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


                                   FORM 10-QSB


[X]  Quarterly  Report under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934 For the quarterly period ended December 31, 2005

[_]  Transition Report under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934 For the transition period ____________ to ____________


                        Commission File Number 000-49735



                           INTRAOP MEDICAL CORPORATION

        (Exact name of small business issuer as specified in its charter)


             Nevada                                  87-0642947
(State or other jurisdiction of         (I.R.S. Employer Identification No.)
 incorporation or organization)

                               570 Del Rey Avenue
                           Sunnyvale, California 94085
                    (Address of principal executive offices)

          Issuer's telephone number, including area code: 408-986-6020



(Former name, former address and former fiscal year,
if changed since last report)

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

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

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 20,494,801 shares of $0.001 par value
Common Stock outstanding as of the date of this filing.

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

                                       1
<PAGE>



                           INTRAOP MEDICAL CORPORATION

                                   FORM 10-QSB

                                TABLE OF CONTENTS



PART 1 - FINANCIAL INFORMATION...............................................3
   Item 1.  Financial Statements.............................................3
   Item 2.  Management's Discussion and Analysis or Plan of Operation........3
   Item 3.  Controls and Procedures.........................................19


PART II - OTHER INFORMATION.................................................19

   Item 1.  Legal Proceedings...............................................19
   Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.....19
   Item 3.  Defaults Upon Senior Securities.................................20
   Item 4.  Submission of Matters to a Vote of Security Holders.............20
   Item 5.  Other Information...............................................20
   Item 6.  Exhibits........................................................20

SIGNATURES..................................................................21

INDEX TO FINANCIAL STATEMENTS .............................................F-1

                                       2

<PAGE>



                         PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

         The accompanying unaudited financial statements, listed on the index to
financial statements on page F-1 and filed as part of this Form 10-QSB, have
been prepared in accordance with the instructions to Form 10-QSB and, therefore,
do not include all information and footnotes necessary for a complete
presentation of financial position, results of operations, cash flows, and
stockholders' deficit in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments considered necessary
for a fair presentation of the results of operations and financial position have
been included and all such adjustments are of a normal recurring nature.
Operating results for the three months ended December 31, 2005 are not
necessarily indicative of the results that can be expected for the year ending
September 30, 2006.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
AUDITED FINANCIAL STATEMENTS AND ACCOMPANYING FOOTNOTES INCLUDED IN OUR FORM
10-KSB IN WHICH WE DISCLOSED OUR FINANCIAL RESULTS FOR THE YEARS ENDED SEPTEMBER
30, 2005 AND 2004 AND SUCH OTHER REPORTS AS WE FILE FROM TIME TO TIME WITH THE
SEC.

         THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS  INVOLVE  A  NUMBER  OF  RISKS  AND  UNCERTAINTIES,  INCLUDING  THOSE
IDENTIFIED  IN THE SECTION OF THIS FORM 10-QSB  TITLED " RISK  FACTORS" THAT MAY
CAUSE ACTUAL RESULTS TO DIFFER  MATERIALLY  FROM THOSE  DISCUSSED IN, OR IMPLIED
BY, SUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS WITHIN THIS FORM
10-QSB ARE  IDENTIFIED BY WORDS SUCH AS  "BELIEVES,"  "ANTICIPATES,"  "EXPECTS,"
"INTENDS," "MAY," AND OTHER SIMILAR  EXPRESSIONS.  HOWEVER,  THESE WORDS ARE NOT
THE ONLY MEANS OF IDENTIFYING SUCH STATEMENTS.  IN ADDITION, ANY STATEMENTS THAT
REFER TO EXPECTATIONS,  PROJECTIONS OR OTHER  CHARACTERIZATIONS OF FUTURE EVENTS
OR  CIRCUMSTANCES  ARE  FORWARD-LOOKING  STATEMENTS.  WE ARE NOT  OBLIGATED  AND
EXPRESSLY  DISCLAIM  ANY  OBLIGATION  TO  PUBLICLY  RELEASE  ANY  UPDATE  TO ANY
FORWARD-LOOKING  STATEMENT.  ACTUAL RESULTS COULD DIFFER  MATERIALLY  FROM THOSE
ANTICIPATED IN, OR IMPLIED BY, FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THE RISKS OUTLINED ELSEWHERE IN THIS REPORT.

BUSINESS OVERVIEW

         Intraop Medical Corporation or Intraop, formerly Digitalpreviews.com,
Inc., was organized under the laws of the State of Nevada on November 5, 1999.
Intraop's initial purpose was to engage in a consulting and seminar business. In
September 2003, in anticipation of negotiating a potential merger with Intraop
Medical, Inc., a privately-held Delaware corporation, we formally abandoned our
consulting and seminar business operations, which from inception through March
9, 2005, generated no revenue and during which time we were considered to be a
development stage company. On March 9, 2005, we completed the merger with
Intraop Medical, Inc. pursuant to the terms of an Agreement and Plan of
Reorganization dated February 24, 2004, or the Merger Agreement, by and between
Intraop and Intraop Medical, Inc., pursuant to which Intraop Medical, Inc. was
merged with and into Intraop, and Intraop remained as the surviving corporation.
As result of the merger, we acquired all of the assets and assumed all of the
obligations of Intraop Medical, Inc. Such assets consist, without limitation, of
all of Intraop Medical, Inc.'s cash and cash equivalents, accounts receivables,
inventory, prepaid expenses, property and equipment, leased equipment,
intangible assets (including patents, certain installment payments for license
rights to acquire certain technology, amounts paid to third parties for
manufacturing and design rights as well as design rights and manufacturing/
design instructions in connection with the Mobetron, Intraop Medical, Inc.'s
product, and a certain medical device approval license).

         In connection with the consummation of the merger and pursuant to the
merger agreement, each of the issued and outstanding shares of Intraop Medical,
Inc.'s preferred stock and common stock were cancelled and extinguished and
automatically converted into the right to receive one (1) corresponding share of
our common stock. As a result of the merger, 14,175,028 shares of our common
stock were issued to stockholders of Intraop Medical, Inc. in exchange for their
shares of preferred stock and common stock. Additionally, as of March 9, 2005 we
assumed (i) 1,023,611 options reserved under Intraop Medical, Inc.'s stock
option plan which were exercisable within 60 days of the closing date for the
merger; (ii) warrants exercisable for 926,291 shares of our common stock; and
(iii) convertible promissory notes convertible into 1,540,795 shares of our
common stock. Additionally, we sold 795,000 shares of our common stock to
certain consultants in consideration for services provided in connection with
the consummation of the Merger. All of these securities were issued in reliance
upon the exemption from securities registration afforded by the provisions of
Regulation D, as promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.


                                       3
<PAGE>

         As a result of the merger with Intraop Medical, Inc., we now
manufacture, market and distribute the Mobetron, a proprietary mobile electron
beam cancer treatment system designed for use in IORT. The IORT procedure
involves the direct application of radiation to a tumor and/or tumor bed while a
patient is undergoing surgery for cancer. The Mobetron is designed to be used
without requiring additional shielding in the operating room, unlike
conventional equipment adapted for the IORT procedure. The Mobetron system can
be moved from operating room to operating room, thereby increasing its
utilization and cost effectiveness. In addition to IORT, the Mobetron system
also can be used as a conventional radiotherapy electron beam accelerator.

         Our strategy is to expand our customer base both in the United States
and internationally through direct and distributor sales channels and joint
ventures with health care providers. We also intend to continue our research and
development efforts for additional Mobetron applications.

         We derive revenues from Mobetron product and accessory sales, service
and support, and leases. Product sales revenue is recognized upon installation
provided that any remaining obligations are inconsequential or perfunctory and
collection of the receivable is deemed probable. Revenues from accessory sales
are recognized upon shipment. Revenue from lease activities is recognized as
income over the lease term as it becomes receivable according to the provisions
of the lease. Revenue from maintenance is recognized as services are completed
or over the term of the service agreements as more fully disclosed in our
financial statements.

         Cost of revenues consists primarily of amounts paid to contact
manufacturers and, salary and benefit costs for employees performing customer
support and installation, lease related interest expense and depreciation
related to leased assets. General and administrative expenses include the
salaries and benefits of executive and administrative personnel, communications,
facilities, insurance, professional services and other administrative expenses.
Sales and marketing costs include salaries, benefits and the related expenses of
the sales staff including travel expenses, promotion materials, conferences and
seminars. Research and development expenses consist primarily of compensation
and related direct costs for employees and an allocation of research and
development-related overhead expenses. Since inception, we have invested
approximately $6.7 million in research and development. These amounts have been
primarily invested in development of the Mobetron product and have been expensed
as they have been incurred.

         As the Mobetron, our primary product, sells for in excess of $1,000,000
depending on configuration, and because we are just beginning to move into full
commercial sale and production of this product, our historical results may vary
significantly from period to period. For example, sale of only one Mobetron in
any given quarter may substantially alter the sales and cost numbers for that
quarter, and the timing of such a sale often cannot be predicted with any
accuracy. While we expect that our financial results may ultimately become more
predictable as sales increase and costs stabilize, our financial results for the
foreseeable future are likely to continue to vary widely from period to period.

CRITICAL ACCOUNTING POLICIES

         This discussion and analysis of financial condition and results of
operation is based on our financial statements which were prepared in conformity
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires our management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. These estimates and assumptions are based on
historical experience and on various other factors that they believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. These estimates and assumptions also
require the application of certain accounting policies, many of which require
estimates and assumptions about future events and their effect on amounts
reported in the financial statements and related notes. We periodically review
our accounting policies and estimates and make adjustments when facts and
circumstances dictate. Actual results may differ from these estimates under
different assumptions or conditions. Any differences may have a material impact
on our financial condition and results of operations.


                                       4
<PAGE>

         We believe that the following accounting policies fit the definition of
critical accounting policies. We use the specific identification method to set
reserves for both doubtful accounts receivable and the valuation of our
inventory, and use historical cost information to determine our warranty
reserves. Further, in assessing the fair value of option and warrant grants, we
have valued these instruments based on the Black-Scholes model which requires
estimates of the volatility of our stock and the market price of our shares,
which in the absence of a market for shares, was based on estimates of fair
value made by our Board of Directors.

RESULTS OF OPERATION  FOR THE QUARTER  ENDED  DECEMBER 31, 2005  COMPARED TO THE
QUARTER ENDED DECEMBER 31, 2004.

REVENUE, COSTS OF REVENUE AND GROSS MARGINS


<TABLE>
<CAPTION>

                            QUARTER ENDED DECEMBER 31,
REVENUE                        2005              2004            CHANGE        PERCENT
-----------------------------------------------------------------------------------------
<S>                       <C>               <C>              <C>                 <C>
  Product sales          $1,051,254        $2,277,708       $(1,226,454)       - 53.85%
  Leasing                    62,168            62,168              --             0.00%
  Service                    19,583            21,088            (1,505)       -  7.14%
-----------------------------------------------------------------------------------------
TOTAL REVENUE             1,133,005         2,360,964        (1,227,959)       - 52.01%
-----------------------------------------------------------------------------------------

COSTS OF REVENUE
-----------------------------------------------------------------------------------------
  Product sales             917,247         1,748,640          (831,393)       - 47.55%
  Leasing                    38,323            94,041           (55,718)       - 59.25%
  Service                    13,233            25,104           (11,871)       - 47.29%
-----------------------------------------------------------------------------------------
TOTAL COSTS OF REVENUE      968,803         1,867,785          (328,977)       - 48.13%
-----------------------------------------------------------------------------------------

GROSS MARGIN
-----------------------------------------------------------------------------------------
  Product sales             134,007           529,068          (395,061)       - 74.67%
                              12.75%            23.23%

  Leasing                    23,845           (31,873)           55,718        -174.81%
                              38.36%          - 51.27%

  Service                     6,350            (4,016)           10,366        -258.12%
                              32.43%          - 19.04%
-----------------------------------------------------------------------------------------
TOTAL GROSS MARGIN       $  164,202        $  493,179       $  (328,977)       -66.71%
                              14.49%            20.89%
=========================================================================================
</TABLE>


PRODUCT SALES

         Product sales revenue, which includes systems and accessories sales but
excludes parts sold as part of our service business, decreased during the
quarter ended December 31, 2005 in comparison to quarter ended December 31,
2004, primarily due to the number of systems sold during each of those quarters.
During the quarter ended December 31, 2004, we sold two of the three total
systems sold in fiscal year ended September 30, 2005, while in the quarter ended
December 31, 2005, we sold only one Mobetron system. This system was our sixth
system in Europe and our second system in Poland, a country that is making a
significant investment in upgrading its cancer treatment programs. This second
sale in Poland demonstrates that IORT will be an integral part of Poland's
cancer treatment plan. We expect overseas sales to continue outnumber U.S. sales
over the next few years.


                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                QUARTER ENDED DECEMBER 31,
PRODUCT SALES ANALYSIS                          2005              2004        CHANGE     PERCENT
------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>              <C>        <C>
Systems Sold                                       1                 2             1

  Product sales                          $ 1,051,254       $  2,277,708
  Revenue per system sold                  1,051,254          1,138,854     $ (87,600)    -7.69%

  Materials cost                             777,862          1,628,265
  Materials cost per system sold             777,862            814,133       (36,271)    -4.46%
------------------------------------------------------------------------------------------------
  Materials margin                           273,392            649,443
  Materials margin per system sold           273,392            324,722       (51,330)   -15.81%
                                               26.01%             28.51%

  Warranty, labor, and overhead              139,385            120,375
------------------------------------------------------------------------------------------------
  Margin after warranty, labor and
    overhead                             $   134,007       $    529,068     $(395,061)   -74.67%
                                               12.75%             23.23%
================================================================================================
</TABLE>


         Per systems sales revenues were higher in the quarter ended December
31, 2004 versus December 31, 2005 due to a better mix of direct-to-customer
versus distributor based sales in the quarter ended December 31, 2004.
Additionally, included in revenue for the quarter ended December 31, 2004 were
approximately $41,130 of certain one-time foreign exchange gains on a system
sold prior to December 31, 2004 but for which receivables were collected during
the December 31, 2004 quarter. Without these foreign exchange gains, per system
revenue would have been approximately $1,118,199 in the quarter ended December
31, 2004, and materials margin per system sold would have been 27.20%, closer to
our materials margin per system of 26.01% in the quarter ended December 31,
2005.

         Because of our continued efforts to bring down materials costs, average
materials costs per system decreased by $36,271 in the quarter ended December
31, 2005 versus the quarter ended December 31, 2004, a 4.46% improvement. The
difference in warranty, labor and overhead for the quarters ended December 31,
2005 and December 31, 2004 is primarily related to differences in warranty
expense as would be expected by the difference in units sold during those
periods. We continue to seek improvement in our margins through various
engineering cost reduction efforts for the Mobetron.

LEASING

         Leasing revenue in the quarter ended December 31, 2005 and 2004 is
comprised of revenue recognized on a Mobetron system delivered to our customer
in Eindhoven, Holland in November 2003. At inception, as an equipment supplier,
we received proceeds in the amount of $1,230,685 as sale price of the equipment
from a third party leasing company, who in turn leased the equipment to the
hospital pursuant to a seventy month lease. We have no material obligations
under the lease and the lease remains an unconditional obligation of the
hospital as the lessee to make payments to the leasing company as lessor for the
leasing company's own account.



                                       6
<PAGE>


         However, as an inducement to the hospital to enter into the lease, we
agreed in a contract with the hospital that, should the hospital decide, upon
sixty days prior notice to us, that at end of month eighteen of its lease on May
31, 2005 that the hospital wishes to prepay the lease with the leasing company
(a one-time option), that we would reimburse the hospital for the cost of the
hospital's exercise of the prepayment option to the leasing company. Following
the reimbursement by us to the hospital for the prepayment amount, title to the
equipment would revert to us.

         Because of the potential reimbursement to the hospital at the end of
month eighteen of the lease, we retain substantial risk of ownership in the
leased property, and the transaction has therefore been accounted for in
accordance with SFAS 13, "Accounting for Leases", specifically paragraphs 19,
21, and 22. Accordingly, we recorded the entire $1,230,685 of proceeds received
from the leasing company as obligation for leased equipment, a liability on its
balance sheet and accounted for the item as borrowing. In accordance with APB
Opinion 21, "Interest on Receivables and Payables" paragraphs 13 and 14, we
determined an interest rate for the obligation of 14.5% based on other debt
arrangements entered into by us at dates closest to the inception of the
obligation for leased equipment.

         Further, although we are not entitled to the cash rental payments, we
recognized rental revenue totaling $62,168 revenue during each of the quarters
ended December 31, 2005 and December 31, 2004. A portion of each month's rental
revenue is recorded as interest and included in cost of revenue with the
remainder recorded as a reduction in obligation for leased equipment.

         Accordingly, we have recorded $1,016,238, the amount that would
otherwise have been our cost of revenue for the transaction, as leased
equipment, an asset on our balance sheet. The asset is being depreciated on a
straight line basis over the period of our reimbursement obligation to the
hospital down to a value equal to the estimated residual value of the equipment
at the end of the obligation of approximately $631,114. The depreciation expense
is included in cost of revenue.

         Prior to May 31, 2005 the hospital notified us that it intended to
exercise its prepayment option, however not until January 1, 2006. We agreed to
extend our reimbursement option from May 31, 2005 until January 1, 2006, and
agreed to a new reimbursement amount. Although satisfied with the performance of
the Mobetron, the customer completed the build out of certain shielded
facilities and found the Mobetron surplus to its use. We estimate that the net
amount of the refund will be approximately $970,000 based on the prepayment
price quoted by the lessor and contingent on the euro to dollar exchange.
Pursuant to the reimbursement option extension, we will continue to recognize
revenue and expense on this reimbursement option transaction as described above
through January 1, 2006.

         In the quarter ended December 31, 2004 we incurred interest and
depreciation on the Mobetron in Eindhoven, Holland of $94,091, exceeding the
revenue recognized on this transaction during that same period. In the quarter
ended December 31, 2005, we stopped depreciating this asset as we believe that
the residual value of the equipment at January 1, 2006 will exceed the assets
book value. Thus, leasing expense for the quarter ended December 31, 2005 of
$38,323 was made up entirely of interest expense on the Eindhoven transaction.

SERVICE

         The majority of service revenue for the quarters ended December 31,
2005 and December 31, 2004 came from two service contracts with U.S. hospitals,
with the balance from as-requested service calls and parts sales to customers.
We expect service revenue to grow in relative proportion to U.S. based sales.
Overseas distributors are generally responsible for servicing their own
customers with parts supplied by us.



                                       7
<PAGE>




OPERATING EXPENSES

         A comparison of the Company's  operating expenses for the quarter ended
December 31, 2005 and December 31, 2004 are as follows:


<TABLE>
<CAPTION>
                                   QUARTER ENDED DECEMBER 31,
                                   2005                  2004          CHANGE       PERCENT
--------------------------------------------------------------------------------------------
<S>                             <C>                   <C>              <C>           <C>
Research and Development       $118,157              $103,648        $ 14,509        14.00%
General & Administrative        394,879               312,893          81,986        26.20%
Sales and Marketing             235,703               115,588         120,115       103.92%
--------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES       $748,739              $532,129        $216,610        40.71%
============================================================================================
</TABLE>


         RESEARCH AND DEVELOPMENT expenses increased by approximately 14% in
quarter ended December 31, 2005 in comparison to quarter ended December 31, 2004
as we continue work on various cost reduction and enhancement projects for the
Mobetron.

         GENERAL AND ADMINISTRATIVE expenses increased by $81,986 in quarter
ended December 31, 2005 in comparison to quarter ended December 31, 2004. The
largest component of this change were increases in compensation and related
charges paid to employees and directors as we added staff in this area and began
to provide cash compensation to our outside directors. We also incurred higher
rental and office expenses due to our move to new, larger facilities in October
2005.

         SALES AND MARKETING expenses rose by $120,115 in quarter ended December
31, 2005 in comparison to quarter ended December 31, 2004 due to an expansion of
our sales force and increased expenditures for marketing and promotion,
including travel, especially abroad. We expect expenses in this area to continue
to rise as we further our critical sales efforts by hiring staff and increasing
our marketing, public relations, and advertising efforts.

         INTEREST EXPENSE increased by $458,638 in quarter ended December 31,
2005 in comparison to the quarter ended December 31, 2004 fiscal year. After
subtracting amortization of debt issuance costs, debt discounts due to warrants
and beneficial conversions features (all non-cash components of interest),
adjusted interest expense as a percentage of our interest bearing obligations in
quarter ended December 31, 2005 was 8.90%, an approximation of our borrowing
rate during the quarter ended December 31, 2005.



                                                        QUARTER ENDED
                                                         DECEMBER 31,
        INTEREST BEARING OBLIGATIONS                         2005
        -------------------------------------------------------------
        Notes payable, related parties                  $    726,824
        Notes payable other, current portion               2,299,557
        Obligation for leased equipment                    1,008,393
        Add back debt discounts and beneficial
          conversion features
        ------------------------------------------------------------
        Interest bearing obligations, current              4,034,774
        Notes payable other, non-current                   2,035,294
        Add back debt discounts and beneficial
           conversion features                             6,844,832
        ------------------------------------------------------------
        Interest bearing obligations, non-current          8,880,126
        ------------------------------------------------------------
        Total interest bearing obligations              $ 12,914,900
        ============================================================
        INTEREST EXPENSE
        ------------------------------------------------------------
        Interest Expense                                $    927,662
        Amortization of debt issuance costs, debt
        discounts due to warrants and beneficial
        conversion features                                  640,271
        ------------------------------------------------------------
        Adjusted interest expense                       $    287,391
        Annualized adjusted interest expense               1,149,564
        Interest bearing obligations                    $ 12,914,900
        Adjusted interest expense percentage                    8.90%
        ============================================================

                                       8
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

         We experienced net losses of $1,491,358 and $418,271 for the quarters
ended December 31, 2005 and 2004, respectively. In addition, we have incurred
substantial monetary liabilities in excess of monetary assets over the past
several years and, as of December 31, 2005, have an accumulated deficit of
$22,346,175. These matters, among others, raise substantial doubt about our
ability to continue as a going concern. In view of the matters described above,
recoverability of a major portion of the recorded asset amounts shown on our
consolidated balance sheet is dependent upon our ability to generate sufficient
sales volume to cover our operating expenses and/or to raise sufficient capital
to meet our payment obligations. Management is taking action to address these
matters, which include:

         o        Retaining experienced management personnel with particular
                  skills in the development and sale of its products and
                  services.

         o        Developing new markets (primarily Europe) and expanding its
                  sales efforts.

         o        Evaluating funding strategies in the public and private
                  markets.

         Historically, management has been able to raise additional capital.
During the quarter ended December 31, 2005, we obtained an additional $4.5
million through sale of convertible debentures. The proceeds will be used for
working capital. The successful outcome of future activities cannot be
determined at this time and there is no assurance that if achieved, we will have
sufficient funds to execute our business plan or generate positive operating
results.

                                       QUARTER ENDED DECEMBER 31,
CASH FLOWS                               2005               2004       CHANGE
-----------------------------------------------------------------------------
Provided by (Used in):
  Operating Activities            $(1,585,340)       $1,205,402   $(2,790,742)
  Investing Activities                (48,005)          (53,471)        5,466
  Financing Activities              3,136,413          (938,200)    4,074,613
-----------------------------------------------------------------------------
Net Increase                      $ 1,503,068        $  213,731   $ 1,289,337
=============================================================================



                                       9
<PAGE>




         Our primary cash inflows and outflows for the quarters ended December
31, 2005 and 2004 are as follows:

OPERATING ACTIVITIES

         Net cash used for operating activities increased by $2,790,742 in the
quarter ended December 31, 2005 in comparison to the same period in the prior
fiscal year. Of that amount, $1,073,087 presented a change in our net loss
during those same two periods. Significantly offsetting our net loss for the
quarter ended December 31, 2005 were $640,271 of non-cash charges for
amortization of debt discounts, beneficial conversion features and issuance
costs related to our new senior and convertible debentures. Additionally, large
combined differences in other asset and liability accounts of approximately $2.1
million between quarter ended December 31, 2005 and December 31, 2004
significantly affected operating cash flow during those two years. These
accounts which include inventories, account receivable, accounts payable,
customer deposits, and deposits with vendors are currently highly subject to
short term fluctuations and will continue to be volatile because of our low
volume of Mobetron sales and large per system cost of the Mobetron.

INVESTING ACTIVITIES

         Although we had a low level of investing activity in the fiscal year
ended September 30, 2005, we expect activity here to grow as we expand our test
and manufacturing ability at our new facilities and add staff to meet future
sales growth.

FINANCING ACTIVITIES

         In October and November 2005, we completed the sale of our convertible
debentures with the issuance of an additional $4.5 million dollars of
debentures. The addition of these debentures to our existing convertible and
senior debentures completes a significant change and improvement to our capital
structure. Prior to the sale of the senior and convertible debentures, all of
our notes payable were due within one year. However, because no scheduled
principal amortization is required on the convertible debentures until their
maturity three years from date of issuance, and because only $333,333 of
scheduled principal amortization per annum is required on the senior debentures,
our capital structure is much more stable.

         During the quarter ended December 31, 2005 we repaid $324,134 of
outstanding notes to related parties. Additionally, a related party agreed to
convert $183,967 of principal and $66,033 of interest to shares of our common
stock during the three months ended December 31, 2005. We plan to fully repay
our related party debt over the next few years. Also during the quarter ended
December 31, 2005, we repaid $755,180 of other notes payable, the majority of
which were repayments under our revolving line which we expect to re-borrow.


                                       10
<PAGE>




DEBT AND LEASE OBLIGATIONS

         At December 31, 2005, we had notes payable, capital leases, and
obligations for leased equipment from various sources as shown below. Interest
rates on such debt range from 5% to 24%. We also lease office space and
equipment under non-cancelable operating and capital leases with various
expiration dates through 2011.

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                                2005
                                                                          -------------
<S>                                                                       <C>
Notes payable, related parties, current                                   $    726,824
                                                                          =============
Convertible debentures                                                    $  7,000,000
Revolving line of credit                                                     2,285,650
Senior secured debentures                                                    1,888,889
Other Notes                                                                      5,144

Less debt discounts due to warrants                                         (3,235,673)
Less beneficial conversion features                                         (3,609,159)
                                                                          -------------
                                                                             4,334,851
Less current portion                                                        (2,299,557)
                                                                          -------------
   Notes payable, other, net of current portion,
     unamortized debt discounts and beneficial
        conversion features                                               $  2,035,294
                                                                          =============
Obligation for leased equipment                                           $  1,008,393
                                                                          =============
Capital lease for equipment                                               $     11,660
Less current portion                                                            (2,028)
                                                                          -------------
Capital lease obligations, net of current portion                         $      9,632
                                                                          =============
</TABLE>

                                       11
<PAGE>




         As of December 31, 2005, future minimum lease payments that come due in
the current and following fiscal years ending September 30:


<TABLE>
<CAPTION>
                  YEAR ENDED SEPTEMBER 30,                          CAPITAL            OPERATING
                                                                     LEASES              LEASES
--------------------------------------------------------------    -------------      ---------------
<S>                         <C>                                        <C>               <C>
                            2006                                       $ 1,934           $  165,760
                            2007                                         2,579              233,796
                            2008                                         2,579              237,625
                            2009                                         2,579              244,754
                            2010                                         2,579              233,838
                            2011                                           431                    -
                                                                  -------------      ---------------
Total minimum lease payments                                            12,681           $1,115,773
                                                                                     ===============
Less: Amount representing interest                                     (1,021)

Present value of minimum lease payments                                 11,660
Less: Current portion                                                  (2,028)
                                                                  -------------
Obligations under capital lease, net of current portion                $ 9,632
                                                                  =============
</TABLE>


DEFERRED REVENUE ITEMS

         We had no deferred  revenue  items to report for the three months ended
December 31, 2005 or December 31, 2004.



OFF-BALANCE SHEET ARRANGEMENTS

         We had no off-balance sheet arrangements to report for the three months
ended December 31, 2005 or December 31, 2004



                                       12
<PAGE>




                                  RISK FACTORS

         Stockholders should carefully consider the following risk factors,
together with the other information included and incorporated by reference in
this Form 10-QSB.

                         RISKS RELATING TO OUR BUSINESS

WE HAVE BEEN IN OPERATION FOR OVER 10 YEARS AND HAVE NEVER BEEN PROFITABLE.

         Intraop is a medical device company that has experienced significant
operating losses in each year since incorporation on March 9, 1993, primarily
due to the cost of substantial research and development of its sole product, the
Mobetron. We have generated about $13.8 million in revenues through December 31,
2005, however we expect to continue to incur operating losses as well as
negative cash flows from operations in future periods. Our ability to achieve
profitability will depend upon our successful commercial marketing of the
Mobetron and our effectively making the transition to a manufacturing and
marketing company. It is possible that the Mobetron and any other products of
Intraop will never gain full commercial acceptance, and as a result we may never
generate significant revenues or achieve or maintain profitability. As a
consequence of these uncertainties, our independent public accountants have
expressed a "going concern" qualification in their audit reports.

WE HAVE PLEDGED ALL OF OUR ASSETS AND ISSUED A SIGNIFICANT AMOUNT OF OUR CAPITAL
STOCK AS SECURITY FOR A LOAN.

         In August 2005, we entered into a revolving, $3,000,000, combined
inventory and international factoring agreement, or Revolving Line, under which
we pledged as collateral certain of our inventory and receivables. Also in
August 2005, we borrowed $2,000,000 pursuant to 10% senior secured debentures
issued to two private lenders which are due at maturity in August 2008. Among
other terms, the loan is secured by a lien on all of our assets not otherwise
pledged under our Revolving Credit Facility. In addition we issued 1,600,000
shares of our common stock to the holders of the 10% senior secured debentures,
the Collateral Shares. So long as an event of default under the secured
debentures has not occurred, we retain voting rights over the Collateral Shares
and the lenders are not permitted to sell the Collateral Shares.

         Should a default occur under the Revolving Line or the secured
debentures, the lenders under those agreements would be entitled to exercise
their rights as secured creditors under the Uniform Commercial Code, including
the right to take possession of the pledged collateral, which in the case of the
10% senior secured debentures would include all of our assets, and to sell those
assets at a public or private sale and also to sell the Collateral Shares. In
the event the lenders exercise those rights, we would have a very short period
of time in which to obtain adequate capital to satisfy the amount of the
obligations to the lenders to prevent the sale of our assets. For us to obtain
such capital in such a short period would result in very significant dilution to
the stockholders and if we are unable to obtain those funds, we could be unable
thereafter to operate, possibly resulting in a total loss of the investment made
by our stockholders.

WE HAVE SIGNIFICANT ADDITIONAL CAPITAL NEEDS.

         We have expended, and will continue to expend, substantial funds on
development, marketing, research, and commercialization related to the Mobetron.
In the past we received liquidity from payments by distributors and customers,
proceeds from the sale of equity securities and debt instruments, and government
grants. Any additional secured indebtedness would require the consent of our
senior lenders. Equity or debt financing may not be available on terms favorable
to us or at all, in which case we may be unable to meet our expenses.



                                       13
<PAGE>

OUR SINGLE PRODUCT IS SUBJECT TO UNCERTAIN MARKET ACCEPTANCE.

         We have not yet manufactured, marketed, or sold the Mobetron in full
commercial quantities. We cannot assure that the Mobetron will gain broad
commercial acceptance or that commercial viability will be achieved; that future
research and development related to the Mobetron system will be successful or
produce commercially salable products; that other products under development by
us will be completed or commercially viable; or that hospitals or other
potential customers will be willing to make the investment necessary to purchase
the Mobetron or other products under development by us, or be willing to comply
with applicable government regulations regarding their use.

WE ARE DEPENDENT ON KEY SUPPLIERS AND HAVE LIMITED MANUFACTURING EXPERIENCE.

         We have entered into an agreement with CDS Engineering LLC ("CDS") for
the manufacture of the majority of the Mobetron System, while the accelerator
guide, a key component of the Mobetron, is manufactured by Accuray Incorporated
of Sunnyvale, California. One of the founders of Accuray Incorporated, Donald A.
Goer, is our President and CEO.

         Though members of management have extensive experience in
manufacturing, to date we have not manufactured the Mobetron system ourselves.
We do not have experience manufacturing our products in the volumes that will be
necessary for us to achieve significant commercial sales. Any significant
interruption in our relationship with Accuray, CDS, or any other key suppliers,
including subcontractors, would have a material adverse effect on our ability to
manufacture the Mobetron and, therefore, on our business, financial condition,
and results of operation.

         We expect to retain the rights to manufacture certain Mobetron
accessories, options, and disposable medical devices. We may encounter
difficulties in scaling up the production of the Mobetron or in hiring and
training additional personnel to manufacture the Mobetron in commercial
quantities.

         We intend to continue to do our own final testing of the Mobetron. This
testing requires a specialized test facility. In September, 2005 we entered into
a lease for combined office, manufacturing, research and test facilities which
we believe are adequate for testing Mobetrons through August, 2010. Should our
business grow more quickly than anticipated, our inability to locate additional
test facilities or expand test facilities at our current location would likely
have a material adverse effect on our ability to manufacture the Mobetron and,
therefore, on our business, financial condition, and results of operation.

WE MAY BE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY.

         Our ability to compete effectively in the marketplace will depend, in
part, on our ability to protect our intellectual property rights. We rely on
patents, trade secrets, and know-how to establish and maintain a competitive
position in the marketplace. The enforceability of medical device or other
patents, however, can be uncertain. Any limitation or reduction in our rights to
obtain or enforce our patents could have a material adverse effect on our
ability to maintain or protect our intellectual property rights.

WE MAY UNKNOWINGLY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES
AND THEREBY BE EXPOSED TO LAWSUIT(S).

         We attempt to avoid infringing known proprietary rights of third
parties in our product development efforts. However, we have not conducted and
do not conduct comprehensive patent searches to determine whether the technology
used in our products infringes patents held by third parties. In addition, it is
difficult to proceed with certainty in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies.

         If we discover that our products violate third-party proprietary
rights, we cannot assure that we would be able to obtain licenses to continue
offering such products without substantial reengineering or that any effort to
undertake such reengineering would be successful, that any such licenses would
be available on commercially reasonable terms, if at all, or that litigation
regarding alleged infringement could be avoided or settled without substantial
expense and damage awards. Any claims against us relating to the infringement of
third-party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and in injunctions
preventing us from distributing certain products. Such claims could materially
adversely affect our business, financial condition, and results of operations.


                                       14
<PAGE>


WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR WHICH WE HAVE NO INSURANCE
COVERAGE.

         The manufacture and sale of our products entails the risk of product
liability claims. Although we obtained product liability insurance prior to
commercially marketing our products, product liability insurance is expensive
and may not be available to us in the future on acceptable terms or at all. To
date, we have not experienced any product liability claims. A successful product
liability claim against us in excess of our insurance coverage could have a
material adverse affect on our business, financial condition, and results of
operations.

WE ARE SUBSTANTIALLY DEPENDENT ON CERTAIN KEY EMPLOYEES.

         We believe that our success will depend to a significant extent upon
the efforts and abilities of a relatively small group of management personnel,
particularly Donald A. Goer, PhD, our Chief Executive Officer. The loss of the
services of one or more of these key people could have a material adverse effect
on us. We have employment agreements with Mr. Goer and one other employee and
have purchased "key person" life insurance in the amount of $5,000,000, of which
$3,000,000 has been pledged to holders of our 10% senior secured debentures as
security for their debentures.

         Our future success will also depend upon our ability to continue to
attract and retain qualified personnel to design, test, market, and service its
products and manage its business. Competition for these technical and management
employees is significant. We cannot assure that we will be successful in
attracting and retaining such personnel.

OUR LIMITED RESOURCES MAY PREVENT US FROM DEVELOPING ADDITIONAL PRODUCTS OR
SERVICES.

         We have limited financial, management, research, and development
resources. Plans by us to develop additional products and services may require
additional management or capital which may not be available at the appropriate
time or at a reasonable cost. In addition, these products and services may
divert our resources from the development and marketing of the Mobetron system
which could decrease our revenue and potential earnings.

                         RISKS RELATING TO OUR INDUSTRY

WE ARE SUBJECT TO INTENSE COMPETITION.

         Conventional medical linear accelerator manufacturers have more
substantial histories, backgrounds, experience, and records of successful
operations; possess greater financial, technical, marketing, and other
resources; and have more employees and more extensive facilities than we now
have, or will have in the foreseeable future. These companies have sold one or
two modified conventional accelerators and could continue to offer essentially
the same type of conventional unshielded system. Additionally, two other
manufacturers, Hytesis and Liac, are known to us to have developed systems that
are light enough for operating room use.

         The possibility of significant competition from other companies with
substantial resources also exists. The cancer treatment market is subject to
intense research and development efforts all over the world, and we can face
competition from competing technologies that treat cancer in a different manner.
It is also likely that other competitors will emerge in the markets that we
intend to commercialize. We cannot assure that our competitors will not develop
technologies or obtain regulatory approval for products that may be more
effective than our products, and that our technologies and products would not be
rendered less competitive or obsolete by such developments.



                                       15
<PAGE>




OUR INDUSTRY IS SUBJECT TO RAPID, UNPREDICTABLE, AND SIGNIFICANT TECHNOLOGICAL
CHANGE.

         The medical device industry is subject to rapid, unpredictable, and
significant technological change. Our business is subject to competition in the
U.S. and abroad from a variety of sources, including universities, research
institutions, and medical device and other companies. Many of these potential
competitors have substantially greater technical, financial, and regulatory
resources than we do and are accordingly better equipped to develop,
manufacture, and market their products. If these companies develop and introduce
products and processes competitive with or superior to our products, we may not
be able to compete successfully against them.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.

         The development, testing, manufacturing, and marketing of the Mobetron
are regulated by the United States Food and Drug Administration, or FDA, which
requires government clearance of such products before they are marketed. We
filed and received 510(k) pre-market notification clearance from the FDA in July
1998. We received clearance for sales in Japan, or JIS, in May 2000, and
received European EC Certificate approval, or CE Mark, on October 12, 2001.
However, we may need to obtain additional approvals from the FDA or other
governmental authorities if we decide to change or modify the Mobetron. In that
case, the FDA or other authorities may not grant any new approvals. In addition,
if we fail to comply with FDA or other regulatory standards, we could be forced
to withdraw our products from the market or be sanctioned or fined.

         We are also subject to federal, state, and local regulations governing
the use, generation, manufacture, and testing of radiation equipment, including
periodic FDA inspections of manufacturing facilities to determine compliance
with FDA regulations. In addition, we must comply with federal, state, and local
regulations regarding the manufacture of healthcare products and radiotherapy
accelerators, including Good Manufacturing Practice, or GMP, regulations,
Suggested State Regulations for the Control of Radiation, or SSRCR, and
International Electrotechnical Committee, or IEC, requirements, and similar
foreign regulations and state and local health, safety, and environmental
regulations. Although we believe that we have complied in all material respects
with applicable laws and regulations, we cannot assure that we will not be
required to incur significant costs in the future in complying with
manufacturing and environmental regulations. Any problems with our, or our
manufacturers' ability to meet regulatory standards could prevent us from
marketing the Mobetron or other products.

WE EXPECT TO BE HIGHLY DEPENDENT ON OVERSEAS SALES.

         We believe that the majority of our sales over at least the next few
years will be made to overseas customers. Our business, financial condition, and
results of operations could be materially adversely affected by changes or
uncertainties in the political or economic climates, laws, regulations, tariffs,
duties, import quotas, or other trade, intellectual property or tax policies in
the United States or foreign countries. We may also be subject to adverse
exchange rate fluctuations between local currencies and the U.S. dollar should
revenue be collectable or expenses paid in local currencies.

         Additionally, we have limited experience in many of the foreign markets
in which we plan to sell our goods and services. To succeed, we will have to
overcome cultural and language issues and expand our presence overseas by hiring
and managing additional staff and opening overseas offices to meet our sales,
manufacturing, and customer support goals. No assurance can be given that we can
meet these goals. We may also be subject to taxation in foreign jurisdictions,
and transactions between any of our foreign subsidiaries and us may be subject
to U.S. and foreign withholding or other taxes. We also may encounter
difficulties due to longer customer payment cycles and encounter greater
difficulties in collecting accounts receivable from our overseas customers.
Further, should we discontinue any of our international operations, we may incur
material costs to cease those operations. An inability to expand our overseas
presence or manage the risks inherent in that expansion could have a material
adverse affect on our business, financial condition, and results of operations.



                                       16
<PAGE>




IORT TREATMENT MAY NOT BECOME A "STANDARD OF CARE" FOR CANCER TREATMENT.

         Despite the fact that more than 20,000 patients have received IORT
treatment, and despite the promising results in selected clinical studies, IORT
is not yet considered by the majority of cancer practitioners to be a "standard
of care". In fact, IORT may never develop into a "standard of care" for the
treatment of cancer, in which case the market potential for the Mobetron and
other IORT techniques will remain limited. If the market remains limited, the
Company may not be able to achieve sustained profitability, or profitability at
all.

OUR SUCCESS IN SELLING OUR MOBETRON SYSTEMS IN THE U.S. MAY DEPEND ON INCREASING
REIMBURSEMENT FOR IORT SERVICES.

         Hospitals in the U.S. pay increasing attention to treatment costs,
return on assets and time to investment recovery when making capital purchase
decisions. While IORT is generally reimbursable, its rate of return on capital
invested compared to the return for external beam and other radiotherapy
delivery systems is currently unfavorable. While the Company intends to make an
effort to increase the rate of reimbursement to improve the rate of return on
the capital investment in the Mobetron for hospitals in the U.S., there is no
assurance that such an effort will be ultimately successful. Therefore,
regardless of positive clinical outcomes, the current U.S. reimbursement
environment may slow the widespread acceptance of IORT and the Mobetron in the
U.S. market.

IF OUR REVENUE STREAM WERE TO BECOME MORE DEPENDENT UPON THIRD PARTY PAYORS SUCH
AS INSURANCE COMPANIES, OUR REVENUES COULD DECREASE AND OUR BUSINESS COULD
SUFFER.

         The system of health care reimbursement in the United States is being
intensively studied at the federal and state level. There is a significant
probability that federal and state legislation will be enacted that may have a
material impact on the present health care reimbursement system. If, because of
a change in the law or other unanticipated factors, certain third party payors
(primarily insurance companies) were to become a more substantial source of
payment for our products in the future, our revenues may be adversely affected.
This is because such providers commonly negotiate or legislate cost structures
below the prevailing market rate and typically negotiate payment arrangements
which are less advantageous than those available from private payors. Payment by
third party payors could also be subject to substantial delays and other
problems related to receipt of payment. The health care industry, and
particularly the operation of reimbursement procedures, has been characterized
by a great deal of uncertainty, and accordingly no assurance can be given that
third party payors will not become a significant source of payment for our
products, or that such a change in payment policies will not occur. Any of these
factors could have a material adverse effect on our business and financial
condition and affect our ability to make interest and principal payments under
our notes. We cannot assure that such legislation will not restrict hospitals'
ability to purchase equipment such as the Mobetron or that such legislation will
not have a material adverse affect on our ability to sell the Mobetron and our
business prospects and financial condition.

                        RISKS RELATED TO OUR COMMON STOCK

THE TRADING MARKET FOR OUR COMMON STOCK IS LIMITED.

         Our common stock is quoted on the OTC Bulletin Board under the symbol
"IOPM.OB." The trading market for our common stock is limited. Accordingly, we
cannot assure the liquidity of any markets that may develop for our common
stock, the ability of holders of our common stock to sell our common stock, or
the prices at which holders may be able to sell our common stock.

OUR STOCK PRICE MAY BE VOLATILE.

         The market price of our common stock is likely to be highly volatile
and could fluctuate widely in price in response to various factors, many of
which are beyond our control, including:

         o    technological innovations;
         o    introductions or withdrawals of new products
              and services by us or our competitors;
         o    additions or departures of key personnel;
         o    sales of our common stock;
         o    our ability to integrate operations,
              technology, products and services;
         o    our ability to execute our business plan;
         o    operating results below expectations;
         o    loss of any strategic relationship;
         o    industry developments;
         o    changes in the regulatory environment;
         o    economic and other external factors; and
         o    period-to-period fluctuations in our financial results.


                                       17
<PAGE>

         Because we have a limited operating history with little revenues to
date, any one of these factors may be considered material. Our stock price may
fluctuate widely as a result of any of the above.

         In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.

WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON
STOCK.

         We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial condition and
other business and economic factors affecting it at such time as the board of
directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on your investment will only occur if its
stock price appreciates.

OUR COMMON STOCK MAY BE DEEMED PENNY STOCK WITH A LIMITED TRADING MARKET.

         Our common stock is currently listed for trading on the OTC Bulletin
Board which is generally considered to be a less efficient market than markets
such as NASDAQ or other national exchanges, and which may cause difficulty in
conducting trades and difficulty in obtaining future financing. Further, our
securities are subject to the "penny stock rules" adopted pursuant to Section 15
(g) of the Securities Exchange Act of 1934, as amended, or Exchange Act. The
penny stock rules apply to non-NASDAQ companies whose common stock trades at
less than $4.00 per share or which have tangible net worth of less than
$5,000,000 ($2,000,000 if the company has been operating for three or more
years). Such rules require, among other things, that brokers who trade "penny
stock" to persons other than "established customers" complete certain
documentation, make suitability inquiries of investors and provide investors
with certain information concerning trading in the security, including a risk
disclosure document and quote information under certain circumstances. Many
brokers have decided not to trade "penny stock" because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. If we remain subject to the
"penny stock rules" for any significant period, the market, if any, for our
securities may suffer. Because our securities are subject to the "penny stock
rules," investors will find it more difficult to dispose of our securities.
Further, for companies whose securities are traded in the OTC Bulletin Board, it
is more difficult: (i) to obtain accurate quotations, (ii) to obtain coverage
for significant news events because major wire services, such as the Dow Jones
News Service, generally do not publish press releases about such companies, and
(iii) to obtain needed capital.

A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.

         If our stockholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding options
or warrants, the market price of our common stock could fall. These sales also
may make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem reasonable or appropriate.
Approximately 2,284,000 shares of our restricted common stock are eligible for
sale pursuant to Rule 144. In addition, we expect within the next twelve months,
to register a minimum of up to 73,500,000 shares of our common stock, including
shares resulting from the conversion of convertible securities and the exercise
of warrants and options, which upon registration with the SEC will be freely
tradable.


                                       18
<PAGE>


ITEM 3.  CONTROLS AND PROCEDURES.

         As of the end of the period covered by the Quarterly Report on Form
10-QSB, we evaluated, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
the effectiveness of our disclosure controls and procedures, as such term is
defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to insure that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934 is properly recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.

         There has been no change in our internal control over financial
reporting during the quarter ended December 31, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None.


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         During the three months ended December 31, 2005, we have issued and
sold the following securities:

         On October 25, 2005, October 31, 2005, and November 4, 2005, we issued
7% convertible debentures in an aggregate principal amount of $4,500,000
convertible into 11,250,000 shares of common stock at an initial conversion
price of $0.40 per share and warrants to purchase an aggregate of 11,250,000
shares of common stock. All of these securities were issued in reliance upon the
exemption from registration afforded by the provisions of Regulation D, as
promulgated by the SEC under the Act.

         On December 7, 2005, we issued options to purchase an aggregate of
602,000 shares of common stock under our 2005 Equity Incentive Plan to certain
officers, directors, consultants and employees. All options have a term of 10
years and were issued with an exercise price of $0.58 per share.

         On December 7, 2005, we issued 431,034 shares of common stock as
repayment of approximately $250,000 of principal and accrued interest under a
promissory note held by our Chief Executive Officer Donald A. Goer.

         The issuances of the securities described above were deemed to be
exempt from registration under the Act in reliance on Section 4(2) of the Act as
transactions by an issuer not involving any public offering. In addition, the
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access, through their relationships with Intraop, to information about
Intraop. No underwriters were used in connection with these sales and issuances.



                                       19
<PAGE>




ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

         None.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS

Exhibit
Number       Description
--------     -----------
31.1         Certification of Chief Executive Officer pursuant to
             Section 302 of the Sarbanes-Oxley Act of 2002.

31.2         Certification of Chief Financial Officer pursuant to
             Section 302 of the Sarbanes-Oxley Act of 2002.

32.1         Certification of Chief Executive Officer pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002.

32.2         Certification of Chief Financial Officer pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002.





                                       20
<PAGE>




                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                           INTRAOP MEDICAL CORPORATION


Date:  February 9, 2006    By: /S/   DONALD A. GOER
                           --------------------------------------------------
                               Donald A. Goer, Chief  Executive Officer and
                               President
                               (Principal Executive Officer)

Date:  February 9, 2006
                           By: /S/   HOWARD SOLOVEI
                           --------------------------------------------------
                               Howard Solovei, Chief Financial Officer
                               (Principal Financial Officer)

Date:  February 9, 2006
                           By: /S/   REGIS BESCOND
                           --------------------------------------------------
                               Regis Bescond, Corporate Controller
                               (Principal Accounting Officer)


                                 21
<PAGE>


                           INTRAOP MEDICAL CORPORATION
        INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


                                                                        PAGES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
  Condensed Consolidated Balance Sheet (Unaudited)                        F-2
  Condensed Consolidated Statements of Operations (Unaudited)             F-3
  Condensed Consolidated Statements of Cash Flows (Unaudited)             F-4
  Notes to Condensed Consolidated Financial Statements (Unaudited)        F-6



                                      F-1
<PAGE>



<TABLE>
<CAPTION>
INTRAOP MEDICAL, CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------------------------------------------------
                                                                              DECEMBER 31,
                                                                                   2005
                                                                             -------------
ASSETS
Current assets:
<S>                                                                           <C>
  Cash and cash equivalents                                                   $  1,546,509
  Accounts receivable                                                            1,061,898
  Inventories                                                                    2,399,165
  Prepaid expenses and other current assets                                        130,130
                                                                             -------------
         Total current assets                                                    5,137,702

Property and equipment, net                                                        151,850
Leased equipment, net                                                              631,114
Intangible assets, net                                                              39,353
Deferred financing cost                                                          1,165,872
Deposits                                                                           406,622
                                                                             -------------
        Total Assets                                                          $  7,532,513
                                                                             =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                           $  1,641,225
   Accrued liabilities                                                             816,912
   Capital lease obligations, current portion                                        2,028
   Notes payable, related parties, current portion                                 726,824
   Notes payable, other, current portion, net of unamortized debt discounts      2,299,557
   Obligation for leased equipment                                               1,008,393
                                                                             -------------
         Total current liabilities                                               6,494,939

   Capital lease obligations, net of current portion                                 9,632
   Notes payable, other, net of current portion, unamortized debt discounts
       and beneficial conversion features                                        2,035,294
                                                                             -------------
         Total liabilities                                                       8,539,865
                                                                             -------------
Commitments and contingencies (see Note 10)

Stockholders' deficit:
  Common stock, $0.001 par value: 100,000,000 shares authorized;
     20,494,801 shares issued and outstanding                                       20,495
  Additional paid-in capital                                                    21,468,328
  Treasury stock, at cost, 600,000 shares at $.25 per share                       (150,000)
  Accumulated deficit                                                          (22,346,175)
                                                                             -------------
          Total stockholders' deficit                                           (1,007,352)
                                                                             -------------
             Total liabilities and stockholders' deficit                      $  7,532,513
                                                                             =============

See accompanying notes to these condensed consolidated financial statements.

</TABLE>




                                      F-2
<PAGE>

<TABLE>
<CAPTION>
INTRAOP MEDICAL, CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------
                                                    THREE MONTHS ENDED
                                                       DECEMBER 31,
                                            ---------------------------------
                                                 2005                2004
                                            ---------------    --------------
Revenues:
<S>                                            <C>              <C>
  Product sales                                $  1,051,254     $  2,277,708
  Leasing                                            62,168           62,168
  Service                                            19,583           21,088
                                            ---------------    -------------
  Total revenues                                  1,133,005        2,360,964
                                            ---------------    -------------
Cost of revenues:
  Product sales                                     917,247        1,748,640
  Leasing                                            38,323           94,041
  Service                                            13,233           25,104
                                            ---------------    -------------
  Total cost of revenues                            968,803        1,867,785
                                            ---------------    -------------
Gross margin                                        164,202          493,179

Operating expenses:
  Research and development                          118,157          103,648
  General and administrative                        394,879          312,893
  Sales and marketing                               235,703          115,588
                                            ---------------    -------------
          Total operating expenses                  748,739          532,129
                                            ---------------    -------------
Loss from operations                               (584,537)         (38,950)

Other income                                         20,841             --
Gain on settlement of liability                        --             89,703
Interest expense                                   (927,662)        (469,024)
                                            ---------------    -------------
Loss from operations before taxes                (1,491,358)        (418,271)

Provision for income taxes                             --               --
                                            ---------------    -------------
Net loss                                       $ (1,491,358)    $   (418,271)
                                            ===============    =============
Basic and diluted net loss per share
   available to common shareholders            $      (0.07)    $      (0.03)
                                            ===============    =============
Weighted average number of shares in
  calculating net loss per share:
  Basic and diluted                              20,244,494       13,874,692
                                            ===============    =============

See accompanying notes to these condensed consolidated financial statements.

</TABLE>


                                      F-3
<PAGE>


<TABLE>
<CAPTION>
INTRAOP MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED)
---------------------------------------------------------------------------------------------------
                                                                    THREE MONTHS ENDED
                                                                         DECEMBER 31,
                                                           ----------------------------------------
                                                                   2005                 2004
                                                           ----------------       -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                            <C>                      <C>
Net loss                                                       $(1,491,358)             $  (418,271)
Adjustments to reconcile net loss to net cash
  provided by (used for) operating activities:
Depreciation of property and equipment                              10,861                   58,160
Amortization of intangible assets                                    1,703                   45,494
Amortization of beneficial conversion rights                       256,354                     --
Amortization of debt discount                                      285,515                     --
Amortization of debt issuance costs                                 57,249                  156,250
Non-cash compensation  for options issued                            8,476                   20,650
Non-cash compensation for warrants issued                           41,153                     --
Non-cash revenue received on leased equipment                      (62,168)                 (62,168)
Non-cash interest expense                                           38,324                   41,524
Changes in assets and liabilities:
Accounts receivable                                               (132,595)                 186,945
Inventories                                                       (137,204)               1,430,481
Prepaid expenses and other current assets                          (22,744)                 (11,857)
Other assets                                                      (218,511)                   8,739
Accounts payable                                                    67,588                 (266,788)
Accrued liabilities                                               (277,347)                  16,243
Foreign exchange translation                                       (10,636)                    --
                                                          ----------------        -----------------
Net cash provided by (used for) operating activities            (1,585,340)               1,205,402
                                                          ----------------        -----------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Acquisition of fixed assets                                        (48,005)                  (3,471)
Acquisition of intangible assets                                      --                    (50,000)
                                                          ----------------        -----------------
Net cash used for investing activities                             (48,005)                 (53,471)
                                                          ----------------        -----------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
  Proceeds from note payable, related party                         50,000                     --
  Proceeds from note payable, other                              4,500,000                1,207,500
  Payments on note payable, related party                         (324,134)                 (50,000)
  Payments on note payable, other                                 (755,180)              (2,095,700)
  Debt issuance costs                                             (337,273)                    --
  Proceeds from issuance of common stock                             3,000                     --
                                                          ----------------        -----------------
    Net cash provided by (used for) financing activities         3,136,413                 (938,200)
                                                          ----------------        -----------------
Net increase in cash and cash equivalents                        1,503,068                  213,731
Cash and cash equivalents, at beginning of period                   43,441                  119,475
                                                          ----------------        -----------------
Cash and cash equivalents, at end of period                    $ 1,546,509              $   333,206
                                                          ================        =================

See accompanying notes to these condensed consolidated financial statements.
</TABLE>



                                      F-4
<PAGE>



<TABLE>
<CAPTION>
INTRAOP MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED) (CONTINUED)
----------------------------------------------------------------------------------------------------------------
                                                                                     THREE MONTHS ENDED
                                                                                        DECEMBER 31,
                                                                              ----------------------------------
                                                                                  2005                2004
                                                                              -------------      ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S>                                                                               <C>                 <C>
Cash paid for interest                                                            $301,127            $ 354,015
Income taxes paid                                                                        -                    -

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:
  Inventory reclassified to leased equipment                                      $      -            $   1,137
  Property and equipment, at book value, converted to inventory                          -                6,620
  Proceeds of notes payable deposited with vendors                                       -              525,000
  Accounts payable, interest payable and royalty payable converted
     to notes payable                                                                    -              186,185
  Conversion of promissory notes and interest payable
     to common stock                                                               250,000                    -


See accompanying notes to these condensed consolidated financial statements.

</TABLE>


                                      F-5
<PAGE>




                    INTRAOP MEDICAL CORPORATION NOTES TO THE
             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES

BASIS OF PRESENTATION:

The  condensed  consolidated  financial  statements  have been  prepared  by the
Company  pursuant to the rules and regulations SB of the Securities and Exchange
Commission ("SEC").  Certain information and note disclosures  normally included
in  financial   statements   prepared  in  accordance  with  generally  accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations.   These  condensed   consolidated   financial  statements  and  the
accompanying  notes are  unaudited  and should be read in  conjunction  with the
consolidated  financial  statements  and  the  notes  thereto  included  in  the
Company's Annual Report on Form 10-KSB for the year ended September 30, 2005. In
the opinion of  management,  the  condensed  consolidated  financial  statements
herein include  adjustments  (consisting only of normal  recurring  adjustments)
necessary  for a fair  presentation  of the Company's  financial  position as of
December 31, 2005, results of operations for the three months ended December 31,
2005 and December 31, 2004,  and cash flows for the three months ended  December
31, 2005 and December 31, 2004.  The results of operations  for the three months
ended December 31, 2005 are not necessarily  indicative of the operating results
to be expected for the full fiscal year or any future periods.

FORMATION AND BUSINESS OF THE COMPANY:

Intraop Medical  Corporation (the "Company") was organized under the laws of the
State of  Nevada on  November  5, 1999  under the name  DigitalPreviews.com.  On
January  21,  2004,  the  Company  filed a  Certificate  of  Amendment  with the
Secretary   of  State  of  Nevada  to  change  the  name  of  the  Company  from
DigitalPreviews.com,  Inc.  to Intraop  Medical  Corporation.  On March 9, 2005,
Intraop Medical  Corporation merged with Intraop Medical,  Inc. Until this date,
Intraop Medical  Corporation had been seeking viable business  opportunities but
had not commenced  operations and was considered a development  stage company as
defined in Statement of Financial Accounting Standards No. 7.

Intraop  Medical,  Inc., was  incorporated in Delaware in March 1993 to develop,
manufacture, market, and service mobile electron beam treatment systems designed
for  intraoperative  radiotherapy  (IORT).  IORT is the application of radiation
directly to a cancerous tumor and/or tumor bed during surgery. In July 1998, the
Company obtained FDA 510(k)  clearance on its initial  product,  the "Mobetron".
The business of Intraop Medical, Inc., is now the sole business of the Company.

HISTORY

On March 9, 2005,  the Company  acquired all the  outstanding  shares of Intraop
Medical,  Inc., a privately-held  Delaware  Corporation  (incorporated on March,
1993) in exchange for an aggregate of 14,175,028 restricted shares of its common
stock.  The merger  transaction  was a tax-free  exchange  of stock.  All of the
outstanding common and preferred stock of Intraop Medical, Inc. was exchanged on
a one-for-one basis with the Company's common stock, and the Company assumed all
obligations under outstanding  options,  warrants and convertible  securities of
Intraop Medical, Inc. The acquisition has been accounted for as a reverse merger
(recapitalization)  with  Intraop  Medical,  Inc.,  deemed to be the  accounting
acquirer.  Accordingly, the historical financial statements presented herein are
those of Intraop Medical,  Inc., as adjusted to give effect to any difference in
the par value of the issuer's and the accounting acquirer's stock with an offset
to capital in excess of par value, and those of Intraop Medical Corporation (the
legal  acquirer)  since the merger.  The  retained  earnings  of the  accounting
acquirer have been carried forward after the  acquisition  and Intraop  Medical,
Inc.'s   basis  of   assets   and   liabilities   were   carried   over  in  the
recapitalization.  Operations prior to the business combination are those of the
accounting  acquirer.  Further  pursuant  to  the  Merger,  certain  holders  of
convertible notes  representing  $295,000 of principal and $100,000 of principal
due related parties under Intraop Medical Corporation's Promissory Note program,
converted  their notes to common stock upon  completion of the Merger at a price
of $1.25 per share.

                                      F-6

<PAGE>


NOTE 1 - INTRAOP MEDICAL CORPORATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)



Further  pursuant  to the  Merger,  the Company had agreed upon the close of the
Merger to issue 795,000 shares of common stock to certain  service  providers in
exchange for services  related to the Merger.  These shares were valued at $1.53
per share, the price of the Company's common stock on March 9, 2005, the date of
the Merger and were recorded as expense on the Company's books.

In April 2005, the Company  received notices from  stockholders  representing an
aggregate of 97,000 shares of common stock who had previously  voted against the
Merger  that they  wished to redeem  their  shares in  accordance  with  certain
dissenter's rights provisions.  An accrual for the estimated redemption value of
$121,250  and a  corresponding  offset to common  stock and  additional  paid in
capital was recorded and subsequently paid to the dissenting shareholders.

BASIS OF CONSOLIDATION:

The unaudited condensed  consolidated  financial statements include the accounts
of Intraop Medical Corporation and its wholly owned subsidiaries Intraop Medical
Services,  Inc. and Intraop Medical  Services  Louisville,  LLC. All significant
intercompany  balances and  transactions  have been eliminated in preparation of
the unaudited condensed consolidated financial statements.

GOING CONCERN:

The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity  with  generally  accepted  accounting  principles in the
United States, which contemplate continuation of the Company as a going concern.
However,  the Company has  experienced net losses of $1,491,358 and $418,271 for
the three months ended  December 31, 2005 and 2004,  respectively.  In addition,
the Company has incurred  substantial monetary liabilities in excess of monetary
assets  over the past  several  years  and,  as of  December  31,  2005,  has an
accumulated  deficit  of  $22,346,175.   These  matters,   among  others,  raise
substantial doubt about the Company's ability to continue as a going concern. In
view of the matters  described above,  recoverability  of a major portion of the
recorded   asset  amounts  shown  in  the   accompanying   unaudited   condensed
consolidated  balance sheet is dependent upon the Company's  ability to generate
sufficient sales volume to cover its operating  expenses and to raise sufficient
capital to meet its payment obligations.  Management is taking action to address
these matters, which include:

         -        Retaining  experienced  management  personnel with  particular
                  skills  in  the  development  and  sale  of its  products  and
                  services.

         -        Developing  new markets  (primarily  Europe) and expanding its
                  sales efforts.

         -        Evaluating  funding  strategies  in  the  public  and  private
                  markets.

                                      F-7
<PAGE>



NOTE 1 - INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

Historically,  management has been able to raise additional capital.  During the
three months ended December 31 2005, the Company  obtained  capital  through the
issuance  of  convertible  debentures.   The  unaudited  condensed  consolidated
financial   statements   do  not  include  any   adjustments   relating  to  the
recoverability  and  classification  of recorded asset  amounts,  or amounts and
classification  of  liabilities  that might be  necessary  should the Company be
unable to continue in existence.  The  successful  outcome of future  activities
cannot be  determined  at this time and there is no assurance  that if achieved,
the Company will have sufficient funds to execute its intended  business plan or
generate positive operating results.

CONCENTRATION OF CREDIT RISK:

The  Company  maintains  its cash in bank  accounts,  which at times may  exceed
federally  insured  limits.  The Company has not  experienced any losses on such
accounts.

Credit  risk with  respect to account  receivables  is  concentrated  due to the
number  of  large  orders  recorded  in any  particular  period.  Two  customers
represent  45.8% and 44.9% of accounts  receivable  at December  31,  2005.  The
company  reviews  the  credit  quality  of its  customers  but does not  require
collateral  or other  security to support  customer  receivables.  One  customer
accounted for 90.9% of net revenue for the three months ended December 31, 2005.
Two  customers  accounted  for 54.5% and 40% of net revenue for the three months
ended December 31, 2004.

USE OF ESTIMATES:

The  preparation  of  consolidated  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 amounts in
the financial  statements and  accompanying  notes.  Actual results could differ
from those estimates.

Management  makes  estimates  that affect  reserves for  allowance  for doubtful
accounts,  deferred  income tax assets,  estimated  useful lives of property and
equipment,  accrued expenses,  fair value of equity instruments and reserves for
any other commitments or contingencies. Any adjustments applied to estimates are
recognized in the period in which such adjustments are determined.

REVENUE RECOGNITION:

Revenue is  recognized  when earned in  accordance  with  applicable  accounting
standards,  including Staff Accounting  Bulletins 104,  "Revenue  Recognition in
Financial  Statements" ("SAB 104"), and the interpretive  guidance issued by the
Securities and Exchange Commission and EITF issue number 00-21,  "Accounting for
Revenue Arrangements with Multiple Elements", of the FASB's Emerging Task Force.
Revenue is generated from machine sales, leasing of machines, installations, and
maintenance.   Machine  sales  and  installation  revenue  are  recognized  upon
shipment,  installation,  or final  customer  acceptance,  depending on specific
contract  terms,  provided any  remaining  obligations  are  inconsequential  or
perfunctory and collection of resulting  receivable is deemed probable.  Revenue
from maintenance is recognized as services are completed or over the term of the
maintenance agreements.  Revenue from the leasing of machines is recognized over
the term of the lease agreements.

During the three  months ended  December  31, 2005 and  December  31, 2004,  the
Company  recognized  revenue on service  contracts with two institutions for the
service of Mobetrons at the customer  site.  The  customers  paid for a one-year
service contract for which they receive  warranty-level labor and a credit for a
certain contracted dollar amount of service-related parts. On each contract, the
Company  recorded a liability  for parts equal to the amount of the parts credit
contracted for by the customer with the remainder of the contract price recorded
as labor related service contract liability.


                                       F-8
<PAGE>

NOTE 1 - INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

LEASE REVENUE AND LEASING TRANSACTIONS:

Revenue for the three months years ended December 31, 2005 and December 31, 2004
is partly comprised of revenue  recognized on a Mobetron system delivered to our
customer in Eindhoven,  Holland in November 2003. At inception,  as an equipment
supplier,  we received proceeds in the amount of $1,230,685 as the sale price of
the  equipment  from a third  party  leasing  company,  who in turn  leased  the
equipment to the hospital  pursuant to a seventy month lease. The Company has no
material  obligations  under the lease and the lease  remains  an  unconditional
obligation of the hospital as the lessee to make payments to the leasing company
as lessor for the leasing company's own account.

However,  as an inducement to the hospital to enter into the lease,  the Company
agreed in a contract with the hospital that,  should the hospital  decide,  upon
sixty days prior  notice to the  Company,  to prepay the lease with the  leasing
company (a  one-time  option),  at the end of the 18th month of its lease on May
31,  2005,  the  Company  would  reimburse  the  hospital  for  the  cost of the
hospital's  exercise of the prepayment option to the leasing company.  Following
the  reimbursement  by the Company to the  hospital for the  prepayment  amount,
title to the equipment would revert to the Company.

Because  of the  potential  reimbursement  to the  hospital  at the end of month
eighteen of the lease, the Company retains  substantial risk of ownership in the
leased  property,  and the  transaction  has  therefore  been  accounted  for in
accordance with SFAS 13,  "Accounting for Leases",  specifically  paragraphs 19,
21, and 22.

Accordingly,  the Company  recorded the entire  $1,230,685 of proceeds  received
from the leasing company as obligation for leased equipment,  a liability on its
balance sheet and accounted  for the item as borrowing.  In accordance  with APB
Opinion 21,  "Interest on  Receivables  and Payables"  paragraphs 13 and 14, the
Company  determined an interest rate for the  obligation of 14.5% based on other
debt arrangements  entered into by the Company at dates closest to the inception
of the obligation  for leased  equipment.  Further,  although the Company is not
entitled to the cash rental  payments,  the Company  recognized  rental  revenue
totaling  $62,168 and $62,168 for the three months  ended  December 31, 2005 and
December  31, 2004  respectively.  A portion of each month's  rental  revenue is
recorded as interest and included in cost of revenue with the remainder recorded
as a reduction in obligation for leased equipment.

Accordingly,  the Company has recorded  $1,016,238,  the amount that the Company
would otherwise have been the Company's cost of revenue for the transaction,  as
leased equipment,  an asset on its balance sheet. The asset is being depreciated
on a  straight  line  basis  over  the  period  of the  Company's  reimbursement
obligation to the hospital down to a value equal to the estimated residual value
of the  equipment  at the end of the  obligation.  The  depreciation  expense is
included in cost of revenue.

Prior to May 31,  2005,  the  hospital  notified the Company that it intended to
exercise  its  prepayment  option,  however  the  Company  agreed to extend  its
reimbursement option from May 31, 2005 until January 1, 2006 and agreed to a new
reimbursement  amount.  Pursuant  to the  reimbursement  option  extension,  the
Company  continued  to  recognize  revenue  and  expense  on  this  transaction,
including  continued  straight line  depreciation  down to a new asset  residual
value of $631,114  which was reached on September  30,  2005,  based on extended
usage, as described above.  Subsequently,  the hospital exercised its prepayment
option on January 1, 2006.



                                      F-9
<PAGE>


NOTE 1 - INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

INTANGIBLE ASSETS:

Intangible assets consist primarily of amounts paid for manufacturing and design
rights  related to the Mobetron and a medical  device  approval  license.  These
manufacturing  and design  rights  related to the  Mobetron  are  amortized on a
straight-line basis over their estimated useful lives of three to five years.

The medical device approval  license has an indefinite life and therefore is not
subject to amortization.

The Company  evaluates the carrying  value of its  intangible  assets during the
fourth  quarter of each year and between  annual  evaluations if events occur or
circumstances  change  that would more  likely than not reduce the fair value of
the asset below its carrying amount. Such circumstances  could include,  but are
not limited to: (1) a significant adverse change in legal factors or in business
climate, (2) unanticipated  competition,  or (3) an adverse action or assessment
by a regulator.

The  Company's  evaluation  of  intangible  assets  completed  during the fourth
quarter of the fiscal year ended  September  30, 2005  resulted in no impairment
losses.

INCOME TAXES:

The  Company  accounts  for its  income  taxes  using the  Financial  Accounting
Standards  Board   Statements  of  Financial   Accounting   Standards  No.  109,
"Accounting  for Income Taxes," which requires the  establishment  of a deferred
tax asset or  liability  for the  recognition  of future  deductible  or taxable
amounts and operating loss and tax credit carryforwards. Deferred tax expense or
benefit is recognized as a result of timing differences  between the recognition
of assets and liabilities for book and tax purposes during the year.

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.  Deferred tax assets are
recognized  for deductible  temporary  differences  and operating  loss, and tax
credit  carryforwards.  A  valuation  allowance  is  established  to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be  realized.  The  Company  has  recorded a full  valuation  allowance
against its deferred tax assets.



                                      F-10
<PAGE>




NOTE 1 - INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

BASIC AND DILUTED LOSS PER SHARE:

In accordance with SFAS No. 128,  "Earnings Per Share," the basic loss per share
is computed by dividing  the loss  attributable  to common  stockholders  by the
weighted average number of common shares  outstanding  during the period.  Basic
net loss per share excludes the dilutive effect of stock options or warrants and
convertible notes. Diluted net loss per share was the same as basic net loss per
share for all periods  presented,  since the effect of any potentially  dilutive
securities  is excluded,  as they are  anti-dilutive  due to the  Company's  net
losses.

The following table sets forth the computation of basic and diluted net loss per
common share:

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                                      DECEMBER 31,
                                                            ---------------------------------
                                                                 2005                2004
                                                            --------------    ---------------
Numerator
<S>                                                         <C>                  <C>
Net loss available to common shareholders                   $ (1,491,358)        $  (418,271)

Denominator
Weighted average common shares outstanding                    20,244,494          13,874,692
                                                            --------------    ---------------
Total shares, basic                                           20,244,494          13,874,692
                                                            ==============    ===============
Net loss per common share:
  Basic and diluted                                         $      (0.07)        $     (0.03)
                                                            ==============    ===============
</TABLE>

The potential  shares,  which are excluded from the  determination  of basic and
diluted net loss per share as their effect is anti-dilutive, are as follows:

<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED
                                                                       DECEMBER 31,
                                                           -------------------------------------
                                                                 2005                 2004
                                                           -----------------    ----------------
<S>                                                              <C>                    <C>
Warrants to purchase common stock                                23,023,174             863,091
Debentures convertible to common stock                           17,500,000                   -
Options to purchase common stock                                  1,699,500           1,127,500
Notes payable convertible to common stock                                 -           1,415,570
                                                           -----------------    ----------------

Potential equivalent shares excluded                             42,222,674           3,406,161
                                                           =================    ================
</TABLE>




                                      F-11
<PAGE>




NOTE 1 - INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

STOCK-BASED COMPENSATION:

The Company accounts for stock-based  compensation in accordance with Accounting
Principles  Board  ("APB")  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees",  and  complies  with the  disclosure  provisions  of SFAS  No.  123,
"Accounting for Stock-Based Compensation". Under APB No. 25 compensation cost is
recognized on the excess,  if any, on the date of grant of the fair value of the
Company's shares over the employee's  exercise price. When the exercise price of
the option is less than the fair  value  price of the  underlying  shares on the
grant date,  deferred stock  compensation is recognized and amortized to expense
in accordance with Financial Accounting Standards Board ("FASB")  Interpretation
No. 44 over the vesting period of the individual  options.  Accordingly,  if the
exercise  price of the Company's  employee  options equals or exceeds the market
price of the underlying shares on the date of grant, no compensation  expense is
recognized. The Company has, since inception,  granted options at the fair value
of the stock and therefore has had no compensation expense to record.

The  Company  accounts  for  equity   instruments  issued  to  non-employees  in
accordance  with the  provisions  of SFAS No 123 and Emerging  Issues Task Force
("EITF") No 96-18,  Accounting for Equity  Instruments  That Are Issued to Other
Than Employees for Acquiring,  or in Conjunction  with Selling Goods or Services
and  complies  with  the  disclosure  provisions  of SFAS  148,  Accounting  for
Stock-Based Compensation an Amendment of SFAS 123.

The  Company   has  adopted   SFAS  No.   148,   "Accounting   for   Stock-Based
Compensation-Transition and Disclosure," which amends, SFAS No. 123, "Accounting
for Stock-Based  Compensation," to provide alternative methods of transition for
a voluntary  change to the fair value based method of accounting for stock-based
employee  compensation.  In  addition,  SFAS  No.  148  expands  the  disclosure
requirements  of SFAS No.  123 to require  more  prominent  disclosures  in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.  The  transition  provisions  do not  currently  have an  impact on the
Company's  unaudited  condensed  consolidated  financial position and results of
operations as the Company has not elected to adopt the fair  value-based  method
of  accounting  for  stock-based  employee  compensation  under SFAS No. 123 The
Company has adopted the disclosure requirements of SFAS No. 148.
The  Company  accounts  for its stock  option  plans under the  recognition  and
measurement  principles  of APB Opinion No. 25,  Accounting  for Stock Issued to
Employees,  and related  Interpretations.  No stock-based employee  compensation
cost is reflected in net loss, except when options granted under those plans had
an exercise price less than the market value of the  underlying  common stock on
the date of grant.



                                      F-12
<PAGE>




NOTE 1 - INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition  provisions of FASB Statement No.
123,   Accounting  for  Stock-Based   Compensation,   to  stock-based   employee
compensation.

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                  DECEMBER 31,
                                                           2005                   2004
                                                      ----------------    ----------------
<S>                                                    <C>                     <C>
Net Loss                                               $  (1,491,358)          $ (418,271)
Compensation recognized under APB 25                               -                    -
Compensation recognized under SFAS 123                      (347,029)             (47,637)
                                                      ----------------    ----------------
Pro-forma net loss                                     $  (1,838,387)          $ (465,908)
                                                      ================    ================
Net loss per share:

  Basic and diluted - as reported                      $       (0.07)          $    (0.03)
                                                      ================    ================
  Basic and diluted - pro-forma                        $       (0.09)          $    (0.03)
                                                      ================    ================
</TABLE>

The weighted  average fair value of the stock options  granted  during the three
months ended  December 31, 2005 and 2004 was  approximately  $0.58 and $0.54 per
share.

The fair value of the Company's  stock-based  awards to employees was determined
using the Black-Scholes option-pricing model and the following assumptions:


<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED
                                                                       DECEMBER 31,
                                                        --------------------------------------------
                                                               2005                    2004
                                                        -------------------    ---------------------
<S>                                                      <C>                   <C>
Expected life (in years)                                          4 to 10                  4 to 10
Risk-free interest rate                                     4.41% to 4.48%           3.11% to 4.10%
Expected volatility                                                103.37%                   42.68%
Expected dividend yield                                                  -                        -
</TABLE>


ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES:

The  Company  has  issued   convertible  debt  securities  with   non-detachable
conversion features. The Company accounts for such securities in accordance with
Emerging  Issues Task Force Issue Nos. 98-5,  00-19,  00-27 and 05-02 and 05-08.
For a contingent  benefit  conversion  option, the Company records the intrinsic
value,  which is to be  measured  using the  commitment  date fair  value of the
underlying stock.



                                      F-13
<PAGE>



NOTE 1-  INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

COMPREHENSIVE LOSS:

Comprehensive  loss  consists of net loss and other  gains and losses  affecting
shareholders' equity that, under generally accepted accounting  principles,  are
excluded  from net loss in  accordance  with  Statement of Financial  Accounting
Standards No. 130, "Reporting Comprehensive Income." The Company,  however, does
not have any components of other  comprehensive  loss as defined by SFAS No. 130
and  therefore,  for  the  three  months  ended  December  31,  2005  and  2004,
comprehensive   loss  is  equivalent   to  the  Company's   reported  net  loss.
Accordingly, a statement of comprehensive loss is not presented.

SEGMENT:

The Company  operates in a single  business  segment  that  includes the design,
development,  and  manufacture  of  the  Mobetron.  The  Company  does  disclose
geographic  area  data,  which is based on  product  shipment  destination.  The
geographic summary of long-lived assets is based on physical location.

RECENT ACCOUNTING PRONOUNCEMENTS:

In December  2004,  the FASB issued SFAS  No.123  (revised  2004),  "Share-Based
Payment".  Statement 123(R) will provide  investors and other users of financial
statements  with more complete and neutral  financial  information  by requiring
that the  compensation  cost relating to  share-based  payment  transactions  be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability  instruments issued.  Statement 123(R) covers a
wide range of share-based  compensation  arrangements  including  share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting  for  Stock-Based  Compensation,  and  supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995,  established  as preferable a  fair-value-based  method of accounting  for
share-based  payment  transactions  with  employees.   However,  that  Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable  fair-value-based method been used. Public entities
(other  than those  filing as small  business  issuers)  are  required  to apply
Statement  123(R) as of the first interim or annual reporting period that begins
after June 15,  2005.  The Company has  evaluated  the impact of the adoption of
SFAS  123(R),  and  does not  believe  the  impact  will be  significant  to the
Company's  overall  results of operations or financial  position.  However,  the
Company will recognize additional  compensation expense related to stock options
and warrants granted to employees.



                                      F-14
<PAGE>


NOTE 1-  INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

In March 2005,  the FASB issued  Staff  Accounting  Bulletin No. 107 ("SAB 107")
which provides additional guidance to the new stock option expensing  provisions
under SFAS 123(R). SAB 107 acknowledges that fair value estimates cannot predict
actual future  events and as long as the estimates are made in good faith,  they
will  not  be  subsequently  questioned  no  matter  what  the  actual  outcome.
Historical  volatility  should be measured on an unweighted  basis over a period
equal to or longer than the expected option term or contractual term,  depending
on the  option-pricing  model that is used.  Implied  volatility is based on the
market prices of a company's traded options or other financial  instruments with
option-like features,  and is derived by entering the market price of the traded
option into a closed-form  model and solving for the volatility  input.  SAB 107
provides  additional guidance for companies when estimating an option's expected
term.  In  general,  companies  are not  allowed  to  consider  additional  term
reduction  and the  option  term  cannot be  shorter  than the  vesting  period.
Companies are permitted to use historical  stock option  exercise  experience to
estimate  expected term if it represents  the best estimate for future  exercise
patterns.  SAB 107 provides  that  companies  should  enhance  MD&A  disclosures
related to equity  compensation  subsequent to adoption of Statement 123(R). SAB
107 provided that companies should provide all disclosures required by Statement
123 (R) in the first 10-Q filed after adoption of the new rules.

In December 2004 the Financial  Accounting Standards Board issued two FASB Staff
Positions--FSP  FAS 109-1,  Application  of SFAS Statement 109  "Accounting  for
Income Taxes" to the Tax Deduction on Qualified  Production  Activities Provided
by the American  Jobs  Creation Act of 2004,  and FSP FAS 109-2  Accounting  and
Disclosure Guidance for the Foreign Earnings  Repatriation  Provision within the
American Jobs Creation Act of 2004.  Neither of these affected the Company as it
does not participate in the related activities.

In March 2005,  the FASB  issued FASB  Interpretation  No. 47,  "Accounting  for
Conditional Asset Retirement  Obligations"  ("FIN 47"). FIN 47 clarifies that an
entity must record a liability for a conditional asset retirement  obligation if
the fair value of the obligation can be reasonably  estimated.  Asset retirement
obligations  covered  by FIN 47 are  those  for  which  an  entity  has a  legal
obligation  to  perform  an asset  retirement  activity,  even if the timing and
method of settling the obligation are  conditional on a future event that may or
may not be within  the  control of the  entity.  FIN 47 also  clarifies  when an
entity would have sufficient  information to reasonably  estimate the fair value
of an asset retirement obligation.  FIN 47 is effective no later than the end of
fiscal  years ending  after  December  15, 2005.  We do not expect there to be a
material  impact  from  the  adoption  of  FIN  47 on  our  unaudited  condensed
consolidated financial position, results of operations, or cash flows.

In June  2005,  the FASB  issued  SFAS No.  154,  ACCOUNTING  CHANGES  AND ERROR
CORRECTIONS,  a replacement of APB No. 20, ACCOUNTING  Changes,  and SFAS No. 3,
REPORTING  ACCOUNTING  CHANGES IN  INTERIM  FINANCIAL  STATEMENTS.  SFAS No. 154
changes the  requirements  for the  accounting  for and reporting of a change in
accounting   principle.   Previously,   most  voluntary  changes  in  accounting
principles  required  recognition via a cumulative  effect adjustment within net
income  of the  period  of the  change.  SFAS  No.  154  requires  retrospective
application to prior periods' financial  statements,  unless it is impracticable
to determine either the period-specific  effects or the cumulative effect of the
change.  SFAS No. 154 is effective for  accounting  changes made in fiscal years
beginning after December 15, 2005;  however,  this statement does not change the
transition  provisions of any existing  accounting  pronouncements.  The Company
does not  believe  adoption  of SFAS No. 154 will have a material  effect on its
unaudited condensed  consolidated  financial position,  results of operations or
cash flows.


                                      F-15
<PAGE>


NOTE 1-  INTRAOP  MEDICAL  CORPORATION  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING
POLICIES (CONTINUED)

In September 2005, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 05-08,  "Income Tax  Consequences of Issuing  Convertible Debt
with a Beneficial  Conversion  Feature."  EITF 05-08 is effective  for financial
statements  beginning in the first interim or annual  reporting period beginning
after December 15, 2005. We do not expect there to be a material impact from the
adoption  of  EITF  05-08  on our  unaudited  condensed  consolidated  financial
position, results of operations, or cash flows.

In September 2005, the Financial Accounting Standards Board Emerging Issues Task
Force  issued  EITF  05-02,  "The  Meaning  of  'Conventional  Convertible  Debt
Instrument'  in EITF  Issue No.  00-19,  'Accounting  for  Derivative  Financial
Instruments  Indexed to, and  Potentially  Settled in, a Company's  Own Stock.'"
EITF  05-02 is  effective  for new  instruments  entered  into  and  instruments
modified in reporting  periods  beginning  after June 29, 2005. We do not expect
there to be a material  impact from the adoption of EITF 05-02 on our  unaudited
condensed consolidated financial position, results of operations, or cash flows.

In September 2005, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 05-07,  "Accounting for  Modifications  to Conversion  Options
Embedded in Debt  Instruments  and Related  Issues."  EITF 05-7 is effective for
future  modifications  of debt  instruments  beginning  in the first  interim or
annual  reporting  period  beginning  after  December 15, 2005. We do not expect
there to be a material  impact from the adoption of EITF 05-07 on our  unaudited
condensed consolidated financial position, results of operations, or cash flows.

NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Two customers represented 45.8% and 44.9% of accounts receivable at December 31,
2005. One customer accounted for 90.9% of net revenue for the three months ended
December 31, 2005. Two customers  accounted for 54.5% and 40% of net revenue for
the three months ended December 31, 2004.

Two suppliers  represented  56.7% and 30.7% of accounts  payable at December 31,
2005.  Purchases from these suppliers during the three months ended December 31,
2005 and 2004 totaled approximately $782,861 and zero respectively.



                                      F-16
<PAGE>




NOTE 3 - BALANCE SHEET COMPONENTS

INVENTORY:


Inventory consists of the following:
<TABLE>
<CAPTION>

<S>                                                                               <C>
              Finished goods                                                      $       733,441
              Work-in-progress                                                          1,173,238
              Purchased parts and raw material                                            492,486
                                                                                  ---------------
                                                                                  $     2,399,165
</TABLE>

PROPERTY AND EQUIPMENT AND LEASED EQUIPMENT:

A summary is as follows:
<TABLE>
<CAPTION>

<S>                                                                               <C>
              PROPERTY AND EQUIPMENT
              Equipment                                                           $       174,706
              Computer equipment                                                           74,728
              Furniture & fixtures                                                         63,646
              Lease hold improvements                                                       2,315
                                                                                  -----------------
                                                                                          315,395
              Less accumulated depreciation                                              (163,545)
                                                                                  -----------------
                                                                                  $       151,850

              LEASED EQUIPMENT
              Leased equipment                                                    $     1,016,238
              Less accumulated depreciation                                              (385,124)
                                                                                  -----------------
                                                                                  $       631,114
</TABLE>

Included in property and  equipment is an asset  acquired  under  capital  lease
obligations  with an original  cost of $11,742 as of December 31, 2005.  Related
accumulated  depreciation and amortization of this asset was $783 as of December
31, 2005.

INTANGIBLE  ASSETS:

A summary is as follows:

<TABLE>
<CAPTION>
<S>                                                                                    <C>
            Mobetron related manufacturing and design rights                      $        24,400
            Less accumulated amortization                                                 (15,047)
                                                                                  ----------------
            Mobetron related manufacturing and design rights, net                           9,353
            Medical device approval license not subject to amortization                    30,000
                                                                                  ----------------
            Intangible assets, net                                                $        39,353
                                                                                  ================
</TABLE>

The  Company's  historical  and  projected  revenues are related to the sale and
servicing of the Company's sole product,  the Mobetron.  Should  revenues of the
Mobetron  product in future  periods  be  significantly  less than  management's
expectation,  the benefit from the Company's Mobetron related  intangibles would
be limited and may result in an impairment of these assets.



                                      F-17
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

DEFERRED FINANCING COST:

A summary is as follows:


<TABLE>
<CAPTION>
<S>                                                               <C>
            Debt issuance cost                                           $ 1,284,611
            Less accumulated amortization                                   (118,739)
                                                                  ------------------
            Deferred financing cost, net                                 $ 1,165,872
                                                                  ==================
</TABLE>

ACCRUED LIABILITIES:

A summary is as follows:

<TABLE>
<CAPTION>

                                                                       DECEMBER 31,
                                                                          2005
                                                                  -------------------
            ACCRUED LIABILITIES:
<S>                                                               <C>
            Accrued sales tax payable                                    $     59,040
            Accrued personal paid leave                                        96,022
            Accrued royalty payable - related party                           150,000
            Accrued interest payable                                           84,903
            Accrued warranty                                                  207,119
            Contract advances                                                 171,652
            Other accrued liabilities                                          48,176
                                                                  -------------------
                                                                         $    816,912
                                                                  ===================
</TABLE>

WARRANTY:

The warranty periods for the Company's  products are generally one year from the
date of shipment.  The Company is responsible for warranty  obligations  arising
from its sales and provides for an estimate of its  warranty  obligation  at the
time of sale. The Company's contract manufacturers are responsible for the costs
of any manufacturing  defects.  Management  estimates and provides a reserve for
warranty upon sale of a new machine based on historical warranty repair expenses
of the Company's installed base.

The following  table  summarizes  the activity  related to the product  warranty
liability, which was included in accrued liabilities.


<TABLE>
<CAPTION>
<S>                                                               <C>
            Warranty accrual at September 30, 2005                       $   168,555

            Accrual for warranties during the period                          59,730
            Actual product warranty expenditures                             (21,166)
                                                                  ------------------
            Warranty accrual at December 31, 2005                        $   207,119
                                                                  ==================
</TABLE>



                                      F-18
<PAGE>




NOTE 4 - BORROWINGS

Outstanding notes payable were as follows:

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                                                              DECEMBER 31,
                                                                                  2005
                                                                          -------------------
<S>                                                                              <C>
Notes payable, related parties, current                                          $    726,824
                                                                          ===================

Convertible debentures                                                           $  7,000,000
Revolving line of credit                                                            2,285,650
Senior secured debentures                                                           1,888,889
Other Notes                                                                             5,144

Less debt discounts due to warrants                                                (3,235,673)
Less beneficial conversion features                                                (3,609,159)
                                                                          -------------------
   Notes payable, net of debt discounts and
       beneficial conversion features                                               4,334,851

Less current portion                                                               (2,299,557)
                                                                          -------------------
   Notes payable, other, net of current portion,
       unamortized debt discounts and beneficial
         conversion features                                                      $ 2,035,294
                                                                          ===================
</TABLE>

NOTES PAYABLE, RELATED PARTIES:

Notes payable to related parties of $726,824 at December 31, 2005, include notes
issued to various  officers,  directors,  and  stockholders of the Company.  The
notes are due on demand  and bear  interest  at 9% per  annum.  During the three
months ended  December  31, 2005,  $183,967 of principal of notes and $66,033 of
interest  were  converted to 431,034  shares of common stock at $0.58 per share.
Additionally,  during the three  months ended  December  31,  2005,  the Company
received  note proceeds of $50,000 from related  parties and repaid  $324,134 of
principal to related parties.

CONVERTIBLE DEBENTURES

In August 2005,  the Company sold  $2,500,000  of 7%  convertible  debentures to
certain  investors.  The debentures are  convertible  into the Company's  common
stock at $0.40  per  share  at the  option  of the  debenture  holders  and bear
interest at 7% per annum, payable quarterly. The debentures have a term of three
years with  principal  due in full at  maturity.  As a further  inducement,  the
Company granted the holders of the debentures warrants to purchase 3.125 million
shares of the Company's common stock,  expiring September 30, 2006, and warrants
to purchase 3.125 million shares of the Company's common stock,  expiring August
31, 2010. All warrants are exercisable at $0.40 per share



                                      F-19
<PAGE>




NOTE 4 - BORROWINGS (CONTINUED)

In October  2005,  the Company sold an additional  $2,500,000 of 7%  convertible
debentures to certain  investors.  The debentures are  convertible  into Company
common  stock at $0.40 per  share at the  option  of the note  holders  and bear
interest at 7% per annum, payable quarterly. The debentures have a term of three
years with  principal  due in full at  maturity.  As a further  inducement,  the
Company granted the holders of the convertible debentures short-term warrants to
purchase 3.125 million shares of its common stock,  expiring  November 2006, and
warrants to purchase 3.125 million shares of its common stock,  expiring October
2010. All warrants are exercisable at $0.40 per share.

In November  2005,  the Company sold an additional  $2,000,000 of 7% convertible
debentures to certain  investors.  The  debentures  are  convertible  to Company
common  stock at $0.40 per  share at the  option  of the note  holders  and bear
interest at 7% per annum, payable quarterly. The debentures have a term of three
years with  principal  due in full at  maturity.  As a further  inducement,  the
Company granted the holders of the convertible debentures short-term warrants to
purchase 2.5 million  shares of its common stock  expiring  December 4, 2006 and
warrants to purchase 2.5 million shares of its common stock expiring November 4,
2010. All warrants are exercisable at $0.40 per share.

The   convertible   debentures  are  deemed   "conventional   convertible   debt
instruments"  in  accordance  with EITF  05-02 and EITF  00-19,  Accounting  for
Derivative  Financial  Instruments  Indexed  to, and  Potentially  Settled in, a
Company's Own Stock, with respect to (i)  contingencies  related to the exercise
of the conversion  option and (ii) convertible  preferred stock with a mandatory
redemption date. The relative fair values of the warrants issued were determined
using the  Black-Scholes  option-pricing  model.  The relative fair value of the
warrants was recorded as a note  discount and will be amortized to interest over
the life of the  debentures.  The  application  of the  provisions of EITF 98-5,
"Accounting for Convertible  Securities with Beneficial  Conversion  Features or
Contingently  Adjustable  Conversion  Ratios," and EITF 00-27,  "Application  of
Issue 98-5 to Certain Convertible Instruments" resulted in the calculation of an
embedded beneficial conversion feature in the convertible  debentures,  which is
required to be treated as an additional discount to the convertible  debentures.
The value of the beneficial  conversion feature was limited to the relative fair
value of the debentures,  and will be amortized to interest over the life of the
debentures.



                                      F-20
<PAGE>




NOTE 4 - BORROWINGS (CONTINUED)

At December 31, 2005 the  outstanding  principal  balance of the 7%  convertible
debentures  was  $7,000,000  and the  unamortized  note discount and  beneficial
conversion features were as follows:

Relative fair value of debt:
Convertible debentures - August 2005                    $ 1,418,862
Convertible debentures - October 2005                     1,504,037
Convertible debentures - November 2005                    1,251,733
                                                       -------------
Total relative fair value of debt                       $ 4,174,632
                                                       =============
Relative fair value of warrants
Convertible debentures - August 2005                    $ 1,081,138
Convertible debentures - October 2005                       995,963
Convertible debentures - November 2005                      748,267
                                                       -------------
Total relative fair value of warrants                     2,825,368
Less accumulated amortization                             (217,028)
                                                       -------------
Note discount, net                                      $ 2,608,340
                                                       =============
Beneficial conversion features
Convertible debentures - August 2005                    $ 1,418,862
Convertible debentures - October 2005                     1,487,797
Convertible debentures - November 2005                      998,267
                                                       -------------
Total beneficial conversion features                      3,904,926
Less accumulated amortization                             (295,767)
                                                       -------------
Beneficial conversion features, net                     $ 3,609,159
                                                       =============

REVOLVING LINE:

In August  2005,  the  Company  entered  into a  $3,000,000  revolving  combined
inventory financing and international factoring agreement (the "Revolving Line")
with a  financial  institution.  Under the terms of the  agreement,  the Company
agreed to pay interest at the rate of 12% per annum on inventory  financings and
24% per annum on  factoring  related  borrowings  under  the  line.  The loan is
secured  by a lien on the  financed  inventory  and  receivables.  As a  further
inducement,  the  Company  also  agreed to grant  the  financial  institution  a
warrant, which included piggyback registration rights, for 576,923 shares of its
common stock at an exercise price of $0.52 per share. The warrant has a two year
term. The fair value  attributable  to the warrant of $120,608 was recorded as a
note  discount  and will be amortized  to interest  over a one year  period.  At
December 31, 2005 the  outstanding  principal  balance under this  agreement was
$2,285,650 and the unamortized note discount was $80,405.




                                      F-21
<PAGE>




NOTE 4 - BORROWINGS (CONTINUED)

SENIOR SECURED DEBENTURES

In January 2001, the Financial  Accounting  Standards Board Emerging Issues Task
Force issued EITF 00-27,  "Application of Issue No. 98-5 to Certain  Convertible
Instruments".  This pronouncement requires the use of the intrinsic value method
for  recognition of the detachable and imbedded  equity  features  included with
indebtedness,  and  requires  amortization  of the  amount  associated  with the
convertibility  feature  over the life of the debt  instrument  rather  than the
period for which the instrument first becomes convertible.

In August 2005, the Company sold $2,000,000 of 10% senior secured  debentures to
certain  investors.  The  debentures  bear  interest  at 10% per annum,  payable
monthly,  and have three year  term.  Principal  in the amount of $27,778 of the
original  principal is due monthly,  with the remaining balance due at maturity.
The  debentures  are secured by a blanket  security  interest  in the  Company's
assets. In addition,  the Company issued 1,600,000 shares of its common stock to
the holders of the debentures as security for the debentures,  which the Company
estimated had a fair market value of $0.55 per share.  As a further  inducement,
the  Company  granted  the holders of the  debentures  warrants to purchase  2.5
million  shares of its common stock at an exercise price of $0.40 per share with
an expiration  date of August 31, 2010. The relative fair values of the warrants
issued were determined using the Black-Scholes option-pricing model. The Company
determined  that the relative fair value of the debt and warrants was $1,361,266
and  $638,734,  respectively.  The fair value of the  warrants was recorded as a
note discount and will be amortized to interest over the life of the debentures.
At December  31, 2005 the  outstanding  principal  balance  under the 10% senior
secured  debentures  was  $1,888,889  and  the  unamortized  note  discount  was
$546,928.

OTHER NOTES:

The Company converted an outstanding  accounts payable balance into an unsecured
note during fiscal year 2003.  This  unsecured  note accrues  interest at 5%. At
December 31, 2005, the principal balance outstanding under this note was $5,144.


NOTE 5 - CAPITAL LEASE

CAPITAL LEASE

Capital lease obligations were as follows:

                                                         THREE MONTHS ENDED
                                                             DECEMBER 31,
                                                                 2005
                                                        --------------------
Capital lease for equipment                                         $ 11,660

Less current portion                                                  (2,028)
                                                        --------------------
Capital lease obligations, net of current portion                   $  9,632
                                                        ====================

During the year ended September 30, 2005, the Company acquired  equipment from a
vendor,  to be paid in monthly  installments  through November 2010. At December
31, 2005 the outstanding  principal  balance under the lease is $11,660 of which
$2,028 is classified as current and $9,632 as long term.


                                      F-22
<PAGE>


NOTE 6 - OBLIGATION FOR LEASED EQUIPMENT


The Company  delivered one of its Mobetron's to a hospital in the Netherlands in
November 2003. As an equipment  supplier,  the Company received  proceeds in the
amount of $1,230,685  as sale price of the equipment  from a third party leasing
company,  who in turn leased the equipment to the hospital pursuant to a seventy
month lease (See Note 1, Lease Revenue and Leasing Transactions).

Because of the potential  reimbursement to the hospital at the 18th month of the
lease, the Company retains substantial risk of ownership in the leased property,
and the transaction has therefore been accounted for in accordance with SFAS 13,
"Accounting for Leases", specifically paragraphs 19, 21, and 22.

Accordingly,  the Company  recorded the entire  $1,230,685 of proceeds  received
from the leasing company as obligation for leased equipment,  a liability on its
balance sheet and accounted  for the item as borrowing.  In accordance  with APB
Opinion 21,  "Interest on  Receivables  and Payables"  paragraphs 13 and 14, the
Company  determined an interest rate for the  obligation of 14.5% based on other
debt arrangements  entered into by the Company at dates closest to the inception
of the obligation  for leased  equipment.  Further,  although the Company is not
entitled  to the cash rental  payments,  the Company  recognized  rents  revenue
totaling  $62,168 and $62,168 for the three months  ended  December 31, 2005 and
December  31, 2004  respectively.  A portion of each month's  rental  revenue is
recorded as interest and included in cost of revenue with the remainder recorded
as a reduction in obligation for leased equipment.

Prior to May 31,  2005,  the  hospital  notified the Company that it intended to
exercise  its  prepayment  option,  however  the  Company  agreed to extend  its
reimbursement option from May 31, 2005 until January 1, 2006 and agreed to a new
reimbursement  amount.  Pursuant  to the  reimbursement  option  extension,  the
Company continued to recognize revenue,  expense and reduction on obligation for
leased equipment on this transaction,  as described above. At December 31, 2005,
the obligation for leased equipment was $1,008,393.  Subsequently,  the hospital
exercised its prepayment option on January 1, 2006.

NOTE 7 - COMMON STOCK

SHARES RESERVED FOR FUTURE ISSUANCE:

The Company has reserved shares of common stock for future issuance as follows:


<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                            2005
                                                                    ---------------------
<S>                                                                    <C>
            2005 Equity Incentive Plan                                     3,597,000
            Common stock warrants                                         23,023,174
                                                                    ---------------------
            Total                                                         26,620,174
                                                                    =====================
</TABLE>


CONVERSION OF NOTES PAYABLE, RELATED PARTIES INTO COMMON STOCK:

During the three months ended  December  31, 2005,  one holder of the  Company's
notes  payable to related  parties  elected to convert an  aggregate of $183,967
principal  amount of the notes and $66,033 of related  interest into 317,185 and
113,849 shares of the Company's common stock, respectively.



                                      F-23
<PAGE>




NOTE 8 - STOCK OPTIONS

In 1995,  the  Company  adopted  the 1995 Stock  Option  Plan (the  "Plan")  and
reserved 2,400,000 shares of common stock for issuance under the Plan.

On December 7, 2005, the Company's Board of Directors voted to amend and restate
the  Company's  1995 Stock  Option  Plan to among  other  things,  a) extend the
expiration  date of the Plan to December 7, 2015; b) change the name of the plan
to the "2005 Equity  Incentive Plan" (the "New Plan") and c) increase the number
of shares reserved under the New Plan from 2,400,000 shares to 4,000,000 shares.

Under the New Plan, incentive options to purchase the Company's common stock may
be granted to  employees  at prices not lower than fair market value at the date
of grant as  determined  by the Board of  Directors.  In addition,  incentive or
non-statutory  options  may be granted to  persons  owning  more than 10% of the
voting  power of all  classes  of stock at prices no lower than 110% of the fair
market value at the date of grant as  determined  by options (no longer than ten
years from the date of grant, five years in certain instances).  Options granted
generally vest at a rate of 33% per year.

Activity under the Plan is as follows:


<TABLE>
<CAPTION>
                                                                             WEIGHTED
                                          SHARES                              AVERAGE
                                        AVAILABLE         NUMBER OF          EXERCISE
                                        FOR GRANT          SHARES              PRICE          AGGREGATE PRICE
                                       -------------    --------------    ----------------    ----------------
<S>                                     <C>               <C>                  <C>                <C>
Balance at September 30, 2004             1,010,500         1,016,500            $   0.72           $ 729,450
Options granted                           (116,000)           116,000                1.25             145,000
Options exercised                                 -                 -                   -                   -
Options cancelled                             5,000             (5000)              (1.25)             (6,250)
Option expired                                    -                 -                   -                   -
                                       -------------    --------------    ----------------    ----------------
Balance at September 30, 2005               899,500         1,127,500                0.77             868,200
Options authorized                        1,600,000                 -                   -                   -
Options granted                            (602,000)          602,000                0.58             349,160
Options exercised                                 -           (30,000)              (0.10)             (3,000)
Options cancelled                                 -                 -                   -                   -
Options expired                                   -                 -                   -                   -
                                       -------------    --------------    ----------------    ----------------
Balance at December 31, 2005              1,897,500         1,699,500             $  0.72          $1,214,360
                                       =============    ==============    ================    ================
</TABLE>


At December 31, 2005 and 2004,  options to purchase 1,147,152 and 989,722 shares
of common stock were outstanding and exercisable respectively.

During the three months ended  December  31, 2005 and 2004,  the Company  issued
options to purchase 597,000 and 88,500 shares of common stock  respectively,  to
its employees and directors.  The fair value of each option grant is computed on
the date of grant using  intrinsic  value method in accordance  with APB Opinion
No. 25, "Accounting for Stock Issued to Employees".

During the three months ended  December  31, 2005 and 2004,  the Company  issued
options  to  purchase  5,000 and  27,500  shares of  common  stock for  services
rendered by non-employees respectively.



                                      F-24
<PAGE>




NOTE 8 - STOCK OPTIONS (CONTINUED)

             Total options  under the Plan at September 30, 2005,  comprised the
following:


<TABLE>
<CAPTION>
                                      OPTIONS                 WEIGHTED                OPTIONS
                                    OUTSTANDING               AVERAGE               EXERCISABLE
               OPTION                  AS OF                 REMAINING                 AS OF
              EXERCISE              SEPTEMBER 30,            CONTRACTUAL           SEPTEMBER 30,
                PRICE                   2005                LIFE (YEARS)                2005
            ---------------    ----------------------     -----------------    -------------------
<S>                                  <C>                     <C>                    <C>
                $0.100                  30,000                  0.12                   30,000
                 0.500                  97,000                  2.87                   97,000
                 0.550                 300,000                  2.20                  300,000
                 0.800                 386,500                  6.53                  386,250
                 0.880                 120,000                  5.55                  120,000
                 1.250                 164,000                  8.63                   98,583
                 1.375                  30,000                  8.51                   15,000
                               ----------------------                          -------------------
                Total                1,127,500                                      1,046,833
                               ======================                          ===================
</TABLE>

Total options under the Plan at December 31, 2005, comprised the following:


<TABLE>
<CAPTION>
                                      NUMBER                  WEIGHTED                NUMBER
                                    OUTSTANDING               AVERAGE               EXERCISABLE
               OPTION                  AS OF                 REMAINING                 AS OF
              EXERCISE              DECEMBER 31,             CONTRACTUAL           DECEMBER 31,
                PRICE                  2005                 LIFE (YEARS)              2005
            ---------------    ----------------------     -----------------    -------------------
<S>                              <C>                        <C>                  <C>
                $0.100                      -                      -                        -
                 0.500                 97,000                   2.62                  97,000
                 0.550                300,000                   1.95                 300,000
                 0.580                602,000                   9.94                 117,194
                 0.800                386,500                   6.28                 386,500
                 0.880                120,000                   5.30                 120,000
                 1.250                164,000                   8.38                 108,958
                 1.375                 30,000                   8.25                  17,500
                               --------------------                            ------------------
                Total               1,699,500                                      1,147,152
                               ====================                            ==================
</TABLE>



                                      F-25
<PAGE>



NOTE 9 - WARRANTS

The following warrants are each exercisable into one share of common stock:


<TABLE>
<CAPTION>
                                                                         WEIGHTED             AGGREGATE
                                              NUMBER OF SHARES        AVERAGE PRICE             PRICE
                                             -------------------     -----------------     ----------------
<S>                                                     <C>                 <C>                <C>
 Balance at September 30, 2004                          863,091                $ 1.49         $  1,287,500
 Warrants granted                                    10,222,583                  0.42            4,250,200
 Warrants exercised                                           -                     -                    -
 Warrants cancelled                                           -                     -                    -
 Warrants repriced                                     (119,100)                (1.25)            (148,875)
 Warrants repriced                                      119,100                  0.70               83,370
 Warrants expired                                      (100,000)                (2.00)            (200,000)
                                             -------------------     -----------------     ----------------
 Balance at September 30, 2005                                                   0.48            5,272,195
                                                     10,985,674
 Warrants granted                                    12,037,500                  0.40            4,815,000
 Warrants exercised                                           -                     -                    -
 Warrants cancelled                                           -                     -                    -
 Warrants expired                                             -                     -                    -
                                             -------------------     -----------------     ----------------
 Balance at December 31, 2005                        23,023,174                $ 0.44         $ 10,087,195
                                             ===================     =================     ================

The common stock warrants are comprised of the following:

                                               NUMBER           WEIGHTED
                                            OUTSTANDING         AVERAGE
                                               AS OF           REMAINING
                     EXERCISE               SEPTEMBER 30,     CONTRACTUAL
                       PRICE                    2005          LIFE (YEARS)
                 --------------------    ----------------   ------------------
                       $0.400                  9,537,500           3.64
                        0.520                    576,923           1.88
                        0.700                    119,100           4.92
                        1.250                    583,060           1.85
                        1.375                     69,091           1.42
                        2.500                    100,000           0.50
                                         ----------------
                        Total                 10,985,674
                                         ================

                                               NUMBER           WEIGHTED
                                            OUTSTANDING         AVERAGE
                                               AS OF           REMAINING
                     EXERCISE               DECEMBER 31,      CONTRACTUAL
                       PRICE                    2005          LIFE (YEARS)
                 --------------------    ----------------   ------------------
                       $0.400                 21,575,000           3.17
                        0.520                    576,923           1.62
                        0.700                    119,100           4.67
                        1.250                    583,060           1.59
                        1.375                     69,091           1.16
                        2.500                    100,000           0.25
                                         ----------------
                        Total                 23,023,174
                                         ================
</TABLE>






                                      F-26
<PAGE>





NOTE 9 - WARRANTS (CONTINUED)

During the following  fiscal years,  the numbers of warrants to purchase  common
stock which will expire in the next five years if unexercised are:

                      FISCAL YEAR
                        ENDING
                     SEPTEMBER 30,             NUMBER
                 --------------------     ----------------
                        2006                    3,325,000
                        2007                    6,539,974
                        2008                       44,100
                        2009                      150,000
                        2010                    6,551,600
                                          ================
                                               16,610,674
                                          ================

During the three months  ended  December  31,  2005,  the Company  issued to the
holders of its 7% convertible  debentures  short-term warrants to purchase 5.625
million shares of its common stock,  with expiration  dates between November 25,
2006 and December 4th, 2006 and warrants to purchase 5.625 million shares of its
common stock,  with expiration  dates between October 25, 2010 and November 4th,
2010. All warrants are exercisable at $0.40 per share. The debentures are deemed
"conventional  convertible  debt  instruments" in accordance with EITF 05-02 and
EITF 00-19,  Accounting for  Derivative  Financial  Instruments  Indexed to, and
Potentially Settled in, a Company's Own Stock, with respect to (i) contingencies
related to the exercise of the conversion option and (ii) convertible  preferred
stock with a mandatory redemption date. The Company determined that the relative
fair value of the debentures  and the warrants was  $2,755,770  and  $1,744,230,
respectively. The fair value of the warrants was recorded as a note discount and
will be amortized to interest over the life of the 7% convertible debentures. At
December 31, 2005 the unamortized note discount was $1,647,328.

During the three months ended  December 31, 2005,  the Company  issued five year
warrants  to purchase  787,500  shares of common  stock at an exercise  price of
$0.40 per share for services  rendered by a financial advisor in connection with
sales of the 7%  convertible  debentures  (see Note 4).  The fair value of these
warrants of $255,085 was  capitalized  as debt issuance cost and amortized  over
the term of the debentures.  At December 31, 2005 the unamortized  debt issuance
cost was $240,913.

The  values of the  warrants  issued  were  determined  using the  Black-Scholes
option-pricing model based on the following assumptions:


                                               THREE MONTHS ENDED
                                                  DECEMBER 31,
                                                      2005
                                            -------------------------
Expected life (in years)                           1.08 to 5
Risk-free interest rate                          4.26% to 4.56%
Expected volatility                             77.39% to 79.08%
Expected dividend yield                                -



                                      F-27
<PAGE>


NOTE 10 - COMMITMENTS AND CONTENGENCIES

The Company  leases  offices and equipment  under  non-cancelable  operating and
capital leases with various  expiration dates through 2011. Rent expense for the
three  months  ended  December  31,  2005  and 2004  was $  37,662  and  $25,957
respectively.  The terms of the facility lease provide for rental  payments on a
graduated  scale. The Company  recognizes rent expense on a straight-line  basis
over the lease period, and has accrued for rent expense incurred but not paid.

Future minimum lease payments under non-cancelable  operating and capital leases
are as follows:

<TABLE>
<CAPTION>

                                                                    CAPITAL            OPERATING
                  YEAR ENDED SEPTEMBER 30,                           LEASES              LEASES
--------------------------------------------------------------    -------------      ---------------
<S>                                                                <C>                <C>
                            2006                                       $ 1,934           $  165,760
                            2007                                         2,579              233,796
                            2008                                         2,579              237,625
                            2009                                         2,579              244,754
                            2010                                         2,579              233,838
                            2011                                           431                    -
                                                                  -------------      ---------------
Total minimum lease payments                                            12,681           $1,115,773
                                                                                     ===============

Less: Amount representing interest                                      (1,021)

Present value of minimum lease payments                                 11,660
Less: Current portion                                                   (2,028)
                                                                  -------------
Obligations under capital lease, net of current portion                $ 9,632
                                                                  =============
</TABLE>


NOTE 11 - OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Net  revenues  by  geographic  area  are  presented  based  upon the  region  of
destination. No other foreign region represented 10% or more of net revenues for
any of the periods presented. Net revenues by geographic area were as follows:


                                             THREE MONTHS ENDED
                                                DECEMBER 31,
                                  ------------------------------------------
                                        2005                    2004
                                  ------------------     -------------------

            Europe                     $  1,074,433            $  1,049,833
            United States                    58,572               1,311,131
                                  ------------------     -------------------
            Total Revenue              $  1,133,005            $  2,360,964
                                  ==================     ===================



                                      F-28
<PAGE>




NOTE 11 - OPERATING SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)

Long lived assets includes property and equipment, intangible assets, and leased
equipment each net of applicable  depreciation or  amortization  residing in the
following geographic regions as of December 31, 2005.



            Europe                           $   631,114
            United States                        151,850
                                       ------------------
            Total                            $   782,964
                                       ==================


NOTE 12 - SUBSEQUENT EVENTS


In  January  2006,  the  Company's  customer  in the  Netherlands  (see  Note 6)
exercised its prepayment  option under its lease for the Company's  equipment by
paying certain sums to the third party leasing company.  As per prior agreement,
the Company is obligated to reimburse the customer a net amount of approximately
$970,000.


In January  2006,  the  Company  repaid  the  following  amounts of  principals,
$487,749 due under the Revolving Line,  $27,778 due under the 10% senior secured
debentures, $5,703 due under notes to related parties and $181 due under capital
leases.  Additionally,  the Company received proceeds of $998,290 for borrowings
under the Revolving Line.

In January 2006,  the Company did not meet the deadlines for filing of Form SB-2
with  the  SEC as  required  by the  terms  of the  agreements  relating  to its
convertible  and senior  debentures  and may be  subject  to certain  liquidated
damages as defined in those agreements. The Company and debenture holders are in
discussion regarding a settlement of the damages.




                                      F-29