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 June 30, 2007

[   ]   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: 408-636-1020


              (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: 26,477,172 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]

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<S>  <C>                                                                                                         <C>
                           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..............................................................................31

PART II - OTHER INFORMATION......................................................................................32

   Item 1.  Legal Proceedings....................................................................................32

   Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..........................................32

   Item 3.  Defaults upon Senior Securities......................................................................33

   Item 4.  Submission of Matters to a Vote of Security Holders..................................................33

   Item 5.  Other Information....................................................................................33

   Item 6.  Exhibits.............................................................................................33


SIGNATURES.......................................................................................................34


INDEX TO FINANCIAL STATEMENTS...................................................................................Q-1
</TABLE>

                                       2
<PAGE>
                         PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

     The accompanying unaudited financial statements, listed on the index to
financial statements on page Q-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 and nine months ended June 30, 2007 are not
necessarily indicative of the results that can be expected for the year ending
September 30, 2007.

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, 2006
and 2005 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 a result of the merger, we acquired all of the assets and assumed all of the
obligations of Intraop Medical, Inc. Such assets consisted of, without
limitation, 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 Mobetron, Intraop Medical, Inc.'s
product, and a certain medical device approval license).

                                       3
<PAGE>

     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 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.

     As a result of the merger with Intraop Medical, Inc., we now manufacture,
market and distribute Mobetron, a proprietary mobile electron-beam cancer
treatment system designed for use in IOERT. The IOERT procedure involves the
direct application of radiation to a tumor and/or tumor bed while a patient is
undergoing surgery for cancer. Mobetron is designed to be used without requiring
additional shielding in the operating room, unlike conventional equipment
adapted for the IOERT procedure. Mobetron system can be moved from operating
room to operating room, thereby increasing its utilization and cost
effectiveness. In addition to IOERT, 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 shipment, provided
that any remaining obligations are inconsequential or perfunctory and collection
of the receivable is deemed probable. 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, 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
our sales staff including travel expenses, promotion materials, conferences and
seminars. Research and development expenses consist primarily of compensation
and related direct costs for our employees and an allocation of research and
development-related overhead expenses. These amounts have been primarily
invested in development of Mobetron and have been expensed as they have been
incurred.

                                       4
<PAGE>

     As Mobetron, our primary product, has a list price of approximately $1.8
million, and given our current low unit sales volume, our historical results may
vary significantly from period to period. For example, the sale of even one
additional Mobetron in any given period may substantially alter the sales and
cost numbers for that period, while the timing of such a sale often cannot be
predicted with 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.

     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 prior to our merger, at which time their was no public market for shares,
was based on estimates of fair value made by our Board of Directors.

     Additionally, we entered into registration rights agreements pursuant to
our issuance of our senior and convertible debentures and warrants on August 31,
2005 and October 25, 2005. Pursuant to the registration rights agreements, we
agreed to file a resale registration statement covering the resale of the shares
issuable to the investors upon the exercise of their warrants and conversion of
their debentures by September 30, 2005 and November 24, 2005, respectively. At
inception, the registration rights agreements required us to pay monthly
liquidated damages if:

     o    a registration statement was not filed on or prior to September 30,
          2005 and November 24, 2005, respectively, or
     o    we failed to file with the Securities and Exchange Commission a
          request for acceleration in accordance with Rule 461 promulgated under
          the Securities Act, within five trading days of the date that we are
          notified by the Commission that a registration statement will not be
          "reviewed," or not subject to further review, or

                                       5
<PAGE>
     o    prior to its effectiveness date, we failed to file a pre-effective
          amendment and otherwise respond in writing to comments made by the
          Commission in respect of such registration statement within 10
          calendar days after the receipt of comments by or notice from the
          Commission that such amendment is required for a registration
          statement to be declared effective, or
     o    a registration statement filed or required to be filed hereunder was
          not declared effective by the Commission by December 29, 2005 and
          February 22, 2006, respectively, or
     o    after December 29, 2005 and February 22, 2006, respectively, a
          registration statement ceases for any reason to remain continuously
          effective as to all registrable securities for which it is required to
          be effective, or the investors are not permitted to utilize the
          prospectus therein to resell such registrable securities for 10
          consecutive calendar days but no more than an aggregate of 15 calendar
          days during any 12-month period.

     The amount of monthly liquidated damages equals 2.0% of the aggregate
purchase price paid by the investors for any registrable securities held by the
investors. Late payment beyond seven days is subject to interest at an annual
rate of 18%.

     We evaluated the liquidated damages feature of the registration rights
agreements in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"). The liquidated damages qualify as embedded derivative instruments
at issuance and, because they do not qualify for any scope exception within SFAS
133, they were required by SFAS 133 to be recorded as derivative financial
instruments. Further, in accordance with EITF 05-04, "The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No.
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", we also evaluated whether the
registration rights agreements, the senior and convertible debentures, and
associated warrants should be combined into and accounted for as a single unit
or accounted for as separate financial agreements. In considering the
appropriate treatment of these instruments, we observed that:

     o    Although entered into contemporaneously, the debentures, warrants and
          registration rights agreements are nevertheless separate legal
          agreements.

     o    Payment of the liquidated damages penalties under the registration
          rights agreements does not alter the investors' rights under either
          the warrant or debenture agreements. The debentures and warrants have
          values which are based on their interest rate and the relation between
          their conversion price or exercise price and the value of our common
          stock. This value is independent of any payment for liquidated damages
          under the registration rights agreements, which is based on how long
          the shares remain unregistered.

     o    The various agreements do not relate to the same risk. The risk
          inherent in the debentures relates to our ability to repay these
          instruments as and when they come due or to the extent converted into
          common stock, to the price of our common stock. The warrants similarly
          bear risk related to the value of our common stock. The liquidated
          damages penalty under the registration rights agreements relates to
          the risk of IntraOp filing a registration statement and having it
          declared effective.

     Thus, in light of the above facts and circumstances and in accordance with
guidance in EITF 05-4, View C, we evaluated and treated the registration rights
agreements, senior and convertible debentures and associated warrants as
separate free standing agreements.

                                       6
<PAGE>

     Upon execution, the registration rights agreements had no initial fair
value. In subsequent periods, the carrying value of the derivative financial
instrument related to the registration rights agreements will be adjusted to its
fair value at each balance sheet date and any change since the prior balance
sheet date will be recognized as a component of other income/(expense).

     The estimated fair value of the registration rights agreements was
determined using the discounted value of the expected future cash flows. At
September 30, 2005 and November 24, 2005, we were not able to file a
registration statement with the SEC or have it declared effective as required by
the dates specified in the registration rights agreements. However, in January
2006, we obtained an amendment to the registration rights agreements to extend
the required filing date of our initial registration statement to January 27,
2006, a deadline that we met, and to extend the required effectiveness date of
that same initial registration statement to March 31, 2006, a deadline we did
not meet, and to waive all amounts potentially due under the liquidated damages
clause which would have been due but for the waiver. On April 18, 2006 we
obtained a further amendment to the registration rights agreements to further
extend the required effectiveness date of our initial registration statement to
May 15, 2006 for investors subject to the August 31, 2005 registration rights
agreements and extend to May 30, 2006 the date on which we must have an
effective registration statement for 50% of the registrable shares for investors
who were signatory to the October 25, 2005 registration rights agreements, both
deadlines we met. On June 19, 2006, we met the requirements to have an effective
registration statement for all shares required to be registered pursuant to the
registrations right agreements. We believe that, in the future, we will be able
to meet the registration requirements of the registration rights agreements and
that in the event we cannot, and assuming we are making reasonable efforts to
file and have a registration statement declared effective, the holders of the
debentures will waive the liquidated damages required under the registration
rights agreements. As a result, at June 30, 2007, we assigned no value to the
potential liquidated damages under the registration rights agreements.

     EITF 05-04 offers multiple views on the question of whether a registration
rights agreement should be combined as a unit with the underlying financial
instruments and be evaluated as a single instrument. EITF 05-04 does not reach a
consensus on this question and allows for treatment as a combined unit (Views A
and B) as well as separate freestanding financial instruments (View C). On
September 15, 2005, the FASB staff postponed further discussion of EITF 05-04.
As of June 30, 2007 the FASB has still not rescheduled EITF 05-04 for
discussion.

     In conjunction with our issuance of senior and convertible debentures and
the related warrants and registration rights, we adopted View C of EITF 05-04.
Accordingly, the registration rights agreements, the warrants associated with
the senior and convertible debentures, the debentures themselves, as well as
certain features of the debentures were evaluated as stand alone financial
instruments. This treatment resulted in classification of the warrants and
certain features of the debentures as equity while the registration rights
agreements and other features of the debentures were treated as derivative
liabilities. Derivative liability treatment requires adjusting the carrying
value of the instrument to its fair value at each balance sheet date and
recognizing any change since the prior balance sheet date as a component of
other income / (expense). The recorded value of such derivative liabilities can
fluctuate significantly based on fluctuations of the market value of our
underlying securities, as well as on the volatility of our stock price during
the term used for observation and the term remaining for the underlying
financial instruments. We believe that should the FASB staff reach a consensus
on EITF 05-04 and select combined unit treatment (View A or B), the debt
features of the debentures and associated warrants previously classified as
equity will have to be evaluated as a combined unit with the registration rights
agreements. This combination will result in these instruments being treated as
derivative liabilities requiring periodic reevaluation of fair value with
potentially significant fluctuation in fair value from period to period.
Accordingly, this consensus could have a significant effect on our financial
statements.

                                       7
<PAGE>

Share-based Compensation Expense

     Effective January 1, 2006, we adopted the modified prospective transition
method under Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, or SFAS 123(R), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors, including stock options issued under our 2005 Equity
Incentive Plan. Our financial statements as of June 30, 2007 and for the three
and nine months ended June 30, 2007 reflect the effect of SFAS 123(R). In
accordance with the modified prospective transition method, our financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R). Share-based compensation expense recognized
is based on the value of the portion of share-based payment awards that is
ultimately expected to vest. Share-based compensation expense recognized in our
Condensed Consolidated Statements of Operations (Unaudited) during the three and
nine months ended June 30, 2007, included compensation expense for share-based
payment awards granted prior to, but not yet vested as of, December 31, 2005
based on the grant date fair value estimated in accordance with the pro forma
provisions of SFAS 123 and compensation expense for the share-based payment
awards granted subsequent to January 1, 2006 based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). In conjunction with
the adoption of SFAS 123(R), we elected to attribute the value of share-based
compensation to expense using the straight-line attribution method. Share-based
compensation expense related to stock options was $17,930 and $65,935 before
taxes on earnings, respectively, for the three and nine months ended June 30,
2007. During the three and nine months ended June 30, 2007, there was no
share-based compensation expense related to stock options recognized under the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, or APB 25. See Note 7 to the
Unaudited Condensed Consolidated Financial Statements for additional
information.

     Upon adoption of SFAS 123(R), we elected to value our share-based payment
awards granted after January 1, 2006 using the Black-Scholes option-pricing
model, or the Black-Scholes model, which we previously used for the pro forma
information required under SFAS 123. For additional information, see Notes 1 and
7 to the Unaudited Condensed Consolidated Financial Statements.

     The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
The Black-Scholes model requires the input of certain assumptions. Our options
have characteristics significantly different from those of traded options, and
changes in the assumptions can materially affect the fair value estimates. The
determination of the fair value of share-based payment awards on the date of
grant using the Black-Scholes model is affected by our stock price as well as
the input of other subjective assumptions. These assumptions include, but are
not limited to the expected term of stock options and our expected stock price
volatility over the term of the awards.

     The expected term of stock options represents the weighted-average period
the stock options are expected to remain outstanding. The expected term is based
on the observed and expected time to post-vesting exercise and forfeitures of
option by our employees. Upon the adoption of SFAS 123(R), we determined the
expected term of stock options using the simplified method as allowed under
SAB107. Prior to January 1, 2006, we determined the expected term of stock
options based on the option vesting period. Upon adoption of SFAS 123(R), we
used historical volatility measured over a period equal to the option expected
terms in deriving its expected volatility assumption as allowed under SFAS
123(R) and SAB 107. Prior to January 1, 2006, we had also used our historical
stock price volatility in accordance with SFAS 123 for purposes of our pro forma
information. The risk-free interest rate assumption is based upon observed
interest rates appropriate for the term of our stock options. The dividend yield
assumption is based on our history and expectation of dividend payouts.

                                       8
<PAGE>

     As share-based compensation expense recognized in the Unaudited
Consolidated Statements of Operations for the three and nine months ended June
30, 2007, is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were estimated based on our
historical experience. In our pro-forma information required under SFAS 123 for
the periods prior to January 1, 2006, we accounted for forfeitures as they
occurred. If factors change and we employ different assumptions in the
application of SFAS 123(R) in future periods, the compensation expense that we
record under SFAS 123(R) may differ significantly from what we have recorded in
the current period.

     As of June 30, 2007, there was $34,813 of total unrecognized compensation
expense related to stock options granted under our 2005 Equity Incentive Plan.
This unrecognized compensation expense is expected to be recognized over a
weighted average period of 0.86 years.




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                                       9
<PAGE>

Results of Operation for the three months ended June 30, 2007 compared to the
three months ended June 30, 2006.

Revenue, Costs of Revenue and Gross Margins

                                 Three months
                                 ended June 30,
Revenue                             2007           2006         Change
----------------------------------------------------------------------
  Product sales                  992,509         25,100        967,409
  Service                         96,176         60,319         35,857
----------------------------------------------------------------------
Total Revenue                  1,088,685         85,419      1,003,266
----------------------------------------------------------------------

Costs of Revenue
----------------------------------------------------------------------
  Product sales                  911,183         69,797        841,386
  Service                         38,608         27,314         11,294
----------------------------------------------------------------------
Total Costs of Revenue           949,791         97,111        852,680
----------------------------------------------------------------------

Product Sales

     Product sales revenue, which includes systems and accessories sales, but
excludes parts sold as part of our service business, included the sale of our
first Mobetron to China in the three months ended June 30, 2007 as compared to
sales of accessories only in the three months ended June 30, 2006. As an
introductory Mobetron sale into the Chinese market under a one-time, legacy
pricing arrangement, the revenues and gross margin of $81,326 on product sales
in the three months ended June 30, 2007 were lower than what we anticipate from
future Mobetron sales to China or our other domestic or foreign customers.
Regardless, we believe that Chinese market holds tremendous potential for us as
the unit was delivered to the prestigious Chinese Academy of Medical Sciences in
Beijing where the initial use of Mobetron will be for the treatment of lung
cancer. Not only could this unit bring great benefit to the Center's over 8,000
annual lung cancer patients, but the research and experience gained by the
Chinese in combating this devastating disease could help further the application
of IOERT to lung cancer in other markets.

Service

     The majority of service revenue for the three months ended June 30, 2007
came from six annual service contracts, with the balance from as-requested
service calls and parts sales to customers. In the three months ended June 30,
2006, we had an increase to five customers with annual service contracts with us
versus three customers with such contacts at the beginning of that three month
period. In addition, an expensive, one-time repair under one of those contracts
added over $100,000 of service revenue and a corresponding amount of expense
during the three months ended June 30, 2006. We expect service revenue to grow
in relative proportion to U.S. based sales and to a lesser extent overseas
sales. Overseas distributors are generally responsible for servicing their own
customers with parts supplied by us, though we also recently obtained direct
contracts with a few of their customers in Europe, which revenue is included in
the three months ended June 30, 2007.

                                       10
<PAGE>

Operating Expenses

     A comparison of our operating expenses for the three months ended June 30,
2007 and June 30, 2006 are as follows:

                                  Three months
                                 ended June 30,
                                    2007           2006         Change   Percent
--------------------------------------------------------------------------------
Research and Development         169,045        164,073          4,972        3%
General & Administrative         640,907        784,474       (143,567)     -18%
Sales and Marketing              508,260        171,085        337,175      197%
--------------------------------------------------------------------------------
Total Operating Expenses       1,318,212      1,119,632        198,580       18%
================================================================================

     Research and development expenses increased by approximately 3% in the
three months ended June 30, 2007, in comparison to three months ended June 30,
2006, as we completed work on the various cost reduction and enhancement
projects for Mobetron. Our recent research and development in the area included
the production cut-in of our newly redesigned modulator which will decrease
build cost and increase reliability of this Mobetron component, and the addition
of a motorized transport for the Mobetron which allows for easier movement of
Mobetron between operating rooms within a facility. Both of these projects were
accomplished largely through the use of contract engineering services supplied
by a Mobetron parts vendor, allowing us to continue to keep our research and
development staff and overhead as low as possible. Regardless, we believe that
research and development expenses will increase over time as we develop new
products and applications and continue our efforts to cut Mobetron production
costs.

     General and administrative expenses decreased by approximately 18% in the
three months ended June 30, 2007 versus the three months ended June 30, 2006.
The majority of this decrease was due to a reduction of $198,693 in investor
relations expenses in the three months ended June 30, 2007 versus the three
months ended June 30, 2006. Of that reduction in investor relations expenses,
$142,093 represented reductions in the non-cash costs of stock grants and
warrants issued as payment for services to investor relations firms with the
majority of the remainder of the reduction in investor relations expenses
related to the our retention of only one investor relations firm in the period
ended June 30, 2007, versus two such firms in the three months ended June 30,
2006. We also experienced an increase in consulting expenses related to our
efforts to raise additional capital of approximately $50,000, a decrease of
$20,274 in business insurance expenses and an increase of $26,596 in legal
expenses, primarily related to our European patents suits, in the three months
ended June 30, 2007 versus the three months ended June 30, 2006.

     Sales and marketing expenses nearly tripled in the three months ended June
30, 2007 in comparison to the three months ended June 30, 2006, mainly due to
increased personnel expenses of $133,814, and related travel and entertainment
expenses, as we have added sales people in the both the United States and Europe
since June 30, 2006. We also increased our spending on marketing, advertising
and conference promotion for Mobetron by $167,300 during the three months ended
June 30, 2007 versus the same three months ended June 30, 2006.. We expect sales
and marketing expenses to continue to increase as we expand our Mobetron sales
efforts.

                                       11
<PAGE>

     Interest Expense. We completed the post-merger restructuring of our debt in
August through November 2005 through the sale of our senior debentures which
bear interest at 10% per annum and our convertible debentures which bears
interest at 7% per annnum, the addition of our product financing arrangement
(see Note 4 to our financial statements included in this filing) which bears
interest at 12% per annum for financed inventory and 24% per annum for financed
purchase orders and receivables, or factoring, and the repayment of certain
pre-merger borrowings. Additionally we added significant additional notes
payable, in January 2007, with the addition of $1,200,000 of short term
debentures which bear interest at 8% per annum and in April and May 2007, with
the addition of $500,000 of short term promissory notes which bear interest at
10% per annum. We account for the warrants and beneficial conversion features
related to these transactions as discounts from the face value of the notes and
amortize these discounts into interest expense (a non-cash expense) over the
life of the debt instruments. To better understand our annualized cost of
borrowing, the table below presents our notes payable and capital leases gross
of these discounts as our interest bearing obligations, and our interest expense
gross of the amortization of these discounts as our adjusted interest expense.
On this basis, our estimated annual borrowing cost rose from 9.34% to 11.67%,
respectively, during the three months ended June 30, 2006 and June 30, 2007,
primarily because our higher interest rate factoring arrangements represented a
larger proportion of our borrowings during the three months ended June 30, 2007
than they did during the three months ended June 30, 2006.
<TABLE>
<CAPTION>
<S>                                          <C>             <C>            <C>
                                                 Three months
                                                ended June 30,
Interest Bearing Obligations                       2007           2006         Change
-----------------------------------------------------------------------------------------
Notes payable and capital lease
 obligations, current and non-current,
 net discounts                               12,123,659      7,945,532      4,178,127

Add back debt discounts and beneficial
 conversion features                          3,006,969      5,188,641     (2,181,672)
-----------------------------------------------------------------------------------------
Interest bearing obligations                 15,130,628     13,134,173      1,996,455
=========================================================================================

Interest Expense                                   2007           2006         Change
-----------------------------------------------------------------------------------------
Interest Expense                              1,349,140      1,528,124       (178,984)

Amortization of debt issuance costs,
 debt discounts due to warrants and
 beneficial conversion features                 907,519      1,221,445       (313,926)
-----------------------------------------------------------------------------------------
Adjusted interest expense                       441,621        306,679        134,942
Annualized adjusted interest expense          1,766,483      1,226,717
Interest bearing obligations                 15,130,628     13,134,173
Estimated annual cost of borrowing               11.67%          9.34%
=========================================================================================
</TABLE>
                                       12
<PAGE>

Results of Operation for the nine months ended June 30, 2007 compared to the
nine months ended June 30, 2006.

Revenue, Costs of Revenue and Gross Margins
<TABLE>
<CAPTION>
<S>                            <C>            <C>              <C>              <C>
                                      Nine months
                                     ended June 30,
Revenue                             2007           2006         Change        Percent
-------------------------------------------------------------------------------------
  Product sales                2,079,900      1,948,556        131,344          6.74%
  Leasing                              -        134,127       (134,127)      -100.00%
  Service                        317,223        238,058         79,165         33.25%
-------------------------------------------------------------------------------------
Total Revenue                  2,397,123      2,320,741         76,382          3.29%
-------------------------------------------------------------------------------------

Costs of Revenue
-------------------------------------------------------------------------------------
  Product sales                1,769,571      1,748,476         21,095          1.21%
  Leasing                              -         38,323        (38,323)      -100.00%
  Service                        137,057        201,682        (64,625)       -32.04%
-------------------------------------------------------------------------------------
Total Costs of Revenue         1,906,628      1,988,481        (81,853)        -4.12%
-------------------------------------------------------------------------------------

                                      Nine months
                                     ended June 30,
Gross Margin                        2007           2006         Change        Percent
-------------------------------------------------------------------------------------
  Product sales                  310,329        200,080        110,249         55.10%
                                   14.92%         10.27%

  Leasing                              -         95,804        (95,804)            --
                                                  71.43%

  Service                        180,166         36,376        143,790        395.29%
                                   56.79%         15.28%
-------------------------------------------------------------------------------------
Total Gross Margin               490,495        332,260        158,235         47.62%
                                   20.46%         14.32%
=====================================================================================
</TABLE>

Product Sales

     In both the nine months ended June 30, 2007 and June 30, 2006 we sold two
Mobetron systems. The difference in product sales revenue, which includes
systems and accessories sales, but excludes parts sold as part of our service
business, was however primarily due to accessories sales, which increased by
$107,534 in the nine months ended June 30, 2007 over the nine months ended June
30, 2006. Moreover, system sales revenue in the nine months ended June 30, 2007
also included $120,972 of additional installation, profit sharing, and other
revenue related to systems sold in prior periods. System sales revenue related
to systems delivered in the nine months ended June 30, 2007 was $1,809,620 and
for the nine months ended June 30, 2006 was $1,990,234.

                                       13
<PAGE>

     In the nine months ended June 30, 2007, we sold our second system in Japan
and our first system in China, both at prices well below our overall target
prices to introduce our products into those markets. Similarly we sold below
target priced units into the very competitive Italian market and into Poland in
the nine months ended June 30, 2006. We expect future sale prices in all of
these markets to increase as we have begun to establish our name and product
quality in these countries. We also expect an increase in sales and orders based
on our expanded U.S. and European sales force.

Leasing

     Leasing revenue in the nine months ended June 30, 2006 is comprised of
revenue recognized on a Mobetron system leased to our customer in Eindhoven,
Holland, which lease ended on January 1, 2006. We had no leasing transactions in
the nine months ended June 30, 2007.

Service

     The majority of service revenue for the nine months ended June 30, 2007
came from six annual service contracts, with the balance from as-requested
service calls and parts sales to customers. In the nine months ended June 30,
2006, we ended the period with five customers with annual service contracts with
us, two of which customers were added in the last three months that period. In
addition, an expensive, one-time repair under one of those contracts added over
$100,000 of service revenue and a corresponding amount of expense during the
three months ended June 30, 2006. We expect service revenue to grow in relative
proportion to U.S. based sales and to a lesser extent overseas sales. Overseas
distributors are generally responsible for servicing their own customers with
parts supplied by us, though we also recently obtained direct contracts with a
few of their customers in Europe, which revenue is included in the nine months
ended June 30, 2007.

Operating Expenses

     A comparison of our operating expenses for the nine months ended June 30,
2007 and June 30, 2006 are as follows:
<TABLE>
<CAPTION>
<S>                              <C>            <C>             <C>                <C>
                                      Nine months
                                     ended June 30,
                                    2007           2006         Change        Percent
-------------------------------------------------------------------------------------
Research and Development         495,808        459,553         36,255             8%
General & Administrative       1,716,691      1,756,896        (40,205)           -2%
Sales and Marketing            1,415,744        545,236        870,508           160%
-------------------------------------------------------------------------------------
Total Operating Expenses       3,628,243      2,761,685        866,558            31%
=====================================================================================
</TABLE>

     Research and development included the production cut-in of our newly
redesigned modulator which will decrease build cost and increase reliability of
this Mobetron component, and the addition of a motorized transport for Mobetron
which allows for easier movement of Mobetron between operating rooms within a
facility. Both of these projects were accomplished largely through the use of
contract engineering services supplied by a Mobetron parts vendor, allowing us
to continue to keep our research and development staff and overhead as low as
possible. Amortization of these capitalized contract engineering services
however, was primarily responsible for an increase in research and development
expenses of approximately 8% in the nine months ended June 30, 2007, in
comparison to nine months ended June 30, 2006. We believe that our research and
development expenses will increase further over time as we develop new products
and applications and continue our efforts to cut Mobetron production costs.

                                       14
<PAGE>

     General and administrative expenses decreased by approximately 2% in the
nine months ended June 30, 2007 versus the nine months ended June 30, 2006. If
not however for a decrease in investor relations expenses of $206,936 in the
nine months ended June 30, 2007, as compared to the nine months ended June 30,
2006, we would have posted an increase in general and administrative expenses of
$166,731 in the nine months ended June 30, 2007 as compared to the nine months
ended June 30, 2006. Of the decrease in investor relations expenses in the nine
months ended June 30, 2007 versus the nine months ended June 30, 2006, $73,091
was the result of reductions in the non-cash costs of stock grants and warrants
issued as payment for services to investor relations firms, with the majority of
the remainder of the reduction in investor relations expenses related to the our
retention of only one investor relations firm in the nine months ended June 30,
2007, versus two such firms in the nine months ended June 30, 2006.
Significantly, we experienced an increase in consulting expenses mainly related
to our efforts to raise additional capital of approximately $75,780, a decrease
of $32,975 in business insurance expenses, and increase of $42,856 in payroll
related expenses, and an increase of $59,587 in rent and office expense in the
nine months ended June 30, 2007 versus the nine months ended June 30, 2006.

     Sales and marketing expenses increased by approximately 160% in the nine
months ended June 30, 2007 in comparison to the nine months ended June 30, 2006,
mainly due to increased personnel expenses of $477,301, and related travel and
entertainment expenses, as we have added sales people in the both the United
States and Europe since June 30, 2006. We also increased our spending on
marketing, advertising and conference promotion for Mobetron by $222,475 during
the nine months ended June 30, 2007 versus the same nine months ended June 30,
2006. We expect sales and marketing expenses to continue to increase as we
expand our Mobetron sales efforts.



                  (Remainder of page intentionally left blank)







                                       15
<PAGE>

     Interest Expense. We completed the post-merger restructuring of our debt in
August through November 2005 through the sale of our senior debentures which
bear interest at 10% per annum and our convertible debentures which bears
interest at 7% per annum, the addition of our product financing arrangement (see
Note 4 to our financial statements included in this filing) which bears interest
at 12% per annum for financed inventory and 24% per annum for financed purchase
orders and receivables, or factoring, and the repayment of certain pre-merger
borrowings. Additionally we added significant additional notes payable, in
January 2007, with the addition $1,200,000 of short term debentures which bear
interest at 8% per annum and in April and May 2007, with the addition of
$500,000 of short term promissory notes which bear interest at 10% per annum. We
account for the warrants and beneficial conversion features related to these
transactions as discounts from the face value of the notes and amortize these
discounts into interest expense (a non-cash expense) over the life of the debt
instruments. To better understand our annualized cost of borrowing, the table
below presents our notes payable and capital leases gross of these discounts as
our interest bearing obligations, and our interest expense gross of the
amortization of these discounts as our adjusted interest expense. On this basis,
our estimated annual borrowing cost rose from 8.85% to 9.87%, respectively,
during the three months ended June 30, 2006 and June 30, 2007, primarily because
our higher interest rate factoring arrangements represented a larger proportion
of our borrowings during the nine months ended June 30, 2007 than they did
during the nine months ended June 30, 2006.
<TABLE>
<CAPTION>
<S>                                          <C>             <C>            <C>
                                                    Nine months
                                                   ended June 30,
Interest Bearing Obligations                       2007           2006         Change
-----------------------------------------------------------------------------------------
Notes payable and capital lease
 obligations, current and non-current,
 net discounts                               12,123,659      7,945,532      4,178,127

Add back debt discounts and beneficial
 conversion features                          3,006,969      5,188,641     (2,181,672)
-----------------------------------------------------------------------------------------
Interest bearing obligations                 15,130,628     13,134,173      1,996,455
=========================================================================================

Interest Expense                                   2007           2006         Change
-----------------------------------------------------------------------------------------
Interest Expense                              3,677,794      3,580,134         97,660

Amortization of debt issuance costs,
 debt discounts due to warrants and
 beneficial conversion features               2,558,089      2,708,842       (150,753)
-----------------------------------------------------------------------------------------
Adjusted interest expense                     1,119,705        871,292        248,413
Annualized adjusted interest expense          1,492,940      1,161,723
Interest bearing obligations                 15,130,628     13,134,173
Estimated annual cost of borrowing                 9.87%          8.85%
=========================================================================================
</TABLE>

                                       16
<PAGE>

Liquidity and Capital Resources

     We experienced net losses of $6,990,127 and $6,019,773 for the nine months
ended June 30, 2007 and 2006, respectively. In addition, we have incurred
substantial monetary liabilities in excess of monetary assets over the past
several years and, as of June 30, 2007, had an accumulated deficit of
$35,005,041. 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 our products and services.

     o    Developing new markets, primarily in Europe and Asia, and expanding
          our sales efforts.

     o    Evaluating funding strategies in the public and private markets.

     Historically, management has been able to raise additional capital. During
the fiscal year 2006, we obtained an additional $4.5 million through the sale of
convertible debentures and $1,245,716 through the exercise of warrants related
to these debentures, while during the nine months ended June 30, 2007, we raised
$1.2 million of 8% debenture financing and $500,000 of short term promissory
notes in April and May 2007. August 2007, we signed definitive agreements which
will result in a significant recapitalization of IntraOp, and which are
described in more detail in the subsequent events footnote to our financial
statements for the quarter ended June 30, 2007, pursuant to which we will raise
approximately $5.4 million of new equity, extinguish all $6.4 million face value
of our convertible debentures and related debt discounts due to warrants and
beneficial conversion features, extinguish all $1.2 million of our 8% debentures
issued in January 2007, extinguish $400,000 of promissory notes issued in April
and May 2007, and extinguish an additional approximately $1.1 million of other
notes and payables. Regardless, the successful outcome of future operating and
financing 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.

Our primary cash inflows and outflows for the nine months ended June 30, 2007
and June 30, 2006 were as follows:
<TABLE>
<CAPTION>
<S>                               <C>            <C>             <C>
                                          Nine months
                                         ended June 30,
Cash Flows                              2007           2006          Change
---------------------------------------------------------------------------
Provided by (Used in):
  Operating Activities            (1,828,957)    (4,532,662)     2,703,705
  Investing Activities               (22,069)      (193,237)       171,168
  Financing Activities             1,757,746      4,899,410     (3,141,664)
---------------------------------------------------------------------------
Net Increase/(Decrease)              (93,280)       173,511       (266,791)
===========================================================================
</TABLE>

                                       17
<PAGE>
Operating Activities

     Net cash used in operating activities decreased by $2,703,705 in the nine
months ended June 30, 2007 in comparison to the nine months ended June 30, 2006.
Significantly offsetting our net loss of $6,990,127 for the nine months ended
June 30, 2007 were $1,850,201 of non-cash charges, primarily for amortization of
debt discounts, beneficial conversion features and issuance costs related to our
senior and convertible debentures, but also for common stock, options, and
warrants issued in lieu of compensation. During the nine months ended June 30,
2006, our net loss of $6,019,773 was similarly offset by non-cash charges of
$3,079,233. Additionally, while changes in our asset and liability accounts of
approximately $2,307,568 decreased our cash used in operating activities during
the nine months ended June 30, 2007, changes in those same asset and liability
accounts of approximately $1,568,278 increased our cash used in operating
activities during the nine months ended June 30, 2006. These asset and liability
accounts, which include inventories, accounts receivable, accounts payable,
customer deposits, and deposits with vendors, are currently subject to
significant short term fluctuations and will continue to be volatile because of
our low volume of Mobetron sales, large per system cost of Mobetron, and the
timing of collection of our accounts receivable.

Investing Activities

     The difference in investing activity in the nine months ended June 30, 2007
versus the nine months ended June 30, 2006 was primarily the result of the
acquisition of fixed assets related to our move and expansion into our new
headquarters, manufacturing, and test facilities in October 2005.

Financing Activities

     From October 2005 through November 2005, we raised $4.5 million of
convertible debentures, which along with $2.5 million of similar convertible
debentures and $2 million in senior debentures raised at the end of fiscal year
2005, completing a significant change and improvement to our capital structure.
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.
Additionally, we made use of borrowings under our product financing arrangement
and inventory finance arrangement, as further described in Note 4 to our
financial statements hereto, to finance inventory and receivables ahead of
anticipated stronger demand for Mobetron. During the nine months ended June 30,
2007 we raised $1.2 million of short-term debentures and $500,000 of short term
promissory notes, while the majority of the remainder of our borrowing during
this period was related to receivables and inventory finance under our product
financing arrangement and inventory financing arrangement. Similarly, the
majority of our debt repayments were related to our product financing
arrangement.





                  (Remainder of page intentionally left blank)




                                       18
<PAGE>
Debt and Lease Obligations

     At June 30, 2007, we had notes payable and obligations for leased equipment
from various sources as shown below. Interest rates on such debt range from 7%
on our convertible debentures to 24% on our factored receivables financing. We
also lease office space and equipment under non-cancelable operating and capital
leases with various expiration dates through 2011.


                                                          June 30,
                                                            2007
                                                  --------------------

Notes payable, related parties, current               $     1,171,528

Less debt discounts due to warrants                            (5,305)
                                                  --------------------

   Notes payable, related parties, net unamortized
    debt discounts                                    $     1,166,223
                                                  ====================


Convertible debentures                                $     6,400,000
Product financing arrangement                               4,795,025
Senior secured debentures                                   1,416,667
Short term debentures                                       1,121,429
Other notes                                                   214,670

Less debt discounts due to warrants                        (1,386,374)
Less beneficial conversion features                        (1,612,289)
                                                  --------------------

Notes payable, net of debt discounts and
 beneficial conversion features                            10,949,128

Less current portion                                       (6,314,642)
                                                  --------------------

   Notes payable, other, net of current portion,
    unamortized debt discounts and beneficial
    conversion features                               $     4,634,486
                                                  ====================






                  (Remainder of page intentionally left blank)



                                       19
<PAGE>

     As of June 30, 2007, future minimum lease payments that come due in the
fiscal years ending September 30 are as follows:

Period Ending September 30,                       Capital Leases   Operating
                                                                      Leases
------------------------------------------------- ------------------------------
2007                                              $          645  $       58,070
2008                                                       2,579         237,625
2009                                                       2,579         244,754
2010                                                       2,579         233,838
2011                                                         431               -
                                                  ------------------------------
Total minimum lease payments                               8,813  $      774,287
                                                                 ===============

Less: Amount representing interest                          (505)
                                                  ---------------

Present value of minimum lease payments                    8,308
Less: Current portion                                     (2,332)
                                                  ---------------
Obligations under capital lease, net of current
 portion                                          $        5,976
                                                  ===============


Deferred Revenue Items

     Revenue under service agreements is deferred and recognized over the term
of the agreement, typically one year, on a straight line basis. As of June 30,
2007 deferred revenue was $182,037, which is included under accrued liabilities.

Off-Balance Sheet Arrangements

     We had no off-balance sheet arrangements to report for the three or nine
months ended June 30, 2007.


                  (Remainder of page intentionally left blank)













                                       20
<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 the incorporation on March 9, 1993 of its
merger partner, Intraop Medical Inc., primarily due to the cost of substantial
research and development of its sole product, Mobetron. Since inception, we have
generated about $20.9 million in revenue through June 30, 2007, however we
expect to continue to incur operating losses as well as negative cash flow from
operations in future periods. Our ability to achieve profitability will depend
upon our ability to sell Mobetron at higher unit volumes and at higher margins.
Further, if Mobetron and any other of our products do not gain commercial
acceptance, 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 also entered into a revolving, $3,000,000, combined
inventory and factoring agreement, or product financing arrangement, under which
we pledged as collateral certain of our inventory and receivables. Pursuant to
further amendments to the product financing arrangement, as of June 30, 2007,
availability under the line was $5,000,000, but will revert to $4,000,000 on
August 31, 2007.

     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 10% senior secured debentures are secured by a lien
on all of our assets not otherwise pledged under our product financing
arrangement. In addition we issued 1,600,000 shares of our common stock to the
holders of the 10% senior secured debentures as collateral for the loan. So long
as an event of default under the secured debentures has not occurred, we retain
voting rights over the shares pledged as collateral and the lenders are not
permitted to sell such shares.

     Should a default occur under the product financing arrangement or the 10%
senior 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 not
otherwise pledged under the product financing arrangement, and to sell those
assets at a public or private sale and also to sell the shares pledged as
collateral. 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.

                                       21
<PAGE>

We have significant additional capital and operating needs.

     We have spent, and will continue to spend, substantial funds on
development, marketing, research, and commercialization related to Mobetron and
the day to day operation of our company. In the past we received funds 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. In August 2007, we entered into certain
definitive binding agreements as described in more detail in the subsequent
events footnote to our financial statements for the quarter ended June 30, 2007.
Pursuant to those agreements we will raise approximately $5.4 million of new
equity, extinguish all $6.4 million of our convertible debentures, extinguish
all $1.2 million of our 8% debentures issued in January 2007, extinguish
$400,000 of promissory notes issued in April and May 2007, and extinguish an
additional approximately $1.1 million of other notes and payables. Regardless,
our ability to continue to operate may require us to obtain additional funds
over the coming year.

Our single product is subject to uncertain market acceptance.

     We cannot assure that Mobetron will gain broad commercial acceptance or
that commercial viability will be achieved; that future research and development
related to 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 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.

     CDS Engineering LLC, or CDS, manufactures the majority of Mobetron. Other
key Mobetron components include our accelerator guide which is manufactured by
Accuray Incorporated of Sunnyvale, California, and parts of our modulator which
is manufactured by TPI Systems 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 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, TPI Systems or any other key suppliers,
including subcontractors, would have a material adverse effect on our ability to
manufacture 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 Mobetron or in hiring and training additional
personnel to manufacture Mobetron in increasing quantities.

     We intend to continue to do our own final testing of 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 Mobetron and,
therefore, on our business, financial condition, and results of operation.

                                       22
<PAGE>
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.

     NRT, an Italian company, is offering a modified, non-shielded IOERT unit
called the Novac 7. This linear accelerator system was developed, in part, with
funding from the Italian government. The Novac 7 cannot achieve the higher
treatment energies offered by Mobetron and requires mobile shielding to be
positioned around the surgical table prior to treatment. A spin-off of NRT,
called Info & Tech, which manufactures a system called the Liac, is attempting
to replace NRT in the market. Info & Tech has delivered a small number of
pre-commercial units to its customers. The features and technology of the Liac
system are very similar to that of the NRT system.

     The Liac system has been offered to at least one customer in Germany and we
have notified Info & Tech and its German distributor, Conmedica GmbH, that the
Liac system infringes on our intellectual property and demanded that Liac desist
from this infringement. In June 2006, the we brought suit at the District Court
of Dusseldorf, Germany against Info & Tech S.p.A., an Italian company which
manufactures an IOERT system marketed as the Liac, Info & Tech's German
distributor, Conmedica GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold for
infringement of the German subpart DE69428698 of our European Patent 700578,
seeking damages and an injunction against further infringement. Oral proceedings
took place on October 31, 2006, and a hearing took place before the court on
July 31, 2007. A ruling on the case is scheduled for August 23, 2007. In a
related matter, on June 21, 2007, Geomarco Spa., filed a proceeding for
nullification of that same German subpart DE69428698 of our European Patent
0700578 with the German Federal Patent Court. Our response to this filing is due
on November 3, 2007, with oral arguments expected to take place approximately
six to twelve months thereafter.

We may unknowingly infringe the intellectual property rights of third parties
and thereby be exposed to lawsuits.

     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.

                                       23
<PAGE>

We could be subject to product liability claims for which we may have inadequate
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 Dr. Goer and one other employee and
have purchased "key person" life insurance for Dr. Goer 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 our products
and manage our 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 Mobetron system which could
decrease our revenue and potential earnings.

The preparation of our financial statements requires us to make estimates and
assumptions and apply certain critical accounting policies that could materially
affect the reported amounts of our assets, liabilities, revenues and expenses.

     Estimates and assumptions used in our financial statements are based on
historical experience and on various other factors that we 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.

                                       24
<PAGE>

     In June 2005, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 05-04, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Under EITF 05-04, liquidated damages clauses may qualify
as freestanding financial instruments for treatment as a derivative liability.
Furthermore, EITF 05-04 addresses the question of whether a registration rights
agreement should be combined as a unit with the underlying financial instruments
and be evaluated as a single instrument. EITF 05-04 does not reach a consensus
on this question and allows for treatment as a combined unit (Views A and B) as
well as separate freestanding financial instruments (View C). On September 15,
2005, the FASB staff postponed further discussion of EITF 05-04. As of June 30,
2007, the FASB has still not rescheduled EITF 05-04 for discussion.

     In conjunction with our issuance of senior and convertible debentures and
the related warrants and registration rights, we adopted View C of EITF 05-04.
Accordingly, the registration rights agreements, the warrants associated with
the senior and convertible debentures, the debentures themselves, as well as
certain features of the debentures were evaluated as stand alone financial
instruments. This treatment resulted in classification of the warrants and
certain features of the debentures as equity while the registration rights
agreements and other features of the debentures were treated as derivative
liabilities. Derivative liability treatment requires adjusting the carrying
value of the instrument to its fair value at each balance sheet date and
recognizes any change since the prior balance sheet date as a component of other
income or expense. The recorded value of such derivative liabilities can
fluctuate significantly based on fluctuations of the market value of our
underlying securities, as well as on the volatility of our stock price during
the term used for observation and the term remaining for the underlying
financial instruments. We believe that should the FASB staff reach a consensus
on EITF 05-04 and select combined unit treatment (View A or B), the debt
features of the debentures and associated warrants previously classified as
equity will have to be evaluated as a combined unit with the registration rights
agreements. This combination will result in these instruments being treated as
derivative liabilities requiring periodic reevaluation of fair value with
potentially significant fluctuation in fair value from period to period.
Accordingly, this consensus could have a significant effect on our financial
statements.

     We believe that the following critical accounting policies also require us
to make assumptions and estimates that that could materially affect the reported
amounts of our assets, liabilities, revenues and expenses. 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 certain 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 prior to our merger at which time their was no public
market for shares, was based on estimates of fair value made by our Board of
Directors

We are required to recognize expense for share-based compensation related to
stock and there can be no assurance that the expense that we are required to
recognize accurately measures the value of our share-based payment awards and
the recognition of this expense could cause the trading price of our common
stock to decline.

     On January 1, 2006, we adopted SFAS 123(R) using the modified prospective
transition method, which requires the measurement and recognition of
compensation expense for all share-based payment awards made to our employees
and directors including stock options and restricted stock based on their fair
values. As a result, our operating results contain, and our operating results
for future periods will contain, a charge for share-based compensation related
to stock. This charge is in addition to other share-based compensation expense
we have recognized in prior periods.

                                       25
<PAGE>

     The application of SFAS 123(R) requires the use of an option-pricing model,
such as the Black-Scholes option-pricing model, to determine the fair value of
share-based payment awards. Option-pricing models were developed for use in
estimating the value of traded options that have no vesting restrictions and are
fully transferable. Our stock options have characteristics significantly
different from those of traded options, and changes in the assumptions (such as
expected term, stock price volatility and other variables) can materially affect
the fair value estimates. Therefore, although we determine the fair value of
stock options in accordance with SFAS 123(R) and SAB 107, the existing valuation
models may not provide an accurate measure of such fair value, and there can be
no assurance that the resulting expense that we are required to recognize
accurately measures that value.

     As a result of the adoption of SFAS 123(R), our earnings for the periods
subsequent to our adoption of SFAS 123(R) were lower than they would have been
had we not been required to adopt SFAS 123(R). This will continue to be the case
for future periods. We cannot predict the effect that this decrease in earnings
will have on the trading price of our common stock.


                         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 small number modified
conventional accelerators and could continue to offer essentially the same type
of conventional unshielded system. Additionally, two other manufacturers, NRT
and Info & Tech, are known to us to have developed systems that are light enough
for operating room use.

     NRT, an Italian company, is offering a modified, non-shielded IOERT unit
called the Novac 7. This linear accelerator system was developed, in part, with
funding from the Italian government. The Novac 7 cannot achieve the higher
treatment energies offered by Mobetron and requires mobile shielding to be
positioned around the surgical table prior to treatment. A spin-off of NRT,
called Info & Tech, which manufactures a system called the Liac, is attempting
to replace NRT in the market. Info & Tech has delivered a small number of
pre-commercial units to its customers. The features and technology of the Liac
system are very similar to that of the NRT system. Both of these competitors
have had some sales success, mainly in Italy, where we view them as significant
competition.

     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.

                                       26
<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 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 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 Electro technical 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 Mobetron or other products.

We expect to be highly dependent on overseas sales.

     We believe that a substantial portion 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 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.

                                       27
<PAGE>

IOERT treatment may not become a "standard of care" for cancer treatment.

     Despite the fact that more than 30,000 patients have received IOERT
treatment, and despite the promising results in selected clinical studies, IOERT
is not yet considered by the majority of cancer practitioners to be a "standard
of care". In fact, IOERT may never develop into a "standard of care" for the
treatment of cancer, in which case the market potential for Mobetron and other
IOERT techniques will remain limited. If the market remains limited, we 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 IOERT 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 IOERT is generally reimbursable, its rate of return on capital
invested compared to the return for external beam and other radiotherapy
delivery systems may not be as favorable. While we are making efforts to
increase the rate of reimbursement to improve the rate of return on the capital
investment in Mobetron for hospitals in the U.S., there is no assurance that
such an effort will be ultimately successful. Although Medicare has recently
established a billing code directly related to certain uses of our product, the
rate of reimbursement under the code, if any, has not been set, and it may take
a number of years before Medicare has enough data to establish the reimbursement
rate, if any. Therefore, regardless of positive clinical outcomes, the current
U.S. reimbursement environment may slow the widespread acceptance of IOERT and
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 payors 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 Mobetron or that such legislation will not
have a material adverse affect on our ability to sell Mobetron and our business
prospects and financial condition.

                                       28
<PAGE>

                        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.

     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 our 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

                                       29
<PAGE>

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 to: (i)
obtain accurate quotations, (ii) 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) 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. Between
April 2006 and July 2006 we completed four registration statements resulting in
a total of 68,378,224 shares of our common stock being registered, including
shares resulting from the conversion of convertible securities and the exercise
of warrants. In May 2007 we filed a registration statement on Form SB-2 to
register up to an additional 4,982,143 shares of our common stock related to our
convertible debentures and 2,021,420 shares of our common stock resulting from
the exercise of warrants, which upon effectiveness will also be freely tradable.
Additionally in May 2007 we filed a registration statement on Form S-8 to
register 3,597,000 shares of our common stock resulting from the exercise of
options.

     Under the terms of certain definitive binding agreements executed in August
2007, as described in more detail in the subsequent events footnote to our
financial statements for the quarter ended June 30, 2007, we will have,
following the close of transactions contemplated by those agreements,
approximately 89.9 million common shares outstanding, 4,665,701 common shares
reserved for issuance pursuant to warrants for common shares and 3,597,000
common shares reserved for issuance pursuant to options issued or to be issued
under our stock option plan. Subsequent to the second closing of the
recapitalization, to occur after such time as, among other things, we obtain
stockholder approval to amend the our Amended and Restated Articles of
Incorporation to increase the authorized number of shares of common stock to
500,000,000, and assuming no other issuances of common shares or warrants, we
will have approximately 323 million common shares outstanding, 15,466,433 common
shares reserved for issuance pursuant to warrants for common shares and
25,659,664 common shares reserved for issuance pursuant to options issued or to
be issued under the our stock option plan. Pursuant to the recapitalization, we
have agreed to register at the demand of the parties to the recapitalization, up
to 62,500,000 shares of our common stock, 227,501,211 shares of our common stock
issuable upon the exercise of warrants and 22,062,664 shares of our common stock
issuable upon the exercise of options.

                                       30
<PAGE>

Item 3. Controls and Procedures.

     As of the end of the period covered by this 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 three or nine months ended June 30, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




                  (Remainder of page intentionally left blank)








                                       31
<PAGE>

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings

     On April 21, 2006, DLA Piper Gray Cary US LLP, or DLA Piper, notified us
that it had filed an arbitration proceeding against us with the American
Arbitration Association, claiming that we owed it legal fees and costs in the
amount of $445,909 for services rendered. We disputed the amount of fees and
costs claimed. On July 2, 2007, we entered into a Final Settlement Agreement and
Mutual Release, or Settlement Agreement, with DLA Piper with respect to the
settlement of a dispute between the two parties concerning the amount of
attorneys' fees billed by DLA Piper to us. Pursuant to the Settlement Agreement,
we will pay DLA Piper the total sum of $228,000 in six equal monthly payments of
$38,000 each, beginning on July 2, 2007 and on the fifteenth of the month
thereafter through November 15, 2007. In addition, pursuant to the Settlement
Agreement we have agreed to issue to DLA Piper a five-year warrant to purchase
400,000 shares of IntraOp common stock at an exercise price of $0.45 per share.
We previously issued to DLA Piper a warrant dated October 27, 2003 to purchase
150,000 shares of IntraOp common stock. This warrant has been cancelled in
connection with the execution of the Settlement Agreement. We have also agreed
with DLA Piper that we will register with the SEC the shares issuable upon
exercise of the warrants issued pursuant to the Settlement Agreement. The
Settlement Agreement also provides that IntraOp and DLA Piper will release each
other from any claims occurring or existing at any time up to and including the
effective date of the Settlement Agreement, except for the obligations set forth
in the Settlement Agreement.

     In June 2006, the we brought suit at the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactures an
IOERT system marketed as the Liac, Info & Tech's German distributor, Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold for infringement of the
German subpart DE69428698 of our European Patent 700578, seeking damages and an
injunction against further infringement. Oral proceedings took place on October
31, 2006, and a hearing took place before the court on July 31, 2007. A ruling
on the case is scheduled for August 23, 2007. In a related matter, on June 21,
2007, Geomarco Spa., filed a proceeding for nullification of that same German
subpart DE69428698 of our European Patent 0700578 with the German Federal Patent
Court. Our response to this filing is due on November 3, 2007 with oral
arguments expected to take place approximately six to twelve months thereafter.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     On April 9, 2007, we agreed to enter into a short-term unsecured note
financing in an aggregate amount of up to $500,000. The notes are unsecured,
bear interest at 10% per annum and are due and payable ninety days from date of
issuance. Each holder of a note will receive a warrant to purchase that number
of shares of IntraOp common stock equal to 20% of the face amount of the note
divided by $0.40. The warrants have a term of three years and an exercise price
of $0.40 per share. During April and May 2007, we sold $500,000 of such notes
and issued 250,000 warrants pursuant to those same notes.

     On July 25, 2007, we entered into a short-term promissory note financing
with Eckert & Ziegler Strahlen-und Medizintechnik, or E&Z, in the amount of
(euro)250,000. The promissory note issued to E&Z bears interest at a rate of
7.5% per annum and is due and payable on the earlier of (i) 20 days from the
date on which IntraOp receives an equity investment in excess of $4,000,000 or
(ii) January 31, 2008. In connection with the issuance of the promissory note,
we issued to E&Z a two-year warrant to purchase 100,000 shares of IntraOp common
stock at an exercise price of $0.45 per share.

                                       32
<PAGE>

     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.

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
--------------  ----------------------------------------------------------------
10.32           Employment Agreement dated October 1, 1993 by and between the
                Registrant and Donald A. Goer.
10.33           Employment Agreement dated December 15, 2002 by and between the
                Registrant and Howard Solovei.
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.


                                       33
<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: August 17, 2007                   By: /s/ Donald A. Goer
                                            ------------------
                                            Donald A. Goer, Chief Executive
                                            Officer and President
                                            (Principal Executive Officer)


Date: August 17, 2007                   By: /s/ Howard Solovei
                                            ------------------
                                            Howard Solovei, Chief Financial
                                            Officer
                                            (Principal Financial Officer and
                                            Principal Accounting Officer)



                                       34
<PAGE>
                           Intraop Medical Corporation
             Index to Consolidated Financial Statements (Unaudited)
                    For the Three Months Ended June 30, 2007

<TABLE>
<CAPTION>
<S>                                                                                    <C>
Consolidated Balance Sheet as of June 30, 2007 (Unaudited)                              Q-2
Consolidated Statements of Operations for the three months and nine months ended        Q-3
June 30, 2007 and June 30, 2006 (Unaudited)
Consolidated Statements of Cash Flows for the nine months ended                         Q-5
June 30, 2007 and June 30, 2006 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)                                  Q-7
</TABLE>

                                      Q-1
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                   <C>
Intraop Medical Corporation
Consolidated Balance Sheet - Unaudited
-------------------------------------------------------------------------------------

                                                                         June 30,
                                                                           2007
                                                                      ---------------
ASSETS
Current assets:
  Cash and cash equivalents                                           $       56,593
  Accounts receivable                                                        471,662
  Inventories, net                                                         1,354,004
  Inventories, under product financing arrangement                         3,753,770
  Prepaid expenses and other current assets                                   80,720
                                                                      ---------------

         Total current assets                                              5,716,749

Property and equipment, net                                                  199,514
Intangible assets, net                                                       301,325
Deferred financing cost                                                      518,952
Deposits                                                                     231,242
                                                                      ---------------

        Total Assets                                                  $    6,967,782
                                                                      ===============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                   $    3,477,484
   Accrued liabilities                                                     1,763,085
   Capital lease obligations, current portion                                  2,332
   Notes payable, related parties, current portion                         1,166,223
   Notes payable, other, current portion, net of unamortized debt
    discounts                                                              6,314.642
                                                                      ---------------

         Total current liabilities                                        12,723,766

   Capital lease obligations, net of current portion                           5,976
   Notes payable, other, net of current portion, unamortized debt
    discounts and beneficial conversion features                           4,634,486
                                                                      ---------------

         Total liabilities                                                17,364,228
                                                                      ---------------


Stockholders' deficit:
  Common stock, $0.001 par value: 100,000,000 shares authorized;
     26,477,172 shares issued and outstanding                                 26,477
  Additional paid-in capital                                              24,732,118
  Treasury stock, at cost, 600,000 shares at $.25 per share                 (150,000)
  Accumulated deficit                                                    (35,005,041)
                                                                      ---------------

          Total stockholders' deficit                                    (10,396,446)
                                                                      ---------------

             Total liabilities and stockholders' deficit              $    6,967,782
                                                                      ===============
</TABLE>
              See accompanying notes to these financial statements.

                                      Q-2
<PAGE>
<TABLE>
<CAPTION>
<S>                      <C>                <C>                  <C>                 <C>
Intraop Medical Corporation
Consolidated Statements of Operations - Unaudited
----------------------------------------------------------------------------------------------------

                                 Three months ended                     Nine months ended
                                     June 30,                               June 30,
                         ---------------------------------------------------------------------------

                              2007                2006                2007                2006
                         ---------------    ----------------     ---------------     ---------------
Revenues:
  Product sales          $      992,509     $        25,100      $    2,079,900      $    1,948,556
  Leasing                             -                   -                   -             134,127
  Service                        96,176              60,319             317,223             238,058
                         ---------------    ----------------     ---------------     ---------------

Total revenues                1,088,685              85,419           2,397,123           2,320,741
                         ---------------    ----------------     ---------------     ---------------

Cost of revenues:
  Product sales                 911,183              69,797           1,769,571           1,748,476
  Leasing                             -                   -                   -              38,323
  Service (1)                    38,608              27,314             137,057             201,682
                         ---------------    ----------------     ---------------     ---------------

  Total cost of revenues        949,791              97,111           1,906,628           1,988,481
                         ---------------    ----------------     ---------------     ---------------

Gross margin                    138,894             (11,692)            490,495             332,260
                         ---------------    ----------------     ---------------     ---------------

Operating expenses:
  Research and
   development (1)              169,045             164,073             495,808             459,553
  General and
   administrative (1)           640,907             784,474           1,716,691           1,756,896
  Sales and marketing
   (1)                          508,260             171,085           1,415,744             545,236
                         ---------------    ----------------     ---------------     ---------------

 Total operating
  expenses                    1,318,212           1,119,632           3,628,243           2,761,685
                         ---------------    ----------------     ---------------     ---------------

Loss from operations         (1,179,318)         (1,131,324)         (3,137,748)         (2,429,425)

Other income                   (116,887)            (42,375)           (174,863)            (45,627)
Gain on extinguishment
 of debt                              -                   -                 261              28,214
Interest income                       4               1,646                  17               7,199
Interest expense             (1,349,140)         (1,528,124)         (3,677,794)         (3,580,134)
                         ---------------    ----------------     ---------------     ---------------

Loss before taxes            (2,645,341)         (2,700,177)         (6,990,127)         (6,019,773)

Provision for income
 taxes (1)                            -                   -                   -                   -
                         ---------------    ----------------     ---------------     ---------------

Net loss                 $   (2,645,341)    $    (2,700,177)     $   (6,990,127)     $   (6,019,773)
                         ---------------    ----------------     ---------------     ---------------

Basic and diluted net
 loss per share
 available to common
 shareholders            $        (0.10)    $         (0.13)     $        (0.26)     $        (0.29)
                         ---------------    ----------------     ---------------     ---------------
Weighted average number
 of shares in
 calculating net loss
 per share:
Basic and diluted            26,468,381          21,048,860          26,391,458          20,602,552
                         ---------------    ----------------     ---------------     ---------------
</TABLE>
              See accompanying notes to these financial statements.

                                      Q-3
<PAGE>
<TABLE>
<CAPTION>
<S>                                     <C>           <C>             <C>            <C>
Intraop Medical Corporation
Consolidated Statements of Operations - Unaudited (Continued)
------------------------------------------------------------------------------------------

                                   Three months ended              Nine months ended
                                        June 30,                       June 30,
                                   2007           2006            2007            2006
                             -------------------------------------------------------------
(1) Includes the following
 amounts related to share-
 based compensation expense
 of stock options:

Cost of revenues - Service              635           1,826           2,088          4,430
Research and development              4,974          15,705          16,325         38,716
General and administrative            6,329          20,623          20,345         46,291
Sales and marketing                   5,992          15,008          27,177         36,120
                              -------------  --------------  --------------  -------------

         Total                $      17,930  $       53,162  $       65,935  $     125,557
                              =============  ==============  ==============  =============
</TABLE>

              See accompanying notes to these financial statements.


                  (Remainder of page intentionally left blank)






                                      Q-4
<PAGE>
<TABLE>
<CAPTION>
<S>                                                    <C>                 <C>
Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited
------------------------------------------------------------------------------------------

                                                           Nine months ended June 30,
                                                       -----------------------------------
                                                            2007                2006
                                                       ---------------     ---------------
Cash flows from operating activities:
  Net loss                                             $   (6,990,127)     $   (6,019,773)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
    Depreciation of property and equipment                     58,538              56,489
    Amortization of intangible assets                          55,035               9,352
    Amortization of beneficial conversion rights              926,937           1,169,255
    Amortization of debt discount                           1,282,434           1,095,513
    Amortization of debt issuance costs                       185,849             181,207
    Non-cash compensation for options issued                   84,893             127,538
    Non-cash compensation for warrants issued                 211,916             223,878
    Non-cash compensation for common stock issued              48,000             216,001
    Non-cash revenue received on leased equipment                   -             (62,168)
    Non-cash interest expense                                       -              38,324
  Changes in assets and liabilities:
      Accounts receivable                                   3,131,230             740,072
      Inventories                                          (1,872,162)         (1,854,297)
      Prepaid expenses and other current assets                52,666             (16,294)
      Other assets                                            139,628            (224,133)
      Accounts payable                                        354,683              (9,689)
      Accrued liabilities                                     505,738            (269,008)
      Foreign exchange translation                             (4,215)             65,071
                                                       ---------------     ---------------

      Net cash (used for) operating activities             (1,828,957)         (4,532,662)
                                                       ---------------     ---------------

Cash flows used for investing activities:
  Acquisition of fixed assets                                 (22,069)           (193,237)

                                                       ---------------     ---------------
      Net cash used for investing activities                  (22,069)           (193,237)
                                                       ---------------     ---------------

Cash flows provided by financing activities:
    Proceeds from note payable, related party                 628,571              50,000
    Proceeds from note payable, other                       9,566,875           8,057,092
    Payments on note payable, related party                         -            (341,789)
    Payments on note payable, other                        (8,437,700)         (2,819,325)
    Debt issuance costs                                             -            (339,568)
     Proceeds from issuance of common stock                         -             293,000
                                                       ---------------     ---------------

          Net cash provided by financing activities         1,757,746           4,899,410
                                                       ---------------     ---------------

Net increase (decrease) in cash and cash equivalents          (93,280)            173,511
Cash and cash equivalents, at beginning of period             149,873              43,443
                                                       ---------------     ---------------

Cash and cash equivalents, at end of period            $       56,593      $      216,954
                                                       ===============     ===============
</TABLE>
              See accompanying notes to these financial statements.

                                      Q-5
<PAGE>
<TABLE>
<CAPTION>
<S>                                                         <C>                   <C>
Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited (Continued)
-----------------------------------------------------------------------------------------

                                                           Nine months ended June 30,
                                                       ----------------------------------
                                                            2007                2006
                                                       --------------      --------------

Supplemental disclosure of cash flow information:
  Cash paid for interest                                    1,502,446             777,509

Supplemental disclosure of non-cash investing
  and financing activities:
  Leased equipment reclassified to inventory                        -             631,114
  Promissory notes and interest payable converted
     to common stock                                                -             864,660
  Intangible assets purchased under vendor payment
     arrangements                                                   -             312,500
</TABLE>


              See accompanying notes to these financial statements.



                  (Remainder of page intentionally left blank)




                                      Q-6
<PAGE>

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

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

Basis of Presentation:

The consolidated financial statements have been prepared by Intraop Medical
Corporation, a Nevada corporation (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
or omitted pursuant to such rules and regulations. These 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, 2006. In the opinion of management, the 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 June 30, 2007, and results of operations for the three months and
nine months ended June 30, 2007 and June 30, 2006. The results of operations for
the three months and nine months ended June 30, 2007 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:

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 electron-beam radiotherapy ("IOERT"). IOERT 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, 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 in exchange for an
aggregate of 14,175,028 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.


                                      Q-7
<PAGE>
NOTE 1 - INTRAOP MEDICAL CORPORATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)

Basis of Consolidation:

For the three months and nine months ended June 30, 2006, the consolidated
financial statements include the accounts of Intraop Medical Corporation and its
wholly owned subsidiary, Intraop Medical Services, Inc. and IMS Louisville LLC.
As of October 1, 2006, IMS Louisville, LLC was dissolved and all of its
remaining assets and liabilities were assumed by Intraop Medical Corporation. In
April 2007 the Company formed Intraop Medical Europe Ltd., a United Kingdom
registered corporation in which Intraop Medical Corporation is the majority
shareholder. Consequently, for the three months and nine months ended June 30,
2007, the consolidated financial statements include the accounts of Intraop
Medical Corporation, Intraop Medical Services, Inc., and Intraop Medical Europe
Ltd. All significant inter-company balances and transactions have been
eliminated in preparation of the consolidated financial statements.

Going Concern:

The accompanying 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 $2,645,341 and $2,700,177 for the quarters
ended June 30, 2007 and 2006, respectively. In addition, the Company has
incurred substantial monetary liabilities in excess of monetary assets over the
past several years and, as of June 30, 2007, has an accumulated deficit of
$35,005,041. 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 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:

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

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

     o    Evaluating funding strategies in the public and private markets.

Historically, management has been able to raise additional capital. The
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.

                                      Q-8
<PAGE>
NOTE 1 - INTRAOP MEDICAL CORPORATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)

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
limited number of transactions recorded in any particular period. Three
customers represented 61.6%, 18.3% and 17.2% of accounts receivable at June 30,
2007. 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 79% of net revenue for the three months ended June 30,
2007. Two customers accounted for 40.8% and 35.9% and for 44.4% and 37.8% of net
revenue for the nine months ended June 30, 2007 and 2006, respectively.

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, and 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 Issues Task
Force. The Company recognizes revenue on sales of machines upon delivery,
provided there are no uncertainties regarding installation or acceptance,
persuasive evidence of an arrangement exists, the sales price is fixed or
determinable, and collection of the related receivable is reasonably assured.
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.

The Company recognized revenue on service contracts for the service of Mobetrons
at the customer site with six institutions during the three months and nine
months ended June 30, 2007 and five institutions during the three months and
nine months ended June 30, 2006. Under these agreements, customers agree to a
one-year service contract for which they receive warranty-level labor and either
full coverage or a credit for a certain contracted dollar amount for
service-related parts. On contracts with credit for service-related parts, 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. On full coverage contract, the
Company recorded the contract price as service contract liability.

                                      Q-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 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 fiscal 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 its intangible assets completed during its fiscal
quarter ended September 30, 2006 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 carry forwards. 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 three
months.

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.

Basic and Diluted Loss per Share:

In accordance with SFAS No. 128, Earnings per Share, 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.

                                      Q-10
<PAGE>
NOTE 1 - INTRAOP MEDICAL CORPORATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)

The following table sets forth the computation of basic and diluted net loss per
common share:
<TABLE>
<CAPTION>
<S>                                 <C>              <C>               <C>               <C>
                                          Three months ended                   Nine months ended
                                   ---------------------------------  --------------------------------
                                               June 30,                            June 30,
                                   ---------------------------------  --------------------------------
                                          2007             2006             2007             2006
                                   ----------------  ---------------  ---------------  ---------------

Numerator
Net loss available to common
  stockholders                          (2,645,341)      (2,700,177)      (6,990,127)      (6,019,773)

Denominator
Weighted average common shares
  outstanding                           26,468,381       21,048,860       26,391,458       20,602,552
                                   ----------------  ---------------  ---------------  ---------------

Total shares, basic                     26,468,381       21,048,860       26,391,458       20,602,552
                                   ================  ===============  ===============  ===============
Net loss per common share:
  Basic and diluted                   $      (0.10)    $      (0.13)    $      (0.26)    $      (0.29)
                                   ================  ===============  ===============  ===============

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

                                            Three months ended          Nine months ended
                                         -------------------------  --------------------------
                                                 June 30,                    June 30,
                                         -------------------------  --------------------------
                                             2007         2006         2007          2006
                                         ------------  -----------  -----------  -------------

Debentures convertible to common
  stock                                    20,178,571   16,000,000   20,178,571     16,000,000
Options to purchase common stock            1,840,500    1,740,000    1,840,500      1,740,000
Warrants to purchase common stock          15,832,229   22,390,481   15,832,229     22,390,481
                                         ------------  -----------  -----------  -------------

Potential equivalent shares excluded       37,851,300   40,130,481   37,851,300     40,130,481
                                         ============  ===========  ===========  =============
</TABLE>

Stock-Based Compensation:

Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"),
which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including stock
options and restricted stock based on their fair values. SFAS 123(R) supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), which the Company previously followed in accounting for
stock-based awards. In March 2005, the SEC issued Staff Accounting Bulletin No.
107 ("SAB 107") to provide guidance on SFAS 123(R). The Company has applied SAB
107 in its adoption of SFAS 123(R). See Note 7 for a detailed discussion of SFAS
123(R).

                                      Q-11
<PAGE>

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

On November 10, 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. FAS 123(R)-3 Transition Election Related to Accounting
for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt
the "short-cut" method provided in the FASB Staff Position for calculating the
tax effects of share-based compensation pursuant to SFAS 123(R). The "short-cut"
method includes simplified methods to establish the beginning balance of the
additional paid-in capital pool ("APIC pool") related to the tax effects of
share-based compensation, and to determine the subsequent impact on the APIC
pool and the Consolidated Statements of Cash Flows of the tax effects of
share-based compensation awards that are outstanding upon adoption of SFAS
123(R).

Comprehensive Loss:

Comprehensive loss consists of net loss and other gains and losses affecting
stockholders' 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 and nine months ended June 30, 2007 and
2006, respectively, 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.

Reclassification:

The Company made certain reclassifications to the consolidated financial
statements for the three months and nine months ended June 30, 2006 to conform
to the presentation of the consolidated financial statements for the period
ended three months and nine months ended June 30, 2007. There was no effect on
previously reported net loss.

Recent Accounting Pronouncements:

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
159, The Fair Value Option for Financial Assets and Financial Liabilities ,
which permits entities to elect to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. This election is irrevocable. SFAS 159 will be effective for the
Company on January 1, 2008. The Company is currently assessing the potential
impact that the adoption of SFAS 159 will have on its financial statements.

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109. Companies are required to
apply FIN 48 as of the first annual reporting period that begins after December
15, 2006. The Company does not believe adoption of FIN 48 will have a material
effect on its consolidated financial position, results of operations or cash
flows.

                                      Q-12
<PAGE>

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

In September 2006, the FASB issued FAS No. 13-2, Accounting for a Change or
Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated
by a Leveraged Lease Transaction. Companies are required to apply Statement 13-2
as of the first annual reporting period that begins after December 15, 2006. The
Company does not believe adoption of FAS No. 13-2 will have a material effect on
its consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
Companies are required to apply Statement 157 as of the first annual reporting
period that begins after November 15, 2007. The Company does not believe
adoption of SFAS No. 157 will have a material effect on its consolidated
financial position, results of operations or cash flows.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (SAB
108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, which addresses how
uncorrected errors in previous years should be considered when quantifying
errors in current-year financial statements. SAB 108 requires companies to
consider the effect of all carry over and reversing effects of prior-year
misstatements when quantifying errors in current-year financial statements and
the related financial statement disclosures. SAB 108 must be applied to annual
financial statements for the first fiscal year ending after November 15, 2006.
The Company is currently assessing the impact of adopting SAB 108 but does not
expect that it will have a material impact on its consolidated financial
position, results of operations or cash flows.

On September 29, 2006, the FASB issued SFAS No.158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires an entity to
recognize in its statement of financial position the over funded or under funded
status of a defined benefit postretirement plan measured as the difference
between the fair value of plan assets and the benefit obligation. Furthermore,
SFAS No. 158 requires that an entity use a plan measurement date that is the
same as its fiscal year-end. An entity will be required to disclose additional
information in the notes to financial statements about certain effects on net
periodic benefit cost in the upcoming fiscal year that arise from delayed
recognition of the actuarial gains and losses and the prior service costs and
credits. The requirement to recognize the funded status of a defined benefit
postretirement plan and the related disclosure requirements is effective for
fiscal years ending after December 15, 2006. The requirement to change the
measurement date to the year-end reporting date is for fiscal years ending after
December 15, 2008. The Company does not anticipate this statement will have any
impact on its consolidated financial position, results of operations or cash
flows.

                  (Remainder of page intentionally left blank)


                                      Q-13
<PAGE>

NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three customers represent 61.6%, 18.3% and 17.2% of accounts receivable at June
30, 2007. One customer accounted for 79% of net revenue for the three months
ended June 30, 2007. Five customers accounted for 23.4%, 22.8%, 21.5%, 11.7% and
10.1% of net revenue for the three months ended June 30, 2006. Two customers
accounted for 40.8% and 35.9% of net revenue for the nine months ended June 30,
2007, and for 44.4% and 37.8% of net revenue for the nine months ended June 30,
2006.

Three suppliers represented 28.8%, 28.5% and 15.3% of accounts payable at June
30, 2007. Purchases from these suppliers during the three months ended June 30,
2007 totaled approximately $954,281, $0 and $0 respectively and $2,573,090, $0
and $0 during the nine months ended June 30, 2007 respectively.

NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:

                                                                   June 30,
                                                                     2007
                                                               ---------------

Finished goods                                                  $            -
Work-in-progress                                                       960,186
Purchased parts and raw material, net of reserves of $10,159           393,818
                                                               ---------------

                                                                $    1,354,004
                                                               ===============

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:

                                                                    June 30,
                                                                      2007
                                                               ---------------

Finished goods                                                   $     669,435
Work-in-progress                                                     2,676,535
Purchased parts and raw material                                       407,800
                                                               ---------------

                                                                 $   3,753,770
                                                               ===============

Under the Company's Product Financing Arrangement and Inventory Financing
Arrangement (see Note 4), ownership of the financed inventory is transferred to
the lender. However, the Company has the right to subsequently repurchase
financed inventory from the lender at a price equal to the original transfer
price plus interest.

                                      Q-14
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:

                                                          June 30,
                                                           2007
                                                      ----------------

Equipment                                             $      269,322
Computer equipment                                           132,465
Furniture & fixtures                                          64,307
Leasehold improvements                                         5,706
                                                      ----------------
                                                             471,800
Less accumulated depreciation                               (272,286)
                                                      ----------------
                                                      $      199,514
                                                      ================

Included in property and equipment is an asset subject to a capital lease with
an original cost of $11,742. Related accumulated depreciation and amortization
of this asset was $4,305 as of June 30, 2007.

Intangible Assets:

Intangible Assets consist of the following:

                                                         June 30,
                                                           2007
                                                      ----------------

Mobetron related manufacturing and design
 rights                                               $      551,728
Less accumulated amortization                               (280,403)
                                                      ----------------
Mobetron related manufacturing and design
 rights, net                                                 271,325
Medical device approval license not subject to
 amortization                                                 30,000
                                                      ----------------
Intangible assets, net                                $      301,325
                                                      ================


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.

Deferred financing cost:

                                                          June 30,
                                                            2007

Debt issuance cost                                    $    1,286,906
Less accumulated amortization                               (767,954)
                                                      ----------------
Deferred financing cost, net                          $      518,952
                                                      ================


                                      Q-15
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

   Accrued Liabilities:

A summary is as follows:

                                                         June 30,
                                                           2007
                                                      ----------------
Contract advances                                     $      726,500
Accrued interest payable                                     383,878
Accrued warranty                                             128,364
Deferred revenue                                             182,037
Accrued personal paid leave                                  124,817
Accrued sales tax payable                                     65,050
Accrued royalty payable                                      100,000
Other accrued liabilities                                     52,439
                                                      ----------------

                                                      $    1,763,085
                                                      ================

Warranty:

The Company generally warrants Mobetron systems from the date of shipment
through the earliest to occur of (a) one year from the date of acceptance or (b)
18 months 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 above.


                                                          June 30,
                                                            2007
                                                      ----------------
Warranty accrual at the beginning of period           $      114,324

Accrual for warranties during the period                      43,302
Actual product warranty expenditures                         (29,262)
                                                      ----------------

Warranty accrual at the end of the period             $      128,364
                                                      ================

                                      Q-16
<PAGE>

NOTE 4 - BORROWINGS

Outstanding notes payable were as follows:

                                                         June 30,
                                                           2007
                                                      ----------------

Notes payable, related parties, current               $    1,171,528

Less debt discounts due to warrants                           (5,305)
                                                      ----------------

   Notes payable, related parties, net
       unamortized debt discounts                     $    1,166,223
                                                      ================

Convertible debentures                                $    6,400,000
Inventory and receivables financing
 arrangements                                              4,795,025
Senior secured debentures                                  1,416,667
Short term debentures and promissory notes                 1,121,429
Other notes                                                  214,670

Less debt discounts due to warrants                       (1,386,374)
Less beneficial conversion features                       (1,612,289)
                                                      ----------------

Notes payable, net of debt discounts and
 beneficial conversion features                           10,949,128

Less current portion                                      (6,314,642)
                                                      ----------------

   Notes payable, other, net of current portion,
    unamortized debt discounts and beneficial
    conversion features                               $    4,634,486
                                                      ================

Notes payable, related parties:

Notes payable to related parties of $1,171,528 at June 30, 2007 includes
$592,958 related to notes issued to an officer of the Company. These notes are
due on demand and bear interest at 9% per annum.

Notes payable in the amount of $228,570 are related to certain short term
debentures issued in January 2007. These debentures bear interest at 8% per
annum and were originally scheduled to mature on May 10, 2007, however as of
June 2007, their maturities were extended to July 31, 2007, before entering into
certain definitive agreements in August 2007, which will result in the
extinguishment of the debt (see Note 11 - Subsequent Events). As a further
inducement to enter into the short-term debentures, the Company granted warrants
to the holders to purchase 244,895 shares of the Company's common stock
exercisable at $0.28 per share and expiring in January, 2012.

Notes payable in the amount of $350,000 are related to certain promissory notes
issued in April and May 2007. These promissory notes bear interest at 10% per
annum and were originally scheduled to mature ninety days from issuance before
entering into certain definitive agreements in August 2007, which will result in
the extinguishment of the debt (see Note 11 - Subsequent Events). As a further
inducement to enter into these promissory notes, the Company granted warrants to
the lenders to purchase 175,000 shares of the Company's common stock exercisable
at $0.40 per share and expiring three years from date of issuance

                                      Q-17
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Convertible debentures

In August 2005, the Company sold $2,500,000 of convertible debentures to certain
investors. The debentures bear interest at 7% per annum, payable quarterly, and
at issuance, were convertible into the Company's common stock at $0.40 per share
at the option of the holders. 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, the unexercised balance of which expired September 30,
2006, and warrants to purchase an additional 3.125 million shares of the
Company's common stock, expiring August 31, 2010. Both sets of warrants were
exercisable at $0.40 per share.

In October 2005, the Company sold an additional $2,500,000 of convertible
debentures to certain investors. The debentures bear interest at 7% per annum,
payable quarterly, and at issuance, were convertible in to the Company's common
stock at $0.40 per share at the option of the holders. 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, the
unexercised balance of which expired November 2006, and warrants to purchase an
additional 3.125 million shares of its common stock, expiring October 2010. Both
sets of warrants were exercisable at $0.40 per share.

In November 2005, the Company sold an additional $2,000,000 of convertible
debentures to certain investors. The debentures bear interest at 7% per annum,
payable quarterly, and at issuance, were convertible in to the Company's common
stock at $0.40 per share at the option of the holders. 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, the
unexercised balance of which expired December 2006, and warrants to purchase an
additional 2.5 million shares of its common stock expiring November 4, 2010.
Both sets of warrants were exercisable at $0.40 per share.

The convertible debentures and associated warrants include a price reset
provision. Under this provision the conversion price of the debentures and the
exercise price of the warrants is adjusted to take into account the effect of
certain dilutive events. The price reset provision of the convertible debentures
and associated warrants is triggered if the following events occur:

     o    the payment of a dividend in the form of common stock or other
          equivalent equity security, or the occurrence of a stock split,
          reverse stock split, or reclassification of common stock. Upon such
          event, the conversion price of the debentures and the exercise price
          of the warrants would be adjusted by a percentage equal to the
          percentage of the Company outstanding common shares prior to the event
          over the Company outstanding common shares and other equivalent equity
          securities after the event.
     o    the re-pricing, sale, or right to re-price or buy the Company's common
          stock or equivalent instrument at a price less than the conversion
          price. Upon such event, the conversion price of the debentures and the
          exercise price of the warrants would be adjusted to the price of the
          Company common stocks or other equivalent equity securities involved
          in the triggering event.
     o    the making of distribution of cash, evidence of indebtedness, cash
          other or other assets, or rights to any equity securities to the
          holders of the Company's common stock. Upon such event, the conversion
          price of the debentures and the exercise price of the warrants would
          be adjusted by a percentage equal to the percentage change in the
          Company common stock price resulting from this event.

                                      Q-18
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

     o    the occurrence of a transaction for the merger, sale, tender offer, or
          recapitalization of the Company. Upon such event, the conversion price
          of the debentures and the exercise price of the warrants would be
          adjusted to allow the holders of the convertible debentures to receive
          upon conversion, the same consideration received by the holder of the
          Company common stocks at the time of the triggering event.

Pursuant to the registration rights agreements with the holders of the
convertible debentures dated August 31, 2005 and October 25, 2005, the Company
was required to file by September 30, 2005 and November 24, 2005 respectively, a
resale registration statement covering the resale of the shares issuable to the
investors upon the conversion of their debt and the exercise of their warrants.
The Company has filed the required registration statement. The registration
rights agreements required the Company to pay monthly liquidated damages if:

     o    a registration statement was not filed on or prior to September 30,
          2005 and November 24, 2005, respectively, or
     o    the Company fails to file with the Commission a request for
          acceleration in accordance with Rule 461 promulgated under the
          Securities Act, within five trading days of the date that the Company
          is notified by the Commission that a registration statement will not
          be "reviewed," or not subject to further review, or
     o    prior to its effectiveness date, the Company fails to file a
          pre-effective amendment and otherwise respond in writing to comments
          made by the Commission in respect of such registration statement
          within 10 calendar days after the receipt of comments by or notice
          from the Commission that such amendment is required in order for a
          registration statement to be declared effective, or
     o    a registration statement filed or required to be filed, is not
          declared effective by the Commission by December 29, 2005 and February
          22, 2006, respectively, or
     o    after December 29, 2005 and February 22, 2006, respectively, a
          registration statement ceases for any reason to remain continuously
          effective as to all registrable securities for which it is required to
          be effective, or the investors are not permitted to utilize the
          prospectus therein to resell such registrable securities for 10
          consecutive calendar days but no more than an aggregate of 15 calendar
          days during any 12-month period.

The amount of monthly liquidated damages equals 2.0% of the aggregate purchase
price paid by the investors for any registrable securities held by the
investors. Seven day late payment of the damages is subject to interest at an
annual rate of 18%. At June 30, 2007 the Company determined the maximum
potential liquidated damages to be approximately, $1,397,812.

The Company evaluated the liquidated damages feature of the registration rights
agreements in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"). The liquidated damages provisions qualify as embedded derivative
instruments at issuance and, because they do not qualify for any scope exception
within SFAS 133, they were required by SFAS 133 to be recorded as derivative
financial instruments. Further, in accordance with EITF 05-04, "The Effect of a
Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF
Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the Company also evaluated
whether the registration rights agreements, the convertible debentures, and
associated warrants should be combined into and accounted for as a single unit
or accounted for as separate financial agreements.

                                      Q-19
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

In considering the appropriate treatment of these instruments, the Company
observed that:

     o    Although entered into contemporaneously, the debentures, warrants and
          registration rights agreements are nevertheless separate legal
          agreements.
     o    Payment of liquidated damages penalties under the registration rights
          agreements does not alter the investors' rights under either the
          warrant or debenture agreements. The debentures and warrants have
          values which are based on their interest rate and the relation between
          their conversion price or exercise price and the value of the
          Company's common stock. This value is independent of any payment for
          liquidated damages under the registration rights agreements, which is
          based on how long the shares remain unregistered.
     o    The various agreements do not relate to the same risk. The risk
          inherent in the debentures relates to the Company's ability to repay
          these instruments as and when they come due or to the extent converted
          into common stock, to the price of the Company's common stock. The
          warrants similarly bear risk related to the value of the Company
          common stock. The liquidated damages penalty under the registration
          rights agreements relates to the risk of the Company filing a
          registration statement and having it declared effective.

Thus, in light of the above facts and circumstances and accordance with guidance
in EITF 05-4, View C, the Company evaluated and treated the registration rights
agreements, convertible debentures and associated warrants as separate free
standing agreements.

At issuance of the convertible debentures on August 31, 2005, October 31, 2005
and November 4, 2005, the Company assigned no initial fair value to the
registration rights agreements. In subsequent periods, the carrying value of the
derivative financial instrument related to the registration rights agreements
will be adjusted to its fair value at each balance sheet date and any change
since the prior balance sheet date will be recognized as a component of other
income/ (expense).

The estimated fair value of the registration rights agreements was determined
using the discounted value of the expected future cash flows. At September 30,
2005 and November 24, 2005, the Company was not able to have a registration
statement declared effective by the SEC as required by the registration rights
agreements. However, in January 2006, the Company obtained an amendment to the
registration rights agreements to extend the required filing date of the
Company's initial registration statement to January 27, 2006, a deadline that
the Company met, and to extend the required effectiveness date of that same
initial registration statement to March 31, 2006, a deadline the Company did not
meet, and to waive all amounts potentially due under the liquidated damages
clause which would have been due but for the waiver. On April 18, 2006 the
Company obtained a further amendment to the registration rights agreements to
further extend the required effectiveness date of its initial registration
statement to May 15, 2006 for investors subject to the August 31, 2005
registration rights agreement and extend to May 30, 2006 the date on which the
Company must have an effective registration statement for 50% of the
registerable shares for investors who were signatories to the October 25, 2005
registration rights agreement, both deadlines the Company met. On June 19, 2006,
the Company met the requirements to have an effective registration statement for
all shares required to be registered pursuant to the registrations right
agreements. The Company believes that, in the future, it will be able to meet
the registration requirements of the registration rights agreements and that, in
the event it cannot, and assuming the Company is making reasonable efforts to
file and have a registration statement declared effective, the holders of the
debentures will waive the liquidated damages required under the registration
rights agreements. As a result, at June 30, 2007, the Company assigned no value
to the potential liquidated damages.

                                      Q-20
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"), certain features of the convertible debentures are not clearly and
closely related to the characteristics of the convertible debentures. SFAS133
requires that, unless they qualify under a scope exemption, these features be
recorded as derivative financial instruments. In accordance with the guidelines
provided by SFAS133 and EITF 00-19, the following convertible debentures
features qualified for a scope exemption under SFAS133 and were recorded as
equity instruments:

     o    Beneficial conversion features: these debentures are convertible at
          the option of the holder with the following provisions:
          o    the conversion can be at anytime on or prior to maturity;
          o    holders of the convertible debentures are subject to certain
               conversion restrictions; and
          o    the conversion price is subject to a conversion price reset
               provision.

The value of the beneficial conversion features, $4,044,212, was limited to the
relative fair value of the debentures and will be amortized to interest over the
life of the debentures.

Only the debt acceleration provision upon default features of the convertible
debentures did not qualify for a scope exception under SFAS133. Accordingly,
they were required by SFAS 133 to be accounted for separately from the debt
instrument and recorded as derivative financial instruments.

At issuance of the convertible debentures on August 31, 2005, October 25, 2005,
October 31, 2005 and November 4, 2005, the derivative features of the
convertible debentures had no initial fair value as the Company estimated the
probability of occurrence of these features to be nil or extremely low. In
subsequent periods, the carrying value of the derivative financial instrument
related to the derivative features of the convertible debentures will be
adjusted to its fair value at each balance sheet date and any change since the
prior balance sheet date will be recognized as a component of other income /
(expense).

As of June 30, 2007, the Company assigned no value to the derivative features of
the convertible debentures, as the Company believes the probability of
occurrence of a default under the debentures to be nil or extremely low.

The estimated fair value of the derivative features was determined using the
probability weighted averaged expected cash flows methodology. Accordingly, the
fair value of the derivative features can fluctuate significantly based on
changes in the Company estimates of the probability of occurrence of a default
on the debentures and their then outstanding balance.

The relative fair value of the warrants issued was determined using the
Black-Scholes option-pricing model.

The relative fair value of the warrants, the debentures conversion feature and
the debentures derivative features were recorded as a note discount and will be
amortized to interest over the life of the debentures.

From July to August 2006, the Company temporarily reduced the exercise price of
6 million short term warrants associated with the convertible debentures from
$0.40 to $0.30 per share for a 15 day period. The fair value attributable to the
short term warrants repricing was recorded as a note discount and amortized into
interest over the life of the debentures.

                                      Q-21
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

In January 2007, a result of the issuance of new short term debentures, the
Company agreed to lower the exercise price of 5,625,000 long term warrants held
by the certain convertible debenture holders from $0.40 per share to $0.28 per
share for the remainder of the life of the warrants. The fair value attributable
to the warrant repricing was recorded as a note discount and will be amortized
into interest over the life of the debentures. In addition, the Company also
agreed as part of the issuance of the January 2007 short term debentures, to
lower the conversion price on $3.9 million of outstanding principal under the
convertible debentures from $0.40 per share to $0.28 per share. The fair value
of the change in beneficial conversion features was recorded as a note discount
and will be amortized to interest over the life of the debentures

The Company evaluated the change in fair value of the conversion option brought
out by modifying the convertible debt agreement in accordance with EITF 05-07
and EITF 96-19. The Company determined that the present value of the original
debt instrument's cashflow varied less than 10% from the present value of the
modified debt. Accordingly, the modification did not result in debt
extinguishment, and was subject to EITF 96-19 modification accounts. The change
in fair value of the conversion option is treated as an adjustment to interest
expense over the remaining term of the debt.

In June 2007, the Company obtained a waiver through July 31, 2007 of interest,
late fees, and default for the non-payment of interest accrued and payable at
June 30, 2007, before entering into certain definitive agreements in August
2007, which will result in the extinguishment of the debt (see Note 11 -
Subsequent Events).

At June 30, 2007 the outstanding principal balance of the convertible debentures
was $6,400,000 and the unamortized note discount was as follows:
<TABLE>
<CAPTION>
<S>                                                                   <C>
Relative fair value of warrants allocated to note discount
Debentures issuance -- August 2005                                     $   1,081,138
Debentures issuance --October 2005                                           995,963
Debenture issuance -- November 2005                                          748,267
Temporary warrant repricing - July and August 2006                           119,113
Warrant repricing -- January 2007                                             26,693
                                                                    ------------------

Total relative fair value of warrants allocated to note discount           2,971,174
Less accumulated amortization                                             (1,786,810)
                                                                    ------------------

Note discount related to warrants, net                                 $   1,184,364
                                                                    ==================

Relative fair value of beneficial conversion features allocated to
 note discount
Debentures issuance -- August 2005                                     $   1,418,862
Debentures issuance --October 2005                                         1,487,797
Debenture issuance -- November 2005                                          998,267
Conversion price reset -- January 2007                                       139,286
                                                                    ------------------

Total relative fair value of beneficial conversion features
 allocated to note discount                                                4,044,212
Less accumulated amortization                                             (2,431,923)
                                                                    ------------------

Note discount related to beneficial conversion features, net           $   1,612,289
                                                                    ==================
</TABLE>

                                      Q-22
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Inventory and receivables financing arrangements:

In August 2005, the Company entered into a $3,000,000 revolving combined
inventory financing and international factoring agreement (the "Product
Financing Arrangement") 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 to provide the financing, the Company also agreed to
grant the lender 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 had an original term of two years. The fair value attributable to the
warrant of $123,209 was recorded as a note discount and was amortized to
interest over a one year period from issuance.

In April 2006, the Company entered into an amendment to the Product Financing
Arrangement to clarify and amend certain terms and conditions pursuant to which
the Company can obtain financing under the agreement. Pursuant to the amendment,
ownership of the inventory financed is transferred to the lender. From time to
time, the Company may repurchase financed inventory from the lender at a price
equal to the original transfer price plus interest.

In June 2006, the Company entered into an amendment to the Product Financing
Arrangement, increasing the debt facility available under the Product Financing
Arrangement to $4,000,000. Under the terms of the amendment, the Company granted
to the lender warrants to purchase 192,307 shares of its common stock at an
exercise price of $0.52 per share with an expiration date of May 31, 2008 and a
fair value of $77,264. Additionally, the Company agreed to extend by one year to
August 15, 2007, the expiration date of 576,923 warrants previously issued to
the lender representing a fair value of $45,945. The fair value attributable to
the warrant and to the expiration date extension was recorded as a note discount
and was amortized to interest over a one year period.

In January 2007, the Company agreed to reduce the price of the previously issued
warrants from $0.52 per share to $0.28 per share. The Company also agreed to
extend the expiration date of the warrants from May 31, 2008 to August 31, 2010.
The fair value of the price reduction and extension of expiration period of
$58,927 was recorded as a note discount and was amortized into interest over a
period of the notes payable.

In April 2007, the Company entered into an amendment to the Product Financing
Arrangement to increase the ratio of borrowing relative to the amount of
financed collateral. Under the terms of the amendment, the Company granted to
the lender warrants to purchase 100,000 shares of its common stock at an
exercise price of $0.40 per share with expiration three years from the date of
issuance. The fair value of $15,004 attributable to the warrant was recorded as
a note discount and was amortized to interest.

As of June 30, 2007, the Company entered into an amendment to the Product
Financing Arrangement, to temporarily increase the available borrowing under the
Product Financing Arrangement to $5,000,000 through August 31, 2007. At June 30,
2007 the outstanding principal balance under this agreement was $4,745,040.

                                      Q-23
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)


In October 2006, the Company entered into a stand-alone, $700,000 revolving
inventory agreement (the "Inventory Financing Arrangement") with a lender and
drew down the entire $700,000 available under the line. Under the terms of the
agreement, the Company agreed to pay interest at the rate of 12% per annum on
inventory financing under the line. Ownership of the inventory financed is
transferred to the lender. From time to time, the Company may repurchase
financed inventory from the lender at a price equal to the original transfer
price plus interest. On March 14, 2007 the Company entered into an amendment to
the Inventory Financing Arrangement, increasing the debt facility available to
$750,000. The outstanding balance under the Inventory Financing Arrangement at
June 30, 2007 was $50,000.

Senior secured debentures

In August 2005, the Company sold $2,000,000 of senior secured debentures to
certain investors. The debentures bear interest at 10% per annum, payable
monthly, and have a three year term. Principal in the amount of $27,778 is due
monthly, with the remaining balance due at maturity. The debentures are secured
by a security interest in substantially all of 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 at the time of issuance. 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 warrants associated with the senior debentures include a price reset
provision. Under this provision the exercise price of the warrants is adjusted
to take into account the effect of certain dilutive events. The price reset
provision of the warrants associated with the senior debentures is triggered if
the following events occur:

     o    the payment of a dividend in the form of common stock or other
          equivalent equity security, or the occurrence of a stock split,
          reverse stock split, or reclassification of common stock. Upon such
          event, the exercise price of the warrants would be adjusted by a
          percentage equal to the percentage of the Company outstanding common
          shares prior to the event over the Company outstanding common shares
          and other equivalent equity securities after the event.
     o    the re-pricing, sale, or right to re-price or buy the Company's common
          stock or equivalent instrument at a price less than the conversion
          price. Upon such event, the exercise price of the warrants would be
          adjusted to the price of the Company common stocks or other equivalent
          equity securities involved in the triggering event.
     o    the making of distribution of cash, evidence of indebtedness, cash
          other or other assets, or rights to any equity securities to the
          holders of the Company's common stock. Upon such event, the exercise
          price of the warrants would be adjusted by a percentage equal to the
          percentage change in the Company common stock price resulting from
          this event.
     o    the occurrence of a defined event of default under the senior
          debentures, upon which event the exercise price of the warrants would
          be reduced to one cent per share.
     o    the occurrence of a transaction for the merger, sale, tender offer, or
          recapitalization of the Company. Upon such event, the exercise price
          of the warrants would be adjusted to allow the holders of the warrants
          to receive upon conversion, the same consideration received by the
          holder of the Company common stocks at the time of the triggering
          event.

                                      Q-24
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Pursuant to the registration rights agreement with the holders of the senior
debentures dated August 31, 2005, the Company agreed to file by September 30,
2005, a resale registration statement covering the resale of the shares issuable
to the holders of the senior debentures upon the exercise of their warrants. The
registration rights agreement required the Company to pay monthly liquidated
damages if:

     o    a registration statement was not filed on or prior to September 30,
          2005, or
     o    the Company fails to file with the Commission a request for
          acceleration in accordance with Rule 461 promulgated under the
          Securities Act, within five trading days of the date that the Company
          is notified by the Commission that a registration statement will not
          be "reviewed," or not subject to further review, or
     o    prior to its effectiveness date, the Company fails to file a
          pre-effective amendment and otherwise respond in writing to comments
          made by the Commission in respect of such registration statement
          within 10 calendar days after the receipt of comments by or notice
          from the Commission that such amendment is required in order for a
          registration statement to be declared effective, or
     o    a registration statement filed or required to be filed is not declared
          effective by the Commission by December 29, 2005, or
     o    after December 29, 2005 a registration statement ceases for any reason
          to remain continuously effective as to all registrable securities for
          which it is required to be effective, or the investors are not
          permitted to utilize the prospectus therein to resell such registrable
          securities for 10 consecutive calendar days but no more than an
          aggregate of 15 calendar days during any 12-month period.

The amount of monthly liquidated damages equals 2.0% of the aggregate purchase
price paid by the investors for any registrable securities held by the
investors. Late payment beyond seven days is subject to interest at an annual
rate of 18%. At June 30, 2007, the Company determined the maximum potential
liquidated damages to be approximately, $485,438.

The Company evaluated the liquidated damages feature of the registration rights
agreement in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"). The liquidated damages qualify as embedded derivative instruments
at issuance and, because they do not qualify for any scope exception within SFAS
133, they were required by SFAS 133 to be recorded as derivative financial
instruments. Further, in accordance with EITF 05-04, "The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No.
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the Company also evaluated
whether the registration rights agreement, the senior debentures, and associated
warrants should be combined into and accounted for as a single unit or accounted
for as separate financial agreements. In considering the appropriate treatment
of these instruments, the Company observed that:

     o    Although entered into contemporaneously, the debentures, warrants and
          registration rights agreements are nevertheless separate legal
          agreements.
     o    Payment of the liquidated damages penalties under the registration
          rights agreement does not alter the investors' rights under either the
          warrant or debenture agreements. The debentures and warrants have
          values which are based on their interest rate and the relation between
          their conversion price or exercise price and the value of the
          Company's common stock. This value is independent of any payment for
          liquidated damages under the registration rights agreement, which is
          based on how long the shares remain unregistered.

                                      Q-25
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

     o    The two agreements do not relate to the same risk. The risk inherent
          in the debentures relates to the Company ability to repay these
          instruments as and when they come due or to the extent converted into
          common stock, to the price of the Company's common stock. The warrants
          similarly bear risk related to the value of the Company common stock.
          The liquidated damages penalty under the registration rights agreement
          relates to the risk of the Company filing a registration statement and
          having it declared effective.

Thus, in light of the above facts and circumstances and accordance with guidance
in EITF 05-4, View C, the Company evaluated and treated the registration rights
agreement, senior debentures and associated warrants as separate free standing
agreements.

At issuance of the senior debentures on August 31, 2005, the Company assigned no
initial fair value to the registration rights agreement. In subsequent periods,
the carrying value of the derivative financial instrument related to the
registration rights agreement will be adjusted to its fair value at each balance
sheet date and any change since the prior balance sheet date will be recognized
as a component of other income/ (expense).

The estimated fair value of the registration rights agreement was determined
using the discounted value of the expected future cash flows. At September 30,
2005, the Company was not able to have a registration statement declared
effective by the SEC as required by the registration rights agreement. However,
in January 2006, the Company obtained an amendment to the registration rights
agreement to extend the required filing date of the Company's initial
registration statement to January 27, 2006, a deadline that the Company met, and
to extend the required effectiveness date of that same initial registration
statement to March 31, 2006, a deadline the Company did not meet, and to waive
all amounts potentially due under the liquidated damages clause which would have
been due and payable but for the waiver. On April 18, 2006 the Company obtained
a further amendment to the registration rights agreement to further extend the
required effectiveness date of its initial registration statement to May 15,
2006, a deadline the Company met. On June 19, 2006, the Company met the
requirements to have an effective registration statement for all shares required
to be registered pursuant to the registrations right agreement. The Company
believes that, in the future, it will be able to meet the registration
requirements of the registration rights agreement and that in the event it
cannot, and assuming the Company is making reasonable efforts to file and have a
registration statement declared effective, the holders of the debentures will
waive the liquidated damages required under the registration rights agreement.
As a result, at June 30, 2007, the Company assigned no value to the potential
liquidated damages.

The relative fair value of the warrants was determined using the Black-Scholes
option-pricing model and was recorded as a note discount and will be amortized
to interest over the life of the debentures. At June 30, 2007 the outstanding
principal balance under the senior secured debentures was $1,416,667 and the
unamortized note discount was $198,261.

                                      Q-26
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)


Short term debentures and promissory notes

In January 2007 the Company sold $971,429 of short-term debentures to certain
existing convertible debenture holders. These debentures bear interest at 8% per
annum and were originally scheduled to mature on May 10, 2007, however as of
June 2007, were their maturities were extended to July 31, 2007, before entering
into certain definitive agreements in August 2007, which will result in the
extinguishment of the debt (see Note 11 - Subsequent Events). As a further
inducement to purchase the short term debentures, the Company granted warrants
to the purchasers to purchase 1,040,813 shares of the Company's common stock at
an exercise price of $0.28 per share and expiring in January 2012. Additionally,
the Company also agreed to reduce from $0.40 per share to $0.28 per share, the
conversion price of $3,900,000 of convertible debentures held by the short term
debenture purchasers and to reduce the exercise price of warrants to purchase
5,625,000 shares of common stock associated with the convertible debentures from
$0.40 per share to $0.28 per share. The Company filed a registration statement
for the new warrants associated with the short term debentures and the
additional shares which would result from the conversion of the convertible
debentures at the new conversion price on May 14, 2007. The Company received a
comment letter regarding the registration from the Commission on June 14, 2007,
but has not yet responded to the letter. Outstanding principal under the
short-term debentures at June 30, 2007 is $971,429.

Notes payable in the amount of $150,000 are related to certain promissory notes
issued in April and May 2007. These promissory notes bear interest at 10% per
annum and were originally scheduled to mature ninety days from issuance, before
entering into certain definitive agreements in August 2007, which will result in
the extinguishment of the debt (see Note 11 - Subsequent Events). As a further
inducement to enter into these promissory notes, the Company granted warrants to
the lenders to purchase 75,000 shares of the Company's common stock exercisable
at $0.40 per share and expiring three years from date of issuance. The relative
fair value of the warrants was determined using the Black-Scholes option-pricing
model and was recorded as a note discount and will be amortized to interest over
the life of the debentures. At June 30, 2007 the outstanding principal balance
under promissory notes issued in April and May 2007 was $150,000 and the
unamortized note discount was $3,749.


Other notes:

The Company has issued two notes which are due on demand and bear interest at 9%
per annum. At June 30, 2007, the outstanding principal balance under the notes
was $214,670.



                  (Remainder of page intentionally left blank)



                                      Q-27
<PAGE>

NOTE 5 - CAPITAL LEASE

Capital lease

The Company leases equipment which is classified as capital lease arrangements.
Capital lease obligations were as follows:

                                                           June 30
                                                             2007
                                                      ------------------

Capital lease for equipment                           $          8,308

Less: current portion                                           (2,332)
                                                      ------------------

Capital lease obligations, net of current portion     $          5,976
                                                      ==================

NOTE 6 - COMMON STOCK

Shares Reserved for Future Issuance:

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

                                                            June 30
                                                              2007
                                                      ------------------

2005 Equity Incentive Plan                                   3,597,000
Common stock warrants                                       15,832,229
                                                      ------------------

Total                                                       19,429,229
                                                      ==================

Issuance of common stock as consideration for services:

On April 7, 2006, the Company entered into an investor relations agreement with
Emerging Markets Consulting, LLC ("EMC"). Pursuant to the agreement the Company
issued 100,000 shares of its common stock to EMC having a market value of
$70,000, which was recorded as a component of general and administrative
expense. Further pursuant to the agreement, the Company issued to EMC an
additional 100,000 shares of common stock upon renewal of the agreement in
December 2006. These shares had a market value of $30,000 and were recorded as a
component of general and administrative expense. On April 9, 2007, the Company
entered into a new investor relations agreement with EMC pursuant to which it
issued an additional 100,000 shares of its common stock to EMC having a market
value of $18,000, which expense was recorded as a component of general and
administrative expense.

Also pursuant to these agreements with EMC, the Company issued 100,000 warrants
for common stock in each of April 2006, November 2006, and April 2007 with an
exercise price of $1.15, $1.00, and $0.40 per share, respectively. Each of the
warrants had a term of five years from date of issuance.

                                      Q-28
<PAGE>

NOTE 7 - 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 "Intraop Medical Corporation 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 and have 10-year contractual terms.

Effective January 1, 2006, the Company adopted SFAS 123(R) using the modified
prospective transition method, which requires the measurement and recognition of
compensation expense for all share-based payment awards made to the Company's
employees and directors including stock options under the New Plan. The
Company's financial statements for the three months and nine months ended June
30, 2007, reflect the effect of SFAS 123(R). In accordance with the modified
prospective transition method, the Company's financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R). Share-based compensation expense recognized is based on the value
of the portion of share-based payment awards that is ultimately expected to
vest. Share-based compensation expense recognized in the Company's Consolidated
Statements of Operations during the three months ended June 30, 2007 included
compensation expense for share-based payment awards granted prior to, but not
yet vested, as of December 31, 2005 based on the grant date fair value estimated
in accordance with the pro forma provisions of SFAS 123 and compensation expense
for the share-based payment awards granted subsequent to December 31, 2005 based
on the grant date fair value estimated in accordance with the provisions of SFAS
123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to
attribute the value of share-based compensation to expense using the
straight-line attribution. Share-based compensation expense related to stock
options for the three months and nine months ended June 30, 2007, was $17,930
and $65,935 respectively. The corresponding amounts for the three months and
nine months ended June 30, 2006 were $53,162 and $125,557 respectively.

Upon adoption of SFAS 123(R), the Company elected to value its share-based
payment awards granted after January 1, 2006 using the Black-Scholes
option-pricing model, which was previously used for its pro-forma information
required under SFAS 123. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. The Black-Scholes model requires the input of
certain assumptions. The Company's options have characteristics significantly
different from those of traded options, and changes in the assumptions can
materially affect the fair value estimates.

                                      Q-29
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)


The fair value of options granted under the Plan and the New Plan were estimated
at the date of grant using the Black-Scholes model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
<S>                        <C>          <C>              <C>              <C>
                                Three months ended              Nine months ended
                                    June 30,                        June 30,
                          ----------------------------  --------------------------------
                              2007          2006             2007            2006
                          ----------------------------  --------------------------------

Expected term (in years)    6.5 to 10    5.1 to 6.5        5.4 to 10        4 to 10
Risk-free interest rate     4.53% to      4.99% to         4.53% to        4.41% to
                              6.63%         511%             4.66%           5.11%
Expected volatility                                       172.65 to       103.37% to
                             178.26        131.35%           178.26         131.35%
Expected dividend yield        0%            0%               0%              0%
  Weighted average fair
    value at grant date       0.19          $0.45            0.29            $0.57
</TABLE>

The expected term of stock options represents the weighted-average period the
stock options are expected to remain outstanding. The expected term is based on
the observed and expected time to post-vesting exercise and forfeitures of
options by employees. Upon the adoption of SFAS 123(R), the Company determined
the expected term of stock options using the simplified method as allowed under
SAB107.

Prior to January 1, 2006, the Company determined the expected term of stock
options based on the option vesting period. Upon the adoption of SFAS 123(R),
the Company used historical volatility measured over a period equal to the
option expected terms in deriving its expected volatility assumption as allowed
under SFAS 123(R) and SAB 107. Prior to January 1, 2006, the Company also used
its historical stock price volatility in accordance with SFAS 123 for purposes
of its pro-forma information. The risk-free interest rate assumption is based
upon observed interest rates appropriate for the term of the Company's stock
options. The expected dividend assumption is based on the Company's history and
expectation of dividend payouts.

As share-based compensation expense recognized in the Consolidated Statements of
Operations for the three months ended June 30, 2007 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on historical experience. In the
Company's pro forma information required under SFAS 123 for the periods prior to
January 1, 2006, the Company accounted for forfeitures as they occurred.


                  (Remainder of page intentionally left blank)


                                      Q-30
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

The effect of recording share-based compensation expense for the three and nine
months ended June 30, 2007 is as follows:
<TABLE>
<CAPTION>
<S>                                               <C>                        <C>
                                                    Three months              Nine months
                                                        ended                    ended
                                                    June 30, 2007            June 30, 2007
                                                  ------------------        ----------------
Stock-based compensation expense related to
 employee stock options and employee stock
 purchases                                          $         17,930          $       65,935
Tax benefit                                                        -                       -
                                                  ------------------        ----------------
Net decrease in net earnings                        $         17,930          $       65,935
                                                  ==================        ================

Effect on:
Cash flows from operating activities                               -                       -
Cash flows from financing activities                               -                       -

Effect on:
Net earnings per share -- Basic                     $              -          $            -
                                                  ==================        ================
Net earnings per share -- Diluted                   $              -          $            -
                                                  ==================        ================
</TABLE>

Total share-based compensation expense capitalized as part of inventories for
the three months and nine months ended June 30, 2007 was $3,670 and $10,147
respectively. Total share-based compensation expense applied to warranty reserve
for the three months and nine months ended June 30, 2007 was $309 and $1,013
respectively.


Activity under the New Plan is presented below:
<TABLE>
<CAPTION>
<S>                        <C>          <C>         <C>         <C>         <C>
                                                                  Weighted
                                                                  Average
                                                      Weighted    Remaining   Aggregate
                            Shares                    Average    Contractual  Intrinsic
                            Available    Number of    Exercise      Term        Value
                           for Grant      Shares       Price     (in years)      (1)
                           -----------  -----------  ----------  -----------  ----------
Balance at September 30,
 2006                       1,857,000    1,740,000       $0.71         6.13           -
Granted                      (183,500)     183,500        0.34            -           -
Authorized                          -            -           -            -           -
Cancelled or expired           83,000      (83,000)      (0.55)           -           -
Exercised                           -            -           -            -           -
                           -----------  -----------  ----------  ----------- -----------
Balance at June 30, 2007    1,756,500    1,840,500        0.68         5.69   $       -
                           -----------  -----------  ----------  ----------- -----------
Exercisable at June 30,
 2007                                    1,617,554        0.71         5.26   $       -
                           ===========  ===========  ==========  =========== ===========
</TABLE>

                                      Q-31
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)


(1) The aggregate intrinsic value represents the total pre-tax intrinsic value,
based on the Company's closing stock price of $0.21 as of June 30, 2007, which
would have been received by the option holders had all option holders exercised
their options as of that date.

Total options outstanding under the New Plan at September 30, 2006, comprised
the following:

                     Options            Weighted           Options
      Option       Outstanding          Average         Exercisable
     Exercise         as of            Remaining            as of
      Price       September 30,     Contractual Life    September 30,
                       2006              (Years)            2006
    ----------  ------------------  ----------------  -----------------
      $0.500          97,000              1.87              97,000
      0.540           50,500              9.36              40,875
      0.550          300,000              1.20             300,000
      0.580          602,000              9.19             380,194
      0.700            3,500              9.36                 777
      0.800          377,000              5.55             377,000
      0.880          120,000              4.55             120,000
      1.250          160,000              7.64             135,333
      1.375           30,000              7.51              25,000
                ------------------                    -----------------

      Total        1,740,000                             1,476,179
                ==================                    =================


             Total options outstanding under the New Plan at June 30, 2007,
comprised the following:

                     Options                               Options
                   Outstanding      Weighted Average     Exercisable
      Option          as of            Remaining            as of
     Exercise     June 30, 2007       Contractual       June 30, 2007
      Price                           Life (Years)
    ----------  ------------------  ----------------  -----------------
      $0.220          13,500              9.76              10,389
      $0.350         170,000              9.52              79,444
      0.500           89,500              1.26              89,500
      0.540           20,000              8.61              20,000
      0.550          300,000              0.45             300,000
      0.580          557,000              8.44             436,944
      0.700            3,500              8.61               1,652
      0.800          377,000              4.81             377,000
      0.880          120,000              3.80             120,000
      1.250          160,000              6.89             153,875
      1.375           30,000              6.76              28,750
                ------------------                    -----------------

      Total        1,840,500                             1,617,554
                ==================                    =================

                                      Q-32
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

SFAS 123(R) requires the Company to present pro forma information for the
comparative period prior to the adoption as if it had accounted for all of its
stock options under the fair value method of SFAS 123.

The following table illustrates the pro forma information regarding the effect
on net earnings and net earnings per share if the Company had accounted for the
share-based employee compensation under the fair value method of accounting:
<TABLE>
<CAPTION>
<S>                                     <C>           <C>             <C>           <C>
                                            Three months ended            Nine months ended
                                                 June 30,                     June 30,
                                             2007          2006            2007         2006
                                       ----------------------------  ---------------------------
Net loss available to common
 stockholders,
  as reported                            $(2,645,341)  $(2,700,177)    $(6,990,127) $(6,019,773)
Compensation recognized under APB 25          -             -               -            -
Compensation recognized under SFAS 123        -             -               -          (347,029)
                                       ----------------------------  ---------------------------

Pro-forma net loss available to common
          stockholders                   $(2,645,341)  $(2,700,177)    $(6,990,127) $(6,366,802)
                                       ============================  ===========================

Net loss per share:

        Basic and diluted - as
         reported                        $     (0.10)  $     (0.13)    $     (0.26) $     (0.29)
                                       ============================  ===========================

        Basic and diluted - pro-forma    $     (0.04)  $     (0.09)    $     (0.11) $     (0.31)
                                       ============================  ===========================
</TABLE>

                  (Remainder of page intentionally left blank)


                                      Q-33
<PAGE>

NOTE 8 - WARRANTS

The following warrants are each exercisable for one share of common stock:
<TABLE>
<CAPTION>
<S>                                  <C>           <C>                  <C>
                                     Number of          Weighted          Aggregate
                                      Shares            Average             Price
                                                         Price
                                   ---------------  ----------------  ------------------

 Balance at September 30, 2006         17,371,428   $          0.44   $       7,614,574
 Warrants granted                       9,068,259              0.30           2,755,767
 Warrants exercised                             -                 -                   -
 Warrants cancelled                    (7,232,551)            (0.41)         (2,960,384)
 Warrants expired                      (3,374,907)            (0.47)         (1,578,579)
                                   ---------------  ----------------  ------------------

 Balance at June 30, 2007              15,832,229   $          0.37   $       5,831,378
                                   ===============  ================  ==================
</TABLE>

The outstanding warrants are comprised of the following:

                          Warrants         Weighted Average
   Exercise             Outstanding            Remaining
     Price                as of           Contractual Life
                      June 30, 2007             (Years)
---------------     ------------------  ----------------------
    $0.280                   7,679,938           3.47
     0.400                   7,550,000           3.25
     0.700                     119,100           3.17
     1.000                     100,000           3.77
     1.150                     100,000           4.38
     1.250                     214,100           1.32
     1.375                      69,091           1.51
                    ------------------
     Total                  15,832,229
                    ==================

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

                2008                      44,100
                2009                     219,091
                2010                   7,570,830
                2011                   6,512,500
                2012                   1,485,708
                                 ---------------
                                      15,832,229
                                 ===============



The fair value of the warrants issued to EMC (see Note 6) of $56,865 and $43,920
was recorded as marketing expense in the nine months ended June 30, 2006 and
June 30, 2007, respectively.


                                      Q-34
<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

In April and May 2007 the Company issued $500,000 of promissory notes bearing
interest at 10% per annum and maturing ninety days from date of issuance (see
Note 4). As a further inducement to enter into these promissory notes, the
Company granted warrants to the lenders to purchase 250,000 shares of the
Company's common stock exercisable at $0.40 per share and expiring three years
from date of issuance. The relative fair value of these warrants of $34,076 was
recorded as a debt discount and will be amortized into interest expense over the
life of the notes.


The value of the warrants issued during the three months ended June 30, 2007,
were determined using the Black-Scholes option-pricing model based on the
following assumptions:

                                          Three months ended
                                           June 30, 2007
                                     --------------------------

Expected life (in years)                       3 to 5
Risk-free interest rate                    4.57% to 4.67%
Expected volatility                      178.85% to 180.73%
Expected dividend yield                          0%


 NOTE 9 - EMPLOYEE BENEFIT PLAN

The Company maintains a 401(k) defined contribution plan that covers
substantially all of its employees. Participants may elect to contribute
compensation up to the maximum limit imposed by federal tax law. The Company, at
its discretion, may make matching contributions to the plan. The Company has
made no matching contributions to the plan through June 30, 2007.


NOTE 10 - OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Net revenues by geographic area are presented based upon the region of
destination. No other 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             Nine months ended
                              June 30,                       June 30,
                   ------------------------------  ----------------------------
                         2007            2006            2007           2006
                   --------------  --------------  -------------  -------------

Europe               $     98,850    $     24,588    $   327,524    $ 2,040,066
Asia                      869,000               -      1,836,883              -
United States             120,835          60,831        232,716        280,675
                   --------------  --------------  -------------  -------------

Total Revenue        $  1,088,685    $     85,419    $ 2,397,123    $ 2,320,741
                   ==============  ==============  =============  =============

                                      Q-35
<PAGE>

NOTE 10 - 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 countries as at June 30, 2007.


                       Three months ended
                         June 30, 2007
                     ------------------------

United States                      190,158
Europe                               6,250
Asia                                 3,106
                     ---------------------

Total                              199,514
                     =====================

NOTE 11 - SUBSEQUENT EVENTS

The following subsequent events occurred between July 1, 2007 and August 14,
2007.

In July 2007, the Company entered into an amendment to the Product Financing
Arrangement to increase the ratio of borrowing relative to the amount of
financed collateral. Under the terms of the amendment, subject to the Board
approval, the Company agreed to grant to the lender warrants to purchase 100,000
shares of its common stock at an exercise price of $0.20 per share with
expiration of two years from the date of issuance.

In July 2007, the Company entered into a Final Settlement Agreement and Mutual
Release, or Settlement Agreement, with DLA Piper US LLP, or DLA Piper, with
respect to the settlement of a dispute between the two parties concerning the
amount of attorneys' fees billed by DLA Piper to us. Pursuant to the Settlement
Agreement, we will pay DLA Piper the total sum of $228,000 in six equal monthly
payments of $38,000 each, beginning on July 2, 2007 and on the fifteenth of the
month thereafter through November 15, 2007. In addition, pursuant to the
Settlement Agreement we have agreed to issue to DLA Piper a five-year warrant to
purchase 400,000 shares of IntraOp common stock at an exercise price of $0.45
per share. A warrant previously issued to DLA Piper a warrant dated October 27,
2003 to purchase 150,000 shares of IntraOp common stock has been cancelled in
connection with the execution of the Settlement Agreement. We have also agreed
with DLA Piper that we will register with the SEC the shares issuable upon
exercise of the warrants issued pursuant to the Settlement Agreement. The
Settlement Agreement also provides that the Company and DLA Piper will release
each other from any claims occurring or existing at any time up to and including
the effective date of the Settlement Agreement, except for the obligations set
forth in the Settlement Agreement.

In August 2007, the Company entered into a series of definitive binding
agreements, (the "August Agreements") whereby:

         An investor group led by Lacuna Hedge Fund LLP (the "Lacuna Investors")
         will pay $3,366,524 to purchase an aggregate of 42,081,556 shares of
         the Company's common stock and warrants to purchase an aggregate of
         165,589,736 shares of common stock, which have an exercise price of
         zero and which will be exercised at a subsequent closing (the "Second
         Closing") to occur after

                                      Q-36
<PAGE>

 NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)

         such time as, among other things, the Company obtains stockholder
         approval to amend the Company's Amended and Restated Articles of
         Incorporation to increase the authorized number of shares of common
         stock to 500,000,000. The Lacuna Investors further agreed, subject to
         certain terms and conditions including, but not limited to, stockholder
         approval to amend the Company's Amended and Restated Articles of
         Incorporation to increase the authorized number of shares of common
         stock to 500,000,000, to invest an additional $1,633,476 to purchase an
         aggregate of 20,418,444 shares of the Company's common stock at the
         Second Closing.

         Certain related parties will pay $54,000 for warrants to purchase an
         aggregate of 675,000 shares of the Company's common stock, which bear
         an exercise price of zero and which will be exercised at the Second
         Closing.

         In exchange for: (i) the extinguishment in full of their convertible
         debentures; (ii) the cancellation of 6,250,000 warrants related to
         those debentures; and (iii) the termination of the registration rights
         agreements related to the debentures and warrants; holders of the
         convertible debentures and related warrants will: (i) convert their
         outstanding principal of $4,400,000 into 15,178,571 shares of the
         Company's common stock; (ii) sell 8,303,571 of those converted shares
         to the Lacuna Investors for $880,000; (iii) receive warrants to
         purchase an aggregate of 16,003,077 shares of the Company's common
         stock, which have an exercise price of zero and which will be exercised
         at the Second Closing; and (iv) waive all rights to any accrued and
         unpaid interest related to their debentures.

         In exchange for: (i) the extinguishment of their convertible debentures
         in full by the Second Closing; (ii) the cancellation of 2,500,000
         warrants related to those debentures; and (iii) the termination of the
         registration rights agreements related to the debentures and warrants;
         holders of the convertible debentures and related warrants will: (i)
         convert their outstanding principal of $1,750,689 into 4,376,722 shares
         of the Company's common stock and will convert the remaining $249,311
         into 623,278 shares of the Company's common stock at the Second
         Closing; (ii) sell 1,875,000 of those converted shares to the Lacuna
         Investors for $400,000; (iii) receive warrants to purchase an aggregate
         of 5,653,577 shares of the Company's common stock, which have an
         exercise price of zero and which will be exercised at the Second
         Closing; and (iv) waive all rights to any accrued and unpaid interest
         related to their debentures.

         In exchange for: (i) the extinguishment in full of short-term
         debentures in principal amount of $771,429; (ii) cancellation of
         warrants to purchase an aggregate of 826,528 shares of the Company's
         common stock related to those debentures; and (iii) the termination of
         the registration rights agreements related to the debentures and
         warrants; holders of the short-term debentures and related warrants who
         were also convertible debenture holders will: (i) receive an aggregate
         cash payment of $400,000, warrants to purchase an aggregate of
         5,000,0000 shares of the Company's common stock, which have an exercise
         price of zero and which will be exercised at the Second Closing; and
         (ii) waive all rights to any accrued and unpaid interest related to
         their debentures.

         In exchange for: (i) the extinguishment in full of their short-term
         debentures in the principal amount of $428,571; (ii) the repricing of
         warrants to purchase an aggregate of 1,328,410 shares of the Company's
         common stock related to those debentures down to $0.08 per share; and
         (iii) the termination of the registration rights agreements related to
         debentures and warrants; holders of the debentures and related
         warrants, including insiders of the Company will: (i) convert their
         debentures into warrants to purchase an aggregate of 5,357,137 shares
         of the Company's common stock, which have an exercise price of zero and
         which will be exercised at the Second Closing; and (ii) waive all
         rights to any accrued and unpaid interest related to their debentures.

                                      Q-37
<PAGE>

 NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)

         In exchange for: (i) the extinguishment in full of their short term
         promissory notes issued in April and May 2007 in the principal amount
         of $400,000; (ii) the repricing of warrants to purchase an aggregate of
         200,000 shares of the Company's common stock related to those
         promissory notes and the Product Financing Arrangement down to $0.08
         per share; and (iii) the termination of the registration rights related
         to promissory notes and warrants; holders of the promissory notes and
         related warrants, including insiders of the Company will: (i) convert
         their promissory notes into warrants to purchase an aggregate of
         5,000,000 shares of the Company's common stock, which bear an exercise
         price of zero and which will be exercised at the Second Closing; and
         (ii) waive all rights to any accrued and unpaid interest related to
         their promissory notes.

         In exchange for forbearance under a short term promissory note in
         principal amount of $100,000 issued in May 2007, the Company will
         reprice warrants to purchase an aggregate of 50,000 shares of the
         Company's common stock related to those promissory notes down to $0.08
         per share.

         In exchange for the extinguishment in full of $50,000 of principal
         related to a promissory note bearing interest at 9%; the note holder
         will: (i) converte the extinguished principal into warrants to purchase
         an aggregate of 625,000 shares of the Company's common stock, which
         have an exercise price of zero and which will be exercised at the
         Second Closing and (ii) waive all rights to any accrued and unpaid
         interest related to their promissory notes.

         In exchange for the extinguishment of $50,000 of principal related to a
         promissory note bearing interest at 9%, the note holder will convert
         the extinguished principal into 625,000 warrants for common shares
         which bear an exercise price of zero and which will be exercised at the
         Second Closing.

         In exchange for the extinguishment of $252,100 of accounts payable and
         accrued liabilities, the holders, which included related parties, will
         convert the payables and accrued liabilities into warrants to purchase
         an aggregate of 3,151,250 shares of the Company's common stock, which
         have an exercise price of zero and which will be exercised at the
         Second Closing.

         In exchange for the extinguishment of $350,000 of principal related to
         a promissory note bearing interest at 9%, a related party will convert
         the extinguished principal into warrants to purchase an aggregate of
         4,375,000 shares of the Company's common stock, which have an exercise
         price of zero and which will be exercised at the Second Closing.

         In exchange for (i) a fee of $85,000; (ii) a reduction of
         the exercise price from $0.40 per share to $.05 per share on 2,400,000
         warrants to purchase the Company's common stock and the ability to net
         exercise the warrant; the holders of the Company's senior debentures
         (i) agreed to certain changes to the terms of the senior debentures;
         and (ii) will net exercise their warrant in full in exchange for shares
         of the Company's common stock.

         The Company will pay fees of $260,000 and will issue warrants to
         certain financial advisors to purchase an aggregate of 10,780,732
         shares of the Company's common stock, which have an exercise price of
         $0.08 per share.


                                      Q-38
<PAGE>

 NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)

         The Company entered into a registration rights agreement with the
         parties listed above whereby, upon the request of a
         majority-in-interest of the Investors (the "Request"), within 45 days
         of such Request, the Company shall file a registration statement with
         the Securities and Exchange Commission registering the shares and
         warrants held by the Investors, to the extent such shares are not
         already registered. The Company agreed to use its commercially
         reasonable efforts to cause such registration statement to become
         effective as promptly as practicable. The Company also agreed not file
         any registration statement (other than a registration statement on Form
         S-8) prior to the effectiveness of the registration statement described
         above.

         Subsequent to the closing of the above described transactions, the
         Company will have approximately 89 million common shares outstanding,
         4,665,701 common shares reserved for issuance pursuant to warrants for
         common shares and 3,597,000 shares reserved for issuance pursuant to
         options issued or to be issued under the Plan, and will have issued an
         additional 212,054,778 warrants for common shares which will be
         exercised at the Second Closing which is contingent upon the Company
         obtaining stockholder approval to amend the Company's Amended and
         Restated Articles of Incorporation to increase the authorized number
         of shares of common stock to 500,000,000.

         Subsequent to the Second Closing, and assuming no other issuances of
         common shares or warrants, the Company will have approximately 323
         million common shares outstanding, 15,446,433 common shares reserved
         for issuance pursuant to warrants for common shares and 25,659,664
         shares reserved for issuance pursuant to options issued or to be
         issued under the Plan.

In August 2007, the Company entered into an amendment to the Product Financing
Arrangement, to temporarily increase the available borrowing under the Product
Financing Arrangement to $5,000,000 through September 30, 2007 and paid an
accommodation fee of $130,000 to effect that amendment.

The Company made the following payments of principal on it notes payable in
addition to those made as part of the August Agreements: $27,778 due under the
10% senior secured debentures,$191 due under the capital leases, and $50,000
under the Inventory Financing Arrangement, fully extinguishing this obligation.
Additionally the Company received proceeds from notes payable of $ 854,540 under
the Product Financing Arrangement.


                                      Q-39