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


                                   FORM 10-QSB


     [X]         Quarterly Report under Section 13 or 15(d) of the Securities
                 Exchange Act of 1934
                 For the quarterly period ended December 31, 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
         incorporation or organization)                  Identification No.)

                               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: 358,402,987 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]


<PAGE>


                           INTRAOP MEDICAL CORPORATION

                                   FORM 10-QSB

                                TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION.................................................3
   Item 1.  Financial Statements...............................................3
   Item 2.  Management's Discussion and Analysis or Plan of Operation..........3
   Item 3.  Controls and Procedures...........................................23

PART II - OTHER INFORMATION...................................................24
   Item 1.  Legal Proceedings.................................................24
   Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.......24
   Item 3.  Defaults upon Senior Securities...................................24
   Item 4.  Submission of Matters to a Vote of Security Holders...............24
   Item 5.  Other Information.................................................24
   Item 6.  Exhibits..........................................................25

SIGNATURES....................................................................26



INDEX TO FINANCIAL STATEMENTS................................................Q-1


                                       2
<PAGE>


                         PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

         The accompanying unaudited financial statements, listed on the index to
financial statements on page 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 months ended December 31, 2007 are not
necessarily indicative of the results that can be expected for the year ending
September 30, 2008.


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, 2007 and 2006 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, was incorporated in Nevada on
November 5, 1999 under the name Digitalpreviews.com to engage in a consulting
and seminar business. We did not generate any revenue from our consulting and
seminar business and in September 2003, we formally abandoned our consulting and
seminar business. We changed our name to "Intraop Medical Corporation" on
January 21, 2004. On March 9, 2005, we completed a merger with Intraop Medical,
Inc., a privately-held manufacturer of a cancer treatment system, pursuant to
which Intraop Medical, Inc. was merged with and into IntraOp and Intraop
Medical, Inc.'s business became our sole business. Since the merger, our
business has been to develop, manufacture, market, distribute and service
Mobetron, a proprietary mobile electron-beam cancer treatment system designed
for use in intraoperative electron-beam radiation therapy, or IOERT. Although
intraoperative radiation therapy may be delivered using a radiation source other
than electrons, in this report we use the term IOERT to mean both intraoperative
radiation therapy in general and in the case of Mobetron, specifically
intraoperative electron-beam radiation therapy. 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
adopted for the IOERT procedure. Mobetron can be moved from operating room to
operating room, thereby increasing its utilization and cost effectiveness. In
addition to IOERT, Mobetron also can be used as a conventional radiotherapy
electron-beam accelerator.

                                       3
<PAGE>

         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,
if any, 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 our 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.

         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.

                                       4
<PAGE>

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

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 for the three months ended
December 31, 2007,reflects 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 during the three months ended December 31, 2007 and ,
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 $661,710 before taxes on earnings, for the three months
ended December 31, 2007. During the three months ended December 31, 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.

                                       5
<PAGE>

         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.

         As share-based compensation expense recognized in the Unaudited
Consolidated Statements of Operations for three months ended December 31, 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 December 31, 2007, there was $2,912,631 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 3.23 years.












                  (Remainder of page intentionally left blank)



                                       6
<PAGE>

Results of Operation for the three months ended December 31, 2007 compared to
the three months ended December 31, 2006.

<TABLE>
<CAPTION>
Revenue, Costs of Revenue and Gross Margins

                                          Three months ended December 31,
Revenue                                2007           2006         Change
-------------------------------------------------------------------------
<S>                            <C>            <C>            <C>
  Product sales                $  3,732,743   $    145,143   $  3,587,600
  Service                           128,861        104,473         24,388
-------------------------------------------------------------------------
Total Revenue                  $  3,861,604   $    249,616   $  3,611,988
-------------------------------------------------------------------------

Costs of Revenue
-------------------------------------------------------------------------
  Product sales                $  2,645,179   $     80,358   $  2,564,821
  Service                            63,429         56,572          6,857
-------------------------------------------------------------------------
Total Costs of Revenue         $  2,708,608   $    136,930   $  2,571,678
-------------------------------------------------------------------------

                                          Three months ended December 31,
Gross Margin                           2007           2006         Change
-------------------------------------------------------------------------
  Product sales                $  1,087,564   $     64,785   $  1,022,779
                                        29%            45%

  Service                            65,432         47,901         17,531
                                        51%            46%
-------------------------------------------------------------------------
Total Gross Margin             $  1,152,996   $    112,686   $  1,040,310
                                        30%            45%
=========================================================================
</TABLE>


Product Sales

         Product sales revenue, which includes systems and accessories sales,
but excludes parts sold as part of our service business, included sales to two
U.S. customers and one overseas customer in the three months ended December 31,
2007 as compared to only sales of accessories and items incidental to the sales
of systems in the three months ended December 31, 2006.

         The two U.S. sales were both in California, one to Stanford Hospital
and Clinics and the other to St. Joseph's Hospital Cancer Center in Orange
County, bringing our total U.S. deliveries to ten machines. Stanford Hospital &
Clinics is known worldwide for advanced patient care provided by its physicians
and staff, particularly for the treatment of rare, complex disorders, including
cancer. Mobetron will replace Stanford's former intraoperative radiation therapy
system, an orthovoltage x-ray machine, and will be used to treat a wide variety
of cancers, such as colorectal, gynecological, gastric, pancreatic, orthopedic,
pediatric, breast and head and neck. St. Joseph's, which treats nearly 1,500 new
cancers patients per year, recently became one of 16 hospitals named by the
National Cancer Institute to participate in a three-year pilot project for the
Institute's Community Cancer Centers Program, the only hospital on the West
Coast named for the study.

                                       7
<PAGE>

         Our overseas sale was made to Centro di Riferimento Oncologico (CRO) in
Aviano, Italy. CRO is the fourth Italian hospital to purchase Mobetron, and one
of the few hospitals in Italy that has been given the status of Institute for
Research in the Cure of Cancer and Scientific Study. The CRO treats more than
3,000 cancer patients per year.

An analysis of our system sales for the three months ended December 31, 2007 is
as follows:
                                              Three Months     Fiscal Year
                                                  ended           ended
                                               December 31,    September 30,
    Mobetron Systems Sales Analysis               2007            2007
    ------------------------------------------------------------------------
    Systems Sold                                          3                3

      Systems Revenue                          $  3,699,465     $  3,210,864
      Revenue per Mobetron System                 1,233,155        1,070,288
      Materials cost per system sold                765,520          733,853

      Materials Margin Per System                   467,635          336,435
                                                        38%              31%

      Labor, Overhead and Warranty                  326,236          415,105
      Labor Overhead and Warranty Per
       System                                       108,745          138,368

    Gross Margin per System                    $    358,890     $    198,067
                                                        29%              19%
    ========================================================================


         Per system sales revenue for the three months ended December 31, 2007
(product sales less sales of accessories and less revenue recognized in the
current period but relating to systems sold in prior period) were well ahead of
per systems sales revenue fiscal year ended September 30, 2007. Materials cost
per system however were lower in fiscal year 2007 than in the three months ended
December 31, 2007, however the high per system sales revenue and lower overhead
and warranty in the three months ended December 31, 2007 preserved per system
materials margins and overall gross margins. Shortly after the end of our 2007
fiscal year we hired an outside engineering firm to help us define future cost
reduction opportunities and feature upgrades for Mobetron. Although the majority
of these efforts will not likely be reflected in cost of materials in the short
term, over the long term we are optimistic about increasing product margins.

Service

         The majority of service revenue for the three months ended December 31,
2007 came from annual service contracts which decreased from six such contracts
in the three months ended December 31, 2006 to five such contracts at December
31, 2007. Overall service revenue for the three months ended December 31, 2007
was higher than overall service revenue for the three months ended December 31,
2006 primarily due to higher repair parts sales in the three months ended
December 31, 2007. 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, although we also recently obtained direct contracts with a few of their
customers in Europe, which revenue is included in the fiscal year ended
September 30, 2007.

                                       8
<PAGE>

Operating Expenses

         A comparison of our operating expenses for the three months ended
December 31, 2007 and December 31, 2006 follows:

<TABLE>
<CAPTION>
                                           Three months ended December 31,
                                         2007          2006        Change       Percent
---------------------------------------------------------------------------------------
<S>                              <C>           <C>           <C>                   <C>
Research and Development         $    471,825  $    163,462  $    308,363          189%
General & Administrative              718,769       534,489       184,280           34%
Sales and Marketing                 1,350,269       319,377     1,030,892          323%
---------------------------------------------------------------------------------------
Total Operating Expenses         $  2,540,863  $  1,017,328  $  1,523,535          150%
=======================================================================================
</TABLE>


         Share based compensation, mainly the non-cash cost of issuing options
 to our employees and directors was much higher in the three months ended
 December 31, 2007 versus the three months ended December 31, 2006 and played a
 large part in increasing operating expenses in all of the categories shown
 below:

     ------------------------------------------------------------------
                                    Three months ended December 31,
                                       2007                 2006
     ------------------------------------------------------------------

     Cost of revenues                  $    16,667          $       403
     Research and development              150,241                2,968
     General and administrative            164,460                3,786
     Sales and marketing                   330,342                5,846
                                ------------------   ------------------
              Total                    $   661,710          $    13,003
                                ==================   ==================


         The increase in share based compensation in the three months ended
December 31, 2007 was primarily the result of new options grants and option
exercise price reductions granted in that three month period to our employees
and directors. Following the significant dilution created by the equity sales
and other transactions entered into by us in August 2007 and completed in
October 2007, our Board of Directors approved (i) a reduction to $0.18 per share
in the exercise price of options to purchase 1,502,500 shares of common stock
previously issued to certain holders with exercise prices between $0.22 to
$1.375 per share, (ii) the issuance of options to purchase an additional
7,197,827 shares of common stock at an exercise price of $0.18 per share to
those same option holders, and (iii) an initial grant of options to purchase
18,330,000 shares of common stock to our new President and Chief Executive
Officer, Mr. John Powers, also with an exercise price of $0.18 per share. Under
SFAS 133(R), the cost of these grants is estimated to be approximately
$3,712,750 amortized over approximately four years.

                                       9
<PAGE>

         Research and development expenses increased by approximately 189% in
the three months ended December 31, 2007, in comparison to the three months
ended December 31, 2006. The majority of this increase came from a $120,000
non-recurring charge for contracting an outside engineering firm to help us
define future cost reduction opportunities and feature upgrades for Mobetron and
an increase by $147,274 in share based compensation as described above. We
believe that research and development expenses will continue to increase over
time as we develop new products and applications and continue our efforts to cut
Mobetron production costs.

         General and administrative expenses increased in the three months ended
December 31, 2007 versus the three months ended December 31, 2006. The majority
of this increase was due to the increased cost of share based compensation.
Although we also experienced increases in legal expenses related to our German
patent protection suits and increases in accounting expenses for the three
months ended December 31, 2007 compared to the three months ended December 31,
2006, these were nearly completely offset by a decrease of $71,119 in investor
relations expenses as we are no longer using certain investor relations firms
which we had under contract in the three months ended December 31, 2006. We
expect however that we will continue to grow general and administrative expenses
as overall staff and sales increase.

         Sales and marketing expenses quadrupled in the three months ended
December 31, 2007 in comparison to the three months ended December, 2006 as we
increased the number of employees and consultants in this area from six
people to fifteen. Consequently, expenses increased mainly due to increased cost
of share based compensation of $324,496, other increased personnel related
expenses, including related travel and entertainment expenses of $389,150, as
well as increased promotion and advertising expenses of $310,709 as we expand
our Mobetron sales efforts. Of the increase in promotion and advertising
expense, $150,000 was a non-recurring charge for certain expenses made on our
behalf by one of our European distributors.

         Interest Expense. Through certain transactions completed in August and
October 2007, we changed our capital structure significantly. As a part of those
transactions, we eliminated $6.4 million face value of convertible debentures
and related beneficial conversion features and debt discounts due to warrants,
$1,200,000 of short-term debentures, $500,000 of promissory notes sold in April
and May 2007, and an additional $350,000 of related party debt. Our senior
debentures, which bear interest at 10% per annum, and our Product Financing
Arrangement now represent the majority of our debt and drive interest expense
accordingly. Our Product Financing Arrangement has two classes of borrowings:
borrowings related to financed inventory prior to sale to a customer bear
interest at 12% per annum while borrowings related to financed purchase orders
and receivables, or factoring, bear interest at 24% per annum.

         An estimate of our new dollar weighted average borrowing rate is shown
below based on the interest rates and outstanding balances of our various types
of debt, before debt discounts of $192,137, at December 31, 2007.

                                             Balance at
                                            December 31,
Type of debt, net debt discounts                2007       Interest Rate
------------------------------------------------------------------------
Notes payable, related parties            $    119,002             9.00%
Product Financing Arrangement,
 inventory                                   3,132,365            12.00%
Product Financing Arrangement,
 factoring                                   2,654,645            24.00%
Senior debentures                            1,250,000            10.00%
Other notes                                     53,034             9.00%
------------------------------------------------------------------------
Total debt, before debt discounts         $  7,209,046
Dollar weighted average borrowing rate                            16.00%
========================================================================

                                       10
<PAGE>

Liquidity and Capital Resources

         We experienced net losses of $1,627,675 and $1,993,104 for the three
months ended December 31, 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 December 31, 2007, had an accumulated deficit of
$35,669,335. These matters, among others, raise substantial doubt about our
ability to continue as a going concern. In view of the matters described above,
recoverability of a major portion of the recorded asset amounts shown on our
consolidated balance sheet is dependent upon our ability to generate sufficient
sales volume to cover our operating expenses and/or to raise sufficient capital
to meet our payment obligations. Management is taking action to address these
matters, which include:

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

         o    Developing new markets overseas and expanding its sales efforts
              within the United States.

         o    Evaluating funding strategies in the public and private markets.

         Historically, management has been able to raise additional capital.
During the year ended September 30, 2007, we obtained capital through the
issuance of notes and the sale of common stock, the proceeds of which were used
for working capital and the repayment of liabilities. The successful outcome of
future activities cannot be determined at this time and there is no assurance
that if achieved, we will have sufficient funds to execute our intended business
plan or generate positive operating results.

Our primary cash inflows and outflows in fiscal years 2007 and 2006 were as
follows:

                            Three months ended December 31,
   Cash Flows                         2007              2006            Change
  ------------------------------------------------------------------------------
   Provided by (Used in):
    Operating Activities      $  (2,246,842)    $   1,011,868     $  (3,258,710)
    Investing Activities            (29,808)           (7,252)          (22,556)
    Financing Activities          2,242,799        (1,109,127)        3,351,926
  ------------------------------------------------------------------------------
   Net Increase/(Decrease)    $     (33,851)    $    (104,511)    $      70,660
  ==============================================================================

Operating Activities

         Net cash used for operating activities decreased by $3,258,710 in the
three months ended December 31, 2007 in comparison to the three months ended
December 31, 2006. Offsetting our net loss of $1,627,675 for the three months
ended December 31, 2007 were $916,117 of non-cash charges, primarily for share
based compensation. During the three months ended December 31, 2006, our net
loss of $1,993,104 was similarly offset by non-cash charges of $829, 529,
primarily for amortization of debt discounts, beneficial conversion features and
issuance costs related to our senior and convertible debentures, but also for
issuances of common stock, warrants, and options issued in lieu of cash
compensation. Additionally, large combined differences in other asset and
liability accounts of approximately $3,760,735 between the three months ended
December 31, 2007 and 2006 significantly affected operating cash flow during
those two three months. These accounts, which include inventories, accounts
receivable, accounts payable, customer deposits, and deposits with vendors, are
currently highly subject to short term fluctuations and will continue to be
volatile because of our low volume and timing of Mobetron sales and large per
system cost of Mobetron.

                                       11
<PAGE>

Investing Activities

         The increase in investing activities in the three months ended December
31, 2007 versus the three months ended December 31, 2006, was primarily due to
the acquisition of computer hardware and software in the three months ended
December 31, 2007.

Financing Activities

         Through certain transactions completed in August and October 2007, we
changed our capital structure significantly. As a part of those transactions, we
eliminated $6.4 million face value of convertible debentures and related
beneficial conversion features and debt discounts due to warrants, $1,200,000 of
short-term debentures, $500,000 of promissory notes sold in April and May 2007,
and an additional $350,000 of related party debt. These transactions, although
creating a more equity-based, stable financial structure, were highly dilutive.
Following the second closing of these transactions in October 2007, we had
324,470,524 basic shares outstanding and 43,329,760 potentially dilutive shares
from options and warrants outstanding at December 31, 2007, compared to
26,477,472 basic shares and 40,130,831 potentially dilutive shares from options,
warrants and convertible debentures as reported on our Form 10-QSB for the three
months ended June 30, 2007.

Debt and Lease Obligations

         At December 31, 2007, we had notes payable and obligations for leased
equipment from various sources as shown below. Interest rates on such debt range
from 9% on our promissory notes 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.


                                                                December 31,
                                                                    2007
                                                            --------------------

     Notes payable, related parties, current                   $    119,002
                                                            --------------------


     Product financing arrangement                             $  5,787,010
     Senior secured debentures                                    1,250,000
     Other notes                                                     53,034

     Less debt discounts due to warrants
                                                                   (192,137)
                                                            --------------------

     Notes payable, net of debt discounts and beneficial
      conversion features                                         6,897,907

     Less current portion                                        (6,897,907)
                                                            --------------------

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

                                       12
<PAGE>



         As of December 31 2007, future minimum lease payments that come due in
the fiscal years ending September 30 are as follows:

Period Ending September 30,                            Capital      Operating
                                                        Leases        Leases
-------------------------------------------------  ----------------------------
2008                                                  $    1,934     $  178,367
2009                                                       2,579        244,754
2010                                                       2,579        233,838
2011                                                         431              -

                                                   ----------------------------
Total minimum lease payments                               7,523     $  656,959
                                                                  =============

Less: Amount representing interest                          (371)
                                                   -------------

Present value of minimum lease payments                    7,152
Less: Current portion                                     (2,373)

                                                   -------------
Obligations under capital lease, net of current
 portion                                              $    4,779
                                                   =============


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
December 31, 2007 deferred revenue was $72,070, which is included under accrued
liabilities.

Off-Balance Sheet Arrangements

         We had no off-balance sheet arrangements to report for the three months
ended December 31, 2007.















                  (Remainder of page intentionally left blank)



                                       13
<PAGE>


                                  RISK FACTORS

The material risks that we believe are faced by IntraOp as of the date of this
report on Form 10-QSB are set forth below. This discussion of risks is not
intended to be exhaustive. The risks set forth below and other risks not
currently anticipated or fully appreciated by the management could adversely
affect the business and prospects of IntraOp.


                         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 $26.4 million in revenue through December 31, 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 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 December 31,
2007, maximum availability under the line was $6,000,000.

         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.

                                       14
<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.

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 each
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 Chief Scientist.

         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. Further, to the extent that we are unable
to negotiate favorable contract terms or to find alternate suppliers for key
parts manufactured by these suppliers, we may be subject to significant price
increases for the goods purchased from these suppliers resulting in a decrease
in product margins and profitability.

         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.

                                       15
<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.

         In June 2006, 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 was made on August 23, 2007 in which we prevailed in enjoining the
above named parties from selling or distributing their product in Germany. This
matter is subject to appeal.

         In a related matter, on June 21, 2007, Gio-marco S.p.A., 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 was made in January 2008 with oral arguments expected to take place
approximately 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.

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.

                                       16
<PAGE>

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 Scientist and John Powers, our
President and 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, Mr. Powers 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.

         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.

                                       17
<PAGE>

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.

         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.

                                       18
<PAGE>

         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.

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.

                                       19
<PAGE>

         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. 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.

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 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 reimbursement is
available for certain IOERT treatments, and although Medicare has recently
established an additional billing code which may allow increased reimbursement
for patients who undergo IOERT treatment, the rate of reimbursement under the
new 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 under the new code,
if any. Meanwhile, reimbursement under the already established codes, as with
all Medicare codes, is subject to change or elimination. 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. 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.

                                       20
<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.

                                       21
<PAGE>

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 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 $5.00 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.

         From August 2007 through the date of this filing, we issued, after
adjusting for warrant exercises in that same period, 319,270,519 shares of
common stock and warrants to purchase 12,130,732 of common stock which have not
been registered with the SEC and may not be sold except pursuant to a
registration statement filed with the SEC or an exemption from registration,
such as SEC Rule 144. Pursuant to certain agreements entered into in August
2007, we have agreed to register 296,508,532 shares of common stock and warrants
to purchase 10,780,732 of common stock upon the demand of the majority of the
holders of those shares and warrants. The holders have not yet demanded
registration of their shares.

                                       22
<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 were effective to insure that information we are
required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934(i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms
and (ii) is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.

         There has been no change in our internal control over financial
reporting during the three months ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.










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                                       23
<PAGE>


                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         In June 2006, we brought suit in 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 was made on August 23, 2007 in which we prevailed in enjoining the
above named parties from selling or distributing their product in Germany. This
matter is subject to appeal.

         In a related matter, on June 21, 2007, Gio-marco S.p.A., 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 was made in January 2008 with oral arguments expected to take place
approximately twelve months thereafter.


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

         In December 2007 we sold 1,175,000 shares of our stock for $94,000 to
certain third parties and related parties.

         On January 2, 2008, we sold 100,000 shares of our common stock to a
related party for $8,000.

         On February 13, 2008, provides we sold an additional 9,167,537 shares
of our common stock for an aggregate purchase price of up to $641,728.

         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

         We held our annual meeting of stockholders on October 15, 2007. A
summary of the matters voted upon and the results of such vote were reported in
our Form 10-KSB for the fiscal year ended September 30, 2007.


Item 5.  Other Information

         None.

                                       24
<PAGE>

Item 6.  Exhibits

Exhibit
Number                                Description
---------  ---------------------------------------------------------------------
31.1       Certification of Chief Executive Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002.
31.2       Certification of Chief Financial Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002.
32.1       Certification of Chief Executive Officer pursuant to Section 906 of
           the Sarbanes-Oxley Act of 2002.
32.2       Certification of Chief Financial Officer pursuant to Section 906 of
           the Sarbanes-Oxley Act of 2002.


                                       25
<PAGE>


                                   SIGNATURES

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

                                       INTRAOP MEDICAL CORPORATION


Date: February 14, 2008                By:   /s/ John P. Powers
                                           --------------------------------
                                              John P. Powers, Chief Executive
                                              Officer and President
                                              (Principal Executive Officer)

Date: February 14, 2008
                                       By:   /s/ Howard Solovei
                                           --------------------------------
                                              Howard Solovei, Chief Financial
                                              Officer
                                              (Principal Financial Officer and
                                              Principal Accounting Officer)



                                       26
<PAGE>


                           Intraop Medical Corporation
             Index to Consolidated Financial Statements (Unaudited)
                  For the Three Months Ended December 31, 2007


Consolidated Balance Sheet                                                   Q-2

Consolidated Statements of Operations                                        Q-3

Consolidated Statements of Cash Flows                                        Q-5

Notes to Consolidated Financial Statements                                   Q-7



                                      Q-1
<PAGE>

Intraop Medical Corporation
Consolidated Balance Sheet - Unaudited
--------------------------------------------------------------------------------
                                                                    December 31,
                                                                       2007
                                                                 ---------------
ASSETS
Current assets:
  Cash and cash equivalents                                        $    504,513
  Accounts receivable                                                 2,785,289
  Inventories, net                                                    1,487,293
  Inventories, under product financing arrangement                    3,557,434
  Prepaid expenses and other current assets                              62,773
                                                                 ---------------

        Total current assets                                          8,397,302

Property and equipment, net                                             190,461
Intangible assets, net                                                  265,042
Deferred financing cost                                                 154,826
Deposits                                                                260,651
                                                                 ---------------

        Total Assets                                               $  9,268,282
                                                                 ===============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable                                                 $  2,681,816
  Accrued liabilities                                                 1,018,712
  Capital lease obligations, current portion                              2,373
  Notes payable, related parties, current portion                       119,002
  Notes payable, other, current portion, net of unamortized
   debt discounts                                                     6,897,907
                                                                 ---------------

        Total current liabilities                                    10,719,810

  Capital lease obligations, net of current portion                       4,779
  Notes payable, other, net of current portion, unamortized
   debt discounts and beneficial conversion features                          -
                                                                 ---------------

        Total liabilities                                            10,724,589
                                                                 ---------------

Stockholders' deficit:
  Common stock, $0.001 par value: 500,000,000 shares authorized;
   324,470,524 shares issued and outstanding                            324,471
  Additional paid-in capital                                         34,038,557
  Treasury stock, at cost, 600,000 shares at $.25 per share            (150,000)
  Accumulated deficit                                               (35,669,335)
                                                                 ---------------

        Total stockholders' deficit                                  (1,456,307)
                                                                 ---------------

           Total liabilities and stockholders' deficit             $  9,268,282
                                                                 ===============


              See accompanying notes to these financial statements.


                                       Q-2
<PAGE>


Intraop Medical Corporation
Consolidated Statements of Operations - Unaudited
--------------------------------------------------------------------------------
                                                       Three months ended
                                                          December 31,
                                               ---------------------------------
                                                     2007              2006
                                               ---------------   ---------------

Revenues:
  Product sales                                  $  3,732,743      $    145,143
  Service                                             128,861           104,473
                                               ---------------   ---------------

  Total revenues                                    3,861,604           249,616
                                               ---------------   ---------------

Cost of revenues:
  Product sales (1)                                 2,645,179            80,358
  Service (1)                                          63,429            56,572
                                               ---------------   ---------------

  Total cost of revenues                            2,708,608           136,930
                                               ---------------   ---------------

Gross margin                                        1,152,996           112,686
                                               ---------------   ---------------

Operating expenses:
  Research and development (1)                        471,825           163,462
  General and administrative (1)                      718,769           534,491
  Sales and marketing (1)                           1,350,269           319,375
                                               ---------------   ---------------

        Total operating expenses                    2,540,863         1,017,328
                                               ---------------   ---------------

Loss from operations                               (1,387,867)         (904,642)

Other income                                          259,226           (56,513)
Interest income                                             7                 7
Interest expense                                     (467,541)       (1,031,956)
                                               ---------------   ---------------

Loss before taxes                                  (1,596,175)       (1,993,104)

Provision for income taxes                            (31,500)                -
                                               ---------------   ---------------

Net loss                                         $ (1,627,675)     $ (1,993,104)
                                               ===============   ===============

Basic and diluted net loss per share
 available to common shareholders                $      (0.01)     $      (0.08)
                                               ===============   ===============
Weighted average number of shares in
 calculating net loss per share:
 Basic and diluted                                265,068,966        26,329,346
                                               ===============   ===============


              See accompanying notes to these financial statements.


                                       Q-3
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Operations - Unaudited (Continued)
--------------------------------------------------------------------------------
                                                Three months ended December 31,
                                               ---------------------------------
                                                    2007              2006
                                               ---------------   ---------------
(1) Includes the following amounts related to
    share-based compensation expense of stock
    options:

Cost of revenues - Service                       $     16,667      $        403
Research and development                              150,241             2,968
General and administrative                            164,460             3,786
Sales and marketing                                   330,342             5,846
                                               ---------------   ---------------
        Total                                    $    661,710      $     13,003
                                               ===============   ===============


              See accompanying notes to these financial statements.


                  (Remainder of page intentionally left blank)


                                       Q-4
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited
--------------------------------------------------------------------------------
                                                Three months ended December 31,
                                               ---------------------------------
                                                     2007              2006
                                               ---------------   ---------------
Cash flows from operating activities:
  Net loss                                       $ (1,627,675)      $(1,993,104)
  Adjustments to reconcile net loss to net
   cash used for operating activities:
   Depreciation of property and equipment              21,363            19,359
   Amortization of intangible assets                   17,938            18,345
   Amortization of beneficial conversion
    rights                                                  -           296,316
   Amortization of debt discount                       92,636           308,745
   Amortization of debt issuance costs                 58,060           107,907
   Non-cash compensation for options issued           792,195            21,847
   Non-cash compensation for warrants issued          (16,075)           27,002
   Non-cash compensation for common stock
    issued                                                  -            30,000
  Changes in assets and liabilities:
     Accounts receivable                           (2,381,218)        3,078,750
     Inventories                                    1,565,269          (810,994)
     Prepaid expenses and other current assets         14,146            49,534
     Other assets                                     (12,266)          (19,253)
     Accounts payable                                (807,975)         (174,374)
     Accrued liabilities                               36,760            56,003
     Foreign exchange translation                           -            (4,215)
                                               ---------------   ---------------

     Net cash provided by/(used for) operating
      activities                                   (2,246,842)        1,011,868
                                               ---------------   ---------------

Cash flows used for investing activities:
  Acquisition of fixed assets                         (29,808)           (7,252)
                                               ---------------   ---------------

     Net cash used for investing activities           (29,808)           (7,252)
                                               ---------------   ---------------

Cash flows provided by financing activities:
  Proceeds from note payable, other                 1,870,946         3,432,945
  Payments on note payable, related party             (37,828)                -
  Payments on note payable, other                  (1,317,794)       (4,542,072)
  Proceeds from issuance of common stock            1,727,475                 -
                                               ---------------   ---------------

     Net cash provided by/(used for)
      financing activities                          2,242,799        (1,109,127)
                                               ---------------   ---------------

Net increase (decrease) in cash and cash
 equivalents                                          (33,851)         (104,511)
Cash and cash equivalents, at beginning of
 period                                               538,364           149,871
                                               ---------------   ---------------

Cash and cash equivalents, at end of period      $    504,513      $     45,360
                                               ===============   ===============


              See accompanying notes to these financial statements.


                                       Q-5
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited (Continued)
--------------------------------------------------------------------------------
                                                Three months ended December 31,
                                               ---------------------------------
                                                     2007              2006
                                               ---------------   ---------------

Supplemental disclosure of cash flow
 information:
  Cash paid for interest                         $    316,073      $    264,235
  Income taxes paid                                    31,500                 -

Supplemental disclosure of non-cash investing
 and financing activities:
  Promissory note principal and interest
   payable forgiven in lieu of cash exercise
   price of options                                    54,000                 -


              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 the Company pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been 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, 2007. 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 December 31, 2007, and the results of operations for the three
months ended December 31, 2007 and December 31, 2006. The results of operations
for the three months ended December 31, 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:

Intraop Medical Corporation (the "Company") was organized under the laws of the
State of Nevada on November 5, 1999 under the name DigitalPreviews.com. On
January 21, 2004, the Company filed a Certificate of Amendment with the
Secretary of State of Nevada to change the name of the Company from
DigitalPreviews.com, Inc. to Intraop Medical Corporation. On March 9, 2005,
Intraop Medical Corporation merged with Intraop Medical, Inc.

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.

Basis of Consolidation:

For the three months ended December 31, 2006, the consolidated financial
statements include the accounts of Intraop Medical Corporation and its wholly
owned subsidiary, Intraop Medical Services, Inc. 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 ended December 31, 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.


                                      Q-7
<PAGE>

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

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 $1,627,675 and $1,993,104 for the three
months ended December 31, 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 December 31, 2007, had an accumulated deficit
of $35,669,335. 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 overseas and expanding its sales efforts
              within the United States.
         o    Evaluating funding strategies in the public and private markets.

Historically, management has been able to raise additional capital. During the
three months ended December 31, 2007, the Company obtained capital through the
sale of common stock and exercise of warrants of approximately $1,696,587 and
extinguished liabilities of approximately $85,789 in exchange for common stock
or the forgiveness of amount dues upon the exercise of options. 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

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. See Note 2
for further discussion of these concentrations.

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.


                                      Q-8
<PAGE>

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

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 a binding sales agreement exists, the sales price is
fixed or determinable, and collection of the related receivable is reasonably
assured. Revenue from maintenance is recognized as maintenance 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 Mobetron
at the customer site with five customers during the three months ended December
31, 2007 and six customers during the three months ended December 31, 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.

Intangible Assets:

Intangible assets consist primarily of capitalized costs relating to a
Japanese device approval license for sale of Mobetron and amounts paid for
certain non-recurring engineering expenses paid to third parties for the
development of certain Mobetron subsystems. Non-recurring engineering expenses
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 three months
ended September 30, 2007 resulted in no impairment losses.


                                      Q-9
<PAGE>

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

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 year.

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized for deductible temporary differences and operating loss, and tax
credit carry forwards. 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. Further, basic and diluted net loss per share was the same
for all periods presented because the inclusion of potential dilutive shares in
the calculation of net loss per share on a fully diluted basis would have
resulted in a lower net loss per share, creating in anti-dilutive effect.

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

                                                     Three months ended
                                                         December 31,
                                              --------------------------------
                                                    2007             2006
                                              ---------------  ---------------
Numerator
Net loss available to common stockholders       $ (1,627,675)    $ (1,993,104)

Denominator
Weighted average common shares outstanding       265,068,966       26,329,346

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

Total shares, basic                              265,068,966       26,329,346
                                              ===============  ===============
Net loss per common shares
  Basic and diluted                             $      (0.01)    $      (0.08)
                                              ===============  ===============



                                      Q-10
<PAGE>

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

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
                                                         December 31,
                                              --------------------------------
                                                    2007             2006
                                              ---------------  ---------------

Debentures convertible to common stock                     -       16,000,000
Options to purchase common stock                  26,993,327        1,732,500
Warrants to purchase common stock                 16,336,433       14,365,481
                                              ---------------  ---------------

Potential equivalent shares excluded              43,329,760       32,097,981
                                              ===============  ===============

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).

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 ended December 31, 2007 and 2006,
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 however disclose
geographic area data based on product shipment destination. The geographic
summary of long-lived assets is based on physical location.


                                      Q-11
<PAGE>

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

Reclassification:

The Company made certain reclassifications to the consolidated financial
statements for the three months ended December 31, 2006 to confirm to the
consolidated financial statements for the three months ended December 31, 2007.
There was no effect on previously reported net loss.

Recent Accounting Pronouncements:

In February 2007, the Financial Accounting Standards Board 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.


NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three customers represent 50.7%, 32.1% and 8.6% of accounts receivable at
December 31, 2007. Three customers accounted for 36.9%, 33.2%, and 25.4% of net
revenue for the three months ended December 31, 2007. Three customers accounted
for 27.7%, 17.7% and 5.9% of net revenue for the three months ended December 31,
2006.

Three suppliers represented 38.9%, 31.6% and 4.7% of accounts payable at
December 31, 2007. Purchases from these suppliers during the three months ended
December 31, 2007 totaled approximately $0, $566,401 and $81,135. Purchases from
these suppliers during the three months ended December 31, 2006 totaled
approximately $0, $783,483 and $0 respectively.


NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:

                                                                December 31,
                                                                    2007
                                                              ---------------

  Finished goods                                                $          -
  Work-in-progress                                                 1,090,818
  Purchased parts and raw material, net of reserves
   of $10,159                                                        396,475
                                                              ---------------
                                                                $  1,487,293
                                                              ===============



                                      Q-12
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:

                                                                December 31,
                                                                    2007
                                                              ---------------

  Finished goods                                                $  1,990,715
  Work-in-progress                                                 1,362,819
  Purchased parts and raw material                                   203,900
                                                              ---------------
                                                                $  3,557,434
                                                              ===============

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.


Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:

                                                                December 31,
                                                                    2007
                                                              ---------------

  Equipment                                                     $    270,990
  Computer equipment                                                 163,183
  Furniture & fixtures                                                64,307
  Leasehold improvements                                               5,707
                                                              ---------------
                                                                     504,187
  Less accumulated depreciation                                     (313,726)
                                                              ---------------
                                                                $    190,461
                                                              ===============

Included in property and equipment is an asset acquired under capital lease
obligations with an original cost of $11,742 as of December 31, 2007. Related
accumulated depreciation and amortization of this asset was $5,480 as of
December 31, 2007.


                                      Q-13
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Intangible Assets:

Intangible Assets consist of the following:

                                                                December 31,
                                                                    2007
                                                              ---------------

  Non-recurring engineering charges paid to third parties       $    342,500
  Less accumulated amortization                                     (107,458)
                                                              ---------------
  Mobetron related manufacturing and design rights, net              235,042
  Medical device approval license not subject to amortization         30,000
                                                              ---------------
  Intangible assets, net                                        $    265,042
                                                              ===============

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:

                                                                December 31,
                                                                    2007
                                                              ---------------
    Debt issuance cost                                          $  1,422,370
    Less accumulated amortization                                 (1,267,544)
                                                              ---------------
    Deferred financing cost, net                                $    154,826
                                                              ===============


 Accrued Liabilities:

A summary is as follows:

                                                                December 31,
                                                                    2007
                                                              ---------------
   Contract advances                                            $    347,000
   Accrued interest payable                                           59,348
   Accrued warranty                                                  179,047
   Deferred revenue                                                   72,070
   Accrued wages and benefits payable                                127,516
   Accrued sales tax payable                                         233,731
                                                              ---------------
                                                                $  1,018,712
                                                              ===============


                                      Q-14
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Warranty:

The warranty periods for the Company's products are generally one year from the
date of acceptance, but no longer than eighteen months from the date of
delivery. 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.

                                                                December 31,
                                                                    2007
                                                              ---------------
   Warranty accrual at the beginning of period                  $    111,515

   Accrual for warranties during the period                          100,000
   Actual product warranty expenditures                              (32,468)
                                                              ---------------

   Warranty accrual at the end of the period                    $    179,047
                                                              ===============


NOTE 4 - BORROWINGS

Outstanding notes payable were as follows:

                                                                December 31,
                                                                    2007
                                                              ---------------

   Notes payable, related parties, current                      $    119,002
                                                              ===============


   Product financing arrangement                                $  5,787,010
   Senior secured debentures                                       1,250,000
   Other notes                                                        53,034

   Less debt discounts due to warrants                              (192,137)
                                                              ---------------

   Notes payable, net of debt discounts and beneficial
    conversion features                                            6,897,907

   Less current portion                                           (6,897,907)
                                                              ---------------

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


                                      Q-15
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Notes payable, related parties:

Notes payable to related parties of $119,002 at December 31, 2007, is related to
a promissory note issued to an officer of the Company. The note is due on demand
and bears interest at 9% per annum. During the three months ended December 31,
2007, the Company repaid $37,827 of principal under this note. The note holder
forgave $52,517 of principal and $1,483 of interest in lieu of paying the cash
exercise price of $0.18 per share on 300,000 options exercised during the three
months ended December 31, 2007.

Product 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
loan facility. 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 for 576,923 shares of common stock at an
exercise price of $0.52 per share. The warrant had an original term of two
years.

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 common stock at an exercise
price of $0.52 per share with an expiration date of May 31, 2008. Additionally,
the Company agreed to extend by one year, to August 15, 2008, the expiration
date of the previously issued warrant to purchase 576,923 shares of common
stock.

In January 2007, the Company agreed to reduce the exercise price of all 769,230
previously issued warrants related to the Product Financing Arrangement 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 expense.

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 common stock at an exercise
price of $0.40 per share with an expiration date 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 into interest expense.

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. As of
August 16, 2007 the Company entered into a further amendment to the Product
Financing Arrangement to extend the increased availability of $5,000,000 through
September 30, 2007, for which it paid a restructuring fee of $130,000.


                                      Q-16
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Also in August 2007, the Company agreed to reduce the exercise price of warrants
to purchase 769,230 shares of common stock with an exercise price of $0.28 per
share and warrants to purchase 100,000 shares of common stock with an exercise
price of $0.40 per share to an exercise price of $0.08. The fair value of the
price reduction of $2,094 was recorded as a note discount and amortized into
interest expense.

On September 17, 2007, the Company entered into amendment to the Product
Financing Arrangement to increase the availability under the agreement to
$6,000,000 and to extend the term of the agreement to two years from date of
signing. The Company agreed to issue an additional warrant to purchase 1,350,000
shares of common stock to the lender with an exercise of price of $0.08 per
share and a term of five years. The fair value of $103,990 attributable to the
warrant was recorded as a note discount and was amortized into interest expense.

At December 31, 2007 the outstanding principal balance under the Product
Financing Arrangement was $5,787,010.

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, other than
those pledged to others under the Product Financing Arrangement. In addition,
the Company issued 1,600,000 shares of 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 common stock at an exercise price of $0.40 per
share with an expiration date of August 31, 2010.

The holders exercised warrants for 100,000 shares of common stock in June 2006,
and in August 2007, the Company agreed to (i) pay to holders of the senior
debentures a restructuring fee in the aggregate amount of $85,000, (ii) reduce
the exercise price of the remaining warrants to purchase 2,400,000 shares of
common stock from $0.40 to $0.05, and (iii) allow cashless exercise of the
warrants. The holders of the senior debentures, in turn, agreed to amend certain
restrictive covenants of the debentures and to waive certain anti-dilutive
features of the associated warrants. The fair value of $50,464 attributable to
the price reduction of the warrant and the $85,000 restructuring fee were
recorded as a debt issuance cost and are being amortized into interest expense
over the remaining life of the loan. In August 2007, the senior debenture
holders opted for cashless exercise of their remaining 2,400,000 warrants,
resulting in the issuance of 1,800,000 shares of common stock.

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
into interest expense over the life of the debentures. At December 31, 2007 the
outstanding principal balance under the senior secured debentures was $1,250,000
and the unamortized note discount related to the original warrant issuance was
$105,479.

Other notes:

The Company has a promissory note payable to a former director with an
outstanding principal balance of $53,034 at December 31, 2007. This note is due
on demand and bears interest at 9% per annum. During the three months ended
December 31, 2007, the Company repaid $24,198 of principal under this note.


                                      Q-17
<PAGE>


NOTE 5 - CAPITAL LEASE

Capital lease

The Company leases equipment which is classified as capital lease arrangements.
Capital lease obligations were as follows:
                                                                December 31,
                                                                    2007
                                                              ---------------

        Capital lease for equipment                             $      7,152

        Less: current portion                                         (2,373)
                                                              ---------------

        Capital lease obligations, net of current portion       $      4,779
                                                              ===============


NOTE 6 - COMMON STOCK

Shares Reserved for Future Issuance:

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

                                                                December 31,
                                                                    2007
                                                              ---------------

        2005 Equity Incentive Plan                                45,359,664
        Common stock warrants                                     16,336,433
                                                              ---------------

        Total                                                     61,696,097
                                                              ===============

At the Company's annual meeting of stockholders on October 15, 2007,
stockholders approved an amendment to the Company's articles of incorporation to
increase the authorized number of shares of common stock from 100 million to 500
million shares and also approved an amendment to the Company's 2005 Equity
Incentive Plan to increase by 22,062,664 shares the number of shares of common
stock reserved for issuance under the Plan. On December 3, 2007, the Board of
Directors approved a further amendment to the Plan to increase the number of
shares of common stock reserved for issuance under the Plan by an additional
20,000,000 shares, subject to approval by the Company's stockholders.

Sale of common stock and exercise of warrants pursuant to the August 2007
Agreements:

In August 2007, the Company entered into a series of agreements more fully
described in Note 6 to the September 30, 2007 financial statements (the "August
2007 Agreements"). In October 2007, parties to the August 2007 Agreements: i)
invested an additional $1,601,687 in cash and forgave $31,789 of Company
accounts payable as consideration for the purchase of an aggregate of 20,418,444
shares of common stock, ii) exercised warrants to purchase 212,029,781 shares of
common stock with an exercise price of $0.00 per share, and iii) exercised
rights to the issuance of an additional 623,278 shares of common stock. As a
direct result of these transactions, the Company recorded and increase to common
stock of $233,072, an increase to additional paid-in-capital of $5,474,026, a
reduction of the obligation to issue common stock of $5,239,769 and a reduction
in stock subscription of $1,150,071.


                                      Q-18
<PAGE>


NOTE 6 - COMMON STOCK (CONTINUED)

Sale of common stock

In December 2007 the Company sold 1,175,000 shares of its common stock for
$94,000 to certain third parties and related parties.

Issuance of common stock upon exercise of warrants and options:

During the three months ended December 31, 2007, holders of warrants to purchase
an aggregate of 10,000 shares of the Company's common stock exercised those
warrants for $900, and an officer of the Company exercised options to purchase
300,000 shares of common stock by forgiving $54,000 of principal and interest
under a promissory note payable to such officer by the Company.


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 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" and c) increase the number of shares
reserved for issuance under the Plan from 2,400,000 shares to 4,000,000 shares.
At the Company's annual meeting of stockholders on October 15, 2007 the
stockholders approved a 22,062,664 share increase in the number of shares of
common stock available for issuance under the Plan. On December 3, 2007, the
Board of Directors approved a further amendment to the Plan to increase the
number of shares of common stock reserved for issuance by an additional
20,000,000 shares subject to approval by the Company's stockholders.

Under the Plan, incentive options may be granted to purchase the Company's
employees at prices not lower than fair market value of the Company's common
stock on 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 Plan. The Company's
financial statements for the three months ended December 31, 2007 and 2006
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 December 31, 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


                                      Q-19
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

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 was $661,710 and $13,003 for the three months ended December 31, 2007
and 2006 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.

Following the significant dilution created by the August 2007 Agreements, in
November 2007 the Board of Directors approved (i) a reduction to $0.18 per share
in the exercise price of options to purchase 1,502,500 shares of common stock
previously issued to certain holders with exercise prices between $0.22 to
$1.375 per share, (ii) the issuance of options to purchase an additional
7,197,827 shares of common stock at an exercise price of $0.18 per share to
those same option holders, and (iii) an initial grant of options to purchase
18,330,000 shares of common stock to the Company's new President and Chief
Executive Officer, Mr. John Powers, also with an exercise price of $0.18 per
share.

In accordance with SFAS 123(R), the Company accounted for the reduction in the
exercise price of options as a cancellation of the existing warrants and an
issuance of a like number of new warrants, and recorded an expense of $18,515
based on change in fair value of the options immediately prior to and
immediately after the exercise price reduction based on share price, remaining
life, historic volatility of the Company's common stock, and interest rates at
the time of the reduction.

The fair value of options granted under the Plan were estimated at the date of
grant using the Black-Scholes model with the following weighted average
assumptions:

                                                         Three months ended
                                                         December 31, 2007
                                                      ------------------------

        Expected term (in years)                             0.03 to 10
        Risk-free interest rate                            3.10% to 4.34%
        Expected volatility                                 204% to 222%
        Expected dividend yield                                  0%
        Weighted average fair  value at grant date             $0.16

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.


                                      Q-20
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

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 December 31, 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.

The effect of recording share-based compensation expense for the three months
ended December 31, 2007 is as follows:
                                                         Three months ended
                                                         December 31, 2007
                                                      ------------------------
     Stock-based compensation expense related to
      employee stock options and employee stock
      purchases                                                 $     661,710

     Tax benefit                                                            -
                                                      ------------------------
     Net decrease in net earnings                               $     661,710
                                                      ========================

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

     Effect on:
     Net earnings per share -- Basic                            $           -
                                                      ========================
     Net earnings per share -- Diluted                          $           -
                                                      ========================

For the three months ended December 31, 2007, total share-based compensation
expense recognized in earnings before taxes was $661,710 and the total related
recognized tax benefit was zero. Total share-based compensation expense
capitalized as part of inventories for the three months ended December 31, 2007
was $120,146. Total share-based compensation expense applied to warranty reserve
for the three months ended December 31, 2007 was $8,057.


                                      Q-21
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

Activity under the Plan is presented below:

<TABLE>
<CAPTION>

                                                                               Weighted
                                                                                Average
                                                                  Weighted     Remaining
                                       Shares                      Average     Contractual     Aggregate
                                      Available    Number of      Exercise        Term         Intrinsic
                                      for Grant       Shares        Price      (in years)      Value (1)
                                    ------------- ------------- ------------- ------------ -----------------
<S>                                  <C>            <C>            <C>               <C>            <C>
Balance at September 30, 2007          1,756,500     1,840,500      $   0.68

Granted                              (27,090,327)   27,090,327          0.18
Authorized                            42,062,664             -             -
Cancelled or expired                   1,637,500    (1,637,500)        (0.68)
Exercised                                      -      (300,000)         0.18
                                    ------------  ------------
Balance at December 31, 2007          18,366,337    26,993,327      $   0.18          9.71            $-
                                    ============  ============

Exercisable at December 31, 2007                     1,781,542      $   0.24          7.12            $-
                                                  ============
</TABLE>

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value,
which is computed based on the difference between the exercise price and the
Company's closing stock price of $0.10 as of December 31, 2007, which would have
been received by the option holders had all option holders exercised their
options as of that date.

Total options under the Plan at September 30, 2007, comprised the following:

                       Options             Weighted              Options
                     Outstanding            Average            Exercisable
    Option              as of              Remaining              as of
   Exercise         September 30,      Contractual Life       September 30,
    Price               2007                (Years)                2007
---------------  --------------------  ------------------  --------------------
    $0.022               13,500              9.51                 10,681
     0.350              170,000              9.27                118,611
     0.500               89,500              1.01                 89,500
     0.540               20,000              8.36                 20,000
     0.550              300,000              0.20                300,000
     0.580              557,000              8.19                460,861
     0.700                3,500              8.36                  1,944
     0.800              377,000              4.55                377,000
     0.880              120,000              3.55                120,000
     1.250              160,000              6.64                159,833
     1.375               30,000              6.51                 30,000
                 --------------------                      --------------------

    Total             1,840,500                                1,688,430
                 ====================                      ====================


                                      Q-22
<PAGE>

Total options under the Plan at December 31, 2007, comprised the following:


                      Options             Weighted             Options
                    Outstanding            Average            Exercisable
   Option              as of              Remaining              as of
  Exercise          December 31,         Contractual          December 31,
   Price               2007              Life (Years)            2007
-------------- ---------------------- -----------------  --------------------
   $0.080               60,000              9.76                 24,694
    0.180           26,722,827              9.73              1,546,348
    0.350               60,000              9.01                 60,000
    0.580               75,000              7.94                 75,000
    0.800               33,000              4.00                 33,000
    1.250               42,500              6.56                 42,500
               ----------------------                    --------------------

   Total            26,993,327                                1,781,542
               ======================                    ====================


NOTE 8 - WARRANTS

The following warrants are each exercisable for one share of common stock:
<TABLE>
<CAPTION>
<S>                                          <C>                     <C>                    <C>
                                                                         Weighted
                                              Number of Shares         Average Price         Aggregate Price
                                             -------------------     -----------------     -------------------
 Balance at September 30, 2007                   228,376,214                $ 0.10               $ 2,361,126
 Warrants granted                                          -                     -                         -
 Warrants exercised                             (212,039,781)               $ 0.00                      (900)
 Warrants cancelled                                        -                     -                         -
 Warrants expired                                          -                     -                         -
                                             -------------------     -----------------     -------------------

Balance at December 31, 2007                     16,336,433                  0.14               $ 2,360,226
                                             ===================     =================     ===================
</TABLE>


Pursuant to the August 2007 Agreements the Company had issued warrants to
purchase 212,029,781 shares of common stock. On October 24, 2007, all of these
warrants were exercised for common stock. In December 2007, an additional 10,000
warrants for common stock with an exercise price of $0.09 per share were
exercised.

                                      Q-23

<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

Common stock warrants are comprised of the following:
<TABLE>
<CAPTION>
<S>                   <C>                   <C>                            <C>
                                                 Warrants                    Weighted Average
                                                Outstanding                     Remaining
                      Exercise                    as of                     Contractual Life
                        Price                December 31, 2007                   (Years)
                 --------------------    ---------------------------     --------------------------
                       $0.080                            13,809,142                4.43
                        0.280                               400,000                4.50
                        0.400                             1,675,000                2.84
                        0.700                               119,100                2.67
                        1.000                               100,000                3.27
                        1.150                               100,000                3.87
                        1.250                                64,100                0.79
                        1.375                                69,091                1.00
                                         ---------------------------
                        Total                            16,336,433
                                         ===========================
</TABLE>

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                      169,091
                                           2010                    2,045,830
                                           2011                      887,500
                                           2012                   13,189,912
                                                             ----------------
                                                                  16,336,433
                                                             ================

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 up to
the maximum limit imposed by federal tax law. The Company, at its discretion,
may make annual matching contributions to the plan. The Company has made no
matching contributions to the plan through December 31, 2007.


                                      Q-24
<PAGE>

NOTE 10 - OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Net revenues by geographic area are presented as follows, with no other
geographic region representing 10% or more of net revenues during the periods
presented.

                                                Three months ended
                                                   December 31,
                                    --------------------------------------------
                                          2007                     2006
                                    ------------------      --------------------

         Europe                      $   1,008,724            $     175,114
         Asia                                6,312                   12,233
         United States                   2,846,568                   62,269
                                    ------------------      -------------------

        Total Revenue               $   3,861,604            $     249,616
                                    ==================      ===================


The Company maintained long lived assets includes property and equipment,
intangible assets, and leased equipment each net of applicable depreciation or
amortization in the following geographic areas during the three months ended
December 31, 2007:

                                           Three months
                                              ended
                                         December 31, 2007
                                      ------------------------

          United States                         $ 447,890
          Europe                                    4,968
          Asia                                      2,645
                                      ------------------------

          Total                                 $ 455,503
                                      ========================


NOTE 11 - SUBSEQUENT EVENTS

The following subsequent events occurred between January 1, 2008 and February
14, 2008.

On January 2, 2008, the Company sold 100,000 shares of common stock to an
officer of the Company at a price of $0.08 per share.

On January 31, 2008, the Company entered into a Common Stock Purchase Agreement
under which the investors named therein paid approximately $2,368,273 to
purchase an aggregate of 33,832,463 shares of the Company's common stock. At a
second closing pursuant to that same Common Stock Purchase Agreement on February
13, 2008, the Company sold an additional 8,999,997 shares of our common stock
for an aggregate purchase price of $630,000.

The Company repaid $975,674 of principal due under its notes payable and
received loan proceeds of $572,462 under the Product Financing Arrangement.

                                      Q-25