSD and TherMatrx a total of $5 million,  the parties  executed mutual releases,
and the  parties  jointly  filed a Notice of  Dismissal  With  Prejudice  of the
pending litigation.  Of the $5 million  settlement,  BSD received $2,950,000 and
TherMatrx  received  $2,050,000.  Under  the terms of the  Settlement,  Urologix
maintained its  non-exclusive  license to certain patents owned by TherMatrx and
BSD  pertaining  to  transurethral  insertable  applicators  and systems for the
treatment of Benign Prostatic Hyperplasia (BPH) and other urological conditions.
The  non-exclusive  license  is  now  fully  paid-up,  irrevocable,   perpetual,
non-cancelable,  and non-terminable  under all  circumstances.  irrevocable (see
Note 15 to Financial Statements).

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

     The Company held an Annual Meeting of  Shareholders on August 21, 1998. The
shareholders  were asked to elect  directors  to serve for the  following  year;
approve the  selection of Tanner & Co. as auditor for the  Corporation's  fiscal
year ended August 31, 1998;  and approve the 1998 Stock  Incentive Plan and 1998
Director  Stock  Plan.   Each  proposal  was  approved  by  a  majority  of  the
shareholders.

     The total  number of shares  of common  stock  that were  voted for Paul F.
Turner to serve as a director of the Company was 13,633,663,  with 23,400 shares
withheld.

     The total  number of shares of common  stock that were voted for Gerhard W.
Sennewald,  Ph.D.  to serve as a director of the Company  was  13,630,763,  with
26,300 shares withheld.

     The total  number of shares of common  stock  that were  voted for S. Lewis
Meyer,  Ph.D. to serve as a director of the Company was 13,633,463,  with 23,600
shares withheld.

     The total  number of shares of common  stock that were voted for J.  Gordon
Short,  M.D. to serve as a director of the Company was  13,631,163,  with 25,900
shares withheld.

     The total  number of shares of common  stock  that were  voted for  Michael
Nobel,  Ph.D. to serve as a director of the Company was 13,633,863,  with 23,200
shares withheld.

     The  total  number  of shares  of  common  stock  that  were  voted for the
Resolution  approving the appointment of Tanner + Co. as the independent  public
accountants  of the  Company  for the fiscal  year  ending  August 31,  1998 was
13,603,307,  with 12,335 shares voting against the resolution, and 24,371 shares
abstaining.

     The  total  number  of shares  of  common  stock  that  were  voted for the
Resolution approving the Company's 1998 Director Stock Plan was 12,388,167, with
149,935 shares voting against the resolution, and 340,285 shares abstaining.

     The  total  number  of shares  of  common  stock  that  were  voted for the
Resolution  approving the Company's 1998 Stock  Incentive  Plan was  12,616,289,
with  145,435  shares  voting  against  the   resolution,   and  116,663  shares
abstaining.



                                                                         page 10
<PAGE>





                                     PART II

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

     The Company's  Common Stock began publicly trading on December 9, 1980, and
was traded in the  over-the-counter  market under the NASDAQ symbol "BSDM" until
it was delisted from NASDAQ on January 3, 1991. After that time, it continued to
trade  (very  sporadically)  in the  over-the-counter  market  and  consistently
reliable  stock  quotations  were not  readily  available  because  there was no
established  market for the Company's  stock. In May 1997, the symbol "BSDM" was
listed on the OTC Bulletin Board.

     The  following  table  sets  forth  the high and low bid  transactions,  as
provided by the OTC  Bulletin  Board,  for the  quarters in fiscal year 1997 and
1998  after  the  Company's  stock  symbol  was  listed.   The  amounts  reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
represent actual transactions.


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

         May 31, 1997......................       9/16         1/2
         August 31, 1997...................       3/4          1/4
         November 30, 1997.................       3/4          1/4
         February 28, 1998.................      13/16         3/8
         May 31, 1998......................       7/16         1/4
         August 31, 1998...................       7/16         1/4


     As of August 31, 1998,  there were  approximately  639 holders of record of
the Common  Stock.  The  Company has not paid any cash  dividends  on its Common
Stock since its  inception  and has no intention  of declaring  any Common Stock
dividends in the foreseeable future.

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

RESULTS OF OPERATIONS
---------------------

     The balance sheet as of August 31, 1998,  and the statements of operations,
statements  of cash flow and  statements of  stockholders'  equity for the years
ending August 31, 1997, and 1998, and the  independent  auditors report thereon,
are  included  elsewhere  in  this  report.  The  following  selected  financial
information  should be read in  conjunction  with the financial  statements  and
notes thereto  included  elsewhere in this report.  BSD currently has fifty-four
percent interest in a subsidiary,  TherMatrx, thus, the financial statements for
the two companies have been consolidated (see Note 1 to Financial Statements).

     FISCAL YEAR ENDED AUGUST 31, 1998. Consolidated revenues for the year ended
August 31, 1998,  totaled  $1,437,917,  as compared to  $1,319,698  for the year
ended August 31, 1997, an increase of $118,219,  or 8.96%,  primarily because of
an increase in sales of the new BSD-2000o3D  product line. The subsidiary had no
revenues.

     During  fiscal  years 1996  through  1998,  the  Company  devoted  time and
resources  to  completion  of a new product line - the  BSD-2000o3D/MR  - and to
establishing the  manufacturing  capabilities  and support  functions needed for
this new product line.  The first  BSD-2000o3D/MR  was installed in August 1997,
and the first MR portion of this system was  installed in August  1998.  BSD has
received orders totaling  $1,631,978 for purchases of this new product,  and, as


                                                                         page 11
<PAGE>



of November  1998, has a back-log of $204,060 in sales for the new product line,
which will be delivered in fiscal 1999.  During fiscal year 1998,  the Company's
subsidiary  devoted time and  resources  to  initiation  of a clinical  study to
evaluate the safety and efficacy of the use of  thermotherapy  for the treatment
of BPH.


     The Company's  consolidated revenues from products and services in the U.S.
decreased  from  $555,912 in fiscal 1997 to $339,244 in fiscal 1998.  The market
for  hyperthermia  equipment  in the U.S.  continues  to be sluggish  due to low
reimbursement  levels and cost  containment  efforts.  The Company is  currently
evaluating  methods to increase U.S. sales; some of these actions may eventually
improve the U.S. market, however, there can be no assurance that U.S. sales will
increase in the future.

     Consolidated product sales increased from $949,369 in 1997 to $1,304,744 in
1998,  an increase of $355,375,  or 37.43%,  as a result of an increase in sales
for the BSD-2000o3D/MR product line.

     Consolidated  gross profit on product  sales was  $597,345,  an increase of
6.49%, as compared to $560,924 for fiscal 1997, due to typical periodic business
fluctuations.

     Consolidated Selling,  General and Administrative Expenses for 1998 totaled
$1,731,383,   an  increase  of  $372,301,  or  27.39%,  of  which  $738,411  was
attributable to the company's subsidiary.  Non-consolidated Selling, General and
Administrative  Expenses for BSD only totaled $992,972,  a decrease of $361,110,
or 26.94%,  as compared to $1,359,082  for fiscal 1997,  primarily  because of a
reduction in legal costs due to  settlement  of the lawsuit with  Urologix  (see
Note 15 to Financial Statements and Part I, Item 3); and a reduction in deferred
compensation  costs for  amortization  of options  and  warrants.  The  Selling,
General  and  Administrative  Expenses  for 1998  included  $151,880 in deferred
compensation from amortization of options and warrants issued to purchase shares
of the Company's  common  stock,  as compared to $372,000 in 1997 (see Note 6 to
Financial Statements). Selling, General and Administrative Expenses may increase
in the future as the Company intends to expand its marketing and sales efforts.

     Consolidated  Research and Development  Expenses for 1998 totaled $878,511,
an  increase  of $446,117 or 103.17%,  of which  $516,776  was  attributable  to
TherMatrx.  Research  and  Development  expenditures  increased  in 1998  due to
expenditures  by TherMatrx,  which is conducting a clinical  trial on the use of
thermotherapy   for  the  treatment  of  BPH.   Non-consolidated   Research  and
Development  Expenses  totaled  $361,735,  a decrease  of $70,659 or 16.34%,  as
compared to $432,394 for fiscal 1997,  due to near  completion  of the design of
the  BSD-2000o3D/MR  product line. There will continue to be costs involved with
this system.  The Company may increase research and development in the future in
order to improve existing products and develop new products.

     Consolidated  Total Costs and Expenses for 1998 were  $3,317,293,  of which
$1,255,187 was attributable to TherMatrx, an increase of $1,137,372,  or 52.17%,
as compared to $2,179,921 for fiscal 1997 due to the aforementioned increases in
Selling,  General and  Administrative  and  Research and  Development  Expenses.
Non-consolidated Total Costs and Expenses for BSD were $2,062,106, a decrease of
$117,815,  or 5.40%,  as  compared to  $2,179,921  for fiscal  1997,  due to the
aforementioned decreases in Selling, General and Administrative and Research and
Development  Expenses for 1998 as well as increases in cost of goods sold due to
higher sales.

     Consolidated  Interest Expense in 1998 decreased to $8,373,  as compared to
$22,936 in 1997.  The decrease  was caused  primarily  by lower  interest  costs
associated  with notes  payable  as they reach  maturity  and  typical  periodic
business  fluctuations.  Consolidated  Interest Income in 1998 was $159,274,  of
which $121,178 was attributable to TherMatrx.

     During fiscal 1998, the Company  experienced a  consolidated  net income of
$2,890,579,  of which  $187,763 was  attributable  to the Company's  subsidiary,
compared  to a net  loss  in  fiscal  1997  of  $872,525.  During  fiscal  1998,
non-consolidated pre-tax income was $2,530,594; after tax income was $2,480,594.
During fiscal 1997,  the Company  experienced a net loss of $872,525  before and
after taxes.  The difference  from 1997 to 1998 was primarily due to the receipt

                                                                         page 12
<PAGE>

in fiscal  1998 of $5 million  from the grant of a patent  license  to  Urologix
pursuant to  settlement  of a lawsuit (see Note 15 to Financial  Statements  and
Part I, Item 3). (Of the $5 million  settlement,  BSD  received  $2,950,000  and
TherMatrx  received  $2,050,000.)  As of November 1998, BSD had received  orders
totaling  $1,631,978  for  purchases  of  BSD-2000o3D/MR  product line and has a
back-log of $204,060 in sales for the new product line,  which will be delivered
in fiscal 1999.

     RISKS  ASSOCIATED  WITH  INTERNATIONAL   OPERATIONS.   International  sales
accounted for 75.3% and 84.21% of the Company's total consolidated product sales
during  the  fiscal  years  ended   August  31,  1997,   and  August  31,  1998,
respectively. Non-consolidated product sales were 75.3% and 87.38%, respectively
of the Company's  total product sales.  The Company  expects that  international
sales will  continue to  represent  a  significant  portion of its total  sales;
however,  a CE Mark is now required  for sales to Europe.  The Company is in the
process of obtaining the  approvals  necessary to allow the Company to affix the
CE Mark to its  products,  but a long  delay or  inability  to obtain  necessary
approvals  could have  adverse  effects on the sales of products to EC countries
(see Government  Regulation,  page 7). The Company is subject to risks generally
associated with international operations, including the establishment by foreign
regulatory  agencies of product standards different from, and in some cases more
stringent  than,  those in the United States.  Although the Company's  sales are
denominated  in U.S.  dollars,  its  international  business  may be affected by
changes in demand  resulting from  fluctuations in currency  exchange rates. The
Company's   international  sales  may  also  be  adversely  affected  by  tariff
regulations and export license requirements. Possible governmental,  legislative
and political  actions that may be taken by the United States in order to reduce
the balance of payments  deficit  may result in  retaliatory  actions by foreign
governments. Such actions could have adverse effects upon sales of the Company's
products in certain foreign  markets.  In addition,  the laws of certain foreign
countries do not protect the Company's  intellectual property rights to the same
extent as do the laws of the United States.

     FLUCTUATIONS  IN  OPERATING  RESULTS.  The  Company's  sales and  operating
results historically have varied (and will likely continue to vary) greatly on a
quarter-to-quarter   and  year-to-year   basis  due  to  risks  associated  with
international  operations;  budgeting considerations of the Company's customers;
the nature of the medical capital equipment market; the inability of the Company
to  predict  the  timing of various  approvals  required  from the Food and Drug
Administration  and other governmental  agencies;  the relatively large per unit
sales prices of the Company's products;  the typical  fluctuations in the mix of
orders for different systems and system  configurations;  the limited unit sales
volumes;  the Company's  limited cash  resources;  changes in Medicare and other
third-party  reimbursement policies;  competition;  and other factors. For these
and other reasons,  the results of operations for a particular fiscal period may
not be indicative of results for any other period.

     LIQUIDITY AND CAPITAL  RESOURCES.  Consolidated  Total assets  increased to
$7,635,150  in 1998,  an increase of  $6,266,143,  as compared to 1997, of which
$3,736,274  was  attributable  to TherMatrx.  Non-consolidated  Total assets for
fiscal year 1998 increased to  $3,898,876,  an increase of $2,529,869 or 184.8%,
as compared to 1997.  The  increase  was  primarily  due to  increases  in cash.
Consolidated Cash increased to $6,391,115,  of which $3,593,083 was attributable
to TherMatrx, as compared to $43,681 in 1997. Non-consolidated Cash increased to
$2,798,032,  an  increase  of  $2,754,351,  or  6,305.60%,  as compared to 1997,
primarily as a result of the Urologix lawsuit  settlement and resultant  paid-up
patent license (see Note 15 to Financial Statements and Part I, Item 3, page 8).
Consolidated  Trade  accounts  receivable  decreased  by $86,626,  a decrease of
21.29%, primarily due to normal business fluctuations; a reduction of $6,690 was
attributable to TherMatrx. Consolidated Total inventories increased to $657,259,
an  increase of  $115,033,  or 21.21%,  of which  $62,295  was  attributable  to
TherMatrx. Consolidated Current liabilities decreased to $690,678, a decrease of
$175,726,   or  20.28%,   of  which  $55,343  was   attributable  to  TherMatrx.
Non-consolidated  Current  Liabilities  decreased  to  $464,335,  a decrease  of
$402,069,  or  46.41%,  primarily  as a result of  decreases  in notes  payable,
accounts  payable,  and  deferred  revenue,  as well as  other  normal  periodic
fluctuations.

                                                                         page 13
<PAGE>

MANAGEMENT DISCUSSION AND CURRENT STATUS OF FINANCIAL CONDITION.
----------------------------------------------------------------

     Management  believes that the current projected sales will be sufficient to
meet the Company's  operating cash requirements into 1999. However, if sales are
not sufficient to meet operating  needs,  management  intends to use its current
cash position to meet  operating  requirements  planned for 1999.  The Company's
backlog of unfilled  customer  orders was $204,060,  as of August 31, 1998.  The
Company  also had long term  receivables  due for  field  service  contracts  of
$47,486,  as of August 31, 1998. As of November  1998,  BSD had received  orders
totaling  $1,634,978 for purchases of the BSD-2000o3D/MR  product line and had a
back-log of  $204,060  in sales for this  product,  which will be  delivered  in
fiscal 1999.

     On  November  14,  1997,  BSD signed an  agreement  with  Oracle  Strategic
Partners  (OSP) to form  TherMatrx,  Inc., a  jointly-owned  company  which will
initially focus on minimally invasive treatments of benign urological  diseases,
specifically  Benign  Prostatic  Hyperplasia  (BPH). BSD participates in the BPH
market through  TherMatrx;  the BPH market is currently  estimated to be over $3
billion  annually in the U.S.  alone.  The Company  continues to provide certain
manufacturing  and consulting  services,  for which  TherMatrx  compensates  the
Company.

     In 1996,  BSD received the first  purchase order for its new, deep regional
hyperthermia system - the BSD-2000o3D System. The first  BSD-2000o3D/MR has been
installed and initial lab testing was successful.  BSD has started collaborative
developments  for  clinical   application  of  this   technology.   The  Company
anticipates  that the BSD-2000o3D  System may increase the commercial  market in
hyperthermia throughout the world.

     The Company is seeking other strategic  partnerships  for marketing,  sales
and distribution of the Company's current products;  collaborative  arrangements
for the  development  of new product  lines;  as well as  alliances  for product
development and manufacturing of the companies' product.

     Management is expanding  worldwide  marketing for current  cancer  products
into two previously unexplored markets: surgical and chemotherapeutic  oncology.
These two  disciplines  control most cancer  patients and treatment  funds,  and
clinical evidence of the safety and efficacy of hyperthermia in conjunction with
chemotherapy  and surgery has been published.  However,  these efforts will take
time to develop.

         The Company's  consolidated  revenues from products and services in the
U.S.  decreased  from  $555,912  in fiscal  1997 to  $339,458  in  fiscal  1998.
Non-consolidated revenues for BSD only from products and services in the U.S. in
fiscal 1998 totaled  $493,857.  The Company is currently  evaluating  methods to
increase U.S.  sales,  which include  development of a low-cost  PC-based device
targeted for the U.S. market and  dissemination of a new  reimbursement  program
showing how  institutions  can  increase  profits  using  hyperthermia  for some
treatments.

     BSD plans to support further R & D for current products to improve function
and reduce cost. Funding of R & D will primarily come from government, strategic
partnerships,  and foundation sources.  Product improvements on existing product
lines will be supported by current  product  sales.  The Company also intends to
expand  marketing and product  applications  into the oncology area. In order to

utilize BSD's manufacturing  expertise, the Company has expanded its business to
include contract manufacturing.

     Management has implemented  programs to increase  profitability  and expand
BSD's  business;  however,  there can be no assurance  that  management  will be
successful in achieving  improved  operating  results and there are certain risk
factors which may impact the Company's ability to fund its cash needs. Such risk
factors include  uncertainties  as to the Company's  ability to achieve adequate
sales,  general economic  conditions,  possible unforeseen and/or  non-recurring
expenses, and the availability of outside financing. The Company's backlog as of
any particular date may not be indicative of the Company's  actual sales for any
fiscal  period.  In  addition,  the  Company's  ability to produce  and ship its
products  depends  upon  its  production  capacity,   manufacturing  yields  and
component  availability,  among  other  factors.  The  U.S.  market  for  cancer
hyperthermia  equipment  has been  severely  adversely  impacted  as a result of
Medicare  and other  third-party  reimbursement  policies  and  procedures.  The
positive  clinical  results from European  studies,  recent  changes in Medicare
reimbursement policy, and the Company's new reimbursement program may eventually
stimulate  the U.S.  market;  however,  BSD projects  that the U.S.  market will
continue to grow at a slower rate than the international market.

                                                                         page 14
<PAGE>

     YEAR 2000  COMPLIANCE.  All of BSD  Medical's  systems  are fully Year 2000
(Y2K)  compliant,  with the exception of some BSD-500 and BSD-2000  systems that
use either a 68000 or 68020 computer  system.  Beginning  January 1, 2000, these
systems  will  display  an error  message  when  the  system  is first  started,
indicating  the system has an invalid  date.  The  Company is in the  process of
rewriting  the  software  for both of these  systems,  which will allow usage to
continue  until the end of 2099. The cost to BSD Medial to address this issue is
not  material  - less than  $10,000.  The new  software  will be  available  for
customer  purchase by March 1, 1999. In the event that a customer  elects not to
purchase  the updated  software,  their system can still be operated by manually
entering a year between 1985 and 1999. The system operations and calculations do
not include any date driven  functions and therefore will not exhibit any change
in performance due to the arrival of the year 2000; rather the date is used only
as a method to identify the treatment  record.  Thus, the use of an invalid date
does not create any material risks. These systems are not connected to any other
computer systems, as they are stand-alone  systems.  The Company is dependent on
other  customers  and  vendors.  The Company has been talking to our vendors and
customers  but has not  been  able to  determine  the  Y2K  readiness  of  these
entities.

ITEM 7.  FINANCIAL STATEMENTS

     Pursuant to Rule 12b-23,  the financial  statements  set forth on pages F-1
through F-19 attached hereto are incorporated by reference.


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

     None.

                                                                         page 15
<PAGE>




                                    PART III

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

     Information regarding directors of the Company are contained under Election
of Directors in the  registrant's  1998 Proxy  Statement,  which is incorporated
herein by reference.  The current directorship positions resulted from vacancies
and were filled by a majority of the directors then in office, and the directors
so chosen  hold  office  until  their  successors  have been  duly  elected  and
qualified. The Company does not presently have a nominating committee. Executive
officers of the Company are appointed by the Board of Directors and serve at the
discretion of the Board.  There are no family  relationships  between any of the
directors  or  executive  officers of the Company and none of these  individuals
have been involved in any reportable legal proceedings.

     The following table sets forth certain information concerning the directors
and executive officers of the Company.


<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------
                                                                                                       Initial Date as
         Name                           Age                          Position                        Officer or Director
-------------------------------------------------------------------------------------------------------------------------

<S>                                     <C>      <C>                                                          <C> 
Paul F. Turner, M.S.E.E.                51       Chairman of the Board, Acting President, and                 1986
                                                   Senior Vice President of Research

Dixie Toolson Sells                     48       Vice President of Regulatory Affairs and Corporate           1987
                                                   Secretary

Ray Lauritzen                           48       Vice President of Field Service                              1988

Gerhard W. Sennewald, Ph.D.             62       Member of the Board of Directors                             1984

S. Lewis Meyer, Ph.D.                   54       Member of the Board of Directors                             1984

J. Gordon Short, M.D.                   67       Member of the Board of Directors                             1984
Michael Nobel, Ph.D.                    58       Member of the Board of Directors                             1987

-------------------------------------------------------------------------------------------------------------------------
</TABLE>



     Pursuant to Section  16(a) of the  Securities  Act of 1934,  the  Company's
directors,  executive officers,  and any persons holding more than 10 percent of
the Company's  stock,  are required to report their ownership and any changes in
beneficial  ownership  of the  Company's  stock to the  Securities  and Exchange
Commission. To the Company's knowledge,  based solely on review of the copies of
such  reports  furnished to the  Company,  all of such persons  subject to these
reporting  requirements filed the required reports with respect to the Company's
most recent fiscal year.


                                                                         page 16
<PAGE>


ITEM 10.  EXECUTIVE COMPENSATION

     The  following   tables  set  forth  certain   information   regarding  all
compensation earned during the last three fiscal years and fiscal year-end stock
option  values for the person  acting in a similar  capacity to chief  executive
officer of the  Company  in the fiscal  year  ended  August 31,  1998.  No stock
options were granted to or exercised by the Acting  President during fiscal year
1998. No other executive officers of the Company received compensation exceeding
$100,000.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------
                                                                      Long Term Compensation Awards
                                         Annual Compensation
                                --------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------

                                                        Other Annual   Restricted                       All Other
      Name and        Fiscal       Salary               Compen-sation(Stock Awards                   Compen-sation($)
      Position          Year        ($)      Bonus ($)                     ($)        Options(#)
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------

<S>                    <C>      <C>          <C>            <C>            <C>            <C>            <C>
Paul F. Turner,        1998     $128,543      -0-           -0-            -0-            -0- (1)        -0-
Acting President;      1997     $115,000      -0-           -0-            -0-            -0-            -0-
Sr. VP, Research       1996     $115,000      -0-           -0-          $2,110 (2)     14,953           -0-

-----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  During fiscal 1998, TherMatrx approved the grant of an option to Mr. Turner
     to purchase 1% of  outstanding  shares of common stock in  TherMatrx,  Inc.
     (strike price and total number of outstanding  shares to be determined at a
     later date by TherMatrx's Board of Directors).

(2)  During  fiscal  1996,  the  Company  awarded  Mr.  Turner  1,000  shares of
     restricted  common stock.  Consistently  reliable stock  quotations had not
     been readily available because there had been no established market for the
     Company's  stock (see Part II, Item 5).  However,  the  Company  received a
     valuation  of $2.11 per share on a minority  interest  basis as of December
     31,  1996.  The  Company  believes  these  numbers  may  not be a  reliable
     indicator of actual realizable value of these shares.  However,  this value
     has been reflected for the shares listed in this table.




               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>

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

<S>                      <C>           <C>         <C>                <C>              <C>                <C> 
Paul F. Turner,          -0-           -0-         175,421            5,532            $26,313            $830
Acting President;
Sr. VP, Research
---------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                         page 17
<PAGE>


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

     During the fiscal  year ended  August 31,  1998,  the  Company's  directors
received  50,000  shares of restricted  common stock,  with the exception of Dr.
Nobel, who received 20,000 shares. These shares served as compensation for their
services to the company as directors through August 31, 1998,  (December 1997 to
August  1998 for Dr.  Nobel  and  December  1994 to  August  1998 for the  other
Directors).  Effective  September 1, 1998,  the Director Stock Plan provides for
annual  compensation in the amount of $12,000 for each  non-employee  director -
$4,000 to be paid in cash and the balance of the retainer to be paid in the form
of restricted shares of BSD Common Stock. In addition to the annual compensation
to  directors,  each  Non-Employee  Director  shall  receive an annual option to
purchase 25,000 restricted shares of BSD Common Stock at a purchase price of 85%
of the Fair Market Value at the date the Option is granted.


                                                                         page 18
<PAGE>



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

     The Company  has an  employment  contract  with the acting  president,  Mr.
Turner,  that was signed  November 2, 1988.  This  agreement  provides  that Mr.
Turner's salary will be based upon a reasonable mutual agreement.  Additionally,
in the case of non-voluntary termination,  Mr. Turner will receive severance pay
for a one-year  period,  which  includes an extension  of all  employee  rights,
privileges,  and benefits,  including medical insurance.  The one-year severance
pay will be an average of Mr.  Turner's  salary for the  immediate  twelve-month
period prior to termination.  The agreement also requires the Company to pay Mr.
Turner any  accrued  unused  vacation  at the time of  termination.  BSD is also
obligated to pay Mr. Turner $1,000 (or the  equivalent  value in stock  options)
for newly issued patents (this  compensation is halved if multiple inventors are
involved).

     Mr. Turner's agreement  includes a period of  non-competition  for one year
following  termination  of  employment.  This  non-competition  agreement may be
extended by BSD for up to an additional four years by written  notification  and
continuing  severance payments for the additional years of extension (as defined
for the first year) if the non-competition obligation is extended.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth certain  information as of October 2, 1998,
with respect to the beneficial  ownership of the outstanding Common Stock by (i)
each person known to management of the Company to own beneficially  more than 5%
of the outstanding Common Stock, (ii) all directors and named executive officers
of the Company, and (iii) all officers and directors as a group:
<TABLE>
<CAPTION>

Name and Address of                              Shares of Common Stock            Percentage of Common Stock
Beneficial Owner                                 Beneficially Owned (1)                  Ownership (2)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>                                 <C>   
Dr. Gerhard W. Sennewald                                 6,726,946(3)                        40.90%
   c/o Medizin-Technik GmbH
   Augustenstrasse 27
   D-80333 Munich, Germany

Paul F. Turner                                           1,990,339(4)                        12.03%
   762 Lacey Way
   North Salt Lake, UT  84054

John E. Langdon                                          1,300,010(5)                        7.94%
   2501 Parkview Drive, Suite 500
   Fort Worth, TX  76102

S. Lewis Meyer, Ph.D.                                       76,000(6)                          *
   c/o Imatron
   389 Oyster Point Boulevard
   South San Francisco, CA  94080

Michael Nobel                                               20,000                             *
   P.O. Box 30043
   S-10425 Stockholm Sweden

J. Gordon Short, M.D.                                       73,000(7)                          *
   c/o Brevis Corporation
   3310 South 2700 East
   Salt Lake City, UT  84109

All officers and directors as                            9,352,020(8)                        55.63%
   a group (7 persons)

*    Less than 1.0%.
</TABLE>

                                                                         page 19
<PAGE>

(1)  Unless  otherwise  noted and  subject to  community  property  laws,  where
     applicable,  the persons  named in the table above  possess sole voting and
     investment power with respect to all shares shown to be beneficially  owned
     by them.

(2)  Shares not outstanding but deemed beneficially owned by virtue of the right
     of a person or member of a group to acquire them within 60 days are treated
     as outstanding  only when  determining the amount and percent owned by such
     person or group.

(3)  Includes 83,065 shares subject to options.  Does not include 500,000 shares
     held  by  Dr.  Sennewald's  spouse,  for  which  he  disclaims   beneficial
     ownership.

(4) Includes 175,421 shares subject to options.

(5)  Includes 403,525 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.

(6) Includes 21,000 shares subject to options.

(7) Includes 21,000 shares subject to options.

(8) Includes 441,729 shares subject to options.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

     The  following  exhibits  are filed as part of this  report  or are  hereby
incorporated by reference as indicated:

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

3.1  Certificate of  Incorporation.  Incorporated by reference to Exhibit 3.1 of
     the BSD  Medical  Corporation  Registration  Statement  on Form S-1,  filed
     October 16, 1986.

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.

                                                                         page 20
<PAGE>

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        Volume Purchase  Agreement  dated June 6, 1986,  between BSD Medical
            Corporation  and Luxtron  Corporation.  Incorporated by reference to
            Exhibit 10.9 of the BSD Medical Corporation  Registration  Statement
            on Form S-1, filed October 16, 1986.

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

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

10.5        Terms of  Engagement  between  BSD Medical  Corporation  and Ambient
            Capital  dated  November  26,  1996.  Incorporated  by  reference to
            Exhibit 10 of Form 10-QSB filed February 27, 1997.

10.6        Stock  Purchase  Agreement  dated  October  31,  1997,  by and among
            TherMatrx, Inc., BSD Medical Corporation, Oracle Strategic Partners,
            L.P., and Charles Manker.

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

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

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

27          Financial Data Schedule.

 (b)  Reports on Form 8-K

      During the last quarter of fiscal year 1998,  the Company filed no reports
on Form 8-K.

                                                                         page 21
<PAGE>


SIGNATURES


     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                                     BSD MEDICAL CORPORATION


Date: December ,1998                                 By:    /s/   Paul F. Turner
--------------------                                    ------------------------
                                                      Paul F. Turner
                                                      Chairman  of the Board,  
                                                      Acting  President,  
                                                      and  Senior  Vice
                                                      President of Research



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


Date: December ,1998                                 By:    /s/   Paul F. Turner
--------------------                                    ------------------------
                                                      Paul F. Turner
                                                      Chairman  of the Board,  
                                                      Acting  President,  
                                                      and  Senior  Vice
                                                      President of Research


Date: December, 1998                                 By:    /s/   S. Lewis Meyer
--------------------                                    ------------------------
                                                      Dr. S. Lewis Meyer
                                                      Member of the Board of 
                                                      Directors


Date: December, 1998                                 By: /s/Gerhard W. Sennewald
--------------------                                    ------------------------
                                                      Dr. Gerhard W. Sennewald
                                                      Member of the Board of 
                                                      Directors


Date: December, 1998                                 By:  /s/   J. Gordon Short
--------------------                                    ------------------------
                                                      Dr. J. Gordon Short
                                                      Member of the Board of 
                                                      Directors


Date: December, 1998                                 By:    /s/   Michael Nobel
--------------------                                    ------------------------
                                                      Dr. Michael Nobel
                                                      Member of the Board of
                                                      Directors



                                                                         page 22
<PAGE>

                            BSD Medical Corporation
                   Index to Consolidated Financial Statements


                                                                            Page
                                                                           -----

Report of Tanner + Co.                                                       F-1

Consolidated Balance Sheet                                                   F-2

Consolidated Statement of Operations                                         F-3

Consolidated Statement of Stockholders' Equity                               F-4

Consolidated Statement of Cash Flows                                         F-5

Notes to Consolidated Financial Statements                                   F-6


<PAGE>



                                                    INDEPENDENT AUDITORS' REPORT








To the Board of Directors and Stockholders
of BSD Medical Corporation


We have audited the  consolidated  balance sheet of BSD Medical  Corporation and
Subsidiary  (the  Company) as of August 31, 1998,  and the related  consolidated
statements of  operations,  stockholders'  equity,  and cash flows for the years
ended August 31, 1998 and 1997. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position  of  BSD  Medical
Corporation  and  Subsidiary  as of August  31,  1998,  and the  results  of its
consolidated  operations  and cash flows for the years ended August 31, 1998 and
1997 in conformity with generally accepted accounting principles.





                                  Tanner + Co.






Salt Lake City, Utah
November 4, 1998

                                                                             F-1
<PAGE>
<TABLE>
<CAPTION>


                                                                                   BSD MEDICAL CORPORATION

                                                                                Consolidated Balance Sheet

                                                                                           August 31, 1998
------------------------------------------------------------------------------------------------------------------------------------



              Assets
Current assets:
<S>                                                                                     <C>               
     Cash and cash equivalents                                                          $        6,391,115
     Receivables                                                                                   320,248
     Inventories                                                                                   657,259
     Prepaid expenses                                                                               21,241
     Deposits                                                                                       12,508
                                                                                        ------------------

                  Total current assets                                                           7,402,371
                                                                                        

Property and equipment, net                                                                        125,516
Other assets, net                                                                                   59,777
Long-term trade receivables                                                                         47,486
                                                                                        ------------------

                                                                                        $        7,635,150
                                                                                        ------------------

------------------------------------------------------------------------------------------------------------------------------------
              Liabilities and Stockholders' Equity Current liabilities:
     Accounts payable                                                                   $           86,548
     Accrued expenses                                                                              396,619
     Current portion of long-term debt                                                              51,388
     Current portion of deferred revenue                                                            94,707
     Current portion of deferred gain on sale - leaseback                                           61,416
                                                                                        ------------------

                  Total current liabilities                                                        690,678
                                                                                        ------------------

Long-term debt                                                                                       5,422
Deferred revenue                                                                                    99,623
Deferred gain on sale - leaseback                                                                  199,523
                                                                                        ------------------

                  Total liabilities                                                                995,246
                                                                                        ------------------

Minority interest                                                                                3,149,946
                                                                                        ------------------

Commitments and contingency                                                                              -

Stockholders' equity:
     Common stock, $.01 par value; authorized 20,000,000
       shares; issued and outstanding 16,370,052 shares                                            163,701
     Additional paid-in capital                                                                 20,531,967
     Accumulated deficit                                                                       (16,894,110)
     Deferred compensation                                                                        (311,366)
     Less 13,412 shares of treasury stock, at cost                                                    (234)
                                                                                        ------------------

                  Total stockholders' equity                                                     3,489,958
                                                                                        ------------------

                                                                                        $        7,635,150
                                                                                        ------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        F-2
</TABLE>
<PAGE>

<TABLE>
<CAPTION>


                                                                      Consolidated Statement of Operations

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




                                                                             1998              1997
                                                                       -----------------------------------

<S>                                                                    <C>                <C>                  
Product sales                                                          $       1,304,744  $        949,369
Grant and license revenue                                                        133,173           370,329
                                                                       -----------------------------------

                  Total revenues                                               1,437,917         1,319,698
                                                                       -----------------------------------

Costs and expenses:
     Cost of product sales                                                       707,399           388,445
     Research and development                                                    878,511           432,394
     Selling, general, and administrative                                      1,731,383         1,359,082
                                                                       -----------------------------------

                  Total costs and expenses                                     3,317,293         2,179,921
                                                                       -----------------------------------

                  Operating loss                                              (1,879,376)         (860,223)

Other income (expense):
     Interest income                                                             159,274            10,634
     Interest expense                                                             (8,373)          (22,936)
     Litigation settlement                                                     5,000,000                 -
                                                                       -----------------------------------

                  Net income (loss) before income taxes
                     and minority interest                                     3,271,525          (872,525)

Provision for income taxes - current                                            (221,000)                -
                                                                       -----------------------------------

                  Income (loss) before minority interest                       3,050,525          (872,525)

Minority interest in net income of subsidiary                                   (159,946)                -
                                                                       -----------------------------------

                  Net income (loss)                                    $       2,890,579  $       (872,525)
                                                                       -----------------------------------

Earnings (loss) per common share - basic                               $            .18   $           (.05)
                                                                       -----------------------------------

Earnings (loss) per  common share - assuming dilution                  $             .17  $           (.05)
                                                                                     
                                                                       -----------------------------------

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

See accompanying notes to consolidated financial statements.
                                                                                                         F-3

</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                                                   BSD MEDICAL CORPORATION

                                                  Consolidated Statement of Stockholders' Equity (Deficit)

                                                                      Years Ended August 31, 1998 and 1997
------------------------------------------------------------------------------------------------------------------------------------




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

Balances,
<S>                   <C>         <C>        <C>           <C>         <C>              <C>      <C>                 
September 1, 1996     16,176,980  $ 161,770  $ 20,341,418  $ (849,416) $ (18,912,164)   67,428   $ (14,867)

Amortization of
deferred compensation          -          -            -      405,170            -           -           -

Cancellation of stock
options                        -          -       (19,843)          -            -           -           -

Deferred
compensation related
to grant of stock              -          -        19,000     (19,000)           -           -           -
options

Treasury stock issued
for employees bonuses          -          -            -           -             -      (3,000)        630

Purchase of treasury
stock for cash                 -          -            -           -             -     170,500      (5,000)

Warrants issued for
services                       -          -        73,000          -             -           -           -

Net loss                       -          -            -           -        (872,525)        -           -
                      -------------------------------------------------------------------------------------

Balance,
August 31, 1997       16,176,980    161,770    20,413,575    (463,246)   (19,784,689)  234,928     (19,237)

Amortization of
deferred compensation          -          -            -      151,880            -          -            -

Donated shares                 -          -            -           -             -       5,412           -

Treasury stock issued
for services                   -          -        51,913          -             -    (226,928)     19,003

Common stock issued
for services             193,072      1,931        66,479          -             -          -            -

Net income                     -          -            -           -       2,890,579        -            -
                      -------------------------------------------------------------------------------------

Balance,
August 31, 1998       16,370,052  $ 163,701  $ 20,531,967  $ (311,366) $ (16,894,110)   13,412   $    (234)
                     -------------------------------------------------------------------------------------



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


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

<PAGE>


<TABLE>
<CAPTION>
                                                                                   BSD MEDICAL CORPORATION

                                                                      Consolidated Statement of Cash Flows

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



                                                                                 1998              1997
                                                                       -----------------------------------
Cash flows from operations activities:
<S>                                                                    <C>                <C>                   
     Net income (loss)                                                 $       2,890,579  $       (872,525)
     Adjustments to reconcile net income (loss) to net
       cash provided by (used in) operating activities:
         Depreciation and amortization                                            36,393            24,481
         Write-off of patents                                                          -            67,742
         Provision for losses on receivables                                           -           (46,694)
         Deferred gain on sale of building                                       (46,061)                -
         Gain on disposal of property and equipment                              (18,154)                -
         Deferred compensation                                                   151,880           386,170
         Stock compensation expense                                              139,326            73,000
         (Increase) decrease in:
              Receivables                                                        107,620           324,539
              Inventories                                                       (144,444)          (11,160)
              Prepaid expense and other assets                                   (78,132)           14,475
         Increase (decrease) in:
              Accounts payable                                                  (237,370)          190,926
              Accrued expenses                                                   188,706          (178,269)
              Deferred revenue                                                     6,747          (252,291)
              Minority interest                                                  159,946                 -
                                                                       -----------------------------------
                  Net cash provided by (used in)
                  operations activities                                        3,157,036          (279,606)
                                                                       -----------------------------------

Cash flows from investing activities:
     Purchase of property and equipment                                          (55,278)          (52,474)
     Proceeds from sale of building                                              446,545                 -
     Capital contribution from minority interest                               2,990,000                 -
                                                                       -----------------------------------
                  Net cash provided by (used in)
                  investing activities                                         3,381,267           (52,474)
                                                                       -----------------------------------

Cash flows from financing activities:
     Proceeds from long-term debt                                                      -           155,672
     Payments on long-term debt                                                 (190,869)         (156,657)
     Purchase of treasury stock                                                        -            (5,000)
                                                                       -----------------------------------
                  Net cash used in
                  financing activities                                          (190,869)           (5,985)
                                                                       -----------------------------------

Increase (decrease) in cash and cash equivalents                               6,347,434          (338,065)

Cash and cash equivalents, beginning of year                                      43,681           381,746
                                                                       -----------------------------------

Cash and cash equivalents, end of year                                 $       6,391,115  $         43,681
                                                                       -----------------------------------



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



                                                                                                        F-5
</TABLE>

<PAGE>


                                                         BSD MEDICAL CORPORATION


                                      Notes to Consolidated Financial Statements

                                                        August 31, 1998 and 1997
--------------------------------------------------------------------------------


                    Business
1.   Summary of     BSD Medical  Corporation  (the  Company)  develops,
     Business and   produces,   markets,  and  services  systems  used  for  the
     Significant    treatment of cancer and other  diseases.  These  systems are
     Accounting     sold  worldwide.  In  addition,  the Company  currently  has
     Policies       fifty-four percent interest in Thermatrx, Inc. (Thermatrx) a
                    corporate  joint venture that is engaged in the  manufacture
                    and sale of medical  equipment.  Principles of Consolidation
                    The consolidated  financial  statements include the accounts
                    of  the  Company,   and  its  subsidiary.   All  significant
                    intercompany balances and transactions have been eliminated.
                          

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


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


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

                    Other Assets
                    Other assets include certain intangibles which costs and are
                    amortized  over five years using the  straight-line  method.
                    Amortization  expense and accumulated  amortization  for the
                    year ended August 31, 1998 and 1997,  totaled  approximately
                    $13,000 and -0-, respectively.

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



                                                                             F-6

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



                    Income Taxes
1.   Summary of     The Company accounts for income taxes using the
     Business       asset and  liability  method.  Under the asset and liability
     and            method,  deferred tax assets and  liabilities are recognized
     Significant    for the future tax consequences  attributable to differences
     Accounting     between the financial statement carrying amounts of existing
     Policies       assets  and  liabilities  and their  respective  tax  bases.
     Continued      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.
           

                    Earnings  (Loss) Per Share
                    The  computation of basic earnings 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.


                    Revenue
                    Recognition Sales revenues for products are recorded
                    when products are shipped.  Revenue from  long-term  service
                    contracts is  recognized on a  straight-line  basis over the
                    term of the contract,  which approximates  recognizing it as
                    it is earned. Deferred revenue includes amounts from service
                    contracts  as well as revenue  from sales of products  which
                    have not been shipped.


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

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


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



                                                                             F-7

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



                    Concentration  of Credit  Risk -  Continued
1.   Summary of     The Company has cash in bank and short-term investments that
     Business       at times, may exceed federally insured limits.  The Company
     and            has not experienced any losses in such accounts.  The 
     Significant    Company believes it is not exposed to any significant credit
     Accounting     risk on cash and short-term investments.
     Policies       
     Continued               
           
                    Use of Estimates in the Preparation of Financial  Statements
                    The  preparation of financial  statements in conformity with
                    generally accepted accounting principles 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.


                    Reclassifications
                    Certain accounts in the 1997 financial  statements have been
                    reclassified to conform with the current year presentation.


2.   Detail of      Details of certain  balance sheet  accounts at September 30,
     Accounts       1998, are as follows:
     Certain
     Balance
     Sheet            

Receivables:
     Trade receivables                                    $         330,248
     Less allowance for doubtful
       accounts                                                     (10,000)
                                                          -----------------

                                                          $         320,248
                                                          -----------------




Inventories:
     Parts and supplies                                   $         342,205
     Work-in-process                                                128,681
     Finished goods                                                 215,784
                                                          -----------------

                                                          $         686,670
                                                          -----------------




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



                                                                             F-8

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



3.   Property and        Property and equipment consists of the following:
     Equipment




Equipment                                                 $         566,043
Furniture and fixtures                                              308,227
                                                          -----------------

                                                                    874,270

Less accumulated depreciation
  and amortization                                                 (778,165)
                                                          -----------------

                                                          $          96,105
                                                          -----------------



4.   Long-term           Long-term debt consists of the following:
     Debt



Note payable to a vendor, due in monthly
installments of $2,742, including interest at 9%,
maturing October 1, 1999                                  $          36,310

Note payable to an insurance company, due in
monthly installments of $2,125, including interest
at 9.6%, maturing June 1999                                          20,500
                                                          -----------------



                                                                     56,810

Less current portion                                                (51,388)
                                                          -----------------

                                                          $           5,422
                                                          -----------------



Future maturities of long-term debt are as follows:


Years Ending August 31:                                         Amount
                                                            ---------------
                           1999                             $        51,388
                           2000                                       5,422
                                                            ---------------

                                                            $        56,810
                                                            ---------------




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



                                                                             F-9

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



5.   Deferred       During the year ended August 31, 1998,  the Company  entered
     Gain           into a sale-leaseback  on its building.  The  sale-leaseback
                    resulted  in a gain  of  $325,513,  of  which  $307,000  was
                    deferred  and is being  credited  to income as rent  expense
                    adjustments  over the term of the lease.  The lease requires
                    monthly payments of $6,533 through November 2002.
     
                    

Future minimum payments at August 31, 1998, are as follows:


Years Ending August 31,                                        Amount
                                                          -----------------
     1999                                                 $          78,396
     2000                                                            78,396
     2001                                                            78,396
     2002                                                            78,396
     2003                                                            19,599
                                                          -----------------

                                                          $         331,183
                                                          -----------------

Rent  expense  on this  operating  lease for the year  ended  August  31,  1998,
amounted to approximately $59,000.


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



                                                    Years Ended
                                                     August 31,
                                         ----------------------------------
                                               1998             1997
                                         ----------------------------------

Income tax (provision) benefit at
  statutory rate                         $      (1,031,000)   $     297,000
Change in valuation allowance                      810,000         (297,000)
                                         ----------------------------------

                                         $        (221,000)   $           -
                                         ----------------------------------



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



                                                                            F-10

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



6.   Income    Deferred tax assets (liabilities) are comprised of the following:
     Taxes
     Continued



Net operating loss carry forward                          $       3,060,000
Deferred compensation expense                                       340,000
Capital loss carry forward                                           86,000
Allowance for bad debt and reserves                                   6,000
General business credit carry forward                               123,000
AMT credit                                                           50,000
                                                          -----------------

                                                                  3,665,000

Valuation allowance                                              (3,665,000)
                                                          -----------------

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



                    At August 31,  1998,  the Company has net  operating  losses
                    (NOL),  research and  experimentation tax credit (RETC), and
                    investment  tax  credit  (ITC)  available  to offset  future
                    taxable income and taxes payable as follows:


   Expiration
      Date              NOL                RETC                ITC
---------------------------------------------------------------------------

2000            $            577,000 $                - $                 -
2001                         236,000                  -               2,000
2002                       2,827,000              8,000                   -
2003                       2,122,000             41,000                   -
2005                       1,270,000             72,000                   -
2007                         190,000                  -                   -
2008                         100,000                  -                   -
2009                         671,000                  -                   -
2010                         170,000                  -                   -
2012                         837,000                  -                   -
                -----------------------------------------------------------

                $          9,000,000 $          121,000 $             2,000
                -----------------------------------------------------------

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

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



                                                                            F-11

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



                    Stock Options
7.   Stock          The Company's  1998 Employee Stock Option Plan
     Options        authorizes  the  granting  of  incentive  stock  options  to
     and            certain key employees and  nonemployees who provide services
     Warrants       to the  Company.  The  Plan  provides  for the  granting  of
                    options for an aggregate of  2,000,000  shares.  The options
                    vest subject to management's discretion.
                   
                    The Company's 1998 Director Stock Plan authorizes granting a
                    total of  $12,000 in cash and  options  to each  nonemployee
                    director.  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.


                    The Company's 1987 Employee Stock Option Plan, which has now
                    expired,  authorizes  the granting of  incentive  options to
                    certain key employees of the Company and nonqualified  stock
                    options to certain key employees,  nonemployee directors, or
                    individuals who provided services to the Company.  The Plan,
                    as amended, allowed for an aggregate of 950,000 shares to be
                    granted.  The options vested  according to a set schedule of
                    over a  five-year  period  and  expire  upon the  employee's
                    termination, or after ten years from the date of grant.


                    In  addition,   the  Board  of  Directors   authorized   the
                    cancellation of all outstanding  options  previously  issued
                    under the 1987 option plan and  reissuance  of these options
                    with an  exercise  price of $.10 per share,  which will vest
                    over a one to five year  period.  Each  employee was granted
                    options  to  purchase  3,000  shares  per  year  of  service
                    performed  at the Company,  and the  officers and  directors
                    were each  granted  options to purchase  35,000  shares.  In
                    addition,  the Company granted  242,655  warrants to another
                    entity at an exercise price of $.20 per share.


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



                                                                            F-12

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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




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




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

Outstanding at September 1,
  1996                                   1,090,246           - $        .10
Granted                                     47,500     242,655  .10  to .20
Expired                                    (30,000)          -          .10
                                      -------------------------------------

Outstanding at August 31, 1997           1,107,746     242,655 $ .10 to .20
Granted                                     27,500           -          .25
                                      -------------------------------------

Outstanding at August 31, 1998           1,135,246     242,655 $ .10 to .25
                                      -------------------------------------



                    The Company has issued options to purchase  shares of common
                    stock to employees and nonemployees, at an exercise price of
                    $.10 per  share.  For  options  granted  to  employees,  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.

                    Stock options shown above include 162,065 options which were
                    authorized  by the  Company's  Board  of  Directors  and not
                    issued under the employee stock option plan discussed above.
                    Of  these   162,065   options   100,000   were   issued   to
                    nonemployees, while 62,065 were issued to a related party.


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



                                                                            F-13

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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




7.   Stock          The  Financial   Accounting   Standards   Board  has  issued
     Options        Statement  of  Financial   Accounting   Standards  No.  123,
     and            "Accounting for Stock-Based  Compensation"  (SFAS 123) which
     Warrants       established financial accounting and reporting standards for
     Continued      stock-based  compensation.  The new standard  defines a fair
                    value method of accounting  for an employee  stock option or
                    similar equity instrument. This statement gives entities the
                    choice between  adopting the fair value method or continuing
                    to  use  the   intrinsic   value  method  under   Accounting
                    Principles   Board  (APB)   Opinion  No.  25  with  footnote
                    disclosures  of the pro  forma  effects  if the  fair  value
                    method  had been  adopted.  The  Company  has  opted for the
                    latter approach.  Accordingly,  no compensation  expense has
                    been recognized for the stock option plans. Had compensation
                    expense for the  Company's  stock  options  been  determined
                    based on the fair value at the grant date for awards in 1998
                    and 1997 consistent with the provisions of SFAS No. 123, the
                    Company's  results of operations  would have been reduced to
                    the pro forma amounts indicated below:
          

                                                        Years Ended
                                                         August 31,
                                            ------------------------------------
                                                       1998              1997
                                            ------------------------------------

Net income (loss) - as reported             $        2,890,579   $     (872,525)
Net income (loss) - pro forma               $        2,883,894   $     (881,898)
Diluted earnings (loss) per share - as
   reported                                 $              .17   $         (.05)
Diluted earnings (loss) per share -
  pro forma                                 $              .17   $         (.05)
                                            ------------------------------------



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


                                                        August 31,
                                            -----------------------------------
                                                   1998             1997
                                            -----------------------------------

Expected dividend yield                     $                   $              -
Expected stock price volatility                            139%             229%
Risk-free interest rate                                    5.6%             6.3%
Expected life of options                                5 years          5 years
                                            -----------------------------------



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



                                                                            F-14

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



7.   Stock          The weighted average fair value of options granted during 
     Options        1998 and 1997 are $.22 and $.10, respectively.
     and
     Warrants       The  following  table  summarizes  information  about  stock
     Continued      options and warrants outstanding at August 31, 1998:
                         
     
                                                        Options and Warrants
                 Options and Warrants Outstanding            Exercisable
              ------------------------------------------------------------------
                             Weighted
                              Average
                 Number      Remaining    Weighted      Number       Weighted
   Range of    Outstanding  Contractual    Average    Exercisable    Average
   Exercise        at          Life       Exercise         at        Exercise
    Prices       8/31/98      (Years)       Price       8/31/98       Price
--------------------------------------------------------------------------------

$ .10 - .25    1,377,901       2.8         $ .12        1,060,397    $ .12

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



8.   Grant          In a prior year,  the  Company  was awarded a federal  grant
     and            from  the  National   Cancer   Institute  for  research  and
     License        development.  No revenues or expenses were recognized  under
     Revenue        this grant during the year ended August 31, 1998. During the
                    year  ended   August  31,  1997,   $138,499  and   $117,699,
                    respectively, of revenues and expenses were recognized under
                    this grant.
             
     
                    


9.   Foreign        Sales to foreign customers are as follows:
     Customer 
     and Major 
     Customer

                                                    Years Ended
                                   August 31,
                                        -----------------------------------
                                               1998             1997
                                        -----------------------------------

Europe                                  $          903,849 $        795,420
Far East                                           194,824                -
Other                                                    -           35,000
                                        -----------------------------------

                                        $        1,098,673 $        830,420
                                        -----------------------------------



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



                                                                            F-15

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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




9.   Foreign        During the years ended August 31, 1998 and 1997, the Company
     Customers      had sales to a major customer which amounted to $888,516 and
     and Major      $692,542, respectively.
     Customer
     Continued               
           
     

10.  Related        During the years ended August 31, 1998 and 1997, the Company
     Party          had sales to a  stockholder  of  approximately  $888,000 and
     Transactions   $693,000.
        
     
11.  Supplemental   During the year ended  August 31,  1998,  the Company sold a
     Cash Flow      building with a book value of $213,259, debt of $93,741, and
     Information    recognized a deferred gain of $307,000.
         
     
                    Actual  amounts  paid for  interest  and income taxes are as
                    follows:


                                                    Years Ended
                                   August 31,
                                        -----------------------------------
                                               1998             1997
                                        -----------------------------------

Interest expense                        $            8,373 $         22,936
                                        -----------------------------------

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



12. Commitments     The  Company  has an  employment  agreement  with the acting
    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  nonvoluntary
                    termination, the acting president will receive severance pay
                    for a one year  period,  which  includes an extension of all
                    employee rights, privileges, and benefits, including medical
                    insurance. The one year severance pay would be an average of
                    the acting president's salary for the immediate twelve month
                    period prior to termination. The agreement also requires the
                    Company to pay the acting  president for any accrued  unused
                    vacation and $1,000 for any newly issued patents.
       
     
--------------------------------------------------------------------------------



                                                                            F-16

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



12.  Commitments    The Company has an exclusive  worldwide license for a unique
     and            temperature probe. The license will remain in effect as long
     Contingencies  as the technology does not become publicly known as a result
     Continued      of actions taken by the licensor. The Company pays royalties
                    based upon its sales of this probe.  Royalties accrued as of
                    August  31,  1998 and 1997,  are  approximately  $1,000  and
                    $5,000,   respectively.    Royalty   expense   amounted   to
                    approximately  $9,000 and $8,000 for the years ended  August
                    31, 1998 and 1997, respectively.
           
           
13.  Fair Value of  None of the  Company's  financial  instruments  are held for
     Financial      trading purposes.  The Company estimates that the fair value
     Instruments    of all financial  instruments  at August 31, 1998,  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 judgement
                    is  necessarily  required  in  interpreting  market  data to
                    develop the estimates of fair value, and,  accordingly,  the
                    estimates are not necessarily indicative of the amounts that
                    the Company could realize in a current market exchange.     
         
                    
14.  Earnings Per   In February 1997, the Financial  Accounting  Standards Board
     Share          issued Statement of Financial  Accounting  Standards No. 128
                    (SFAS 128) "Earnings Per Share," which requires companies to
                    present basic earnings per share (EPS) and diluted  earnings
                    per share,  instead of the primary and fully  diluted EPS as
                    previously   required.   The  new  standard   also  requires
                    additional  informational  disclosures,  and  makes  certain
                    modifications to the previously  applicable EPS calculations
                    defined  in  Accounting  Principles  Board No.  15.  The new
                    standard is  required to be adopted by all public  companies
                    for reporting  periods  ending after  December 15, 1997, and
                    requires  restatement of EPS for all prior periods reported.
                    During the year ended August 31, 1998,  the Company  adopted
                    this standard.
     
                    


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



                                                                            F-17

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



14.  Earnings Per   Earnings per share  information in accordance  with SFAS 128
     Share          is as follows:
     Continued               
     
                    
                           Year Ended August 31, 1998
                                 -----------------------------------------------
                                       Loss           Shares        Per-Share
                                   (Numerator)     (Denominator)      Amount
                                 -----------------------------------------------

Net income                       $      2,890,579
Less preferred stock
  dividends                                     -
                                 ----------------
Basic EPS
Income available to
  common stockholders                   2,890,579       16,214,000 $         .18
                                                                  --------------
Effect of Dilutive Securities
Stock options/warrants                          -          960,000
                                 ---------------------------------
Diluted EPS
Income available to common
  stockholders plus assumed
  conversions                    $      2,890,579       17,174,000 $         .17
                                 -----------------------------------------------



                           Year Ended August 31, 1997
                                 -----------------------------------------------
                                       Loss           Shares        Per-Share
                                   (Numerator)     (Denominator)      Amount
                                 -----------------------------------------------

Net loss                         $       (872,525)
Less preferred stock
  dividends                                     -
                                 ----------------
Basic EPS
Loss available to
  common stockholders                    (872,525)      16,177,000 $       (.05)
                                                                  --------------
Effect of Dilutive Securities
Stock options                                   -                -
                                 ---------------------------------
Diluted EPS
Loss available to common
  stockholders plus assumed
  conversions                    $       (872,525)      16,177,000 $       (.05)
                                 -----------------------------------------------




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



                                                                            F-18

<PAGE>


                                                         BSD MEDICAL CORPORATION

                                      Notes to Consolidated Financial Statements
                                                                       Continued

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


15.  Litigation     During 1998, the Company  settled  litigation with Urologix.
     Settlement     Pursuant  to the  settlement  agreement,  Urologix  paid  an
                    aggregate  total  of  $5,000,000  to  the  Company  and  its
                    subsidiary.  As part of settlement, Urologix maintains   its
                    non-exclusive license to certain patents.
     
                    

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



                                                                            F-19