Edgar Filing: BSD MEDICAL CORP

As filed with the Securities and Exchange Commission on July 7, 2004
Registration No. 333-112240
--------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 2
---------------

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

BSD MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
---------------------------------

Delaware 3845 75-1590407
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)

2188 West 2200 South
Salt Lake City, Utah 84119
(801) 972-5555
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

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

Hyrum A. Mead
President
BSD Medical Corporation
2188 West 2200 South
Salt Lake City, Utah 84119
(801) 972-5555
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

---------------------------------------
Copy to:
Nolan S. Taylor, Esq.
Dorsey & Whitney LLP
170 South Main Street, Suite 900
Salt Lake City, Utah 84101
(801) 933-7360

Approximate date of commencement of proposed sale to
the public: from time to time after the effective date of
this registration statement.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

--------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE

=========================================== ================== ======================= ====================== ===================
Amount Proposed Maximum Proposed Maximum Amount of
to be Offering Price Aggregate Registration
Title of Shares Registered(1) per Share(2) Offering Price(2) Fee(3)
to be Registered
------------------------------------------- ------------------ ----------------------- ---------------------- -------------------

Common stock, 2,162,580 $1.25 $2,703,225 $342.50
$0.001 par value per share
=========================================== ================== ======================= ====================== ===================

(1) The amount to be registered consists of 2,162,580 shares of common stock
to be sold by the selling stockholders identified in this registration
statement. Of the 2,162,580 shares of common stock, 2,059,600 are
currently outstanding and beneficially owned by the selling stockholders
and 102,980 are issuable upon the exercise of warrants by the selling
stockholders.

(2) Estimated based upon the average of the bid and asked price of the
Registrant's common stock on January 23, 2004, as reported by the OTC
Bulletin Board, pursuant to Rule 457(c) promulgated under the Securities
Act of 1933, as amended.

(3) Registration fee was previously paid.

The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

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

The information in this prospectus is not complete and may be changed.
The selling stockholders named herein may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.

PRELIMINARY PROSPECTUS
(Subject to completion: Dated JULY 7, 2004)

2,162,580 Shares
BSD MEDICAL CORPORATION

Common Stock

This prospectus relates to the public offering, which is not being
underwritten, of a total of 2,162,580 shares of the common stock of BSD Medical
Corporation by the selling stockholders described herein. The price at which the
selling stockholders may sell the shares will be determined by the prevailing
market price for the shares or in negotiated transactions. We will not receive
any of the proceeds from the sale of these shares.

Our common stock is quoted on the OTC Bulletin Board under the symbol
"BSDM." On July 2, 2004, the last reported sale price for our common stock on
the OTC Bulletin Board was $1.85 per share.

You should carefully consider the risk factors beginning on page 2 of
this prospectus before purchasing any of the common stock offered by this
prospectus.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this prospectus is July ____, 2004.

TABLE OF CONTENTS

Page
----

BSD Medical Corporation......................................................................................1
Prospectus Summary...........................................................................................1
Risk Factors.................................................................................................3
Use of Proceeds.............................................................................................10
Business....................................................................................................10
Management..................................................................................................22
Executive Compensation......................................................................................24
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values...........................25
Selling Stockholders........................................................................................26
Plan of Distribution........................................................................................27
Management's Discussion and Analysis of Financial Condition and Results of Operations.......................29
Forward-Looking Statements..................................................................................38
Certain Relationships And Related Transactions..............................................................38
Market For Registrant's Common Equity And Related Stockholder Matters.......................................39
Principal Stockholders......................................................................................40
Description of Securities...................................................................................41
Limitation of Liability and Indemnification.................................................................43
Legal Matters...............................................................................................44
Experts.....................................................................................................44
Where You Can Find More Information.........................................................................44

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

You should rely only on information contained in this prospectus. We
have not authorized any person to make a statement that differs from what is in
this prospectus. If any person does make a statement that differs from what is
in this prospectus, you should not rely on it. This prospectus is not an offer
to sell, nor is it seeking an offer to buy, these securities in any state in
which the offer or sale is not permitted. The information in this prospectus is
complete and accurate as of its date, but the information may change after that
date.

In this prospectus, the terms "BSD" "company," "we," "us," and "our"
refer to BSD Medical Corporation.

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is
qualified in its entirety by, the more detailed information and financial
statements appearing elsewhere in this prospectus.

Company Overview

BSD Medical Corporation develops, manufactures, markets and services
hyperthermia microwave systems used to treat cancer, the second leading cause of
death in the United States according to the National Cancer Society. Our
treatment systems are designed to precisely deliver microwave energy to elevate
the temperature of cancerous tumors, directly killing cancerous cells and
enhancing the effectiveness of certain other cancer therapies.

The focus of our cancer therapy business is to develop and
commercialize systems that provide hyperthermia treatment for cancerous tumors
that occur anywhere in the body. To accomplish this, we have developed systems
capable of treating both superficial tumors, or tumors near the body's surface,
and deep tumors. These systems consist of two families of products: the BSD-500
and the BSD-2000.

In October 2003, we announced that we had received FDA approval for a
new operating system, allowing us to commercially introduce in the United States
a new family of four systems, including the BSD-500i-4, BSD-500c-4, BSD-500i-8
and BSD-500c-8. These new systems enable us to treat cancers near the surface of
the body using heat created from focused microwave energy, known as superficial
hyperthermia, and also to treat cancers deeper in the body or in natural
orifices like the esophagus using microwave antennae, known as interstitial
hyperthermia. In addition to treating melanoma, recurring breast cancer and
other cancers requiring superficial hyperthermia therapy, these new systems are
used as companions to interstitial radiation systems, called brachytherapy
systems, that treat cancer with radioactive seeds. We believe that over 1,500
brachytherapy systems have been installed, providing a target customer base for
our systems. We have also obtained the CE Mark certification required to export
these systems to Europe. The new BSD-500 systems are compact, portable and
ergonomically engineered for use in a demanding hospital environment.

Our BSD-2000 family of systems employs an array of microwave antennae
used to focus on and treat tumors located deep in the body. The BSD-2000 system
has not been submitted for FDA pre-market approval, or PMA. Accordingly, we do
not have authority to distribute the BSD-2000 system for sale in the United
States, except as an investigational device. The phase III clinical trial
through which we intend to seek a PMA for this system has already been
completed, and we are underway in developing the commercial version of the
BSD-2000 that we intend to use as the basis of the FDA submission.

In planning for the anticipated pre-market approval of the BSD-2000,
including the commercial upgrades required before market introduction, we
estimated that it would be faster to obtain FDA approvals for the commercial
upgrades if those approvals are received while the BSD-2000 was classified by
the FDA as an investigational device. Three independent investigational device
approvals are required to complete these commercial upgrades. First, a new
commercial amplifier system for the BSD-2000 has been submitted and approved by
the FDA under an investigational device status. Second, we recently received FDA
investigational device approval for a new commercial patient treatment
applicator. Third, we have submitted an application for investigational device
approval of new commercial software for the BSD-2000. The software submission
was completed in May 2004. The FDA has 30 days to respond once a submission has
been made for investigational device approval. Further work and delays can then
follow. All of these investigational device upgrades are an integral part of the
BSD-2000 system and will not therefore be submitted individually for pre-market
approval.

Once the anticipated investigational device upgrade approvals have been
obtained, it becomes considerably more difficult to estimate the time frame
until a potential pre-market approval can be obtained for the BSD-2000. The
timing of a FDA decision depends on the workload of the FDA and the extent of
the review process required. While the response time for submissions can vary
greatly, the average response time between submission and pre-market approval
was 364 days in fiscal year 2003 as reported by the FDA.

In July 2004, American Medical Systems Holdings, Inc., or AMS, acquired
TherMatrx, Inc. for $40 million in cash plus future payments contingent upon the
combined entity's future sales of TherMatrx's DOT systems. The sale includes all
of our TherMatrx shares. We expect to receive an initial cash payment, after the
withholding of escrow funds and the payment of other initial obligations, of
approximately $9 million in connection with the closing. Our approximate 30%
ownership of TherMatrx was reduced to approximately 25% because of the exercise
of outstanding options to acquire common stock of TherMatrx at the closing. We
may also receive future contingent payments. Contingent payments to TherMatrx
shareholders will be four times quarterly sales of TherMatrx's DOT systems
during the six quarters beginning July 5, 2004 and ending December 31, 2005. We
will receive quarterly contingent payments when the accumulated value of four
times quarterly sales has exceeded the initial $40 million payment to TherMatrx
shareholders. The contingent payments are also subject to certain set-off rights
in favor of AMS. The aggregate maximum amount of the initial payment and any
contingent payments is $250 million. While the contingent payments are not
guaranteed and are subject to the future sales of TherMatrx products, we have
offered the following projections. If the sale of TherMatrx products were to
remain flat at the recent sales rates, the total payment for our TherMatrx
shares would be about $30 million, including the initial payment of
approximately $9 million. Since the sale of TherMatrx products has been
increasing in the current year over previous years, we have projected a
continued growth trend during the earn-out period. If that growth trend were
realized, the projected total payment for our TherMatrx shares would be about
$40 million, including the initial payment of approximately $9 million. However,
any future payments are not guaranteed and are subject to uncertainties, and we
may not receive any contingent payments in addition to the initial $9 million,
which is the only amount guaranteed. We expect to use the payments from the sale
of our TherMatrx shares, including any contingent payments, for general
corporate purposes including the sales and marketing effort for our FDA approved
cancer therapy products, supporting the FDA application for our cancer therapy
products under investigational status, and the development of future products
used in medical therapy.

Our principal sources of revenue include the sale of our BSD-500 and
BSD-2000 series hyperthermia systems and the sale of thermotherapy systems,
component parts and contract manufacturing services to TherMatrx. During the six
months ended February 29, 2004, total sales of $1,107,676 consisted of $606,798,
or 55%, from the sale of a BSD-2000 system and miscellaneous equipment to a
related party; $341,300, or 31%, from the sale of two BSD-500 systems to

non-related parties; $88,620, or 8%, from the sale of thermotherapy systems,
component products and contract services to TherMatrx; and $70,958, or 6%, for
service contracts, billable labor, and other miscellaneous items to non-related
parties. During the fiscal year ended August 31, 2003, total sales of $2,572,682
consisted of $1,391,443, or 54%, from the sale of thermotherapy systems,
component products and contract service to TherMatrx; $63,500, or 2% from
royalties paid to us by TherMatrx; $516,142, or 20%, from the sale of a BSD-2000
systems and various component parts to a related party; $203,386, or 8%, from
the sale of two BSD-500 systems to non-related parties; $123,211, or 5%, for
service contracts, billable labor, and other miscellaneous items to non-related
parties; and $275,000, or 11%, from royalties paid by non-related parties.

Our principal executive offices are located at 2188 West 2200 South,
Salt Lake City, Utah 84101, and our telephone number is (801) 972-5555.

The Offering

The selling stockholders identified in this prospectus are selling up
to 2,162,580 shares of our common stock, which they acquired from us in private
placements on November 28, 2003 and December 10, 2003 or will be issued upon the
exercise of warrants issued to a broker-dealer in connection with the private
placements. We will not receive any proceeds from the sale of the shares by the
selling stockholders.

RISK FACTORS

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

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

Since our inception in 1978, our expenses have substantially exceeded
our revenue, resulting in continuing losses and an accumulated deficit of
$20,765,496 at February 29, 2004. In fiscal 2003, we recorded a net loss of
$570,285. Our net loss was primarily due to a write-off of a significant
receivable of approximately $300,000 to bad debt expense, an increase to
inventory reserve of $90,000 and lower overall sales. For the six months ended
February 29, 2004, we recorded a net loss of $279,389. We may continue to incur
operating losses in the future as we continue to incur costs to develop our
products, protect our intellectual property and expand our sales and marketing
activities. To become profitable we will need to increase significantly the
revenues we receive from sales of our hyperthermia therapy products to sustain
and increase our profitability on a quarterly or annual basis. We may be unable
to do so, and therefore may never achieve profitability.

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

To date, hyperthermia therapy has yet to gain wide acceptance by
cancer-treating physicians. We believe this is due in part to the lingering
impression created by the inability of early hyperthermia therapy technologies
to focus and control heat directed at specific tissue locations and conclusions
drawn in early scientific studies that hyperthermia was only marginally
effective. Additionally, market acceptance depends upon physicians and hospitals

obtaining adequate reimbursement rates from third-party payers to make our
products commercially viable, and we believe that reimbursement rates have not
been adequate to stimulate strong interest in adopting hyperthermia as a new
cancer therapy. If our sales and marketing efforts to promote hyperthermia
therapy acceptance in the medical community fail, or our efforts to improve
third-party reimbursement rates for hyperthermia therapy are not successful,
then our future revenue from sales of our products may be limited, and we may
never sustain profitable operations.

While a substantial portion of our revenue in recent periods has been
derived from TherMatrx, we expect revenue from this customer to decline in the
current and future periods.

For the year ended August 31, 2003, TherMatrx accounted for $1,454,943,
or approximately 57% of our net sales and was our largest customer. We
manufacture, assemble and test TherMatrx's TMx-2000 system, and also supply
equipment components and provide consulting services to TherMatrx. During the
six months ended February 29, 2004 our sales to TherMatrx declined to $88,620, a
decrease of $465,323 from the six months ended February 29, 2003. We anticipate
revenue from TherMatrx to be substantially less in the third and fourth quarters
of fiscal 2004 than it was in the third and fourth quarters of fiscal 2003. In
addition, we currently expect revenue from TherMatrx to be less in fiscal 2004
than it was in fiscal 2003. With the sale of our TherMatrx shares to AMS, we
believe product sales to TherMatrx may decrease to zero in future fiscal years.
TherMatrx is under no contractual obligation to obtain from us products or
manufacturing, assembling, testing and other services. TherMatrx now purchases
most of its products from other sources. This projected decline in sales to
TherMatrx will lead to a substantial decline in our revenue if we are
unsuccessful in our efforts to generate an offsetting increase in sales of our
hyperthermia cancer treatment systems.

We may not receive any contingent payments or significantly less in
contingent payment than we have projected from the sale of TherMatrx.

In connection with the closing of the sale of TherMatrx to AMS, we will
receive an initial payment of approximately $9 million and the right to receive
contingent payments based on the future sales of TherMatrx's DOT systems over
the next 18 months. We may not receive any contingent payments. Any future
payments are not guaranteed and are subject to uncertainties, and we cannot be
sure that we will receive any contingent payments in addition to the initial $9
million, which is the only amount guaranteed. Some of the factors that could
cause us not to receive contingent payments, or to materially reduce contingent
payments paid to us below our projections include, without limitation, the
inability of AMS to successfully market and sell the DOT system at levels that
we have assumed, the inability of AMS to pay the contingent payment obligation,
the acquisition of AMS by another company that considers the DOT system to be a
lower priority in its marketing efforts, the inability of AMS to obtain products
to support the demand for DOT sales, a reported injury in which a patient claims
harm from treatment by a DOT system, product recalls that could harm the ability
to sell DOT products, failure of physicians to continue to endorse DOT products,
or a reduction in the reimbursement amount paid by Medicare, Medicaid, and
private insurance payors for DOT treatments.

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

Some of our customers have been developing clinics, and these customers
have been particularly vulnerable to financial difficulties that can cause them
to be unable to pay for equipment that they have purchased. For example, in the
fourth quarter of fiscal 2003 we had a particularly high write off of over
$300,000 resulting from the default of a customer under contract. If we choose
to accept higher risk sales opportunities to clinics in the future, we will be

subject to these customer credit risks that could lower future net sales due to
bad-debt write offs, resulting in losses in future periods and potentially
lowering the value of your stock. While we attempt to provide for foreseeable
doubtful accounts, we cannot assure you that this provision will always be
adequate to cover our credit risks.

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

We believe that the success of our efforts to increase sales of our
hyperthermia systems in the future depends on our ability to successfully expand
our sales distribution channels. Historically, we have sometimes failed in
establishing successful new sales channels. In May 2002, we entered into an
agreement with Nucletron B.V. under which Nucletron became our exclusive sales
agent in most of the world for our BSD-500i interstitial hyperthermia therapy
system. We sold only one BSD-500i through Nucletron. We believe our relationship
with Nucletron was unsuccessful. Our sales agreement with Nucletron was
terminated in March 2004.

We anticipate that the success of our multi-year plan for selling
hyperthermia systems will require expanding our sales and marketing organization
through a combination of direct sales people, distributors and internal and
external marketing expertise. However, as we pursue our marketing plan, there
can be no assurance that we will be successful in securing reliable channels of
distribution to meet our plan through expanded sales. Recruiting and training
new distribution channels can take time and considerable expense. We project
that sales and marketing expenses will increase substantially in the future as
compared to past years. This added expense could have an adverse effect on our
future financial performance that is greater than any potential increases in
sales.

In addition, there can be no assurance that our channels of
distribution that have been successful in the past will be successful in the
future. We have derived most of our revenue from sales in Europe through our
distributor Medizin-Technik, GmbH, which also purchases equipment components and
parts from us. Medizin-Technik sold none of our hyperthermia therapy systems in
Europe in fiscal 2003 and has sold two of our hyperthermia therapy systems in
fiscal 2004. The loss or ineffectiveness of Medizin-Technik as a distributor and
significant customer could result in lower revenue.

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

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

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

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

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

Our success in selling our products will depend in large part on the
extent to which reimbursement for the costs of our products and related
treatments are available from government health agencies, private health
insurers and other third-party payors. Despite the existence of general
reimbursement policies, local medical review policies may differ for public and
private insurance payors, which may cause payment to be refused for some
hyperthermia treatments. Private payors may refuse reimbursement for
hyperthermia treatments.

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

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

The treatment of cancer is currently subject to extensive research and
development. Many cancer therapies are being researched and our products may be
rendered obsolete by existing therapies and as a result of therapy innovations
by others. If our products are rendered obsolete, our revenue will decline, we
may never achieve profitability, and we may not be able to continue in business.

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

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

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

A product liability settlement could exceed our ability to pay.

The manufacturing and marketing of medical devices involves an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
liability insurance with coverage limits of $1 million. Our product liability
insurance does not cover intended injury, injury or damage resulting from the
intoxication of any person, payment of workers' compensation benefits, injury of
our own employee, injury or damage due to war, damage to property that we own,
damage to our work, loss of use of property, patent infringements, pollution
claims, interest payments, depreciation of property, or injury or damage
resulting from asbestos inhalation. We are responsible to pay the first $10,000
resulting from any claim up to a maximum of $50,000 in one year. We cannot
assure you that our product liability insurance will provide adequate coverage
against potential claims that might be made against us. If we were to be subject
to a claim in excess of our coverage or to a claim not covered by our insurance
and the claim succeeded, we would be required to pay the claim from our limited
resources, which would reduce our limited capital resources and liquidity and
reduce capital we could otherwise use to obtain approvals for and market our
products. In addition, liability or alleged liability could harm our business by
diverting the attention and resources of our management and by damaging our
reputation.

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

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

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

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

Because our common stock is traded on the OTC Bulletin Board, your
ability to sell your shares in the secondary trading market may be limited.

Our common stock currently is traded on the over-the-counter market on
the OTC Bulletin Board. Consequently, the liquidity of our common stock is
impaired, not only in the number of shares that are bought and sold, but also
through delays in the timing of transactions and lack of coverage by security
analysts and the news media. As a result, prices for shares of our common stock
may be lower than might otherwise prevail if our common stock were quoted on the
Nasdaq Stock Market or traded on a national securities exchange, like the New
York Stock Exchange or the American Stock Exchange.

Because our common stock is a "penny stock," you may have difficulty
selling our shares in the secondary trading market.

Federal regulations under the Securities Exchange Act of 1934 regulate
the trading of so-called "penny stocks," which are generally defined as any
security not listed on a national securities exchange or Nasdaq, priced at less
than $5.00 per share and offered by an issuer with limited net tangible assets
and revenues. Since our common stock currently trades on the OTC Bulletin Board
at less than $5.00 per share, our common stock is a "penny stock" and may not be
traded unless a disclosure schedule explaining the penny stock market and the
risks associated therewith is delivered to a potential purchaser prior to any
trade.

In addition, because our common stock is not listed on Nasdaq or any
national securities exchange and currently trades at less than $5.00 per share,
trading in our common stock is subject to Rule 15g-9 under the Exchange Act.
Under this rule, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include:

o obtaining financial and investment information from the investor;

o obtaining a written suitability questionnaire and purchase agreement
signed by the investor; and

o providing the investor a written identification of the shares being
offered and the quantity of the shares.

If these penny stock rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. The application of these
comprehensive rules will make it more difficult for broker-dealers to sell our
common stock and our stockholders, therefore, may have difficulty in selling
their shares in the secondary trading market.

Sales of a substantial number of shares of our common stock in the
public market, including the shares offered under this prospectus, could lower
our stock price and impair our ability to raise funds in new stock offerings.

Future sales of a substantial number of shares of our common stock in
the public market, including the shares offered under this prospectus, or the
perception that such sales could occur, could adversely affect the prevailing
market price of our common stock and could make it more difficult for us to
raise additional capital through the sale of equity securities. This prospectus
relates to the sale or distribution of up to 2,162,580 shares of common stock by
the selling stockholders. The shares subject to this prospectus represent
approximately 11% of our issued and outstanding common stock as of April 30,
2004. We filed this registration statement pursuant to an agreement with the
holders of the common stock and warrants purchased in our November and December
2003 private placements. We are required under this agreement to use our
reasonable best efforts to cause this registration statement to remain effective
until the earlier of (1) the sale of all the shares of our common stock covered
by this registration statement; or (2) such time as the selling stockholders
named in this registration statement become eligible to resell the shares of our
common stock pursuant to Rule 144(k) under the Securities Act.

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

The market for our common stock has been limited due to low trading
volume and the small number of brokerage firms acting as market makers. Because
of the limitations of our market and volatility of the market price of our
stock, investors may face difficulties in selling shares at attractive prices
when they want to. The average daily trading volume for our stock has varied

significantly from week to week and from month to month, and the trading volume
often varies widely from day to day. For example, on February 4, 2004 there were
zero shares of our stock traded and the closing price remained at $1.35 per
share (the closing price for the prior trading day). Only eight trading days
later, following a news release involving an FDA approval, there were 175,082
shares of our stock traded at a closing price of $1.57. Over the four month
period beginning November 2003 and ending at the February 2004 stock market
close, the average daily trading volume for our stock was 26,014 shares. In
November 2003, however, the average daily volume was 46,728 shares or 80% above
the four month daily average. Conversely, in December 2003 the average daily
volume was 14,298 shares or 45% below the four month daily average. The average
daily trading volume was over three times greater in November 2003 than it was
in December 2003. The following factors could impact the market for our stock
and cause further volatility in our stock price:

o announcements of new technological innovations;

o FDA and other regulatory developments;

o changes in third-party reimbursements;

o developments concerning proprietary rights;

o third parties receiving FDA approval for competing products; and

o market conditions generally for medical and technology stocks.

If we sell shares of our common stock at a per share price of less than
$1.10 to raise additional capital, we will have to issue additional shares to
the investors in our November and December private placement, which will dilute
our other stockholders' ownership.

To execute our business plan, and in particular to market our recently
FDA approved products, we may need to raise additional capital. We agreed with
the investors in our November and December private placement transactions that
we would issue them additional shares of our common stock if we sold shares of
common stock within one year of their investment at a per share price of less
than the price they paid, which was $1.10 per share. The anti-dilution
protection provided to these investors, commonly referred to as ratchet
anti-dilution, would require us to issue to these investors additional shares
equal to the difference between the number of shares that they would have been
issued if the per share price they paid equaled the lowest price at which we
issued shares to raise capital within one year of their investment, regardless
of the number that we issue, and the number of shares they were issued. If this
anti-dilution protection were triggered, the investors would not be required to
pay any additional consideration for the additional shares issued to them, and
our other stockholders' ownership would be diluted by the issuance. Because of
the significant dilution that could occur if this anti-dilution protection were
triggered, we may choose to not raise additional capital if we cannot raise it
at a per share price that would avoid triggering the anti-dilution protection.
This could delay the execution of our business plan.

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

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

USE OF PROCEEDS

The shares of common stock offered by this prospectus will be sold by
the selling stockholders, and the selling stockholders will receive all of the
proceeds from sales of such shares. We will not receive any proceeds from the
sale of the shares offered by this prospectus.

BUSINESS

Overview

We develop, manufacture, market and service hyperthermia microwave
systems used to treat cancer, the second leading cause of death in the United
States according to the National Cancer Society. Our treatment systems are
designed to precisely deliver microwave energy to elevate the temperature of
cancerous tumors, directly killing cancerous cells and enhancing the
effectiveness of certain other cancer therapies.

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

In October 2003, we announced that we had received FDA approval for a
new operating system, allowing us to launch the commercial market introduction
in the United States of a new family of four systems, including the BSD-500i-4,
BSD-500c-4, BSD-500i-8 and BSD-500c-8. These new systems enable us to treat
cancers near the surface of the body using heat created with focused microwave
energy, known as superficial hyperthermia, and also to treat cancers deeper in
the body or in natural orifices like the esophagus using microwave antennae,
known as interstitial hyperthermia. In addition to treating melanoma, recurring
breast cancer and other cancers requiring superficial hyperthermia therapy,
these new systems are used as companions to interstitial radiation systems,
called brachytherapy systems, that treat cancer with radioactive seeds. We
believe that over 1,500 brachytherapy systems have been installed, providing a
target customer base for our systems. We have also obtained the CE Mark
certification required to export these systems to Europe. The new BSD-500
systems are compact, portable and ergonomically engineered for use in a
demanding hospital environment.

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

Cancer and Hyperthermia Therapy

Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society estimates that 1,334,100 new cancer cases were
diagnosed and that 556,500 Americans died from cancer during 2003 (up from
555,500 cancer deaths in 2002). Exceeded only by heart disease, cancer, as a
group of diseases, remains the second leading cause of death in the United
States. Cancer develops when abnormal cells in a part of the body begin to grow
out of control and spread to other parts of the body.

The primary cancer therapies currently used include:

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

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

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

Because cancer remains a significant cause of death, these three cancer
therapies are still grossly inadequate, and an enormous need for better
treatment is obvious. Hyperthermia is an emerging cancer therapy that both kills
cancer cells directly and has been shown to be a potent additive treatment in
making certain of the major existing cancer therapies more effective for some
cancers.

Cancerous tumors are uncontrolled growths of mutated cells that require
more energy to survive than do cells of normal tissue. As cancer cells grow
rapidly, they tend to outstrip their blood supply, leaving them oxygen-starved,
since there is not enough blood to carry sufficient oxygen to these cells.
Oxygen-starved cancer cells are resistant to radiation therapy because the
destructive power of radiation therapy depends heavily on tearing apart the
oxygen molecules located in cancer cells. When oxygen molecules are torn apart,
they form oxygen radicals that can attack and destroy cancer cell DNA. Blood
depletion also makes cancer resistant to chemotherapy, where blood transport is
required to deliver the drug into the tumor. Our hyperthermia therapy systems
precisely deliver microwave energy to elevate the temperature of tumors, usually
between 40(degree)C and 45(degree)C. The elevated temperatures draw blood to the
tumor as the body's natural response to the stimulus of heat. The increased
blood supply to the tumor improves delivery of drugs to tumors in chemotherapy.
It also delivers more oxygen to the tumor, increasing the effectiveness of
radiation therapy.

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

Hyperthermia has other therapeutic uses. It can be used to shrink
tumors prior to surgery, potentially making resection easier or even possible.
Research has shown hyperthermia to be an activator for gene therapies by
speeding gene production (heat mediated gene therapy). Hyperthermia may play a
role in the development of new anti-tumor vaccines that are based on the
production of heat shock proteins. Research has shown hyperthermia to be an
angiogenesis inhibitor, which means it helps prevent cancer from inducing growth
of new blood vessels to expand its blood supply. Hyperthermia could also become
a follow-up therapy for other angiogenesis inhibitors, used in the final
destruction of cancer cells depleted of blood by angiogenesis inhibitor therapy.
Hyperthermia has been shown to improve a patient's quality of life. Even in
situations where there is no hope for survival, hyperthermia may provide
benefits through alleviation of such effects of cancer as bleeding, pain and
infection.

Since 1978, we have been heavily involved in developing technological
advances to expand the use of hyperthermia therapy for the treatment of cancer.
Our efforts have included joint work with many notable cancer research centers

in the United States and Europe. In past years, funding for our research efforts
has been provided by such sources as the National Institutes of Health in the
United States and major European government agencies. In recent years, we have
focused our efforts in perfecting the technology required to precisely deliver
deep, non-invasive hyperthermia therapy for the treatment of pelvic and other
deep cancers and to demonstrate effective use of deep hyperthermia through
clinical trials. We believe that our BSD-2000 system has emerged from this
development effort as the world's most advanced system for deep hyperthermia
therapy.

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

Our Products and Services

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

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

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

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

BSD-500 Systems. Our BSD-500 systems are used to deliver either
superficial or interstitial hyperthermia therapy or both. There are four
configurations of the BSD-500. The BSD-500i-4 and BSD-500i-8 provide
interstitial hyperthermia treatment using four or eight channel generators,
respectively. Each channel can control three interstitial applicators. The
BSD-500c-4 and BSD-500c-8 provide both superficial and interstitial hyperthermia
treatments using four or eight channel generators. These systems include a touch
screen display monitor by which the operator controls the hyperthermia
treatment, computer equipment and software that controls the delivery of
microwave energy to the tumor, and a generator that creates the needed microwave
energy for the treatment. Additionally, the systems include a variety of

applicators, depending on each system configuration. Non-invasive superficial
applicators are used for superficial hyperthermia treatments. For interstitial
hyperthermia treatments, the system may include up to 24 tiny microwave
heat-delivering antennae that are inserted into catheters used in the standard
practice for internal radiation therapy (called brachytherapy).

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

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

The BSD-2000 systems have not yet received pre-market approval from the
FDA for commercial marketing in the United States, but the BSD-2000 has obtained
an investigational device exemption, or IDE, for sale in the United States for
research purposes only. We have also certified the BSD-2000 family for the CE
Mark required for export into certain European countries. We are engaged in the
extensive and time consuming process of preparing an FDA submission requesting a
PMA for the BSD-2000 based on clinical data we have already obtained. While we
believe that this data has great merit and is worthy of submission, due to the
inherent uncertainties of the FDA approval process there can be no assurance
that FDA approval will be obtained through our submissions.

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

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

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

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

We installed and tested the first BSD-2000/3D/MR system at a leading
German oncological research institution, the Clinic of Medical Oncology of the
Klinikum Gro(beta)hadern Medical School of Ludwigs-Maximilians-Universitat
Munchen, in Munich, Germany. We installed a second BSD-2000/3D/MR system at the
Department of Radiology of Charite University Medical School of Humboldt
University in Berlin, Germany, as part of a collaborative effort with Siemens
Medical Systems. The funding for purchase and development of these systems was
provided by the German government and public foundation funds.

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

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

TherMatrx, Inc. We manufacture, assemble and test for TherMatrx its
FDA-approved TMx-2000 thermotherapy system that treats benign prostatic
hyperplasia, or BPH, a condition associated with an enlarged prostate that
commonly affects men over age 50. We also supply TherMatrx with equipment
components used for its TMx-2000 system, including probes, applicators and
temperature components. We also have provided regulatory compliance and other
consulting services to TherMatrx.

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

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

In manufacturing, assembling and testing the TMx-2000 system and
supplying equipment components and providing consulting services to TherMatrx,
TherMatrx has been our largest customer. For the year ended August 31, 2003,
TherMatrx accounted for $1,454,943, or approximately 57% of our revenue. Our
product sales to TherMatrx dropped significantly during the first six months of
fiscal 2004 compared to first six months of fiscal 2003 because of TherMatrx's
existing excess inventory. TherMatrx is under no contractual obligation to
obtain from us products or manufacturing, assembling, testing or other services,
and is free to obtain such products and services from another source at any
time. We believe TherMatrx purchases the majority of its products from other
sources. As described more fully elsewhere in this prospectus, in July 2004, AMS
acquired TherMatrx, including all of our TherMatrx shares. With the sale of our
TherMatrx shares to AMS, we believe product sales to TherMatrx may decrease to
zero in future fiscal years.

Medizin-Technik GmbH. Additionally, we supply equipment components to
Medizin-Technik located in Munich, Germany, which is a significant distributor
of our hyperthermia therapy systems in Europe. Medizin-Technik purchases
equipment and components to service our hyperthermia therapy systems that it
sells to its customers in Europe. The President and Chief Executive Officer of
Medizin-Technik is Dr. Gerhard W. Sennewald, one of our directors and
significant stockholders. Medizin-Technik was a significant customer for us in
fiscal 2003 with sales of $517,979 or 20% of our revenue. Medizin-Technik has
been a significant customer in prior years and we anticipate that it will be a
significant customer for us in the future. The loss of Medizin-Technik as a
distributor and significant customer would have a material adverse effect on our
business. The distribution rights of Medizin-Technik have been in place since
the early 1980s.

Sales, Marketing and Distribution

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

In May 2002, we entered into an agreement with Nucletron B.V. under
which Nucletron became our exclusive sales agent in most of the world for our
BSD-500i interstitial hyperthermia therapy system. We sold only one BSD-500i
through Nucletron. We have not felt that our relationship with Nucletron was
successful, and our sales agreement with Nucletron was terminated in March 2004.

For our other products that deliver deep hyperthermia therapy,
including the BSD-2000 and related products, we sell our equipment directly to
end-users in the United States. We make international sales of these products
through distributors located in various foreign countries.

Medizin Technik is our exclusive distributor of hyperthermia systems in
Germany, Austria and Switzerland and to certain medical institutions in Belgium
and the Netherlands. Medizin Technik is required to use best efforts to sell our
product within its territory. Due to the limited number of systems that are sold
through this relationship, we do not have pre-negotiated price terms with
Medizin Technik. If Medizin Technik identifies a potential customer, it will
negotiate the price of a hyperthermia system with us, purchase the system, and
resell the system to the customer on terms it negotiates with the customer. We
generally do not provide our distributors with rights of return, price
protection, discounts, credits, or other special terms or sale incentives.
However, we did provide Medizin Technik with an extra applicator at no
additional charge as a sales incentive in connection with the sale of a BSD-2000
system in fiscal 2004. Our distributorship agreement with Medizin Technik runs
from year-to-year and may be terminated by either party by providing written
notice to the other party before December 31 and automatically terminates upon
the occurrence of certain events, including the retirement or death of Dr.
Sennewald. Dr. Sennewald is a director and shareholder of BSD and of Medizin
Technik.

Our sales and marketing strategy involves three main components:

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

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

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

We disseminate information about our company and our hyperthermia
therapy systems by encouraging articles about hyperthermia therapy to be
published in scientific journals, periodicals and other publications, and
promoting dissemination of BSD information through television, radio and other
media outlets. We post information about our products on our web site,
www.bsdmc.com, and our materials are also posted on many other sites. We have
developed promotional materials for our products, including product brochures,
patient brochures and newsletters. We also participate actively in trade shows
and scientific symposia, make public presentations delivered by our scientific
staff and by scientists and researchers using our systems, and we actively
participate in a variety of medical associations. We are co-sponsors of the
annual international BSD Users' Conference in Europe.

Third-Party Reimbursement

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

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

General hyperthermia reimbursement has been approved in the United
States, Germany, Holland, Switzerland and Japan. CMS has also provided billing
codes for thermotherapy/thermal therapy treatment of BPH. These billing codes
apply to TherMatrx's TMx-2000 system treatments of BPH.

Even though a new medical device may have been approved for commercial
distribution, we may find limited demand for that product until reimbursement
approval is obtained from governmental and commercial third party payors of
health care. In addition, even after we receive reimbursement approval, or
coverage, of a product, medical reimbursement rates are unpredictable. Both

government and commercial third party payors of health care are seeking to limit
the growth of health care costs. If clinics, hospitals, and other health care
providers are not reimbursed adequately for our product, they may not purchase
our product. We cannot project the extent to which our business may be affected
by future legislative and regulatory developments, and private sector
initiatives, to reduce health care costs. We cannot assure that future health
care legislation or regulation will not have a material adverse effect on the
coverage of our products, our business, financial condition and results of
operations, or that reimbursement, existing or in the future, will be adequate
to ensure that customers continue to purchase our products.

Competition

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

Product Service

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

Generally, our distributors install and service systems sold to foreign
customers and are responsible for managing their own warranty programs for their
customers, including labor and travel expenses. We provide warranties for the
replacement and/or repair of parts for 12 months for systems sold
internationally through distributors and for 90 days for individual components.
Spare parts are generally purchased by the distributors and stored at the
distributors' maintenance facilities to allow prompt repair. Distributor service
personnel are usually trained at customer sites and at our facilities in Salt
Lake City, Utah.

Production

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

Product Liability Exposure

Government Regulation

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

Most of our hyperthermia treatment systems, including the BSD-500 and
the BSD-2000 and related products, have required or require pre-market approval
from the FDA instead of the simpler 510(k) approval, and we anticipate that our
future systems will similarly require pre-market approval. Pre-market approval
requires that we demonstrate that the medical device is safe and effective. To
do this, we conduct either laboratory and/or clinical testing. The FDA will
grant approval of the product if it determines there is reasonable assurance
that the medical device is safe and effective. FDA approval must be obtained
before commercial distribution of the product. We intend to continue to make
improvements in and to our existing products. Significant product changes must
be submitted to the FDA under investigational device exemptions, or IDEs, or
pre-market approval supplements. As described in the Section entitled "Our
Products and Services" above, we have obtained a PMA for our BSD-500 systems and
IDE status for our BSD-2000 system.

Foreign countries in which our products are or may be sold, have
regulatory requirements that can vary widely from country to country. Sales into
the European Union, or EU, require compliance with the Medical Devices
Directive, or MDD, and require us to obtain the necessary certifications to have
a CE Mark affixed to our products. We have obtained necessary ISO certification
of our quality, development, and manufacturing processes, and we have
successfully completed the CE Mark testing and Annex II audit. This allows us to
certify our own products and to affix the CE Mark label on them. However, we
must maintain compliance with all current and future directives and requirements
to maintain ISO certification and to continue to affix the CE Mark, and there
can be no assurance that we will continue to maintain compliance with regulatory
requirements imposed on us.

After we receive FDA approval to distribute a medical device, we
continue to have ongoing responsibilities under the Federal Food, Drug, and
Cosmetic Act and FDA regulations. The FDA reviews design and manufacturing
practices, labeling, record-keeping, and required reporting of adverse
experiences. All medical devices must be manufactured in accordance with
regulations specified in the FDA Quality System regulations, or QSR, and in
compliance with the ISO and other applicable standards. In complying with these
regulations, we must continue to expend time, money and effort in the areas of
design control, production, and quality control to ensure full compliance. The
FDA's mandatory Medical Device Reporting regulation requires us to provide
information to the FDA on death or serious injuries alleged to have been
associated with the use of our products, as well as information on product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunctions were to recur. In Europe, the MDD vigilance system

regulations require that we, through a representative in Europe, provide
information to authorities on death or serious injuries alleged to have been
associated with the use of our products, as well as information on product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunctions were to recur. If FDA were to assert that we are not in
compliance with applicable laws or regulations, or that any of our medical
devices are ineffective or pose an unreasonable risk to patient health, the FDA
could seize our medical devices, ban such medical devices, or order a recall,
repair, replacement or refund of such devices, and require us to notify health
care professionals and others that the devices present unreasonable risk of
substantial harm to the public. The FDA may also impose operating restrictions,
restrain certain violations of law, and assess civil or criminal penalties
against us. The FDA can also recommend prosecution to the Department of Justice.
Certain regulations are subject to administrative interpretation and we cannot
assure that future interpretations made by the FDA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us.

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

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

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

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

The Federal Communications Commission, or FCC, regulates the
frequencies of microwave and radio frequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The BSD-500 fixed frequency systems and applicators
emit 915 MHz for U.S. and some European installations and 433.92 MHz for some
European installations, which is approved by the FCC for medical applications.
Accordingly, these systems do not require shielding to prevent interference with
communications. Our BSD-2000 deep hyperthermia variable-frequency generators and
applicators require electromagnetic shielding.

Patents, Licenses, and Other Rights

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

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

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

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

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

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

From time to time, we have had and may continue to have discussions
with other companies, universities and private individuals concerning the
possible granting of licenses covering technology and/or patents. There can be
no assurance that such discussions will result in any agreements. In the past,
we have granted non-exclusive practice licenses for a few selected patents to
three companies. One of these companies is no longer in business. We cannot
assure that the patents presently issued to us will be of significant value to
us in the future or will be held valid upon judicial review. Successful
litigation against these patents by a competitor would have a material adverse
effect upon our business, financial condition and results of operations. We
believe that we possess significant proprietary know-how in our hardware and
software capabilities. However, we cannot assure that others will not develop,
acquire or patent technologies similar to ours or that such secrecy will not be
breached.

Research and Development

During the fiscal years ended August 31, 2003, and August 31, 2002, we
expended $676,867 and $603,137 respectively for research and development,
representing 26% and 23% of total revenues. Research and development
expenditures increased in fiscal 2003 due to costs associated with the
development of the BSD-2000/3D/MR system, the continued enhancements of our

BSD-500 systems and the development of new products not yet announced.
Technological changes play an important part in the advancement of our industry.
We intend to continue to devote substantial sums to research and development.
Research and development efforts inherently involve risks and uncertainties that
could aversely affect our projections, outlook and operating results.

Employees

As of April 30, 2004, BSD had 25 employees; 23 of whom were full-time
employees. None of our employees is covered by a collective bargaining
agreement. We consider our relations with our employees to be satisfactory. We
depend upon a limited number of key management, manufacturing, and technical
personnel. Our future success will depend in part on our ability to retain these
highly qualified employees.

Properties

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

Legal Proceedings

There are no legal proceedings pending against or being taken by us.

MANAGEMENT

The following table sets forth certain information concerning our
directors, executive officers and key employees. The directors have served in
their respective capacities since their election and/or appointment and will
serve until the next annual stockholders' meeting or until their successors are
duly elected and qualified. The executive officers serve at the pleasure of the
Board of Directors. There are no family relationships among any of our directors
or officers.

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

Paul F. Turner, MSEE* 56 Chairman of the Board, Senior Vice President, 1986
and Chief Technology Officer

Hyrum A. Mead, MBA* 56 President and Director 1999

Gerhard W. Sennewald, Ph.D. 67 Director 1994

J. Gordon Short, M.D. 72 Director 1994

Michael Nobel, Ph.D. 63 Director 1997

Dixie Toolson Sells 53 Vice President of Regulatory Affairs 1987

Ray Lauritzen 53 Vice President of Field Service 1988

------------------------------------------------------------------------------------------------------------------------
*Executive officers of BSD.

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

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

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

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

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

Dixie Toolson Sells has served as Vice President of Regulatory Affairs
of BSD since December 1994. Ms. Sells served as Administrative Director of BSD
from 1978 to 1984, as Director of Regulatory Affairs from 1984 to September
1987, and as Vice President of Regulatory Affairs from September 1987 to October
1993. She served as Director of Regulatory Affairs from October 1993 to December
1994. Ms. Sells has served as Vice President of Regulatory Affairs since 1994.
She served as Corporate Secretary from 1994 to 2002. Ms. Sells also serves on
the Board of Directors of the Intermountain Biomedical Association.

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

Audit Committee

We have established an audit committee, which consists of Mr.
Sennewald, Mr. Short and Mr. Nobel. The audit committee is responsible for
reviewing and monitoring our financial statements and internal accounting
procedures, recommending the selection of independent auditors by our board,
evaluating the scope of the annual audit, reviewing audit results, consulting
with management and our independent auditor prior to presentation of financial
statements to stockholders and, as appropriate, initiating inquiries into
aspects of our internal accounting controls and financial affairs. We currently
do not have an audit committee financial expert because of our relatively small
size and our limited resources to attract such an expert.

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding all
compensation earned by Paul Turner, our Senior Vice President and Chief
Technology Officer, and Hyrum Mead, our President, for services rendered to us
during fiscal 2003, 2002 and 2001. No other executive officer received total
salary and bonus compensation in excess of $100,000 for the fiscal year ended
August 31, 2003.

Summary Compensation Table

Annual Compensation Long-Term
Compensation Awards
======================
=========== === ============
Name and Principal Position Year Salary ($) Bonus ($) Securities
Underlying
Options / SARs (#)
========================================= ============ =========== ============ ======================

Paul Turner, 2003 $145,000 $400
Chairman of the Board, Senior Vice 2002 $145,000 $400 45,000(1)
President, Chief Technology Officer 2001 $145,000 $400

Hyrum A. Mead, 2003 $125,000 $400
President, Director 2002 $125,000 $30,000 45,000(1)
2001 $125,000 $400

(1) Represents options to purchase shares of TherMatrx common stock we
owned on the date of grant. These options were granted by us in July 2002 and
were exercised in the fourth quarter of fiscal 2002 at an exercise price per
share of $0.001. We recognized a compensation expense related to these TherMatrx
options computed using a value of $4.00 per share. The $4.00 per share value is
based solely on the price per share for common stock sold by TherMatrx to
existing TherMatrx stockholders in December 2001.

The following table summarizes the exercise of stock options during
fiscal 2003 by Messrs. Turner and Mead, and the fiscal year-end value of
unexercised stock options held by each of them. None of these executive officers
exercised stock options during fiscal 2003.

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

Name and Number of Securities Underlying Value of Unexercised In-the-Money
Position Unexercised Options at FY-end (#) Options at FY-end ($) (1)
=============== ================== =============== =================
Exercisable Unexercisable Exercisable Unexercisable
=============== =============== ================== =============== =================

Hyrum A. 200,000 120,000 $33,600 $16,800
Mead,
President

Paul F. 180,953 0 $124,858 0
Turner,
Sr. VP and
Chief
Technology
Officer

(1) Value based on the difference between the fair market value of one share of
our common stock at August 31, 2003, $0.79, and the exercise price of the
options ranging from $0.10 to $0.81 per share. Options are in-the-money if the
market price of the shares exceeds the option exercise price.

Compensation of Directors

We provide annual compensation in the amount of $12,000 to each
non-employee director. Of this amount, $4,000 is to be paid in cash and the
balance is to be paid in the form of restricted shares of our common stock under
our 1998 Director Stock Option Plan. In addition to the annual compensation to
directors, each non-employee director will receive an annual option to purchase
25,000 restricted shares of our common stock at a purchase price of 85% of the
fair market value at the date the option is granted. The options vest ratably
over 5 years and expire in 10 years.

Paul F. Turner and Hyrum A. Mead are the only members of the Board of
Directors who are employed by us. Messrs. Turner and Mead do not receive any
separate compensation for services performed as directors.

Employment Contracts

We entered into an employment agreement with Mr. Mead dated August 10,
1999. This agreement provides that Mr. Mead shall receive an annual base salary
of $125,000, which shall be reviewed annually by the Board of Directors. The
agreement provides that if Mr. Mead is involuntarily terminated, Mr. Mead will
receive severance compensation for a period of six months, including an
extension of all benefits and perquisites. The severance amount shall include
six months of salary at the highest rate paid to Mr. Mead prior to termination
and an additional amount equal to all bonuses received by Mr. Mead during the
12-month period preceding termination (excluding any signing bonus received
during such period). The agreement also requires us to vest any options granted
to Mr. Mead for the purchase of our common stock, allowing a 90-day period for
Mr. Mead to exercise those options. Mr. Mead's agreement includes a
non-competition covenant prohibiting him from competing with us for one year
following his termination.

We entered into an employment agreement with Mr. Turner dated November
2, 1988. The agreement provides that Mr. Turner's salary will be based upon a
reasonable mutual agreement. The agreement provides that if Mr. Turner's
employment is involuntarily terminated, he will receive severance pay for a
one-year period, which pay includes an extension of all of his rights,
privileges and benefits as an employee (including medical insurance). The one
year severance pay shall be equal to Mr. Turner's regular salary for the
12-month period immediately prior to the termination. The agreement also

requires us to pay Mr. Turner for any accrued, unused vacation at the time of
termination. We are also obligated to pay Mr. Turner $1,000 (or the equivalent
value in stock options) for each newly issued patent obtained by us as a result
of Mr. Turner's efforts (Mr. Turner receives only $500 if multiple inventors are
involved). Mr. Turner's agreement includes a non-competition covenant
prohibiting him from competing with us for one year following his termination.
We may continue the non-competition period for up to four additional years by
notifying Mr. Turner in writing and by continuing the severance payments for the
additional years during which the non-competition period is extended.

SELLING STOCKHOLDERS

The following table sets forth the number of shares of our common stock
beneficially owned by the selling stockholders as of April 30, 2004, based on
the selling stockholders' representations regarding their ownership. The
percentages shown in the table are based on 19,937,982 shares of common stock
outstanding on that date. We cannot estimate the number of shares that will be
held by the selling stockholders after completion of this offering because the
selling stockholders may sell all or some of the shares and because there
currently are no agreements, arrangements or understandings with respect to the
sale of any of the shares. The term "selling stockholder" or "selling
stockholders" includes the stockholders listed below and their transferees,
assignees, pledgees, donees or other successors. Each selling stockholder
reserves the right to accept or reject, in whole or in part, any proposed sale
of shares. Each selling stockholder also may offer and sell less than the number
of shares indicated. No selling stockholder is making any representation that
any shares covered by this prospectus will or will not be offered for sale.
Except as indicated in this section, we are not aware of any material
relationship between us and a selling stockholder within the past three years
other than as a result of a selling stockholder's beneficial ownership of our
common stock.

Unless otherwise indicated in the table below, the shares being offered
in this prospectus were issued to seven accredited investors pursuant to that
certain Securities Purchase Agreement dated as of November 28, 2003, and as
amended on December 10, 2003 (the "Purchase Agreement"), between us and these
investors. In accordance with the terms and conditions of the Purchase
Agreement, we issued an aggregate of 2,059,600 shares of common stock. We also
issued a three-year, immediately exercisable warrant to purchase up to 102,980
shares of common stock at an exercise price of $1.80 per share (the "Warrant")
to a broker-dealer in connection with the Purchase Agreement. The shares to be
issued upon exercise of the Warrant are also being offered in this prospectus.

Percentage of
Number of Shares Shares of
Number of Shares Shares of common of Common Stock Common Stock
of Common Stock Stock Being Beneficially Beneficially
Beneficially Owned Offered in the Owned After the Owned After
Selling Stockholder Before the Offering Offering Offering the Offering
--------------------------------------------------------------------------------------------------------------------

JMG Capital Partners, L.P (1) 455,000 455,000 -- *

JMG Triton Offshore Fund, Ltd (2) 455,000 455,000 -- *

J. Steven Emerson IRA R/O II (3) 1,127,787 910,000 217,787 1.09%

Emerson Partners, Ltd. (4) 135,000 135,000 -- *

High Tide, LLC (5) 45,500 45,500 -- *

Kenneth R. Malkes 13,600 13,600 -- *

The Runnels Family Trust (6) 105,500 105,500 -- *

T.R. Winston & Company, LLC (7) 42,980 42,980 -- *

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

* Represents beneficial ownership of less than 1.0% of the
outstanding shares of common stock.
(1) JMG Capital Partners, L.P. ("JMG Partners") is a California limited
partnership. Its general partner is JMG Capital Management, LLC
(the "Manager"), a Delaware limited liability company and an
investment adviser registered with the Securities and Exchange
Commission. The Manager has voting and dispositive power over JMG
Partners' investments, including these shares. The equity interests
of the Manager are owned by JMG Capital Management, Inc., ("JMG
Capital") a Delaware corporation, and Asset Alliance Holding Corp.,
a Delaware corporation. Jonathan M. Glaser is the Executive Officer
and Director of JMG Capital and has sole investment discretion over
JMG Partners' portfolio holdings.
(2) JMG Triton Offshore Fund, Ltd. (the "Fund") is an international
business company under the laws of the British Virgin Islands. The
Fund's investment manager is Pacific Assets Management LLC, a
Delaware limited liability company (the "Manager"). The Manager is
an investment adviser registered with the Securities and Exchange
Commission and has voting and dispositive power over the Fund's
investments, including these shares. The equity interests of the
Manager are owned by Pacific Capital Management, Inc., a Delaware
company ("Pacific") and Asset Alliance Holding Corp., a Delaware
company. The equity interests of Pacific are owned by Messrs. Roger
Richter, Jonathan M. Glaser and Daniel A. David. Messrs. Glaser and
Richter have sole investment discretion over the Fund's portfolio
holdings.
(3) J. Stevens Emerson, the sole beneficiary of J. Steven Emerson IRA
R/O II, has voting and investment control over these shares.
(4) J. Stevens Emerson, a manager of Emerson Partners, Ltd., has voting
and investment control over these shares.
(5) G. Tyler Runnels, manager of High Tide, LLC ("High Tide"), has
voting and investment control over these shares. High Tide, an
affiliate of T.R. Winston & Company, LLC, has represented to us
that the shares held by it were purchased in the ordinary course of
business, and that at the time of issuance it did not have any
agreements or understandings, directly or indirectly, with any
person to distribute the shares.
(6) The shares being offered in this prospectus include 60,000 shares
issuable upon exercise of warrants. These warrants were issued to
The Runnels Family Trust ("Runnels Trust") at the direction of T.R.
Winston & Company, LLC ("TR Winston") in connection with placement
services relating to the Purchase Agreement provided by TR Winston,
and we agreed to register for resale the shares issuable upon
exercise of the warrants. With respect to the remaining 45,500
shares, the Runnels Trust has represented to us that shares were
purchased in the ordinary course of business, and that at the time
of issuance it did not have any agreements or understandings,
directly or indirectly, with any person to distribute the shares.
G. Tyler Runnels, trustee of the Runnels Trust, has voting and
investment control over these shares.
(7) The shares being offered in this prospectus include 42,980 shares
issuable upon exercise of warrants. These warrants were issued to
T.R. Winston & Company, LLC ("TR Winston") in connection with
placement services relating to the Purchase Agreement, and we
agreed to register for resale the shares issuable upon exercise of
the warrants. G. Tyler Runnels, Chairman, and John W. Galuchie,
Jr., President of TR Winston, have voting and investment control
over these shares. TR Winston is a registered broker-dealer and all
of the securities issued to it were issued as compensation for
placement services.

We have agreed to prepare and file any amendments and supplements to
the registration statement relating to these shares as may be necessary to keep
the registration statement effective until such time as all of the shares
covered by this prospectus have been sold or until all of such shares may be
sold without registration or restriction pursuant to Rule 144(k) under the
Securities Act.

This prospectus also covers any additional shares of our common stock
which become issuable in connection with the shares being registered by reason
of any stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration which results in an
increase in the number of our outstanding shares of common stock.

PLAN OF DISTRIBUTION

We have registered the 2,162,580 shares of our common stock offered in
this prospectus on behalf of the selling stockholders. We will pay all expenses
of this registration, other than fees and expenses, if any, of counsel or other
advisors to the selling stockholders. The selling stockholders are responsible
for paying any commissions, discounts, or other brokerage fees incurred in
connection with their sale of any of the shares.

The shares of common stock may be sold in one or more transactions at
fixed prices, at prevailing market prices at the time of sale, at prices related
to the prevailing market prices, at varying prices determined at the time of
sale, or at negotiated prices. These sales may be effected at various times in
one or more of the following transactions, or in other kinds of transactions:

o in the over-the-counter market;

o in private transactions and transactions otherwise than on exchanges or
systems or in the over-the-counter market;

o in connection with short sales of the shares;

o by pledge to secure debt and other obligations;

o through the writing of options, whether the options are listed on an
options exchange or otherwise;

o in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions
in standardized or over-the-counter options; or

o through a combination of any of the above transactions.

The selling stockholder and its successors, including its transferees,
pledgees or donees or their successors, may sell the common stock directly to
purchasers or through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholder or the purchasers. These discounts, concessions or
commissions as to any particular underwriter, broker-dealer or agent may be in
excess of those customary in the types of transactions involved.

We have agreed to indemnify the selling stockholders, and each
director, officer or controlling person of each selling stockholder within the
meaning of Section 15 of the Securities Act of 1933 against all losses, claims,
damages, liabilities and expenses, (or action in respect thereof) including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on (i) any untrue statement or alleged
untrue statement of a material fact contained in, or information incorporated by
reference into, any registration statement or prospectus (or any amendment or
supplement thereto) or any preliminary prospectus prepared in connection with
the registration contemplated by the Purchase Agreement, (ii) any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, (iii) any failure by
us to fulfill and perform any agreement, covenant or undertaking pursuant to the
Purchase Agreement, or (iv) any failure or breach of our representations and
warranties as set forth in the Purchase Agreement.

The selling stockholders also may resell all or a portion of the shares
in open market transactions in reliance on Rule 144 under the Securities Act of
1933, if they meet the criteria and conform to the requirements of that rule.

The selling stockholders and any broker-dealers or agents that
participate with the selling stockholders in the sale of shares may be
"underwriters" within the meaning of the Securities Act of 1933. Any commissions
received by broker-dealers or agents on the sales and any profit on the resale
of shares purchased by broker-dealers or agents may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933.

Under the rules of the SEC, any person engaged in the distribution of
our common stock may not simultaneously buy, bid for or attempt to induce any
other person to buy or bid for our common stock in the open market for a period
of two business days prior to the beginning of the distribution. The rules and
regulations under the Securities Exchange Act of 1934 may also limit the timing
of purchases and sales of shares of our common stock by the selling

stockholders. We have notified the selling stockholders they should not begin
any distribution of common stock unless they have stopped purchasing and bidding
for common stock in the open market as provided in applicable securities
regulations, including Regulation M promulgated under the Securities Exchange
Act of 1934.

We have informed the selling stockholders that the anti-manipulation
provisions of Regulation M may apply to the sales of their shares. We have
advised the selling stockholders of the requirement for delivery of this
prospectus in connection with any sale of the common stock.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed in the
subsections entitled "Forward-Looking Statements and Factors That May Affect
Future Results and Financial Condition" below and the subsection entitled "Risk
Factors" above. The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto included in this prospectus.
All information presented herein is based on our fiscal year ended August 31,
2003 and the six months ended February 29, 2004. We assume no obligation to
revise or update any forward-looking statements for any reason, except as
required by law.

General

We develop, manufacture and market microwave systems used in the
treatment of cancer. Our microwave systems are used in cancer treating therapies
that elevate the temperature of tumors or other targeted tissue to conditions
classified as either hyperthermia or thermal therapy, also called thermotherapy,
through precisely delivered microwave energy.

Since our inception, we have been engaged in the development and
improvement of technology that can better accomplish cancer treatment through
hyperthermia therapy. From our predecessor hyperthermia systems, our current
BSD-500 and BSD-2000 hyperthermia systems have emerged. We have also developed
enhancements to our BSD-2000 system including the BSD-2000/3D that is designed
to allow three dimensional steering of deep focused energy and heat to targeted
tumors and tissue and the BSD-2000/3D/MR that includes an interface for magnetic
resonance imaging. Our hyperthermia systems are sold with supporting software
and may also be sold with support services.

Since inception, we have generated substantial operating losses and at
August 31, 2003, had an accumulated deficit of $20,486,107. We recorded net loss
for fiscal 2003 of $570,285.

We recognize revenue from the sale of cancer treatment systems, the
sale of parts and accessories related to the cancer treatment systems, the sale
of software license rights, providing manufacturing services, training, and
service support contracts. Product sales were $1,956,270 and $1,866,192 for the
years ended August 31, 2003 and 2002, respectively. Service revenue was $212,181
and $716,240 for the years ended August 31, 2003 and 2002, respectively

We derived $1,907,585, or 74% of our revenue in fiscal 2003 from sales
to related parties. Approximately $1,391,443 of such related party revenue was
from manufacturing, assembling and testing thermotherapy systems for TherMatrx
and selling probes, applicators and temperature sensors and other components and
contract services to TherMatrx. We also realized $63,500 of royalty revenue from
TherMatrx, which is included in other revenue. The remaining related party
revenue of approximately $516,142 was for one BSD-2000 system and component
parts sold to Medizin-Technik GmbH. Dr. Gerhard Sennewald, one of our directors,
is a stockholder, executive officer and a director of Medizin-Technik GmbH.

In fiscal 2003, we derived $326,597, or 13% of our revenue from sales
to unrelated parties. These revenues consisted of the sale of two BSD 500
systems for $203,386, billable labor of $20,863, service contracts of $65,731,
and sales of consumable devices used with our hyperthermia systems of $36,617.
During the fiscal year ended August 31, 2003, we also recognized revenue of
$275,000 for royalties in arrears that were collected from a legal settlement.
Such royalties were owing pursuant to a 1996 agreement in which we granted a
license to use our patented technology related to benign prostatic hyperplasia,
or BPH. This payment from the licensee was for settlement in full of all royalty
obligations on the part of the licensee and such royalties will not continue in
future periods.

Cost of sales for the year ended August 31, 2003, included raw material
and labor costs. Research and development expenses include expenditures for new
product development and development of enhancements to existing products.

As described more fully elsewhere in this prospectus, in July 2004, AMS
acquired TherMatrx, including all of our TherMatrx shares. Having sold our
TherMatrx shares, any future product sales to TherMatrx are uncertain and could
decrease to zero in future fiscal periods. While TherMatrx may purchase products
from us in the future, we have not included any TherMatrx sales in our business
planning. It has never been our intent to focus our business on contract
manufacturing. We historically provided manufacturing services to TherMatrx to
help it develop its business.

We project that in fiscal year 2004 the significant decline of
TherMatrx sales will create a significant decline in our total revenue as
compared to fiscal 2003, and that we will incur a greater loss in fiscal 2004
than in 2003.

We intend to use the cash generated from the sale of our TherMatrx
shares to aggressively pursue our business plan and diversify our revenue base
away from related party revenue. Our plan includes increasing support for sales
and marketing of our FDA approved products and the pursuit of pre-marketing
approval for the BSD-2000 in an effort to complete our objective of providing
treatment for solid tumors located throughout the body. Our plan also
anticipates the development of new products that provide heat therapies relating
to cancer and other health concerns. We intend to pursue compatible technologies
other than those developed within our company to further strengthen our product
offering and the markets that we can address. In the future, we expect to spend
substantially more on sales and marketing, including the development of new
channels of distribution, sales partnerships, regulatory efforts to increase our
offering of FDA approved products, and on new technology, developed both outside
our company and internally. These actions are intended to boost our sales to
levels anticipated in our forward business plan. Because our plan requires an
investment in our business as described above, we anticipate that we will incur
substantial losses until our sales rise significantly above past levels.

Critical Accounting Policies and Estimates

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

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

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

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

Inventory Reserves. As of February 29, 2004, we had recorded a reserve
for potential inventory impairment of $140,000. During fiscal 2003, due to the
level of usage of certain inventory items, we estimated that such items on hand
potentially exceeded the estimated near-term usage. As a result, we determined
to increase the inventory reserve by $90,000 in the fourth quarter of fiscal
2003. This estimate is determined based on our forecasted sales and related
inventory usage to fill such sales orders as well as evaluation of technological
enhancements that may render inventory items obsolete in the near-term. We
periodically review our inventory levels and usage, paying particular attention
to slower-moving items. If projected sales for fiscal 2004 do not materialize or
if our hyperthermia systems do not receive increased market acceptance, we may
be required to increase the reserve for inventory in future periods. We have
projected a decrease in future orders placed with us for TherMatrx systems, but
do not project a requirement for any inventory impairment based on this decline.
In the past we have purchased inventory only after receiving orders for
TherMatrx systems, and only in quantities sufficient to fulfill those orders. We
have no inventory for TherMatrx systems that is currently at risk, whether or
not future orders are placed with us for TherMatrx systems.

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

Allowance for Doubtful Accounts. We provide our customers with payment
terms that vary from contract to contract. We perform ongoing credit evaluations
of our customers and maintain allowances for possible losses which, when
realized, have been within the range of management's expectations with exception
of the bad debt expense of approximately $300,000 recorded in fiscal 2003 as
discussed below. Our allowance for doubtful accounts at August 31, 2003 was
approximately $67,000, or approximately 14% of the total outstanding
receivables. Bad debt expense for the fiscal year ended August 31, 2003 was
approximately $300,000. This resulted from a sale of BSD-2000 that was recorded
in fiscal year 2002 to a customer that was determined to be uncollectible in the
fourth quarter of fiscal 2003. Allowance estimates are recorded on a
customer-by-customer basis and are determined based on the age of the
receivable, compliance with payment terms, and prior history with existing
clients. To date, actual results have not differed materially from management's
estimates, with the exception of the above-mentioned bad debt. The non-payment
of a receivable related to the sale of a BSD-500 or BSD-2000 could have a
material adverse impact on our results of operations. As of February 29, 2004,
our allowance for doubtful accounts was approximately $82,000 or approximately
20% of total outstanding receivables.

Results of Operations

Six Months Ended February 29, 2004 Compared to Six Months Ended February 28,
2003

Revenue. Sales decreased from $1,296,145 in the six months ended
February 28, 2003, to $1,107,676 in the six months ended February 29, 2004, a
decrease of $188,469, or 15%, primarily due to a decrease in sales to our
unconsolidated subsidiary, TherMatrx. Sales to Thermatrx declined from $553,943,
or 43% of total revenue for the six months ending February 29, 2004 to $88,620,
or 8%, of total revenue, for the six months ending February 29, 2004. In the
fourth quarter of fiscal 2003, we shipped 35 systems to TherMatrx, which, in
addition to the systems TherMatrx had purchased from another supplier, created
an excess inventory of systems at TherMatrx that will have to be relieved
through sales over time. At present we do not have any further orders for
additional TherMatrx systems. TherMatrx is under no contractual obligation to
purchase products from us or manufacturing, assembling, testing or other
services. We believe TherMatrx has and will continue to develop alternative
sources of such products and services. Consequently, we currently expect revenue
from TherMatrx to be significantly less in fiscal 2004 than it was in fiscal
2003, and that sales to TherMatrx in future fiscal years could decrease to zero.
We project that in fiscal year 2004, the decline of TherMatrx sales will create
a significant decline in our total revenue as compared to fiscal 2003, and that
we will incur a greater loss in fiscal 2004 than in 2003. In future fiscal years
we intend to increase revenue through our expanded sales effort for the BSD-500
and the BSD-2000, and we have not projected sales to TherMatrx in our business
planning for future years.

Related Party Revenue. The remaining related party revenue of $606,798
in the February 29, 2004 period, representing 55% of total sales and 87% of
total related party revenue, was for one BSD-2000 system and component parts
sold to Medizin-Technik GmbH. Dr. Gerhard Sennewald, one of our directors, is a
stockholder, executive officer and a director of Medizin-Technik GmbH.
Non-related party revenue consisted of $341,300 from the sale of two BSD-500's,
$43,230 for service contracts, and $27,728 for miscellaneous items.

Gross Profit. Gross profit for the six months ending February 29, 2004
was $508,812, or 46%, as compared to $776,474, or 60%, of total product sales
for the six month period ending February 28, 2003. The decline in gross profit
margin was primarily due to the cost of excess production employees resulting
from the decrease in sales and due to a sales incentive we agreed to in
connection with the sale of the BSD-2000 to Medizin-Technik. We agreed to

provide an extra applicator at no additional charge as a sales incentive in
connection with the sale of the BSD-2000. The cost of the additional applicator
lowered the gross margin recognized on the sale. Also, we made an adjustment to
inventory to reflect the lower of cost or market which resulted in an increase
in cost of sales of approximately $48,000. In addition, we had sales of higher
margin hyperthermia system products accompanied by production efficiencies
obtained from a higher volume of hyperthermia system sales in the period ending
February 28, 2003.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $461,161 for the six months ended February 29,
2004, as compared to $498,119 in the six months ended February 28, 2003, a
decrease of $36,958, or 7%, primarily due to decreases in legal and consulting
expense of approximately $88,000, offset by an increase in warranty costs of
approximately $17,200 that was associated with a European sale, charges to bad
debt expense of $14,577 and small increases in employee benefits and insurance.
In the six months ended February 28, 2003, we paid significant legal fees
associated with the filing of its fiscal 2002 Form 10-KSB and compliance with
the Sarbanes-Oxley Act. Such costs were not repeated in the six months ended
February 29, 2004. Total costs and expenses increased by $31,058, an increase of
2%, primarily due an increase in cost of goods sold as a result of the
aforementioned adjustment to inventory offset by decreases in selling, general
and administrative and research and development expenses.

Research and Development Expenses. Research and development expenses
were $329,290 for the six months ended February 28, 2004, as compared to
$340,465 in the six months ended February 28, 2003. Research and development
expenses in the period ending February 28, 2004 related primarily to development
work on our BSD-2000/3D/MR hyperthermia system and enhancements to our BSD-500
systems.

Net Loss. Net loss for the six months ending February 28, 2004 was
$279,389 compared to $59,925 for the February 28, 2003 period. The increase in
net loss was primarily due to decreased sales volume and lower gross margins on
product sold.

Fiscal Year Ended August 31, 2003 Compared to Fiscal Year Ended August 31, 2002

Revenue. Revenue for fiscal 2003 was $2,572,682 compared to $2,672,472
for fiscal 2002, a decrease of $99,790, or approximately 4%. The decrease in
total revenue was primarily due to a decrease in sales during fiscal 2003 to
TherMatrx of approximately $390,000 and a decrease in sales of products to
non-related parties of approximately $474,000, offset by an increase in sales to
Medizin-Technik of $442,000, and an increase in royalty revenue of $338,000. We
expect sales to TherMatrx to decline significantly in fiscal 2004. We also
expect royalty revenue to decline significantly as $275,000 of the total
$338,000 in royalty revenue received during fiscal 2003 was related to a
one-time settlement. Sales to Medizin-Technik may fluctuate significantly
depending on Medizin-Technik's anticipated sales and ability to place orders in
Europe. Our revenue can fluctuate significantly from period to period because we
have historically sold relatively few BSD-2000 and BSD-500 systems and these
systems are expensive. Sales of very few systems can cause a large change in the
revenue from period to period as noted in the increase in sales to
Medizin-Technik from 2002 to 2003 and the decrease in sales to non-related
parties from 2002 to 2003. Product sales increased to approximately $1,956,000
in fiscal 2003 from approximately $1,866,000 in fiscal 2002, an increase of
approximately $90,000, or 5%.

Related Party Revenue. We derived $1,907,585, or 74% of our revenue in
fiscal 2003 from sales to related parties as compared to $1,854,714, or 69%, in
fiscal 2002. Approximately $1,391,443 of such related party revenue in fiscal
2003 was from the sales of thermotherapy systems, component products and
contract services to TherMatrx. We also received a royalty payment of $63,500
paid to us by Thermatrx that is included in other revenue. During fiscal 2002,
sales to TherMatrx were approximately $1,781,000. This decline in sales to

TherMatrx in fiscal 2003 was due to increased use of other suppliers in
providing products and services. We believe that we provided approximately 38%
of the inventory and related manufacturing services purchased by TherMatrx in
fiscal 2003 as compared to approximately 55% in fiscal 2002. The remaining
related party revenue of approximately $516,142 in fiscal 2003 was for one
BSD-2000 system and various component parts sold to Medizin-Technik. During
fiscal 2002, we had sales of approximately $74,000 to Medizin-Technik. The
significant increase in sales to Medizin-Technik in fiscal 2003 was due to the
sale of a BSD-2000 system in fiscal 2003. In 2002, Medizin-Technik did not
purchase a complete system. Sales to Medizin-Technik may fluctuate significantly
from period to period due to the high cost of a BSD-2000 or BSD-500 system.
Sales increases of one or two systems can have a material effect on our revenue.

Non-related Party Revenue. In fiscal 2003, we derived approximately
$601,597, or 23% of our total revenue as compared to approximately $817,758, or
31%, in fiscal 2002 from non-related party sales. Our fiscal 2003 non-related
party revenue consisted of sales of two BSD-500 systems in fiscal 2003 for
approximately $203,386. The balance of our non-related party revenue consisted
of consumable devices of $36,617, billable labor of $20,863, service contracts
of $65,731 and royalty revenue of $275,000. As noted above, we expect royalty
revenue to decline significantly as the $275,000 in royalty revenue was related
to a one-time settlement. During fiscal 2002, we sold two BSD-2000 systems and
one BSD-500 system for a aggregate of approximately $630,000. The unit price at
which these systems sold was lower than our normal unit price for new systems
because they were refurbished. The two BSD-2000 systems sold in fiscal 2002 were
purchased by research facilities in the United States. Because the BSD-2000
system can only be sold in the United States pursuant to an Investigational
Device Exemption under FDA regulations, sales in the United States may only be
made to customers using the system for research purposes.

Cost of Sales. Cost of sales for fiscal 2003 was $1,227,377 compared to
$1,114,846 for fiscal 2002, an increase of $112,531, or approximately 10%. This
increase resulted primarily from charges to cost of sales for obsolete inventory
of $90,000. Cost of sales for fiscal 2003 to unrelated parties decreased to
$94,619 from $302,431 primarily because of the decrease in sales to unrelated
customers. Cost of sales to related parties in fiscal 2003 increased to
$1,042,758 from $812,415 in fiscal 2002 primarily due to the increase in related
party sales and the change in product mix sold to related parties from
$1,854,714 of systems, component products and services in fiscal 2002 to
$1,907,585 of systems, component products and services in fiscal 2003. During
fiscal 2003, approximately $748,000, or 74% of the related party cost of sales
were attributable to sales to TherMatrx and approximately $295,000, or 26%, were
attributable to Medizin-Technik. The products sold to TherMatrx generally
require less cost per unit to manufacture than our BSD-2000 and BSD-500 systems.

Gross Profit. Gross profit for fiscal 2003 was $1,006,805 or 45% of
total product sales and related service compared to $1,557,626, or 58%, of total
product sales in fiscal 2002. The gross margin percentage on sales to TherMatrx
decreased from 56% in 2002 to 39% in 2003.

During fiscal 2002 and the first half of fiscal 2003, we only provided
labor in connection with the manufacture of the systems sold to TherMatrx. The
parts and materials for such systems were purchased from suppliers by TherMatrx
and assembled by us. During the second half of fiscal 2003, we began providing
both the labor and materials for the systems sold to TherMatrx. While the total
revenue recorded per system increased from approximately $5,000 per unit to
$10,000 per unit, our total gross margin on the systems declined from
approximately 38% to approximately 28%. During fiscal 2002, we sold 150 systems
to TherMatrx, as compared to 87 in fiscal 2003. We sold 28 systems in the first
half of fiscal 2003 and 59 in the last half of fiscal 2003. In addition, sales
of our applicators, probes, and other component products to TherMatrx declined
as TherMatrx purchased some of its inventory of such products from another
supplier. These items have a higher gross margin than the systems we sold to
TherMatrx.

Our gross margins for sales to Medizin-Technik improved from 55% in
fiscal 2002 to 62% in fiscal 2003. This improvement was due to the sale of the
BSD-2000 unit in fiscal 2003 while we did not sell any complete units to
Medizin-Technik in fiscal 2002. The gross margins on the BSD-2000 and BSD-500
units are higher than the gross margin recognized on component parts, supplies,
and contract services.

Our gross margins for sales to non-related parties improved from 63% in
2002 to 71% in fiscal 2003. This was primarily due to the higher margin that we
received from the first sale of our new BSD-500 system.

Research and Development Expenses. Research and development expenses
for fiscal 2003 were $676,867 compared to $603,137 for fiscal 2002, an increase
of $73,730, or 12%. Research and development expenses in fiscal 2003 related
primarily to development of a commercial version of the BSD-2000/3D/MR
hyperthermia system and to our BSD-500 systems.

Inventory Impairment Expense. We recorded an inventory impairment
charge in fiscal 2003 of $90,000 increasing our total inventory reserve at
August 31, 2003 to $140,000. On at least an annual basis, we attempt to identify
inventory items that have shown relatively no movement or very slow movement.
Generally, if an item has shown little or no movement for over a year, it is
examined for obsolescence. If it is determined that recoverability of the item
is impaired, a reserve is established for that item. In addition, if we identify
products that have become obsolete due to product upgrades or enhancements, a
reserve is established for such products.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2003 were $1,241,561 compared to $1,667,042
in fiscal 2002, a decrease of $425,481, or approximately 26%. This decrease was
primarily due to decrease in compensation expense in fiscal 2003 as compared to
fiscal 2002. This decrease was offset by increases in bad debt expense of
approximately $257,000 and increases in legal fees of approximately $30,000,
mainly resulting from legal assistance provided in our settlement of the royalty
dispute discussed elsewhere herein.

During fiscal 2002, we issued to certain employees and board members
options to purchase 179,300 common shares of TherMatrx, or approximately 7% of
our interest in TherMatrx, at an exercise price of $.001 per share. In
connection with the issuance of these options, we recorded $717,000 of
compensation expense. This expense was computed based on the estimated fair
value of the options. We conservatively estimated the fair value of the options
to be $4.00 per option. This fair value was determined based on a December 2001
private offering of TherMatrx shares in which 525,321 shares of common stock
were sold for $4.00 per share to existing TherMatrx stockholders who elected to
purchase shares in the offering. For accounting purposes, because of the lack of
other contemporaneous transaction data indicating the value of these shares in
July 2002, and to record a conservative estimate of compensation expense, we
recorded the value of each option at $4.00, resulting in $717,000 of
compensation expense. Because all of the options were exercised prior to
year-end, we also recorded a gain of $717,000 because the TherMatrx stock issued
to settle the compensation liability had a book value of $0. The gain is
reflected in the statement of operations as "Gain on transfer of equity interest
in affiliate to related parties." The exercise of these options reduced our
holdings in TherMatrx from 2,700,000 shares, or approximately 32%, to 2,520,700
shares, or approximately 30%.

We recorded a bad debt expense of $300,394 in fiscal 2002 as a result
of a receivable write-off due to our inability to collect payment relating to
the sale of a BSD-2000 system in fiscal 2002. The sale in fiscal 2002 was to a
non-related party. At the time the sale was made, we were led to believe that

the customer had secured payment for the system. After our efforts to collect
the receivable failed, we determined to seek return of the system and write off
the receivable. Accordingly, during the fourth quarter of fiscal 2003, we
recorded a bad debt expense of $300,394. This bad debt expense was the net
result of a receivable write-off of approximately $346,000 and the value of
returned inventory of approximately $46,000. We believe this is an isolated case
and not indicative of a trend. Historically, our bad debt expense has been
substantially lower than fiscal 2003 levels. Generally, we require a significant
deposit on the sales of our BSD systems which reduces the likelihood of bad debt
expense.

Other Income. Other income for fiscal 2003 was $2,838 compared to
$722,198 in fiscal 2002, a decrease of $719,360. This decrease resulted almost
entirely from a gain recognized in 2002 on transfer of equity interest in
affiliate to related parties as noted above.

Net Loss. In fiscal 2003 we had a net loss of $570,285 as compared to
net income in fiscal 2002 of $9,645. The net loss was primarily caused by an
increase in bad debt expense of $300,394, an increase in inventory reserve of
$90,000 and lower overall sales for fiscal 2003.

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

Liquidity and Capital Resources

Since inception, we have generated an accumulated deficit of
$20,765,496 at February 29, 2004. We have historically financed our operations
through cash from operations, licensing of technological assets and issuance of
common stock.

We used $227,298 in cash from operating activities in fiscal 2003
compared to cash generated of $19,800 in fiscal 2002. This was a result of a
significant uncollectible receivable of $300,000 that contributed to a net loss
of $570,285 for fiscal 2003 compared to net income of $9,645 in 2002, and a
reduction of accounts receivable of $9,614 as compared to $55,173 in fiscal 2002
offset by an increase in accounts payable of $217,447 compared to a reduction in
accounts payable of $51,121 in fiscal 2002. Accrued expenses decreased by
$133,066 primarily as a result of a decrease in customer deposits as orders were
shipped. Our investing activities resulted in net cash used of $60,599 relating
to the purchase of certain property and equipment. Cash provided by financing
activities totaled $2,000 reflecting proceeds from the issuance of common stock
in connection with the exercise of outstanding stock options.

On November 28, 2003, we completed the sale of an aggregate of
1,820,000 shares of our common stock to investors for cash consideration of
$1.10 per share, or gross proceeds of $2,002,000. On December 10, 2003, we
issued an additional 239,600 shares to investors at a price per share of $1.10
for gross proceeds of $263,560. The net proceeds from the transactions, after
paying a commission to our placement agent, T.R. Winston & Company, LLC, and
legal and other expenses related to the transaction, were approximately
$2,079,000.

We used $408,622 in cash from operating activities during the period
ended February 29, 2004 compared to cash used of $2,428 in the period ending
February 29, 2003. Cash flow from operating activities decreased in the six
months ending February 29, 2004 primarily because of lower sales volume compared
to the prior year period.

At February 29, 2004, our working capital was $2,290,196 and our cash
and cash equivalents totaled $1,827,289. We have no bank debt and no credit
facility. Our contractual obligations and commercial commitments requiring
capital resources include building rent of $82,000 per year for five years
adjusted annually for increases in the cost of living based on the Consumer
Price Index for Urban Consumers.

Our ability to fund our cash needs and grow our business depends on our
ability to generate cash flow from operations and capital from financing
activities. Our operating cash flow has fluctuated significantly in the past and
may continue to do so in the future. We believe that our current working capital
and anticipated cash flow from future operations will be sufficient to fund our
anticipated operations for fiscal 2004. We have based this belief, however, on
assumptions that may prove to be wrong.

We expect our revenue from sales of products to TherMatrx to decline
substantially in the third and fourth quarters of fiscal 2004 compared to the
third and fourth quarters of fiscal 2003. We also expect to incur additional
expenses related to the commercial introduction of our BSD-500 systems, which
will precede any revenue from the sale of such systems. Due to additional
participation at trade shows, expenditures on publicity, additional travel,
higher sales commissions and other related expenses, we project that our sales
and marketing expenses will be approximately $250,000 higher in 2004 than in the
prior year to support the commercial introduction of the BSD-500 systems. In
addition, we anticipate that we will incur expenses of approximately $100,000
related to governmental and regulatory, including FDA, approvals during fiscal
2004 in excess of fiscal 2003. We are making these investments in sales and
marketing and on government and regulatory activities to increase our revenue
from sales of our BSD-500 system and, upon receipt of FDA approval, from the
sale of our BSD-2000 system in the United States. These increased marketing and
regulatory expenses are an investment in generating offsetting revenue against
the decline in TherMatrx sales that we have projected, and to provide future
revenue growth over the long term. We have not projected any sales to TherMatrx
in our business planning beyond fiscal 2004.

We are currently subject to the penalty provisions of the terms of the
common stock issued in November and December 2003 and as such are required to
pay these investors $1,500 per day until the registration statement, which this
prospectus is a part, is declared effective. We cannot assure when this
registration statement will be declared effective and our obligation to pay this
penalty will cease. Our cash available for operations will decrease by the
amount paid as penalties to these investors.

We believe any cash shortfall during fiscal 2004 that results from this
decrease in revenues and increase in expenses can be covered through the cash
raised in our November and December 2003 private placements and from the initial
closing payment of approximately $9 million from the sale of our TherMatrx
shares. However, if our revenues from TherMatrx decrease more rapidly than we
currently expect or revenues from the sale of our systems is lower than we
currently expect or we are required to pay substantial amounts as penalties to
certain investors, we will have to cut expenses or use more of our available
cash than we anticipated. We believe we can cover any such cash shortfall with
cost cutting or available cash. If we cannot cover any such cash shortfall with
cost cutting or available cash, we would need to obtain additional financing. We
cannot be certain that any financing will be available when needed or will be
available on terms acceptable to us. Insufficient funds may require us to delay,
scale back or eliminate some or all of our programs designed to facilitate the
commercial introduction of our systems.

FORWARD-LOOKING STATEMENTS

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

o our anticipated financial performance and business plan;

o our expectations regarding the commercial introduction of the BSD-500
system;

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

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

o our development or acquisition of new technologies;

o our expectation that sales to TherMatrx will decline and the rate at
which sales to TherMatrx decline;

o the amount of expenses we will incur for the commercial introduction of
the BSD-500 system;

o the amount of expenses we will incur for governmental and regulatory,
including FDA, approvals;

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

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

o our belief that our current working capital and cash from operations
will be sufficient to fund our anticipated operations for fiscal 2004;

o our assumption that we will receive contingent payments from AMS in
connection with the TherMatrx acquisition; and

o our anticipated use of proceeds from the AMS transaction.

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

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TherMatrx, Inc. We manufacture, assemble and test for TherMatrx, Inc.
its TMx-2000 thermotherapy system and supply TherMatrx with equipment components
used for its TMx-2000 system. We also have provided regulatory compliance and
other consulting services to TherMatrx. TherMatrx has become our largest
customer, and for the year ended August 31, 2003, TherMatrx accounted for
$1,391,443, or approximately 54%, of our revenue. We also received a royalty
payment of $63,500 from TherMatrx in fiscal 2003. During fiscal 2002, sales to
TherMatrx were approximately $1,781,000. In the six month period ending February
29, 2004, sales to TherMatrx were $88,620.

During 2002, we issued to certain employees and board members options
to purchase 179,300 common shares of TherMatrx, or approximately 7% of our
interest in TherMatrx, at an exercise price of $.001 per share. In connection
with the issuance of these options, we recorded $717,000 of compensation
expense. This expense was computed based on the estimated fair value of the
options. We estimated the fair value of the options to be $4.00 per option. This
fair value was determined based on a December 2001 private offering of TherMatrx
shares in which 525,321 shares of common stock were sold for $4.00 per share to
existing TherMatrx stockholders who elected to purchase shares in the offering.
We issued options to the following officers and directors in the following
amounts: Hyrum Mead, 45,000; Paul Turner, 45,000; Gerhard Sennewald, 30,000; J.
Gordon Short, 10,000; Michael Nobel, 10,000; Dixie Sells, 2,450; and Ray
Lauritzen, 2,600.

As described more fully elsewhere in this prospectus, in July 2004, AMS
acquired TherMatrx, including all of our TherMatrx shares.

Medizin-Technik GmbH. Additionally, we supply equipment components to
Medizin-Technik GmbH located in Munich, Germany, which is a significant
distributor of our products in Europe. Medizin-Technik purchases equipment,
which it installs, and components to service our hyperthermia therapy systems
that it sells to its customers in Europe. We had revenue of approximately
$516,142 in fiscal 2003 from the sale of one BSD-2000 system and various
component parts sold to Medizin-Technik. During fiscal 2002, we had sales of
approximately $74,000 to Medizin-Technik. Dr. Gerhard W. Sennewald, one of our
directors and significant stockholders, is the President and Chief Executive
Officer of Medizin-Technik and its sole stockholder.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades publicly on the OTC Bulletin Board under the
symbol "BSDM." The following table sets forth the high and low bid transactions,
as provided by the OTC Bulletin Board, for the quarters in fiscal year 2002 and
2003. The amounts reflect inter-dealer prices, without retail mark-up, markdown
or commission, and may not represent actual transactions.

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

November 30, 2001.............. .90 .90
February 28, 2002.............. 1.16 1.10
May 31, 2002................... 1.00 .95
August 31, 2002................ .66 .66

November 30, 2002.............. .42 .42
February 29, 2003.............. 1.65 .60
May 31, 2003................... .45 .45
August 31, 2003................ .80 .78

November 30, 2003.............. 1.45 1.45
February 29, 2004.............. 1.18 1.52

As of April 30, 2004, there were approximately 595 holders of record of
our common stock. We have not paid any cash dividends on our common stock since
our inception and we have no intention of declaring any common stock dividends
in the foreseeable future.

Equity Compensation Plan Information (as of the end of most recent fiscal year)

Number of Securities to Weighted-Average Number of Securities
be Issued Upon Exercise Exercise Price of Remaining Available for
of Outstanding Options, Outstanding Options, Future Issuance Under Equity
Plan Category Warrants and Rights Warrants and Rights Compensation Plans
--------------------------------------------------------------------------------------------------------------------

Equity Compensation Plans 1,275,303 $0.49 1,802,241
Approved by Security Holders

Equity Compensation Plans - - -
not Approved by Security
Holders

Total 1,275,303 $0.49 1,802,241

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of April 30, 2004, the beneficial
ownership of our outstanding common stock by:

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

o each of our executive officers,

o each of our directors, and

o all executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to securities. For purposes of calculating the percentages shown in the
table, each person listed is deemed to beneficially own any shares issuable on
the exercise of vested options and warrants held by that person that are
exercisable within 60 days after April 30, 2004. Except as indicated by
footnote, the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown beneficially owned by them. The
inclusion of any shares as beneficially owned does not constitute an admission
of beneficial ownership of those shares. The percentage calculation of
beneficial ownership is based on 19,937,982 shares of common stock outstanding
as of April 30, 2004. Except as otherwise noted, the address of each person
listed on the following table is 2188 West 2200 South, Salt Lake City, Utah
84119.

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

Common Stock Dr. Gerhard W. Sennewald(1) 6,771,814 33.81%

Common Stock Paul F. Turner(2) 1,947,871 9.68%

Common Stock Hyrum A. Mead(3) 340,000 1.68%

Common Stock Dr. J. Gordon Short(4) 217,635 1.08%

Common Stock Dr. Michael Nobel(5) 154,718 *

Holders of More Than 5%

Common Stock John E. Langdon(6) 1,295,010 6.49%

J. Steven Emerson(7) 1,262,787 6.33%

Common Stock All Executive Officers and Directors as a Group 9,432,038 45.66%
(5 persons)(8)

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

(1) Includes 90,000 shares subject to options. Does not include 500,000 shares
held by Dr. Sennewald's spouse, for which he disclaims beneficial
ownership.

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

(3) Includes 260,000 shares subject to options.

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

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

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

(7) Mr. Emerson's address is: 1522 Ensley Avenue, Los Angeles, CA 90024.

(8) Includes 715,953 shares subject to options.

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

DESCRIPTION OF SECURITIES

General

We are authorized to issue 40,000,000 shares of common stock, $0.001
par value, and 10,000,000 shares of undesignated preferred stock, $0.001 par
value per share.

The following description of our capital stock is a summary. It is not
complete and is subject to and qualified in its entirety by our Amended and
Restated Certificate of Incorporation and Bylaws, a copy of each of which has
been incorporated as an exhibit to the registration statement of which this
prospectus forms a part.

Our Amended and Restated Certificate of Incorporation and Bylaws
contain certain provisions that are intended to enhance the likelihood of
continuity and stability in the composition of the board of directors, which may
have the effect of delaying, deferring or preventing a future takeover or change
in control of BSD unless such takeover or change in control is approved by our
board of directors.

Common Stock

As of April 30, 2004, there were 19,937,982 shares of our common stock
outstanding, which were held of record by 595 stockholders.

Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of common stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors. Subject to preferences that may be applicable to any then-outstanding
preferred stock, holders of common stock are entitled to receive such dividends
as may be declared from time to time by our board of directors out of funds
legally available therefore. We have never declared or paid cash dividends on
our capital stock. We expect to retain future earnings, if any, for use in the
operation and expansion of its business, and do not anticipate paying any cash
dividends in the foreseeable future.

In the event of our liquidation, dissolution or winding up, holders of
common stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of the holders of any preferred stock then outstanding. Holders of
common stock have no preemptive or other subscription or conversion rights, and
there are no redemption or sinking fund provisions applicable to the common
stock.

Preferred Stock

As of April 30, 2004, there were no shares of preferred stock
outstanding. Our Amended and Restated Certificate of Incorporation authorizes
10,000,000 shares of undesignated preferred stock. Our board of directors will
have the authority, without any further vote or action by our stockholders, to
issue from time to time the preferred stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of such series. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could decrease the amount of
earnings and assets available for distribution to holders of common stock or
adversely affect the rights and powers, including voting rights, of the holders
of common stock, and may have the effect of delaying, deferring or preventing a
change in control without further action by the stockholders. We have no current
plans to issue any shares of preferred stock.

Warrants and Options

As of April 30, 2004, warrants to purchase an aggregate of 102,980
shares of our common stock at a weighted average exercise price per share of
$1.80 were issued and outstanding, and options to purchase an aggregate

1,089,550 shares of our common stock at a weighted average exercise price per
share of $0.49 were issued and outstanding.

Antitakeover Effects of Provisions of Our Amended and Restated Certificate of
Incorporation and Bylaws and Delaware Law

Certain provisions of our Amended and Restated Certificate of
Incorporation and Bylaws could make the following more difficult:

o acquisition of us by means of a tender offer;

o acquisition of us by means of a proxy contest or otherwise; and

o the removal of our incumbent officers and directors.

These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of increased
protection resulting from our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure us outweigh
the disadvantages of discouraging such proposals because we believe that the
negotiation of such proposals could result in an improvement of their terms.

Stockholder Meetings. Our Amended and Restated Certificate of
Incorporation provide that only the board of directors, the Chairman of the
Board, the Chief Executive Officer or our President may call special meetings of
stockholders. The provision may not be amended without the affirmative vote of
holders of at least 66 2/3% of our outstanding voting stock.

Elimination of Stockholder Action By Written Consent. Our charter
documents eliminate the right of stockholders to act by written consent without
a meeting.

Elimination of Cumulative Voting. Our charter documents do not provide
for cumulative voting in the election of directors.

Undesignated Preferred Stock. The ability to authorize undesignated
preferred stock makes it possible for the board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of us. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of us.

The provisions of Delaware law and our Amended and Restated Certificate
of Incorporation and Bylaws could have the effect of discouraging others from
attempting unsolicited takeovers and, as a consequence, they may also inhibit
temporary fluctuations in the market price of our common stock that often result
from actual or rumored unsolicited takeover attempts. Such provisions may also
have the effect of preventing changes in our management. It is possible that
these provisions could make it more difficult to accomplish transactions, which
stockholders may otherwise deem to be in their best interests.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Section 145 of the Delaware General Corporation Law permits a
corporation to include in its charter documents, and in agreements between the
corporation and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.

Article 8 of our Amended and Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.

Section 8 of our Bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of us if such person acted in good
faith and in a manner reasonably believed to be in, and not opposed to, our best
interest, and, with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that,
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable.

LEGAL MATTERS

The validity under the Delaware General Corporation Law of the common
stock to be sold by the selling stockholders has been passed on for us by Dorsey
& Whitney LLP, Salt Lake City, Utah.

EXPERTS

Tanner + Co., independent certified public accountants, have audited
our financial statements and schedule included in this prospectus for the year
ended August 31, 2003, as set forth in their reports which are incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
financial statements and schedule are incorporated by reference in reliance on
Tanner + Co.'s reports, given on their authority as experts in accounting and
auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the Public Reference Room. Our SEC
filings are also available to the public at the SEC's web site at
http://www.sec.gov.

In addition, we maintain an Internet website at www.bsdmc.com. We do
not intend that our website be a part of this prospectus.

We have filed a registration statement on Form SB-2 with the SEC for
the common stock offered by the selling stockholders under this prospectus. This
prospectus does not include all of the information contained in the registration
statement. You should refer to the registration statement and its exhibits for
additional information that is not contained in this prospectus. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, you should refer to the exhibits attached to this registration
statement for copies of the actual contract, agreement or document.

BSD MEDICAL CORPORATION
Index to Financial Statements

Page
----

Independent Auditor's Report F-1

Balance Sheet F-2

Statement of Operations F-3

Statement of Stockholders' Equity F-4

Statement of Cash Flows F-5

Notes to Financial Statements F-6

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
of BSD Medical Corporation

We have audited the balance sheet of BSD Medical Corporation (the Company) as of
August 31, 2003, and the related statements of operations, stockholders' equity,
and cash flows for the years ended August 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BSD Medical Corporation as of
August 31, 2003, and the results of its operations and cash flows for the years
ended August 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States of America.

/s/TANNER + CO.

Salt Lake City, Utah
September 29, 2003, except for note 15, which is
Dated January 16, 2004

F-1

BSD MEDICAL CORPORATION
Balance Sheet

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

February 29,
2004 August 31,
(unaudited) 2003
-----------------------------------

Assets
------

Current assets:
Cash and cash equivalents $ 1,827,289 $ 136,003
Receivables, net 202,697 60,844
Related party receivables 127,321 342,878
Inventories 711,889 802,473
Other current assets 25,919 43,238
----------------------------------

Total current assets 2,895,115 1,385,436

Property and equipment, net 119,642 141,294
Patent, net of amortization of $5,982 and
$5,043, respectively 25,946 26,885
----------------------------------

$ 3,040,703 $ 1,553,615
----------------------------------
-----------------------------------------------------------------------------------------

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

Current liabilities:
Accounts payable $ 74,516 $ 280,068
Accrued expenses 496,118 614,470
Current portion of deferred revenue 34,285 43,220
----------------------------------

Total current liabilities 604,919 937,758

Deferred revenue 20,450 40,900
----------------------------------

Total liabilities 625,369 978,658
----------------------------------

Commitments and contingencies - -

Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000
authorized, no shares issued and outstanding - -
Common stock, $.001 par value; authorized
40,000,000 shares; issued and outstanding
19,915,232 and 17,839,633 shares, respectively 19,916 17,840
Additional paid-in capital 23,188,956 21,070,874
Deferred compensation (27,808) (27,416)
Accumulated deficit (20,765,496) (20,486,107)
Treasury stock, at cost (234) (234)
----------------------------------

Total stockholders' equity 2,415,334 574,957
----------------------------------

$ 3,040,703 $ 1,553,615
----------------------------------

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

BSD MEDICAL CORPORATION
Statement of Operations

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

Six Months Ended
February 29/ 28, Years Ended August 31,
----------------------------------------------------------
2004 2003
(unaudited) (unaudited) 2003 2002
----------------------------------------------------------

Revenues:
Sales $ 412,258 $ 254,954 $ 326,597 $ 817,758
Sales to related parties 695,418 1,041,191 1,907,585 1,854,714
Revenue from royalties in arrears - - 275,000 -
Other revenue - related party - - 63,500 -
----------------------------------------------------------

1,107,676 1,296,145 2,572,682 2,672,472
----------------------------------------------------------

Costs and expenses:
Cost of sales 315,186 62,710 94,619 302,431
Cost of sales to related parties 283,676 456,961 1,132,758 812,415
Research and development 329,290 340,465 676,867 603,137
Selling, general, and administrative 461,161 498,119 1,241,561 1,667,042
----------------------------------------------------------

1,389,313 1,358,255 3,145,805 3,385,025
----------------------------------------------------------

Operating (loss) income (281,637) (62,110) (573,123) (712,553)
----------------------------------------------------------

Other income (expense):
Gain on transfer of equity interest in
affiliate to related parties - - - 717,000
Interest income 2,601 2,185 2,838 5,198
Interest expense (353) - - -
----------------------------------------------------------

2,248 2,185 2,838 722,198
----------------------------------------------------------

Net (loss) income before
income taxes (279,389) (59,925) (570,285) 9,645

Income tax benefit (provision) - - - -
----------------------------------------------------------

Net (loss) income $ (279,389) $ (59,925) $ (570,285) $ 9,645
----------------------------------------------------------

Income (loss) per common share -
basic and diluted $ (.01) $ - $ (0.03) $ -
----------------------------------------------------------

Weighted average shares - basic 19,891,000 17,776,000 17,805,000 17,699,000
----------------------------------------------------------

Weighted average shares - diluted 19,891,000 17,776,000 17,805,000 17,932,000
----------------------------------------------------------

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

BSD MEDICAL CORPORATION
Statement of Stockholders' Equity

Years Ended August 31, 2003 and 2002
and Six Months Ended February 29, 2004 (unaudited)
------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

Common stock issued for:
Cash, net of
offering costs of
$165,653 (unaudited) 2,059,600 2,060 2,097,848 - - - -
Services (unaudited) 15,999 16 11,984 - - - - 12,000

Deferred compensation
(unaudited) - - 8,250 (8,250) - - - -

Amortization of deferred
compensation (unaudited) - - - 7,858 - - - 7,858

Net loss (unaudited) - - - - (279,389) - - (279,389)
----------------------------------------------------------------------------------------------------------

Balance February 29,
2004 (unaudited) 19,915,232 $ 19,916 $ 23,188,956 $ (27,808) $ (20,765,496) 24,331 $ (234) $ 2,415,334
----------------------------------------------------------------------------------------------------------

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

BSD MEDICAL CORPORATION
Statement of Cash Flows

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

Six Months Ended
February 29/ 28, Years Ended August 31,
--------------------------------------------------------
2004 2003
(unaudited) (unaudited) 2003 2002
--------------------------------------------------------

Cash flows from operating activities:
Net (loss) income $ (279,389) $ (59,925) $ (570,285) $ 9,645
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating
activities operating expense
Provision for doubtful accounts 61,805 - 284,393 42,403
Provision for inventory write-off - - 90,000 30,000
Depreciation and amortization 22,591 24,013 48,678 48,965
Deferred gain on sale of building - (15,275) (15,275) (61,416)
Amortization of deferred compensation 7,858 6,358 6,358 8,636
Stock compensation expense 12,000 11,999 24,000 24,000
Compensation expense resulting from
options granted to purchase TherMatrx
shares - - - 717,000
Gain on issuance of options of TherMatrx
shares as settlement of compensation - - - (717,000)
Decrease (increase) in:
Restricted certificate of deposit - - - 15,313
Receivables 11,899 107,049 9,614 55,173
Inventories 90,584 (58,003) (85,743) (109,095)
Other current assets 17,319 (8,549) (24,901) 16,767
Increase (decrease) in:
Accounts payable (205,552) 135,591 217,447 (51,121)
Accrued expenses (118,352) (96,933) (133,066) 40,043
Deferred revenue (29,385) (48,763) (78,518) (49,513)
--------------------------------------------------------

Net cash (used in) provided by
operating activities (408,622) (2,438) (227,298) 19,800
-------------------------------------------------------

Cash flows from investing activities:
Purchase of property and equipment - (6,744) (60,599) (22,532)
Purchase of patent license - - - (18,000)
--------------------------------------------------------

Net cash used in
investing activities - (6,744) (60,599) (40,532)
-------------------------------------------------------

Cash flows from financing activities-
proceeds from issuance of common stock 2,099,908 - 2,000 34,602
-------------------------------------------------------

Increase (decrease) in cash and cash equivalents 1,691,286 (9,182) (285,897) 13,870

Cash and cash equivalents, beginning of period 136,003 421,900 421,900 408,030
--------------------------------------------------------

Cash and cash equivalents, end of period $ 1,827,289 $ 412,718 $ 136,003 $ 421,900
--------------------------------------------------------

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

BSD MEDICAL CORPORATION
Notes to Financial Statements

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

1. Organization Organization
and BSD Medical Corporation (the Company) was incorporated
Significant in the State of Delaware on July 3, 1986. The Company
Accounting develops, produces, markets, and services systems used
Policies for the treatment of cancer and other diseases. These
systems are sold worldwide. In addition, the Company
currently has an approximate 30% interest in TherMatrx,
Inc. (TherMatrx) a corporate joint venture that is
engaged in the manufacture and sale of medical
equipment.

Unaudited Information
The Condensed Balance Sheet as of February 29, 2004, the
Condensed Statements of Operations and the Condensed
Statements of Cash Flow for the six months ended
February 29, 2004 and February 28, 2003, and the
condensed statement of stockholders' equity for the six
months ended February 29, 2004, have been prepared by
the Company without audit. In the opinion of management,
all adjustments to the books and accounts (which include
only normal recurring adjustments) necessary to present
fairly the financial position, results of operations,
and changes in financial position of the Company as of
February 29, 2004 and for the six months ended February
29, 2004 and February 28, 2003 have been made.

Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted for the period ended February 29,
2004 and February 28, 2003. The results of operations
for the period ended February 29, 2004, are not
necessarily indicative of the results to be expected for
the full year.

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

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

--------------------------------------------------------------------------------
F-6

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

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

Warranty Reserve
The Company provides limited warranties to its customers
for products sold. Estimated future warranty obligations
are accrued each period. As of August 31, 2003 the
accrued warranty reserve was approximately $3,000.
During the fiscal years ended August 31, 2003 and 2002
total warranty expense was $11,502 and $15,170,
respectively.

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

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

--------------------------------------------------------------------------------
F-7

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

1. Organization Income (Loss) Per Common Share - Continued
and The computation of diluted earnings per common share is
Significant based on the weighted average number of shares
Accounting outstanding during the year, plus the common stock
Policies equivalents that would arise from the exercise of stock
Continued options and warrants outstanding, using the treasury
stock method and the average market price per share
during the year. Common stock equivalents are not
included in the diluted loss per share calculation when
their effect is anti-dilutive. Options to purchase
1,275,303 shares and 1,258,901 shares of common stock at
prices ranging from $.10 to $1.76 per share were
outstanding at August 31, 2003 and 2002, respectively.
Options outstanding during the fiscal year ended August
31, 2003 were not included in the calculation of diluted
earnings per share because their effect was
anti-dilutive.

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

February 29/ 28, August 31,
2004 2003
(unaudited) (unaudited) 2003 2002
----------------------------------------------------

Weighted average number
of shares outstanding -
basic 19,891,000 17,776,000 17,805,000 17,699,000
Dilutive effect of stock - - - 233,000
options
----------------------------------------------------

Weighted average number
of shares outstanding,
assuming dilution 19,891,000 17,776,000 17,805,000 17,932,000
----------------------------------------------------

--------------------------------------------------------------------------------
F-8

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

Six Months Ended
February 29/ 28, Years Ended August 31,
---------------------------------------------
2004 2003
(unaudited) (unaudited) 2003 2002
---------------------------------------------

Net income (loss) - as reported $ (279,389) $ (59,925) $(570,285) $ 9,645

Deduct total stock based
employee
compensation expense
determined (25,000) (63,113) (123,770) (126,225)
under fair value based method
for
all awards, net of related
tax effects
---------------------------------------------

Net income (loss) - pro forma $ (304,389) $(123,038) (694,055) (116,580)
---------------------------------------------

Basic and diluted loss per
share- $ (.01) $ (.00) $ (.03) $ -
as reported
---------------------------------------------

Basic and diluted loss per
share- $ (.02) $ (.01) $ (.04) $ -
pro forma
---------------------------------------------

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

February 29/ 28, August 31,
-------------------------------------------------
2004 2003
(unaudited) (unaudited) 2003 2002
-------------------------------------------------

Expected dividend yield $ - $ - $ - $ -
Expected stock price 114% 137% 122%
volatility 143%
Risk-free interest rate 4.2% 4.2% 4.3% 4.3%
Expected life of options 5 years 5 years 5 years 5 years

--------------------------------------------------------------------------------
F-9

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

1. Organization Stock-Based Compensation - Continued
and The weighted average fair value of options granted
Significant during the years ended August 31, 2003 and 2002 were
Accounting $.57 and $.73, respectively. The unaudited weighted
Policies average fair value of options granted during the six
Continued months ended February 29, 2004 and February 28, 2003,
were $.64 and $.60, respectively.

Revenue Recognition
The Company recognizes revenue from the sale of cancer
treatment systems, the sale of parts and accessories
related to the cancer treatment systems, the sale of
software license rights, providing manufacturing
services, providing training, and service support
contracts. Product sales were $1,956,270 and $1,866,192
for the years ended August 31, 2003 and 2002,
respectively. Service revenue was $277,912 and $806,280
for the years ended August 31, 2003 and 2002,
respectively.

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

--------------------------------------------------------------------------------
F-10

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

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

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

--------------------------------------------------------------------------------
F-11

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

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

2. Detail of Details of certain balance sheet accounts as of August
Certain 31, 2003, are as follows:
Balance
Sheet
Accounts

Receivables:
Trade receivables $ 471,093
Less allowance for doubtful accounts (67,371)
------------------

$ 403,722
------------------
Inventories:
Parts and supplies $ 385,825
Work-in-process 556,648
Reserve for obsolete inventory (140,000)
------------------

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

--------------------------------------------------------------------------------
F-12

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

3. Property Property and equipment as of August 31, 2003 consists of
and the following:
Equipment

Equipment $ 680,630
Furniture and fixtures 297,741
------------------

978,371

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

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

4. Deferred During the year ended August 31, 1998, the Company
Gain entered into a sale-leaseback transaction on its
and building. The sale-leaseback resulted in a gain of
Operating $325,513 of which $307,000 was deferred and is being
Lease credited to income as rent expense adjustments over the
term of the lease. The lease required monthly payments
of $6,533 through November 2002. During the year ended
August 31, 2003, the Company renewed its lease for five
years, which includes payments of approximately $82,000
per year, adjusted annually for increases in the cost of
living based on the Consumer Price Index for Urban
Consumers.

--------------------------------------------------------------------------------
F-13

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

84,120

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

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

--------------------------------------------------------------------------------
F-14

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

2,205,000

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

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

--------------------------------------------------------------------------------
F-15

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

2005 $ 1,270,000
2007 190,000
2008 99,000
2009 671,000
2010 170,000
2012 838,000
2016 153,000
2018 1,052,000
2019 731,000
------------------

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

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

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

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

$ 113,000 $ 57,000
----------------------------------

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

--------------------------------------------------------------------------------
F-16

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

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

--------------------------------------------------------------------------------
F-17

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

Outstanding at September 1, 2001 1,306,434 87,133 $ .10 to 3.00
Granted 75,000 - .73
Exercised (114,312) (12,133) .10 to .37
Forfeitures (8,221) (75,000) .10 to 3.00
-----------------------------------------

Outstanding at August 31, 2002 1,258,901 - .10 to 1.76
Granted 75,000 - .56
Exercised (58,598) - .10 to .65
Forfeitures - -
-----------------------------------------

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

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

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

$ .10-.25 430,703 2.41 $ .13 415,703 $ .12
.37-1.11 794,600 7.65 .61 427,780 .58
1.76 50,000 7.82 1.76 50,000 1.76
-------------------------------------------------------------------------------

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

8. Foreign During the years ended August 31, 2003 and 2002 the
Customer Company had sales of $1,391,443 and $1,844,500
and Major (including $63,500 in royalty revenues), respectively,
Customer to TherMatrx, an unconsolidated affiliate of which it
owns approximately 30%. During the years ended August
31, 2003 and 2002 the Company had sales to a European
entity controlled by a significant stockholder and
member of the Board of Directors of the Company of
approximately $518,000 and $74,000, respectively. The
Company also had a sale to an unrelated entity of
approximately $344,000 or approximately 12.9% of total
sales for the year ended August 31, 2002.

--------------------------------------------------------------------------------
F-18

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

9. Related Party At August 31, 2003, accrued expenses include
Transactions approximately $272,132, due to an entity controlled by a
Not otherwise significant stockholder and member of the Board of
disclosed Directors and an unconsolidated affiliate. These amounts
represent deposits to purchase product from the Company
and will be recognized as revenue when all performance
and delivery obligations have been met.

At August 31, 2003, accounts receivable includes
approximately $38,225, due from an entity controlled by
a significant stockholder and member of the Board of
Directors. Accounts receivable also include $304,653 due
from TherMatrx at August 31, 2003.

Unaudited Related Party Transactions
During the periods ended February 29, 2004 and February
28, 2003 the Company had sales to an unconsolidated
affiliate and an entity controlled by a significant
stockholder of $695,418 and $1,041,191, respectively.
These related party transactions represent 62.78% and
80.32% of total sales, respectively.

At February 29, 2004, accrued expenses include $126,428
consisting of deposits on orders placed by an
unconsolidated affiliate and an entity controlled by a
significant stockholder.

At February 29, 2004, accounts receivable include
$127,321 due from an unconsolidated affiliate and an
entity controlled by a significant stockholder.

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

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

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

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

--------------------------------------------------------------------------------
F-19

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

10. Supplemental Unaudited Supplemental Cash Flow Information for the
Cash Flow periods ended February 29, 2004 and February 28, 2003:
Information
Continued o The Company paid $353 for interest and no cash for
income taxes during the period ended February 29,
2004 and no cash for interest and income taxes for
the period ended February 28, 2003.

o The Company issued 75,000 options to purchase
common stock for the periods ended February 29,
2004 and February 28, 2003, which resulted in an
increase to Deferred Compensation of $8,250 and
$7,500, respectively.

11. Significant The Company has an approximate 30% interest in an
Unconsolidated unconsolidated affiliate (TherMatrx) at August 31, 2003.
Affiliate During the year ended August 31, 2002 the Company
compensated certain employees and directors by issuing
options to purchase 179,300 shares of TherMatrx, or
approximately 2% of the Company's interest in TherMatrx
at $.001 per share. This resulted in compensation
expense of $717,000, which is included in general and
administrative expenses in the statement of operations
for the year ended August 31, 2002. The Company
estimated the fair value of the options to be $4.00 per
option. This fair value was determined based on a
December 2001 private offering of TherMatrx shares in
which 525,321 shares of common stock were sold for $4.00
per share to existing TherMatrx stockholders who elected
to purchase shares in the offering. For accounting
purposes, because of the lack of other contemporaneous
transaction data indicating the value of these shares in
July 2002, the Company recorded the value of each option
at $4.00, thus resulting in $717,000 of compensation
expense. Because the TherMatrx shares used to settle the
compensation obligation had a book value of $0, such
issuance of TherMatrx shares upon exercise of the
options resulted in a gain of $717,000, which is
reflected as gain on transfer of equity interest in
affiliate in the statement of operations. All of the
options had been exercised as of August 31, 2002.

--------------------------------------------------------------------------------
F-20

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

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

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

The Company has an exclusive worldwide license for a
unique temperature probe. The license has no
determinable life. The Company pays royalties based upon
its sales of this probe. Royalties accrued as of August
31, 2003 and 2002, were $1,000. Royalty expense amounted
to approximately $5,000 and $11,000 for the years ended
August 31, 2003 and 2002, respectively.

--------------------------------------------------------------------------------
F-21

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

13. Fair Value of None of the Company's financial instruments are held for
Financial trading purposes. The Company estimates that the fair
Instruments value of all financial instruments at August 31, 2003
and 2002 does not differ materially from the aggregate
carrying values of its financial instruments recorded in
the accompanying balance sheet. The estimated fair value
amounts have been determined by the Company using
available market information and appropriate valuation
methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the
estimates of fair value, and, accordingly, the estimates
are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.

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

--------------------------------------------------------------------------------
F-22

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

14. Recent In June 2002, the FASB issued SFAS No. 146, Accounting
Accounting for Costs Associated with Exit or Disposal Activities
Pronounce- (SFAS 146). This standard addresses financial accounting
ments and reporting for costs associated with exit or disposal
Continued activities and replaces Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)
(EITF 94-3). SFAS 146 requires that a liability for
costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF
94-3, a liability for exit costs, as defined in EITF No.
94-3 were recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS 146
are effective for exit or disposal activities that are
initiated by the Company after December 31, 2002. The
adoption of SFAS No. 146 by the Company did not have a
material impact on the Company's financial position or
operations.

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

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

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

--------------------------------------------------------------------------------
F-24

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

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

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

--------------------------------------------------------------------------------
F-25

BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued

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

15. Subsequent On November 28, 2003, the Company completed the sale of
Event an aggregate of 1,820,000 shares of common stock to
three institutional investors. The shares of common
stock were sold for cash consideration of $1.10 per
share, or a total of $2,002,000, pursuant to the terms
of the Securities Purchase Agreement entered into by and
among the investors and the Company as of November 28,
2003. These shares were issued in a private placement
transaction pursuant to Section 4(2) and Regulation D
under the Securities Act of 1933, as amended. As
provided in the Securities Purchase Agreement, the
Company also agreed to cause a shelf registration
statement covering the resale of these shares to be
filed no later than 60 days after the closing of the
private placement. The Company estimates that the net
proceeds from the transaction, after paying a commission
to the placement agent, T.R. Winston & Company, LLC, and
legal other expenses related to the transaction, will be
approximately $1,840,000. The Company has also agreed to
issue to the placement agent a three-year warrant to
purchase up to 91,000 shares at an exercise price per
share of $1.80 as provided in the Securities Purchase
Agreement.

On December 10, 2003 the Company sold 239,600 shares of
common stock at $1.10 per share or a total of $263,560.
The Company issued to the placement agent a three-year
warrant to purchase up to 11,980 shares at an exercise
price of $1.80.

--------------------------------------------------------------------------------
F-26

================================================================================

BSD MEDICAL CORPORATION

2,162,580

SHARES OF COMMON STOCK

-----------------
PROSPECTUS
-----------------

July _____, 2004

================================================================================

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. Indemnification of Directors and Officers.

Article 8 of our Amended and Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.

ITEM 25. Other Expenses of Issuance and Distribution.

The following table sets forth the various costs and expenses to be
paid by us with respect to the sale and distribution of the securities being
registered. All of the amounts shown are estimates except for the SEC
registration fee.

SEC Registration Fee........................................... $342.50

Legal Fees and Expenses........................................ $60,000.00

Accounting Fees and Expenses................................... $10,000.00

Printing and Other Expenses.................................... $2,500.00
----------

Total..................................................... $72,842.50
==========

We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares.

ITEM 26. Recent Sales of Unregistered Securities.

The following is information as to all securities we have sold within
the past three years that were not registered under the Securities Act of 1933,
as amended:

On November 28, 2003, we issued a total of 1,820,000 shares of our
common stock, for gross proceeds of $2,002,000, to four accredited investors in
a transaction exempt from registration pursuant to Section 4(2) of the
Securities Act and Rule 506 thereunder.

II-1

On December 10, 2003, we issued a total of 239,600 shares of our common
stock, for gross proceeds of $263,560, to three accredited investors in a
transaction exempt from registration pursuant to Section 4(2) of the Securities
Act and Rule 506 thereunder.

On December 10, 2003, we issued warrants to purchase 102,980 shares of
our common stock to a broker dealer in connection with the sale of common stock
to investors in a transaction exempt from registration pursuant to Section 4(2)
of the Securities Act and Rule 506 thereunder.

ITEM 27. Exhibits

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

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

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

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

4.2 Securities Purchase Agreement dated December 10, 2003 among BSD
Medical Corporation and the purchasers identified therein.
Incorporated by reference to Exhibit 4.2 of the BSD Medical
Corporation Form 10-K, filed December 1, 2003.

4.2 Amendment No. 1 to Securities Purchase Agreement dated December
10, 2003 among BSD Medical Corporation and the purchasers
identified therein. Incorporated by reference to Exhibit 99.1 of
the BSD Medical Corporation Form 8-K, filed December 22, 2003.

4.3 Warrant to Purchase 42,980 Shares of Common Stock dated December
10, 2003 issued by BSD Medical Corporation to T.R. Winston &
Company, LLC. Incorporated by reference to Exhibit 99.2 of the
BSD Medical Corporation Form 8-K, filed December 22, 2003.

4.4 Warrant to Purchase 60,000 Shares of Common Stock dated December
10, 2003 issued by BSD Medical Corporation to The Runnel Family
Trust Dated 1/11/2000. Incorporated by reference to Exhibit 99.3
of the BSD Medical Corporation Form 8-K, filed December 22, 2003.

5.1 Opinion of Dorsey & Whitney LLP

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

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

II-2

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

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

10.5 Lease Agreement dated December 5, 1997, between BSD Medical
Corporation and Alcoh Development, Inc., Alan S. Cohen, Orlene H.
Cohen, and Reelman Investments, L.C.

10.6 Lease Extension Agreement and Contract to Purchase dated November
1, 2002 between BSD Medical Corporation and Alcoh Development,
Inc., Alan S. Cohen, Orlene H. Cohen, and Reelman Investments,
L.C.

10.7 Employment Agreement dated August 10, 1999 between BSD Medical
Corporation and Hyrum A. Mead.

10.8 Employment Agreement dated November 2, 1988 between BSD Medical
Corporation and Paul F. Turner.

10.9 Agreement dated May 27, 1994 between BSD Medical Corporation and
Medizin Technik GmbH.

10.10 Agency Agreement dated May 20, 2002 between BSD Medical
Corporation and Nucletron B.V.

10.11 Agreement and Plan of Merger dated June 15, 2004 by and among
American Medical Systems, Inc., Leio Acquisition Corp.,
TherMatrx, Inc., TherMatrx Investment Holdings, LLC and BSD
Medical Corporation.

21 Subsidiary List. Incorporated by reference to Exhibit 21 of the
BSD Medical Corporation Form 10-K, filed December 1, 2003.

23.1 Consent of Independent Public Accountants, Tanner + Co.

23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).

24.1 Power of Attorney (included in signature page).

ITEM 28. Undertakings.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

II-3

(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering price may be reflected in the form of prospectus filed
with the SEC under Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of BSD
Medical Corporation pursuant to the foregoing provisions, or otherwise, BSD
Medical Corporation has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by BSD Medical Corporation of
expenses incurred or paid by a director, officer or controlling person of BSD
Medical Corporation in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, BSD Medical Corporation will,
unless in the opinion of its counsel the question has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Salt Lake City, Utah, on the July 7, 2004.

BSD MEDICAL CORPORATION

By: /s/ HYRUM A. MEAD
---------------------
Hyrum A. Mead
President

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned officers and
directors of BSD Medical Corporation, a Delaware corporation, do hereby
constitute and appoint Paul F. Turner and Hyrum A. Mead and each of them, their
lawful attorneys-in-fact and agents with full power and authority to do any and
all acts and things and to execute any and all instruments which said attorneys
and agents, and any one of them, determine may be necessary or advisable or
required to enable said corporation to comply with the Securities Act and any
rules or regulations or requirements of the Securities and Exchange Commission
in connection with this Registration Statement. Without limiting the generality
of the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed as
part of or in conjunction with this Registration Statement or amendments or
supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or any one of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated. Pursuant to the requirements of the
Securities Act, this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ PAUL F. TURNER* Chairman of the Board, Senior Vice July 7, 2004
--------------------- President and Chief Technology Officer
Paul F. Turner

/s/ HYRUM A MEAD* President (principal executive July 7, 2004
--------------------- officer) and Director
Hyrum A. Mead

/s/ DENNIS BRADLEY* Controller (principal financial and July 7, 2004
--------------------- accounting officer)
Dennis Bradley

/s/ GERHARD W. SENNEWALD* Director July 7, 2004
--------------------------
Gerhard W. Sennewald

/s/ MICHAEL NOBEL* Director July 7, 2004
---------------------
Michael Nobel

/s/ J. GORDON SHORT* Director July 7, 2004
---------------------
J. Gordon Short

*By: /s/HYRUM A MEAD July 7, 2004
----------------
Hyrum A. Mead
Attorney in Fact

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