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


                                    FORM 10-Q


[ X]     Quarterly Report under Section 13 or 15(d) of the Securities Exchange
         Act of 1934 For the quarterly period ended June 30, 2009

[  ]     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 the registrant as specified in its charter)


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

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

          Issuer's telephone number, including area code: 408-636-1020

                                 Not applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). [ ] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

<PAGE>

<TABLE>
<CAPTION>
<S>                  <C>                       <C>                         <C>
Large accelerated    Accelerated filer |_|     Non-accelerated filer |_|    Smaller reporting
    filer |_|                                                                   company |X|
                               (Do not check if a smaller reporting company)
</TABLE>


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: 392,787,597 shares of $0.001 par value
Common Stock outstanding as of the date of this filing.

                                       2
<PAGE>
                           INTRAOP MEDICAL CORPORATION

                                    FORM 10-Q

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                                                              <C>
PART 1 - FINANCIAL INFORMATION....................................................................................4
------------------------------
   Item 1.  Financial Statements..................................................................................4
   -----------------------------
   Item 2.  Management's Discussion and Analysis or Plan of Operation.............................................4
   ------------------------------------------------------------------
   Item 3.  Quantitative and Qualitative Disclosures About Market Risk...........................................19
   -------------------------------------------------------------------
   Item 4.  Controls and Procedures..............................................................................19
   ---------------------------------

PART II - OTHER INFORMATION......................................................................................20
---------------------------                                                                                       -
   Item 1.  Legal Proceedings....................................................................................20
   --------------------------
   Item 1a. Risk Factors.........................................................................................20
   ---------------------
   Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..........................................32
   --------------------------------------------------------------------
   Item 3.  Defaults upon Senior Securities......................................................................32
   ----------------------------------------
   Item 4.  Submission of Matters to a Vote of Security Holders..................................................32
   ------------------------------------------------------------
   Item 5.  Other Information....................................................................................33
   --------------------------
   Item 6.  Exhibits.............................................................................................33
   -----------------
SIGNATURES.......................................................................................................34
----------



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

                                       3
<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-Q, have been
prepared in accordance with the instructions to Form 10-Q 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 June 30, 2009 are not necessarily indicative of the results that
can be expected for the year ending September 30, 2009.


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-K in which we disclosed our financial results for the years ended September
30, 2008 and 2007 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-Q 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-Q 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 the Company, was incorporated in Nevada
on November 5, 1999. Our business is the development, manufacture, marketing,
distribution and service of the 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, we use the term IOERT
to mean both intraoperative radiation therapy in general and, in the case of the
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. The Mobetron is designed
to be used without additional shielding in the operating room, unlike
conventional equipment adopted for the IOERT procedure. The Mobetron can be
moved from operating room to operating room, thereby increasing its utilization
and cost effectiveness. In addition to IOERT, the Mobetron also can be used as a
conventional radiotherapy electron-beam accelerator.

                                       4
<PAGE>

         Our growth 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 and cost
reduction. We are also working to apply the Mobetron's technology to certain
types of cancer for which IOERT has not widely been used, such as dermatological
and breast cancers.

         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.

         Costs of revenue 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 among
other things, the salaries and benefits of our executive and administrative
personnel, communications, facilities, insurance, professional services and
other administrative expenses. Sales and marketing expenses include salaries,
benefits and the related expenses of our sales staff such as 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 the Mobetron and have
been expensed as they have been incurred.

         As the Mobetron, our primary product, has a list price of approximately
$1.5 million, and given our current low unit sales volume, our historical
results may vary significantly from period to period. For example, the sale of
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.
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 our management believes
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 operation.

         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.

                                       5
<PAGE>

Share-based Compensation Expense

         Effective January 1, 2006, we adopted the modified prospective
transition method under Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, or SFAS 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors, including stock options issued under our
2005 Equity Incentive Plan. 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 Note 7 to the audited Consolidated Financial
Statements.

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

         The expected term of stock options represents the weighted-average
period the stock options are expected to remain outstanding. The expected term
is based on the observed and expected time to post-vesting exercise and
forfeitures of options 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 Staff Accounting Bulletin 107, or SAB 107. 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 options' expected terms in deriving their
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 our financial
statements is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were estimated based on our
historical experience. In our pro-forma information required under SFAS 123 for
the periods prior to January 1, 2006, we accounted for forfeitures as they
occurred. If factors change and we employ different assumptions in the
application of SFAS 123(R) in future periods, the compensation expense that we
record under SFAS 123(R) may differ significantly from what we have recorded in
the current period.

         As of June 30, 2009, there was approximately $526,267 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 1.97 years.

                                       6
<PAGE>

         Results of Operation for the three months ended June 30, 2009 compared
to the three months ended June 30, 2008.

Revenue, Costs of Revenue and Gross Margins

<TABLE>
<CAPTION>
<S>                        <C>              <C>              <C>                  <C>
                                                 Three months ended June 30,
Revenue                           2009             2008             Change         Percent
---------------------------------------------------------------------------------------------
  Product sales             $     1,062,242  $     2,031,319  $        (969,077)         -48%
  Leasing                            45,000                -             45,000          100%
  Service                           119,589          108,864             10,725           10%
---------------------------------------------------------------------------------------------
Total Revenue               $     1,226,831  $     2,140,183  $        (913,352)         -43%
---------------------------------------------------------------------------------------------

Costs of Revenue
---------------------------------------------------------------------------------------------
  Product sales             $       823,621  $     1,855,614  $      (1,031,993)         -56%
  Leasing1                           55,694                -             55,694          100%
  Service                            54,462           40,356             14,106           35%
---------------------------------------------------------------------------------------------
Total Costs of Revenue      $       933,777  $     1,895,970  $        (962,193)         -51%
---------------------------------------------------------------------------------------------

                                                 Three months ended June 30,
Gross Margin                           2009             2008              Change
---------------------------------------------------------------------------------------------
  Product sales             $       238,621  $       175,705  $          62,916           36%
                                         22%               9%

  Leasing                           (10,694)               -            (10,694)        -100%
                                        -24%

  Service                            65,127           68,508             (3,381)          -5%
                                         54%              63%
---------------------------------------------------------------------------------------------
Total Gross Margin          $       293,054  $       244,213  $          48,841           20%
                                         24%              11%
=============================================================================================
</TABLE>

(1) Includes the financing cost and the cost of depreciation on the leased
Mobetron

Product Sales

         Product sales revenue includes systems and accessories sales, but
excludes parts sold as part of our service business. During the three months
ended June 30, 2009 we recognized revenue for one Mobetron system sale compared
to two in the three months ended June 30, 2008. We would have recognized revenue
for a second Mobetron system sold during the three months ended June 30, 2009
had that unit not been damaged during transit which prevented it from being
delivered to the customer, and therefore made the transaction ineligible for
revenue recognition during this quarter. We have cargo insurance coverage up to
110% of the invoice amount of the damaged Mobetron and have filed a claim with
our insurance carrier with respect to that system. We anticipate that our claim
will be settled within the next 30 to 60 days. In the meantime, we expect to
ship a replacement unit to this customer later this year.

                                       7
<PAGE>

Leasing Revenue

         Leasing revenue for the three months ended June 30, 2009 was $45,000
compared to none recognized in the three months ended June 30, 2008. This
revenue was generated in connection with the Company's first leasing arrangement
for the placement of a Mobetron in a dermatology clinic. We anticipate further
growth in leasing revenues as we seek to expand our presence in the
dermatological market.

Service Revenue

         The service revenue for the three months ended June 30, 2009 was
$119,590 in comparison to $108,864 for the three months ended June 30, 2008. The
service revenue for as-requested service calls and parts sales to the customers
in the three months ended June 30, 2009 was $20,716 compared to $3,096 during
the three months ended June 30, 2008. We recognized revenue on service contracts
for six customers, during the three months ended June 30, 2008 compared to five
customers for the three months ended June 30, 2008.

Operating Expenses

         A comparison of our operating expenses for the three months ended June
30, 2009 and June 30, 2008 follows:

<TABLE>
<CAPTION>
<S>                         <C>                 <C>               <C>                 <C>
                                  Three months ended June 30,
                                    2009              2008             Change         Percent
-------------------------------------------------------------------------------------------------
Research and Development     $         504,374  $        422,337  $        82,037            19%
General and Administrative             612,180           544,302           67,878            12%
Sales and Marketing                    515,803           934,405         (418,602)          -45%
-------------------------------------------------------------------------------------------------
Total Operating Expenses     $       1,632,357  $      1,901,044  $      (268,687)          -14%
=================================================================================================
</TABLE>

         Share based compensation, which consists mainly of the non-cash cost of
 issuing options to our employees and directors, was lower in the three months
 ended June 30, 2009 versus the three months ended June 30, 2008 and represented
 a material portion of the reduction in operating expenses set forth above. The
 following table sets forth a comparison of the share based compensation expense
 incurred during the three months ended June 30, 2009 as compared to the three
 months ended June 30, 2008:
<TABLE>
<CAPTION>
<S>                           <C>                  <C>                 <C>
-----------------------------------------------------------------------------------------
                                   Three months ended June 30,
                                      2009                2008              Change
-----------------------------------------------------------------------------------------

Cost of revenues - Service     $             6,421   $         10,636   $         (4,215)
Research and development                    60,116            107,958            (47,842)
General and administrative                  49,217            101,425            (52,208)
Sales and marketing                         74,951            219,070           (144,119)
-----------------------------------------------------------------------------------------
         Total                 $           190,705   $        439,089   $       (248,384)
=========================================================================================
</TABLE>

                                       8
<PAGE>

         The decrease in share based compensation in all the above categories in
the three months ended June 30, 2009 was primarily the result of options
expiring during this quarter due to employee terminations, which is contrasted
with the compensation expense that was recognized in the three month period
ended June 30, 2008 as a result of option grants for new employees and directors
during that period.

         Research and development expenses increased by $82,037, or
approximately 19%, in the three months ended June 30, 2009 as compared to the
three months ended June 30, 2008. The majority of this increase totaling
$170,000 is due to additional labor allocated to research and development in
line with the Company's policy to develop in-house production of Mobetron, which
was offset by the reduction in share based compensation of $47,842 and the
reduction in consulting expenditure by $52,115. We believe that research and
development expenses will increase over time as we develop new products and
applications and continue our efforts to cut Mobetron production costs.

         General and administrative expenses increased by $67,878, or
approximately 12%, in the three months ended June 30, 2009 as compared to the
three months ended June 30, 2008. The major increase during the three months
ended June 30, 2009 in comparison to the three months ended June 30, 2008 was
attributable to an increase in legal expenses by $53,775 related to patent
protection suits in Germany and $41,772 related to general corporate matters,
increased travel cost of $12,677 and provision for matters related to compliance
with the Sarbanes Oxley Act of $15,000. The increased cost in general and
administration expenses is offset by the reduction in share based compensation
of $52,208.

         Sales and marketing expenses decreased by $418,602, or approximately
45%, in the three months ended June 30, 2009 as compared to the three months
ended June 30, 2008. A significant portion of this decrease was due to the
decreased cost of share based compensation of $144,119 as explained above.
Marketing expenses decreased by $71,096 primarily due to one time marketing
expenses incurred in Europe during the three months ended June 30, 2008. In
addition, consulting fees decreased by $75,214 as a result of retaining fewer
consultants, payroll related cost decreased by $25,707 due to the reduced sales
staff, expenses associated with sales related travel decreased by $12,194, sales
commissions decreased by $80,000 due to lower sales volume, and the revamping of
our commission structure during the current fiscal year.

         Interest Expense. Our senior debentures and our product financing
arrangement represent the majority of our debt and directly affect interest
expense accordingly. Our product financing arrangement has two classes of
borrowings: borrowings related to financed inventory prior to sale to a
customer, which bear interest at 12% per annum, and borrowings related to
financed purchase orders and receivables, or factoring, which bear interest at
24% per annum. Our interest expense for the three months ended June 30, 2009
increased by $299,691 in comparison to the three months ended June 30, 2008.
This is mainly due to the increased factoring borrowing, and on increased
outstanding balances on our current class of 10% senior secured debentures as
compared to the class of senior debentures that was outstanding during the three
months ended June 30, 2008. In addition, amortization expense increased by
$138,235 for debt discounts during the three months ended June 30, 2009, as
compared to the three months ended June 30, 2008 as a result of the issuance of
warrants to our current class of 10% senior secured debenture holders during the
current quarter.

         An estimate of our new dollar weighted average borrowing rate is found
below based on the interest rates and outstanding balances of our various types
of debt, before debt discounts, at June 30, 2009 and at June 30, 2008.

                                       9
<PAGE>

<TABLE>
<CAPTION>
<S>                                       <C>              <C>       <C>              <C>
                                             Balance at                  Balance at
                                              June 30,       Interest     June 30,     Interest
Type of debt, net debt discounts                2009           Rate         2008         Rate
-----------------------------------------------------------------------------------------------
Notes payable, related parties             $     119,002      9.00%   $    119,002        9.00%
Product Financing Arrangement, inventory         681,056     12.00%      3,385,032       12.00%
Product Financing Arrangement, factoring       4,078,899     24.00%      1,212,768       24.00%
Lease Asset Financing                            579,110     24.00%              -           -
Senior debentures                              3,600,000     10.00%      1,083,333       10.00%
Other notes                                            -         -         150,000        8.00%
Other notes                                       44,367      9.00%         44,367        9.00%
-----------------------------------------------------------------------------------------------
Total debt, before debt discounts          $   9,102,434              $  5,994,502
Dollar weighted average borrowing rate                       17.30%                      13.88%
===============================================================================================
</TABLE>

         Results of Operations for the nine months ended June 30, 2009 compared
to the nine months ended June 30, 2008.

Revenue, Costs of Revenue and Gross Margins

<TABLE>
<CAPTION>
<S>                         <C>             <C>              <C>            <C>
                             Nine months ended June 30,
Revenue                          2009             2008            Change      Percent
-------------------------------------------------------------------------------------
  Product sales              $   3,224,741   $    5,824,186   $  (2,599,445)     -45%
  Leasing                           75,000                -          75,000      100%
  Service                          322,855          291,278          31,577       11%
-------------------------------------------------------------------------------------
Total Revenue                $   3,622,596   $    6,115,464   $  (2,492,868)     -41%
-------------------------------------------------------------------------------------

Costs of Revenue
-------------------------------------------------------------------------------------
  Product sales              $   2,722,583   $    4,642,606   $  (1,920,023)     -41%
  Leasing                           92,824                -          92,824      100%
  Service                          154,592          181,552         (26,960)     -15%
-------------------------------------------------------------------------------------
Total Costs of Revenue       $   2,969,999   $    4,824,158   $  (1,854,159)     -38%
-------------------------------------------------------------------------------------

                                 Nine months ended June 30,
Gross Margin                          2009             2008           Change  Percent
-------------------------------------------------------------------------------------
  Product sales              $     502,158   $    1,181,580   $    (679,422)     -58%
                                        16%              20%

  Leasing                          (17,824)               -         (17,824)    -100%
                                       -24%

  Service                          168,263          109,726          58,537       53%
                                        52%              38%
-------------------------------------------------------------------------------------
Total Gross Margin           $     652,597   $    1,291,306   $    (638,709)     -49%
                                        18%              21%
=====================================================================================
</TABLE>

                                       10
<PAGE>

Product Sales

         During the nine months ended June 30, 2009, we received purchase orders
for five Mobetrons and recognized revenue for three systems as compared to
recognizing revenue for five systems sold during the nine months ended June 30,
2008. We anticipate that we will recognize the revenue on the remaining two
purchase orders placed during the nine months ended June 30, 2009 when shipped
during the fourth quarter of the current fiscal year.

         The three Mobetrons sold in the nine months ended June 30, 2009 were
all delivered to customers in overseas markets, with one sold in Germany and two
sold in China. This brings the total number of Mobetrons sold in Germany to two
and China to four. The Mobetron sold in Germany was delivered to the University
Hospital Giessen in Marburg, and will be used in the treatment of breast cancer
patients. The two units sold in China were delivered to Shanghai Ruijin Hospital
and Shanghai Tumor Hospital. In addition, the one unit that was damaged during
transit as described above was set to be delivered to the Institute Jules Bordet
in Brussels. We anticipate fulfilling this order with a replacement machine
later this year.

         An analysis of our system sales for the nine months ended June 30, 2009
is as follows:

<TABLE>
<CAPTION>
<S>                                   <C>             <C>          <C>           <C>
                                      Nine months ended June 30,
Mobetron Systems Sales Analysis          2009            2008          Change       Percent
-------------------------------------------------------------------------------------------
Systems Sold                                    3              5              -2

  Systems Revenue                      $3,075,600     $5,674,242    $(2,598,642)       -46%
  Revenue per Mobetron System           1,025,200      1,134,848       (109,648)       -10%
  Materials cost per system sold          713,439        744,559        (31,120)        -4%

  Materials Margin Per System             311,761        390,289        (78,528)       -20%
                                              30%            34%

  Labor, Overhead and Warranty            487,728        785,150       (297,422)       -38%
  Labor Overhead and Warranty Per
System                                    162,576        157,030           5,546         4%

Gross Margin per System                  $149,185       $233,259       $(84,074)       -36%
                                              15%            21%
===========================================================================================
</TABLE>

         Per system sales revenue for the nine months ended June 30, 2009
(product sales less sales of accessories) was $109,648, or 10%, lower than the
per systems sales revenue for the nine months ended June 30, 2008. This is
primarily due to below-market sales price offered to our distributors to
increase our presence in Germany and China. Materials cost per system, however,
was $31,120, or 4%, lower in the nine months ended June 30, 2009 than in the
nine months ended June 30, 2008 due to the impact of our cost reduction efforts
in the top level assembly. At the beginning of our 2008 fiscal year, we hired an
outside consulting firm to help us identify cost reduction opportunities and
upgrades for the Mobetron, which has resulted in lowering our manufacturing
costs. We continue to explore additional cost reduction opportunities that will
enable us to increase our product margins over the long term.

         Other costs of systems sales, which include labor, overhead and
warranty, increased by $5,546, or 4%, compared to the nine months ended June 30,
2008. This due to the extended testing of the Mobetron sold in Germany. The
Mobetron sold in Germany, originally earmarked for the dermatology market, had
to be converted back for regular use, which extended its time in inventory and
resulted in the incurrence of additional overhead allocation compared to the
five systems sold during the nine months ended June 30, 2008.

                                       11
<PAGE>

Leasing Revenue

         Leasing revenue for the nine months ended June 30, 2009 was $75,000
compared to none recognized in the nine months ended June 30, 2008. This revenue
was generated in connection with the Company's first leasing arrangement for the
placement of a Mobetron into a dermatology clinic. We anticipate further growth
in leasing revenues as we seek to expand our presence in the dermatological
market.

         Pursuant to the terms of the lease, the rent for the leased Mobetron
system is $15,000 per month for up to 15 patients. For each patient above 15 in
any given month, the rent for that month is increased by $1,000 for each
patient. To date, the customer has not treated more than 15 patients in a month.
Therefore, the cost of leasing revenue is more than the revenue itself,
primarily due to the financing of leased Mobetron through a third party
financier for $579,110 at a fixed interest rate of 24%. The interest charge is
included in the cost of revenue together with the cost of depreciation of the
leased Mobetron on a straight line basis over the expected life of 120 months.

Service

         The service revenue from annual service contracts for the nine months
ended June 30, 2009 was $322,855 in comparison to $291,278 for the nine months
ended June 30, 2008. The service revenue for as-requested service calls and
parts sales to customers in the nine months ended June 30, 2009 was $20,716
compared to $54,430 during the nine months ended June 30, 2008. We recognized
revenue on service contracts for six customers, during the nine months ended
June 30, 2009 compared to five customers for the nine months ended June 30,
2008. We expect service revenue to grow in relative proportion to U.S. based
sales and to a lesser extent overseas sales. Overseas distributors are generally
responsible for servicing their own customers with parts supplied by us, though
we also obtain direct contracts with a few customers in Europe, which revenue is
included in the nine months ended June 30, 2009 and 2008.

           Cost of service revenues decreased by $26,960 in the nine months
ended June 30, 2009, in comparison to the nine months ended June 30, 2008,
primarily due to decreased travel and training expenses related to our European
customers and distributors.

                                       12
<PAGE>

Operating Expenses

         A comparison of our operating expenses for the nine months ended June
30, 2009 and June 30, 2008 follows:

<TABLE>
<CAPTION>
<S>                                         <C>                  <C>              <C>                <C>
                                                     Nine months ended June 30,
                                                      2009                2008             Change    Percent
  -----------------------------------------------------------------------------------------------------------
  Research and Development                   $   1,497,992        $  1,240,650     $     257,324        21%

  General & Administrative                       1,645,075           1,889,267          (244,192)       -13%

  Sales and Marketing                            1,843,221           3,488,782        (1,645,561)       -47%
  -----------------------------------------------------------------------------------------------------------
  Total Operating Expenses                    $  4,986,288        $  6,618,699     $  (1,632,411)       -25%
  ===========================================================================================================
</TABLE>

         Share based compensation, particularly the non-cash cost of issuing
options to our employees and directors, was lower in the nine months ended June
30, 2009 compared to the nine months ended June 30, 2008 and played a large part
in decreasing operating expenses. The following table sets forth a comparison of
the share based compensation expense incurred during the nine months ended June
30, 2009 as compared to the nine months ended June 30, 2008:

<TABLE>
<CAPTION>
<S>                                      <C>               <C>                 <C>
---------------------------------------------------------------------------------------------
                                              Nine months ended June 30,
                                             2009                  2008              Change
---------------------------------------------------------------------------------------------
Cost of revenues - Service              $  23,638           $    40,648         $   (17,010)
Research and development                  230,767               380,481            (149,714)
General and administrative                171,726               396,064            (224,338)
Sales and marketing                       306,597               824,869            (518,272)
---------------------------------------------------------------------------------------------
            Total                       $ 732,728           $ 1,642,062          $ (909,334)
=============================================================================================
</TABLE>


         The decrease in share based compensation for the nine months ended June
30, 2009 was primarily the result of new option grants and a reduction in the
exercise price of options granted in November 2007 to our employees and
directors. Following the significant dilution caused by 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 in the exercise price of options
to purchase 1,502,500 shares of common stock to $0.18 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, and (iii) an initial grant of options
to purchase 18,330,000 shares of common stock with an exercise price of $0.18
per share to our President and Chief Executive Officer, Mr. John Powers. Under
SFAS 123 (R) the cost of these grants is estimated to be approximately
$3,712,750 amortized over approximately four years with immediate vesting for
the re-priced options equivalent to the previous vesting schedule.

         Research and development expenses increased by $257,324, or
approximately 21%, in the nine months ended June 30, 2009 as compared to the
nine months ended June 30, 2008. The majority of this increase totaling $170,000
is due to additional labor allocated to research and development in line with
the Company's policy to develop in-house production of the Mobetron and $285,179
personnel cost of two new employees hired in the fourth fiscal quarter of 2008
and one new employee in the current fiscal quarter ending June 30, 2009, which
was offset by $120,000 of non-recurring charges incurred during nine months
ended June 30, 2008 for contracting an outside engineering firm to help us
define future cost reduction opportunities and feature upgrades for the Mobetron
and $149,714 due to decrease in share based compensation expense as explained
above. Additionally during the nine months ended June 30, 2009, the Company
incurred additional travel related cost totaling $20,710, and small equipment
purchases totaling $5,056 and general repairs and maintenance increased by
$17,967 compared to nine months ended June 30, 2008. 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.

                                       13
<PAGE>

         General and administrative expenses decreased by $244,192, or
approximately 13%, in the nine months ended June 30, 2009 as compared to the
nine months ended June 30, 2008. The majority of this decrease was due to the
decreased cost of share based compensation totaling $224,338, including the cost
of $42,668 for issuance of new options issued to our new Chief Financial Officer
as part of his employment agreement. The net decrease in share based
compensation in the three months ended June 30, 2009 was primarily the result of
option cancellations during first quarter of current fiscal year due to employee
terminations compared to new options grants for new employees and directors in
the six month period ended June 30, 2008. Due to the ongoing effort to curtail
expenditures, the Company recognized a decrease of $44,843 in administrative
related travel cost, $18,145 in insurance cost and $81,006 in utility and office
maintenance cost for the nine months ended June 30, 2009 compared to the nine
months ended June 30, 2008. However, the decrease in costs was offset by
increases of $56,711 in legal expenses related to patent protection suits in
Germany, $28,536 in consulting expenses for fees payable to our new Chief
Financial Officer for the period from November 2008 to January 26, 2009, $24,916
in Board sitting fees and $27,556 in computer network maintenance and support
services provided by an outside agency hired during the fourth fiscal quarter of
2008.

         Sales and marketing expenses decreased by $1,645,561, or approximately
47%, in the nine months ended June 30, 2009 as compared to the nine months ended
June 30, 2008. The majority of this decrease was due to the decreased cost of
share based compensation of $518,272 as explained above. Marketing spending
decreased by $359,922 primarily due to one time marketing expenses incurred in
Europe during the nine months ended June 30, 2008. We also decreased the number
of employees and consultants in this area from fifteen staff in June 30, 2008 to
eleven staff in June 30, 2009. Consequently, the wage and personnel related
expenses, including related travel and entertainment expenses, decreased by
$271,028 and consultant fees decreased by $215,307. Sales commissions decreased
by $233,769 due to the revamping of commission structure during the nine months
ended June 30, 2009. In addition, promotion and advertising expenses decreased
by $46,995 compared to the previous six month period ended June 30, 2008.

         Interest Expense. Our interest expense for the nine months ended June
30, 2009 increased by $162,141 in comparison to the nine months ended June 30,
2008. This is mainly due to the increase in factored revolving line of credit
that bears an interest rate of 24% of $2,866,131 and decrease in inventory
financed revolving line of credit that bears an interest rate of 12% of
$2,703,976. The outstanding balance under 10% senior secured debentures
borrowings also increased by $2,516,667. The increased interest expenditure is
offset by non-cash interest cost of $108,853 due to the amortization of debt
discounts related to during the nine months ended June 30, 2009 which was
$274,400 in comparison to $383,253 for the nine months ended June 30, 2008.

                                       14
<PAGE>

Liquidity and Capital Resources

         We experienced net losses of $5,491,117 and $6,165,106 for the nine
months ended June 30, 2009 and 2008, respectively. In addition, we have incurred
substantial monetary liabilities in excess of monetary assets over the past
several years and, as of June 30, 2009 we have an accumulated deficit of
$48,172,201. 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 nine months ended June 30, 2009, we obtained capital through
borrowing under our lines of credit and 10% senior secured debentures, the
proceeds of which were used for working capital and the repayment of
liabilities. The successful outcome of future financing 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 the nine months ended June 30,
2009 and 2008 were as follows:

<TABLE>
<CAPTION>
<S>                       <C>                  <C>                  <C>
 --------------------------------------------------------------------------------------
                              Nine months ended June 30,
Cash Flows                            2009                 2008                 Change
--------------------------------------------------------------------------------------
Provided by (Used for):
  Operating Activities     $    (3,248,415)     $    (4,597,800)     $      1,349,385
  Investing Activities             (27,483)            (139,894)              112,411
  Financing Activities           3,283,957            4,752,396            (1,468,439)
--------------------------------------------------------------------------------------
Net Increase/(Decrease)    $         8,059      $        14,702      $         (6,643)
======================================================================================
</TABLE>

Operating Activities

         Net cash used for operating activities decreased by $1,349,385 in the
nine months ended June 30, 2009 in comparison to the nine months ended June 30,
2008. Offsetting the net loss of $5,491,117 for the nine months ended June 30,
2009 were $1,295,946 of non-cash charges, primarily for share based compensation
of $861,481 and a charge of $274,400 related to the issuance of warrants to 10%
senior secured debenture holders. During the nine months ended June 30, 2008,
the net loss of $6,165,106 was similarly offset by non-cash charges of
$1,949,825, primarily for share based compensation, 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
$1,962,089 between the nine months ended June 30, 2009 and 2008 significantly
affected operating cash flow during those two nine month periods. 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 the timing of Mobetron sales and the large per system cost of the
Mobetron.

                                       15
<PAGE>

Investing Activities

         The decrease in investing activities in the nine months ended June 30,
2009 compared to the nine months ended June 30, 2008, was due to the efforts of
management to reduce capital expenditures. Also during nine months ended June
30, 2008 the Company capitalized certain engineering costs paid to a third party
and no such costs were incurred except for $5,000 during the nine months ended
June 30, 2009.

Financing Activities

         During the nine months ended June 30, 2009, the Company borrowed
$3,600,000 by way of secured senior debentures. Between June 30, 2008 and 2009,
the company also increased notes payable to EU Capital by $741,265. During the
same period the Company also repaid $1,083,333 to the previous secured debenture
holders and also paid off notes payable to BTH- China $150,000.

Senior Secured Debentures

         As of June 30, 2009, we have issued 10% senior secured debentures in an
aggregate principal amount of $3,600,000 to six private lenders, and may issue
up to an additional $1,400,000 aggregate principal amount of such debentures in
the future under the terms of the debenture purchase agreement that we have
entered into with such lenders. These debentures mature on the earlier of (i)
December 31, 2009 or (ii) the date the Company closes an issuance, or series of
issuances, of promissory notes convertible into shares of its common stock with
gross aggregate proceeds received by the Company of not less than $6,000,000
(other than the 10% senior secured debentures). The 10% senior secured
debentures will convert at the option of the holder into shares of preferred
stock in the event that we close an issuance, or series of issuances, of shares
of preferred stock with gross aggregate proceeds received by us of not less than
$1,000,000 at a conversion price equal to the price per share paid by the
investors purchasing such securities. Interest on the outstanding principal
amount of the debentures accrues at 10% per annum, payable monthly. The 10%
senior secured debentures are secured by a lien on all of our assets not
otherwise pledged under our product financing arrangement.

         The terms of the 10% senior secured debentures also contain restrictive
covenants that limit our ability to (i) subject to certain exceptions, create,
incur, assume, guarantee or suffer to exist indebtedness for borrowed money,
(ii) subject to certain exceptions, create, incur, assume or suffer to exist any
liens on our property or assets, (iii) amend our charter documents so as to
materially and adversely affect any rights of the debenture holders; (iv) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de
minimis number of shares of our common stock or other equity securities; or (v)
pay cash dividends or distributions on any of our equity securities. We believe
that we are in compliance with these covenants.

         Currently, we do not have sufficient capital resources to retire the
10% senior secured debentures if the holders were to demand repayment thereof,
unless we raise additional capital as described above.

                                       16
<PAGE>

Inventory and Factoring Agreement

         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 June 30, 2009,
maximum availability under the line was $6,000,000. The product financing
arrangement has two classes of borrowings: borrowings related to financed
inventory prior to sale to a customer, which bear interest at 12% per annum
payable monthly, and borrowings related to financed purchase orders and
receivables, which bear interest at 24% per annum, payable upon receipt of
payment from customer. This agreement contains limitations on our ability to
sell, dispose of, pledge, grant an interest in, or otherwise encumber our
inventory. In addition, borrowing related to financed purchased orders must be
repaid within six (6) months.

         In February 2009, we were notified by our lender under our inventory
and factoring agreements, that our current purchase order financing will be
discontinued. However, they have informed us that they will continue to support
our inventory factoring, and work with any new purchase order financial
structure we develop with alternative providers. Subsequent to this notice, we
have been able to finance two purchase orders while we continue to seek a longer
term solution.

         In May 2009 we reached a preliminary agreement with a new lender to
finance our purchase orders under similar terms as our previous arrangement
bearing interest at 24% per annum. The terms of our new arrangement allows the
lender to cancel our agreement within the first ninety (90) days. If the lender
so chooses this option we would not have sufficient capital resources to repay
our financed purchased orders without the benefit of receiving payment from our
customers.

Debt and Lease Obligations

         At June 30, 2009, 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.





                (Remainder of the page intentionally left blank)

                                       17
<PAGE>

                                                                      June 30,
                                                                        2009
                                                                   -------------

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

Product financing arrangement                                      $  5,339,065
Senior secured debentures                                             3,600,000
Other notes                                                              44,367

Less debt discounts due to warrants                                    (516,495)
                                                                   -------------

Notes payable, net of debt discounts and beneficial
 conversion features                                                  8,466,937

Less current portion                                                 (8,466,937)
                                                                   -------------

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


         As of June 30, 2009, future minimum lease payments that come due in the
fiscal years ended September 30 are as follows:
<TABLE>
<CAPTION>
<S>                                                                   <C>              <C>
     Fiscal Year Ended September 30,                                  Capital Leases    Operating
                                                                                          Leases
     --------------------------------------------------------------  --------------------------------
     2009                                                                       645           61,634
     2010                                                                     2,579          233,838
     2011                                                                       430                -

                                                                     --------------------------------
     Total minimum lease payments                                             3,654        $ 295,472
                                                                                      ===============

     Less: Amount representing interest
                                                                                (90)
                                                                     -----------------

     Present value of minimum lease payments                                  3,564
     Less: Current portion
                                                                             (2,498)

                                                                     -----------------
     Obligations under capital lease, net of current portion              $   1,066
                                                                     =================
</TABLE>

Deferred Revenue Items

         Revenue under service agreements is deferred and recognized over the
term of the agreement, typically one year, on a straight line basis. As of June
30, 2009 deferred revenue was $168,749, which is included under accrued
liabilities.

Off-Balance Sheet Arrangements

         We currently have no off-balance sheet arrangements.

                                       18
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

         We are not required to provide the information required by this Item.

Item 4.  Controls and Procedures.

         As of the end of the period covered by this Quarterly Report on Form
10-Q, 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
decision regarding required disclosure.

         There has been no change in our internal control over financial
reporting during the three months ended June 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





                (Remainder of the page intentionally left blank)

                                       19
<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 that manufactured 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. 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. The defendants in the case filed an
appeal on October 2, 2007. We responded to that appeal in May 2008. In September
2008, we were notified by the court that one of the defendants, Info & Tech, had
informed the court that their company was bankrupt. The proceedings continued
against the other two defendants and a hearing was held before the court of
appeals on December 18, 2008. The Court dismissed Info & Tech as a defendant due
to their bankruptcy and denied a petition by the remaining defendants to suspend
the infringement proceedings pending a final outcome in the nullification suit
described below.

         On June 21, 2007, Gia-Marco S.p.A., who subsequently acquired the
assets of Info & Tech following its bankruptcy, filed a proceeding for
nullification of that same German subpart DE69428698 of our European Patent
0700578 with the German Federal Patent Court. A nullification hearing determines
whether or not the patent should have been granted in the first place. If the
plaintiffs prevail in their claim then our European patent will be invalid only
in Germany, making the infringement claim moot. Our response to this filing was
made in January 2008. The court hearing on this proceeding was held on March 5,
2009, and the court ruled in favor of Gia-Marco.

         The Company has appealed the adverse ruling in the nullification
proceeding and the court of appeals in the infringement claim described above
has agreed to suspend the effectiveness of its decision pending the outcome of
our appeal of the ruling in the nullification proceeding. The German appeals
court acknowledged receiving our decision to appeal the nullification, and
written briefs are due on November 17, 2009. No date has been set for further
arguments in either the infringement or nullification proceeding. .

Item 1a.  Risk Factors

         This report and other information made publicly available by us from
time-to-time may contain certain forward-looking statements and other
information relating to the Company and our business that are based on the
beliefs of management and assumptions made concerning information then currently
available to management. Such statements reflect the views of management at the
time they are made and are not intended to be accurate descriptions of the
future. The discussion of future events, including the business prospects of the
Company, is subject to the material risks listed in this section and assumptions
made by management.

         These risks include the viability of the planned market penetration
that we intend to make, our ability to identify and negotiate transactions that
provide the potential for future stockholder value, our ability to attract the
necessary additional capital to permit us to take advantage of opportunities
with which we are presented, and our ability to generate sufficient revenue such
that we can support our current and future cost structure. Should one or more of
these or other risks materialize, or if the underlying assumptions of management
prove incorrect, actual results may vary materially from those described in the
forward-looking statements. We do not intend to update these forward-looking
statements, except as may occur in the regular course of our periodic reporting
obligations.

                                       20
<PAGE>

         The material risks that we believe are faced by the Company as of the
date of this quarterly report on Form 10-Q 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 our management could
adversely affect the business and prospects of the Company.




                         RISKS RELATING TO OUR BUSINESS

We have been in operation for over 10 years and have never been profitable.

         We are a medical device company that has experienced significant
operating losses, primarily due to the cost of substantial research and
development of our primary product, the Mobetron. Since inception, we have
generated about $33.5 million in revenue through June 30, 2009. In addition, the
Company has incurred substantial monetary liabilities in excess of monetary
assets over the past several years and, as of June 30, 2009, had an accumulated
deficit of $48,172,500. 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 the Mobetron at higher unit
volumes and at higher margins. Further, if the 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 significant short-term and long-term capital and operating needs.

         We have significant short-term and long-term capital and operating
needs. Unless we are able to raise additional capital in the near future, we
will be unable to satisfy our short-term and long-term liabilities. Equity or
debt financing sufficient to satisfy such liabilities may not be available on
terms favorable to us or at all. Our ability to raise additional capital may be
adversely affected by ongoing general financial conditions. We have spent, and
provided we are able to raise sufficient capital, will continue to spend,
substantial funds on development, marketing, research, and commercialization
related to the 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.

We have pledged all of our assets and significant amount of the capital stock in
our subsidiaries as security for loans.

         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 June 30, 2009,
maximum availability under the line was $6,000,000.

         We have also issued 10% senior secured debentures in an aggregate
principal amount of $3,600,000 to six private lenders, and may issue up to
$1,400,000 aggregate principal amount of such debentures in the future under the
terms of the debenture purchase agreement that we have entered into with such
lenders. Unless earlier converted in accordance with the terms thereof, these
debentures have a maturity date of December 31, 2009. 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. Currently, the
Company does not have sufficient capital resources to retire the 10% senior
secured debentures if the holders were to demand repayment thereof.

                                       21
<PAGE>

          Upon a default 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 and to sell
those assets at a public or private sale and also to sell the shares of our
subsidiaries 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 could
result in very significant dilution to our stockholders and if we are unable to
obtain those funds, we could be unable thereafter to operate, possibly resulting
in a total loss of the investment made by our stockholders.

We have significant additional capital and operating needs.

         We have spent, and will continue to spend, substantial funds on
development, marketing, research, and commercialization related to the 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 primary product is subject to uncertain market acceptance.

           We cannot assure you that the Mobetron will gain broad commercial
acceptance or that commercial viability will be achieved, that future research
and development related to the Mobetron system will be successful or produce
commercially salable products, that other products we may develop will be
completed or commercially viable, or that hospitals or other potential customers
will be willing to make the investment necessary to purchase the Mobetron or
other products that we may develop, or be willing to comply with applicable
government regulations regarding their use.

We are currently dependent on one key supplier.

         Following the termination of our contract manufacturing agreement with
CDS Engineering LLC in November 2008, we are dependent on one key supplier,
Accuray Incorporated, or Accuray, of Sunnyvale, California, for the
manufacturing and delivery of the accelerator guide. One of the founders of
Accuray, Donald A. Goer, is our Chief Scientist.

         Any significant interruption in our relationship with Accuray or any
other supplier, including subcontractors, could have a material adverse effect
on our ability to manufacture the 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 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.

                                       22
<PAGE>

We do not have manufacturing expertise nor facilities to support a significant
increase in commercial sales.

         Although members of management have extensive experience in
manufacturing, we do not have experience manufacturing our products in the
volumes that will be necessary for us to achieve significant commercial sales.
We believe we have expanded our resources to be able to assemble Mobetron to
meet current production demand. However we may encounter difficulties in scaling
production of the Mobetron or in hiring and training additional personnel to
manufacture the Mobetron in increasing quantities.

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

We may be unable to protect our patents and proprietary technology.

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

         In June 2006, we brought suit in the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactured 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. 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. The defendants in the case filed an
appeal on October 2, 2007. We responded to that appeal in May 2008. In September
2008, we were notified by the court that one of the defendants, Info & Tech, had
informed the court that their company was bankrupt. The proceedings continued
against the other two defendants, and a hearing was held before the Appeals
Court on December 18, 2008. The Court dismissed Info & Tech as a defendant due
to their bankruptcy and denied a petition by the remaining defendants to suspend
the infringement proceedings pending a final outcome in the nullification suit
described below.

         In a related matter, on June 21, 2007, Gia-marco S.p.A., who
subsequently acquired the assets of Info & Tech following its bankruptcy, filed
a proceeding for nullification of that same German subpart DE69428698 of our
European Patent 0700578 with the German Federal Patent Court. A nullification
hearing determines whether or not the patent should have been granted in the
first place. If the plaintiffs prevail in their claim then our European patent
will be invalid only in Germany, making the infringement claim moot. Our
response to this filing was made in January 2008. The court hearing on this
proceeding was held on March 5, 2009, and the court ruled in favor of Gia-macro.

                                       23
<PAGE>

         The Company has appealed the adverse ruling in the nullification
proceeding and the court of appeals in the infringement claim described above
has agreed to suspend the effectiveness of its decision pending the outcome of
our appeal of the ruling in the nullification proceeding. The German appeals
court acknowledged receiving our decision to appeal the nullification, and
written briefs are due on November 17, 2009. No date has been set for further
arguments in either the infringement or nullification proceeding.

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 you 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
operation.

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, Ph.D., 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 and Mr. Powers 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 our obligations under the debentures.

                                       24
<PAGE>

         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 you 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 that may not be available at the appropriate
time or at a reasonable cost. In addition, these products and services may
divert our resources from the development and marketing of the Mobetron system,
which could decrease our revenue and potential earnings.

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 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, when there was no public market for shares, was
based on estimates of fair value made by our Board of Directors.

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

         On January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R), using the
modified prospective transition method, which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
our employees and directors, including stock options and restricted stock based
on their fair values. As a result, our operating results contain, and our
operating results for future periods will contain, a charge for share-based
compensation related to stock. This charge is in addition to other share-based
compensation expense we have recognized in prior periods.

                                       25
<PAGE>

         The application of SFAS 123(R) requires the use of an option-pricing
model, such as the Black-Scholes option-pricing model, to determine the fair
value of share-based payment awards. Option-pricing models were developed for
use in estimating the value of traded options that have no vesting restrictions
and are fully transferable. Our stock options have characteristics significantly
different from those of traded options, and changes in the assumptions (such as
expected term, stock price volatility and other variables) can materially affect
the fair value estimates. Therefore, although we determine the fair value of
stock options in accordance with SFAS 123(R) and Staff Accounting Bulletin 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 adopted 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, and 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 also subject to competition in
the United States and abroad from a variety of sources, including universities,
research institutions, conventional medical linear accelerator manufacturers,
other medical device companies and pharmaceutical 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.

         Conventional medical linear accelerator manufacturers have sold a small
number of 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. A spin-off of NRT, called Info & Tech
manufactured a system called the Liac in an attempt to replace the Novac 7 in
the market. Info & Tech delivered a small number of pre-commercial units to its
customers but has now filed for bankruptcy. Sordina, SpA has acquired the assets
of Info & Tech through Gia Marco and we believe Sordina will continue to market
and develop the product. The features and technology of the Liac system are very
similar to that of the NRT system. NRT and Sordina are both developing higher
energy versions of their systems so that they can be more competitive with the
features of the Mobetron. Both of these competitors have had some sales success,
mainly sales of Liac in Italy, where we view the Novac 7 and the Liac as
significant competition

                                       26
<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 you that our competitors will not
develop technologies or obtain regulatory approval for products that may be more
effective than the Mobetron or other products we may develop and that our
technologies and products would not be rendered less competitive or obsolete by
such developments.


We are subject to extensive government regulation.

         The development, testing, manufacturing, and marketing of the Mobetron
are regulated by the U.S. 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, received European EC
Certificate approval, or CE Mark, on October 12, 2001 and received the approval
to market and sell in China, or SFDA, on November 23, 2003. However, we may need
to obtain additional approvals from the FDA or other governmental authorities if
we decide to change or modify the Mobetron. In that case, the FDA or other
authorities, at their discretion, could choose not to 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 practices regulations, suggested
state regulations for the control of radiation, or SSRCR, and International
Electrotechnical Committee 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 you that we will not be required to incur
significant costs in the future in complying with manufacturing and
environmental regulations. Any problems with our or our manufacturers' ability
to meet regulatory standards could prevent us from marketing the Mobetron or
other products.

We expect to be highly dependent on overseas sales.

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

         Additionally, we have limited experience in many of the foreign markets
in which we plan to sell our goods and services. To succeed, we will have to
overcome cultural and language issues and expand our presence overseas. 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 may also encounter difficulties due to longer customer payment cycles
and encounter greater difficulties in collecting accounts receivable from our
overseas customers. Further, should we discontinue any of our international
operations, we may incur material costs to cease those operations. An inability
to expand our overseas presence or manage the risks inherent in that expansion
could have a material adverse affect on our business, financial condition, and
results of operations.

                                       27
<PAGE>

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

         IOERT is not yet considered to be a "standard of care" by the majority
of cancer practitioners. In addition, IOERT may never develop into a "standard
of care" for the treatment of cancer, in which case the market potential for the
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 United States may depend on
increasing reimbursement for IOERT services.

         Hospitals in the United States pay increasing attention to treatment
costs, return on assets, and time to investment recovery when making capital
purchase decisions. The current U.S. reimbursement rates for treatment of
advance cancers and breast cancers using IOERT are relatively low, which
potentially makes the rate of return on capital invested in Mobetron less
favorable compared to the rate of return for external beam and other
radiotherapy delivery systems. While we are making efforts to increase the rate
of reimbursement to improve the rate of return on the capital investment in the
Mobetron for hospitals in the United States, there is no assurance that such an
effort will be ultimately successful. Although Medicare reimbursement is
available for certain Mobetron treatments, and although Medicare has recently
established an additional billing code that may allow increased reimbursement
for patients who undergo Mobetron 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 United States reimbursement
environment may slow the widespread acceptance of IOERT and the Mobetron in the
U.S. market.

         The current U.S. reimbursement for the Mobetron dermatology treatment
is competitive with existing treatments, such as x-ray and Mohs surgery. As with
all reimbursement codes, however, this code is subject to yearly review and
adjustment, and it could be decreased or eliminated in the future.

         In order to enhance the current reimbursement for IOERT, we have
engaged a reimbursement consulting firm with a strong track record of successful
reimbursement applications. Pinnacle Reimbursement, a New Jersey based firm, was
chosen because it has a history working with other radiation device
manufacturers to obtain reimbursement, even though existing clinical data and
use was limited. To begin, we have applied for a new technology Ambulatory
Payment Classification (APC) code that would cover reimbursement for a hospital
or a standalone center for a single dose of radiation during outpatient surgery.
The application argues that IOERT is a similar procedure as stereotactic
radio-surgery (SRS) and should therefore be reimbursed similarly, at a rate of
about $5,000 per fraction delivery. This application is currently in the appeals
process, and the earliest we currently expect a new code to be issued is October
1, 2009. In the meantime, we are working with members of American Society of
Therapeutic Radiation Oncology (ASTRO) to submit an application for a permanent
level 1 Current Procedure Technology (CPT) code that would cover technical and
professional reimbursement for the breast radiation treatment. We expect this
application to be submitted in November 2009, with the earliest possible
reimbursement, upon approval, to occur in 2011.

                                       28
<PAGE>

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 cost structures with individual
hospitals that are below the prevailing market rate and typically negotiate
payment arrangements that are less advantageous than those available from other
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 the Mobetron or that
such legislation will not have a material adverse affect on our ability to sell
the Mobetron and on our business, financial condition, and results of operation.


                        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 you 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        large 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.

                                       29
<PAGE>

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

We have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our common
stock.

         We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial condition and
other business and economic factors affecting the value of our common stock 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 a
stockholder's 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 quoted 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 the 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
common stock may suffer. Because our common stock is subject to the "penny stock
rules," investors will find it more difficult to dispose of our shares. Further,
for companies whose securities are traded on 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.

Our stock may lose access to a viable trading market.

         Given the increasing cost and resource demands of being a public
company, the Company may decide to "go dark," or cease filing with the
Securities and Exchange Commission, or the SEC, by deregistering its securities,
for a period of time until its assets and stockholder base are sufficient to
warrant public trading again. During such time, there would be a substantial
decrease in disclosure by the Company of its operations and prospects, and a
substantial decrease in the liquidity in the Company's common stock even though
stockholders may still continue to trade our common stock in the OTC market or
"pink sheets." The market's interpretation of a company's motivation for "going
dark" varies from cost savings, to negative changes in the firm's prospects, to
serving insider interests, which may affect the overall price and liquidity of a
company's securities.

                                       30
<PAGE>

Our stockholders have given us authority to effect a one-for-fifty reverse stock
split.

         Our stockholders have approved the filing of an amendment to our
articles of incorporation that, if filed, would effect a one-for-fifty reverse
stock split of the outstanding shares of our common stock. We sought authority
to file the amendment because we believe that the current large number of
outstanding shares of our common stock is undesirable and that the current low
market value per share of our common stock has reduced the effective
marketability of the shares of our common stock as institutional investors and
investment funds are generally reluctant to invest in lower priced stocks and
many brokerage firms are generally reluctant to recommend lower priced stocks to
their clients.

         Our Board of Directors has authority to file, and to determine the
exact timing of the filing of, the amendment to our articles of incorporation
that would effect the reverse stock split, without further stockholder approval.
Our Board of Directors also has reserved the right, notwithstanding stockholder
approval and without further action by the stockholders, not to proceed with the
reverse stock split, if, at any time prior to filing the amendment to our
articles of incorporation effecting the reverse stock split with the Secretary
of State of the State of Nevada, our Board of Directors, in its sole discretion,
determines that the reverse stock split is no longer in the best interests of
the Company and our stockholders. The Board of Directors is inclined to file the
amendment to our articles of incorporation effecting the proposed one-for-fifty
reverse stock split by the end of the Company's current fiscal year.

         We cannot assure you that if we file an amendment to our articles of
incorporation effecting a reserve stock split as described above: (i) the market
price of our common stock will increase proportionately to reflect the ratio for
the reverse stock split; (ii) the market price of our common stock will not
decrease to its pre-split level; (iii) our market capitalization will be equal
to the market capitalization before the reverse stock split; or (iv) we will be
able at any time to achieve listing of our common stock on NASDAQ or another
national exchange. The market price of our common stock may be based on other
factors that are unrelated to the number of shares outstanding, including our
future performance.

         Further, the liquidity of our common stock could be affected adversely
by the reduced number of shares of our common stock that would be outstanding
after a reverse stock split. Although we believe that a higher stock price may
help generate investor interest in our stock, there can be no assurance that a
reverse stock split would result in a per-share price that is attractive to
investors. Further, the decreased liquidity that may result from having fewer
shares outstanding may not be offset by increased investor interest in our
common stock.

We have received stockholder approval for an amendment to our articles of
incorporation to authorize a class of "blank check" preferred stock.

         In June 2009 we received stockholder approval for an amendment to our
articles of incorporation that would grant our Board of Directors the authority
to issue up to 20,000,000 shares of preferred stock in one or more series, with
such voting powers, preferences or other rights as the Board of Directors may
determine from time to time without further stockholder approval. The issuance
of preferred stock could, among other things, have the effect of delaying,
deferring or preventing a change in control and may adversely affect the market
price of our common stock and the voting and other rights of holders of our
common stock. In addition, the issuance of shares of preferred stock may
adversely affect the rights of the holders of our common stock.

                                       31
<PAGE>

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, 366,310,425 shares of
common stock and warrants to purchase 44,283,589 shares of common stock, which
in each case 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 shares 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.


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

           None


Item 3.  Defaults upon Senior Securities

         None

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

         Pursuant to a consent solicitation statement dated May 8, 2009, the
following matters were submitted to the Company's stockholders and were approved
by written consent effective as of June 8, 2009:

1. An amendment to the Company's amended and restated articles of incorporation
to implement a one-for-fifty reverse split of the issued and outstanding shares
of the Company's common stock and reduce the authorized number of shares of the
Company's common stock from 500,000,000 to 100,000,000.

The results of the vote on this proposal as of the effective dated of the
approval were as follows:

         For                   Against               Abstain
         ---                   -------               -------
     198,709,801             18,520,833              292,291


                                       32
<PAGE>

2. An amendment to the Company's amended and restated articles of incorporation
to authorize a class of preferred stock, pursuant to which the Company's board
of directors would have the authority to issue up to 20,000,000 shares of such
preferred stock in one or more series, with such voting powers, preferences or
other rights as the Company's board of directors may determine from time to time
without further stockholder approval.

The results of the vote on this proposal as of the effective date of the
approval were as follows:

         For                   Against               Abstain
         ---                   -------               -------
     210,888,437              6,342,197              292,291


Item 5.  Other Information

         None.

Item 6.  Exhibits

Exhibit
Number                              Description
------      ------------------------------------------------------------------
10.55       Second Amendment to the 10% Senior Secured Promissory Notes
31.1        Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2        Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1        Section 1350 Certification of Chief Executive Officer.
32.2        Section 1350 Certification of Chief Financial Officer.


                                       33
<PAGE>

                                   SIGNATURES
--------------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<CAPTION>
<S>                                    <C>
                                       INTRAOP MEDICAL CORPORATION


Date:  August 14, 2009                 By:    /s/   John P. Powers
                                          ------------------------
                                                John P. Powers, Chief  Executive Officer and
                                                President
                                                (Principal Executive Officer)

Date:  August 14, 2009
                                       By:    /s/   JK Hullett
                                                JK Hullett, Chief Financial Officer
                                                (Principal Financial Officer and Principal
                                                Accounting Officer)
</TABLE>

                                       34
<PAGE>

                           Intraop Medical Corporation
             Index to Consolidated Financial Statements (Unaudited)
                    For the Three Months Ended June 30, 2009


Consolidated Balance Sheet                                                   Q-2

Consolidated Statements of Operations                                        Q-3

Consolidated Statements of Cash Flows                                        Q-4

Notes to  Consolidated Financial Statements                                  Q-6

                                      Q-1
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                           <C>                 <C>
Intraop Medical Corporation
Consolidated Balance Sheet - Unaudited
-----------------------------------------------------------------------------------------------------------
                                                                         June 30,          September 30,
                                                                           2009               2008 (1)
                                                                     -----------------  -------------------
 ASSETS
 Current assets:
   Cash and cash equivalents                                           $      290,575     $        282,516
   Accounts receivable                                                      1,736,209              245,819
   Inventories, net                                                           705,797            1,018,257
   Inventories, under product financing arrangement                         1,954,023            3,849,339
   Prepaid expenses and other current assets                                   23,035               14,473
                                                                     -----------------  -------------------

          Total current assets                                              4,709,639            5,410,404

 Property and equipment, net                                                  146,201              190,070
 Leased equipment, net                                                        803,003                    -
 Intangible assets, net                                                       203,366              257,167
 Deposits                                                                      47,328               93,084
                                                                     -----------------  -------------------

         Total Assets                                                  $    5,909,537     $      5,950,725
                                                                     =================  ===================

 LIABILITIES AND STOCKHOLDERS' DEFICIT
 Current liabilities:
    Accounts payable                                                   $    2,056,791     $      1,710,889
    Accrued liabilities                                                     1,400,669              716,482
    Capital lease obligations, current portion                                  2,498                2,435
    Notes payable, related parties, current portion                           119,002              119,002
    Notes payable, other, current portion, net of unamortized debt
     discounts                                                              8,466,937            5,649,917
                                                                     -----------------  -------------------

          Total current liabilities                                        12,045,897            8,198,725

    Capital lease obligations, net of current portion                           1,066                2,946
    Notes payable, other, net of current portion, unamortized debt
     discounts and beneficial conversion features                                   -                    -
                                                                     -----------------  -------------------

          Total liabilities                                                12,046,963            8,201,671
                                                                     -----------------  -------------------

 Stockholders' deficit:
   Common stock, $0.001 par value: 500,000,000 shares authorized;
      392,787,597 shares issued and outstanding                               392,788              392,788
   Additional paid-in capital                                              41,792,286           40,187,351
   Treasury stock, at cost, 600,000 shares at $.25 per share                 (150,000)            (150,000)
   Accumulated deficit                                                    (48,172,500)         (42,681,085)
                                                                     -----------------  -------------------

           Total stockholders' deficit                                     (6,137,426)          (2,250,946)
                                                                     -----------------  -------------------

              Total liabilities and stockholders' deficit              $    5,909,537     $      5,950,725
                                                                     =================  ===================
</TABLE>

(1)     The consolidated balance sheet as of September 30, 2008 was derived from
        audited financial statements as of that date.

                      See accompanying notes to these financial statements.

                                      Q-2
<PAGE>

<TABLE>
<CAPTION>
<S>                                 <C>             <C>                   <C>               <C>
Intraop Medical Corporation
Consolidated Statements of Operations - Unaudited
-----------------------------------------------------------------------------------------------------------------
                                             Three months ended                      Nine months ended
                                                  June 30,                               June 30,
                                     -----------------------------------  ---------------------------------------
                                           2009              2008                2009                 2008
                                     ---------------  ------------------  -----------------  --------------------
Revenues:
  Product sales                       $   1,062,242    $      2,031,319     $    3,224,741     $       5,824,186
  Leasing                                    45,000                   -             75,000                     -
  Service                                   119,589             108,864            322,855               291,278
                                     ---------------  ------------------  -----------------  --------------------

Total revenues                            1,226,831           2,140,183          3,622,596             6,115,464
                                     ---------------  ------------------  -----------------  --------------------

Cost of revenues:
  Product sales                             823,621           1,855,614          2,722,583             4,642,606
  Leasing                                    55,694                   -             92,824                     -
  Service                                    54,462              40,356            154,592               181,552
                                     ---------------  ------------------  -----------------  --------------------

  Total cost of revenues                    933,777           1,895,970          2,969,999             4,824,158
                                     ---------------  ------------------  -----------------  --------------------

Gross margin                                293,054             244,213            652,597             1,291,306
                                     ---------------  ------------------  -----------------  --------------------

Operating expenses:
  Research and development                  504,374             422,337          1,497,992             1,240,650
  General and administrative                612,180             544,302          1,645,075             1,889,267
  Sales and marketing                       515,803             934,405          1,843,221             3,488,782
                                     ---------------  ------------------  -----------------  --------------------

 Total operating expenses                 1,632,357           1,901,044          4,986,288             6,618,699
                                     ---------------  ------------------  -----------------  --------------------

Loss from operations                     (1,339,303)         (1,656,831)        (4,333,691)           (5,327,393)

Other income                                 81,412              72,684            105,112               359,304
Gain on extinguishment of debt                    -                   -                  -                28,000
Interest income                                   1                   5                  6                    16
Interest expense                           (633,082)           (333,092)        (1,262,843)           (1,193,257)
                                     ---------------  ------------------  -----------------  --------------------

Loss before taxes                        (1,890,972)         (1,917,234)        (5,491,416)           (6,133,330)

Provision for income taxes                        -                (276)                 -               (31,776)
                                     ---------------  ------------------  -----------------  --------------------

Net loss                              $  (1,890,972)   $     (1,917,510)    $   (5,491,416)    $      (6,165,106)
                                     ---------------  ------------------  -----------------  --------------------

Basic and diluted net loss per share
 available to common shareholders     $       (0.00)   $          (0.01)    $        (0.01)    $           (0.02)
                                     ---------------  ------------------  -----------------  --------------------
Weighted average number of shares
 in calculating net loss per share:
Basic and diluted                       392,787,597         369,761,958        392,787,597           328,708,689
                                     ---------------  ------------------  -----------------  --------------------
</TABLE>

              See accompanying notes to these financial statements

                                      Q-3
<PAGE>

<TABLE>
<S>                                                        <C>                <C>
Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited
-------------------------------------------------------------------------------------------------
                                                                 Nine months ended June 30,
                                                                 2009                2008
                                                           -----------------  -------------------
Cash flows from operating activities:
  Net loss                                                 $     (5,491,416)  $       (6,165,106)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
    Depreciation of property and equipment                           99,609               68,764
    Loss on disposal of fixed assets                                  1,655                    -
    Amortization of intangible assets                                58,801               56,247
    Amortization of debt discount                                  (468,755)             199,697
    Amortization of debt issuance costs                                   -              174,181
    Non-cash compensation for options issued                        861,481            1,949,825
    Non-cash compensation for warrants issued                       743,454              (16,075)
  Changes in assets and liabilities:
      Accounts receivable                                        (1,490,390)            (286,296)
      Inventories                                                 1,369,860              810,009
      Prepaid expenses and other current assets                      (8,562)              16,463
      Other assets                                                   45,756              122,965
      Accounts payable                                              345,902           (1,381,454)
      Accrued liabilities                                           684,190             (169,316)
      Foreign exchange translation                                        -               22,296
                                                           -----------------  -------------------

      Net cash used in operating activities                      (3,248,415)          (4,597,800)
                                                           -----------------  -------------------

Cash flows used for investing activities:
    Acquisition of fixed assets                                     (22,483)             (75,094)
    Acquisition of intangible assets                                 (5,000)             (64,800)
                                                           -----------------  -------------------

      Net cash used in investing activities                         (27,483)            (139,894)
                                                           -----------------  -------------------

Cash flows provided by financing activities:
    Proceeds from note payable, other                             9,096,463            4,155,744
    Payments on note payable, related party                               -              (37,828)
    Payments on note payable, other                              (5,812,506)          (4,968,313)
    Proceeds from obligation to issue stock                               -            1,150,071
    Proceeds from issuance of common stock                                -            4,452,722
                                                           -----------------  -------------------

    Net cash provided by financing activities                     3,283,957            4,752,396
                                                           -----------------  -------------------

Net increase in cash and cash equivalents                             8,059               14,702
Cash and cash equivalents, at beginning of period                   282,516              538,364
                                                           -----------------  -------------------

Cash and cash equivalents, at end of period                $        290,575   $          553,066
                                                           =================  ===================
</TABLE>

                      See accompanying notes to these financial statements.


                                      Q-4

<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                  <C>
Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited (Continued)
-------------------------------------------------------------------------------------------
                                                              Nine months ended June 30,
                                                           --------------------------------
                                                                2009              2008
                                                           --------------    --------------

Supplemental disclosure of cash flow information:
  Cash paid for interest                                     $    506,843      $    805,080
  Income taxes paid                                                                  31,776

Supplemental disclosure of non-cash investing
  and financing activities:
  Inventory reclassified to leased equipment                      837,916                 -
  Promissory notes and interest payable converted
     to common stock                                                    -            54,900
Accrued liabilities converted to notes payable                          -           150,000

</TABLE>

              See accompanying notes to these financial statements.



                  (Remainder of page intentionally left blank)


                                       Q-5
<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 condensed 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-K for the year
ended September 30, 2008. In the opinion of management, the consolidated
financial statements herein include adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position as of June 30, 2009, and the results of operations for the
three months and nine months ended June 30, 2009 and June 30, 2008. The results
of operations for the three months and nine months ended June 30, 2009 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. The Company's business is the development,
manufacturing, marketing, and service of 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.


Basis of Consolidation:

For the three months and nine months ended June 30, 2009 and June 30, 2008, 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-6
<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 $1,890,972 and $1,917,510 for the three
months ended June 30, 2009 and 2008, respectively. In addition, the Company has
incurred substantial monetary liabilities in excess of monetary assets over the
past several years and, as of June 30, 2009, had an accumulated deficit of
$48,172,500. 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. 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.

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.

                                      Q-7
<PAGE>

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

Revenue Recognition:

Revenue is recognized when earned in accordance with applicable accounting
standards, including Staff Accounting Bulletins ("SAB") 104, Revenue Recognition
in Financial Statements ("SAB 104"), and the interpretive guidance issued by the
SEC and the Financial Accountings Standards Board ("FASB"), specifically,
Emerging Issues Task Force ("EITF") issue number 00-21, Accounting for Revenue
Arrangements with Multiple Elements. 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 the
Mobetron at the customer site with six customers during the three months and
nine months ended June 30, 2009 respectively. Similarly the Company recognized
revenue on service contracts for the service of the Mobetron at the customer
site with five customers during the three months and nine months ended June 30,
2008. 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.

Lease Revenue and Leasing Transactions:

Included in leasing revenue for the three months and nine months ended June 30,
2009 is $45,000 and $75,000 respectively. Similarly the leasing revenue for the
three months and nine months ended June 30, 2008 is $0. The rental revenue is
pursuant to an operating lease between the Company and a customer entered into
in February 2009. Pursuant to the terms of the lease, the rent for the leased
Mobetron system is $15,000 per month for up to 15 patients. For each patient
above 15 in any given month, the rent for that month is increased by $1,000 for
each patient. The customer has also a fixed price option to purchase the
Mobetron at the end of the lease in October 2009 in the amount of $1,150,000
less the amount of any rent paid in any month during the lease term in excess of
$15,000.

The Company financed the Mobetron, through a third party financier for $579,110
at a fixed interest rate of 24%. The interest is included in cost of revenue
together with the cost of depreciation of the leased Mobetron. The leased
Mobetron is depreciated on a straight line basis over the expected life of 120
months.

The Company retains substantial risk of ownership in the leased property, and
the transaction has therefore been accounted for in accordance with Statement of
Financial Accountings Standards ("SFAS") 13, "Accounting for Leases",
specifically paragraphs 19, 21, and 22.

                                      Q-8
<PAGE>

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


Intangible Assets:

Intangible assets consist primarily of capitalized costs relating to a Japanese
device approval license for sale of the 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 the three
months ended September 30, 2008 resulted in no impairment losses.


Income Taxes:

The Company accounts for its income taxes using the Financial Accounting
Standards 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.

                                      Q-9
<PAGE>

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

Basic and Diluted Loss per Share:

In accordance with SFAS No. 128, Earnings per Share, 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:
<TABLE>
<CAPTION>
<S>                        <C>              <C>               <C>               <C>
                                  Three months ended                  Nine months ended
                           --------------------------------   ---------------------------------
                                       June 30,                           June 30,
                           --------------------------------   ---------------------------------
                                2009              2008               2009             2008
                           --------------  ----------------   ----------------  ---------------

Numerator
Net loss attributable to
 common Stockholders        $ (1,890,972)     $ (1,917,510)      $ (5,491,416)    $ (6,165,106)

Denominator
Weighted average common
  shares outstanding         392,787,597       369,761,958        392,787,597      328,708,689

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


Total shares, basic          392,787,597       369,761,958        392,787,597      328,708,689
                           ==============  ================   ================  ===============

Net loss per common
 share:
  Basic and diluted                (0.00)            (0.01)             (0.01)           (0.02)
                           ==============  ================   ================  ===============
</TABLE>

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:
<TABLE>
<CAPTION>
<S>                                                 <C>               <C>                <C>                <C>
                                                           Three months ended                   Nine months ended

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

                                                    ---------------------------------    ---------------------------------
                                                        2009               2008               2009              2008
                                                    --------------    ---------------    ---------------    --------------

Options to purchase common stock                       29,577,483         31,024,099         29,577,483        31,024,099
Warrants to purchase common stock                      48,366,100         16,292,333         48,366,100        16,292,333
                                                    --------------    ---------------    ---------------    --------------

Potential equivalent shares excluded                   77,943,583         47,316,432         77,943,583        47,316,432
                                                    ==============    ===============    ===============    ==============
</TABLE>

                                      Q-10
<PAGE>

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

Comprehensive Loss:

Comprehensive loss consists of net loss and other gains and losses affecting
stockholders' equity that, under generally accepted accounting principles are
excluded from net loss in accordance with SFAS No. 130, Reporting Comprehensive
Income. The Company, however, does not have any components of other
comprehensive loss as defined by SFAS No. 130 and therefore, for the three
months and nine months ended June 30, 2009 and 2008, 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
revenue and long-lived assets by geographic location.

Subsequent Events:

The Company evaluates events that occur subsequent to the balance sheet date of
periodic reports, but before financial statements are issued for periods ending
on such balance sheet dates, for possible adjustment to such financial
statements or other disclosure. This evaluation generally occurs through the
date at which the Company's financial statements are electronically prepared for
filing with the SEC. For the financial statements as of and for the periods
ending June 30, 2009, this date was August 13, 2009.

Reclassification:

The Company made certain reclassifications to the consolidated financial
statements for the three months and nine months ended June 30, 2008 to conform
to the consolidated financial statements for the three months and nine months
ended June 30, 2009. There was no effect on previously reported net loss.

Recent Accounting Pronouncements:

In June 2008, the FASB issued FASB Staff Position ("FSP") on EITF No. 03-6-1,
"Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities." Under the FSP, unvested share-based payment awards
that contain rights to receive non-forfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing EPS. The FSP is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years, and is not expected
to have a significant impact on the Company's results of operations, financial
condition or liquidity.

                                      Q-11
<PAGE>

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

In April 2008, the FASB issued FSP FAS No. 142-3, which amends the factors that
must be considered in developing renewal or extension assumptions used to
determine the useful life over which to amortize the cost of a recognized
intangible asset under FAS No. 142, "Goodwill and Other Intangible Assets." The
FSP requires an entity to consider its own assumptions about renewal or
extension of the term of the arrangement, consistent with its expected use of
the asset, and is an attempt to improve consistency between the useful life of a
recognized intangible asset under FAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under FAS No. 141, "Business
Combinations." The FSP is effective for fiscal years beginning after December
15, 2008, and the guidance for determining the useful life of a recognized
intangible asset must be applied prospectively to intangible assets acquired
after the effective date. The FSP is not expected to have a significant impact
on the Company's results of operations, financial condition or liquidity.

In December 2007, the FASB issued FAS No. 141(R), "Applying the Acquisition
Method." FAS No. 141(R) provides guidance for the recognition of the fair values
of the assets acquired upon initially obtaining control, including the
elimination of the step acquisition model. The standard is effective for
acquisitions made in fiscal years beginning after December 15, 2008, and is not
expected to have a significant impact on the Company's results of operations,
financial condition or liquidity.

In September 2006, the FASB issued FAS 157, "Fair Value Measurements". FAS 157
defines fair value, establishes a framework and gives guidance regarding the
methods used for measuring fair value and expands disclosures about fair value
measurements. In February 2008 FASB Staff Position (FSP) FAS 157-2 was issued
and deferred the effective date of FAS 157 to fiscal years beginning after
November 15, 2008 for nonfinancial assets and nonfinancial liabilities only.
Accordingly, as of October 1, 2008, the Company will adopt FAS 157 for financial
assets and liabilities only. The Company is still in the process of evaluating
the impact that FAS 157 will have on its nonfinancial assets and liabilities.

In June 2008, the FASB ratified the consensus reached on EITF Issue No. 07-05,
Determining Whether an Instrument (or an Embedded Feature) is Indexed to an
Entity's Own Stock ("EITF 07-05"). EITF 07-05 provides guidance for determining
whether an equity-linked financial instrument (or embedded feature) is indexed
to an entity's own stock. EITF 07-05 applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative
under paragraphs 6-9 of SFAS 133, for purposes of determining whether that
instrument or embedded feature qualifies for the first part of the scope
exception under paragraph 11(a) of SFAS 133 and for purposes of determining
whether that instrument is within the scope of EITF No. 00-19 Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock (EITF 00-19), which provides accounting guidance for
instruments that are indexed to, and potentially settled in, the issuer's own
stock. EITF 07-05 is effective for fiscal years beginning after December 15,
2008, which for the Company is fiscal 2010, and early adoption is not permitted.
The Company is currently evaluating the impact of this pronouncement on its
consolidated financial statements.

                                      Q-12
<PAGE>

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

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification(TM) and the Hierarchy of Generally Accepted Accounting Principles
(a replacement of FASB Statement No. 162) ("SFAS 168"). SFAS 168 establishes the
FASB Accounting Standards Codification ("Codification") as the single source of
authoritative GAAP. The Codification does not create any new GAAP standards but
incorporates existing accounting and reporting standards into a new topical
structure. The Codification will be effective for the Company July 1, 2009, and
beginning with the yearend report, a new referencing system will be used to
identify authoritative accounting standards, replacing the existing references
to SFAS, EITF, FSP, etc. Existing standards will be designated by their
Accounting Standards Codification (ASC) topical reference and new standards will
be designated as Accounting Standards Updates, with a year and assigned sequence
number.

The accounting and reporting policies of the Company conform to U.S. generally
accepted accounting principles (GAAP) and to the practices within the industry.
There have been no significant changes in the Company's significant accounting
policies during the three and nine months ended June 30, 2009 compared to what
was previously disclosed in the Company's Annual Report on 10-K for the fiscal
year ended September 30, 2008.



 NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Two customers represented 51.3% and 39.8% of accounts receivable at June 30,
2009. One customer accounted for 87.1% of net revenue for the three months ended
June 30, 2009. Two customers accounted for 50.6% and 42.0% of net revenue for
the three months ended June 30, 2008. Two customers accounted for 58.3% and
27.1% of net revenue and five customers accounted for 23.5%, 21.0%, 17.7%, 16.0%
and 14.7% of net revenue for the nine months ended June 30, 2009 and June 30,
2008, respectively.

Three suppliers represented 23.2%, 4.9% and 4.8% of accounts payable at June 30,
2009. Purchases from these suppliers during the three months ended June 30, 2009
totaled approximately $0, $27,198 and $76,398. Purchases from these suppliers
during the nine months ended June 30, 2009 totaled approximately $0, $64,405 and
$136,681 respectively.

Similarly, three suppliers represented 30.6%, 22.6% and 8.6% of accounts payable
at June 30, 2008. Purchases from these suppliers during the three months ended
June 30, 2008 totaled approximately $0, $502,138 and $0. Purchases from these
suppliers during the nine months ended June 30, 2008 totaled approximately $0,
$1,730,532 and $423,911 respectively.

                                      Q-13
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:
<TABLE>
<CAPTION>
<S>                                                                         <C>                   <C>
                                                                                June 30,            September 30,
                                                                                  2009                  2008
                                                                            -----------------    --------------------

  Finished goods                                                                $          -         $             -
  Work-in-progress                                                                   116,416                 515,821
  Purchased parts and raw material, net of reserves of $211,932                      589,381                 502,436
  (at September 30, 2008 $25,833)
                                                                            -----------------    --------------------

                                                                                $    705,797         $     1,018,257
                                                                            =================    ====================
</TABLE>

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:
<TABLE>
<CAPTION>
<S>                                                                         <C>                   <C>
                                                                                 June 30,           September 30,
                                                                                   2009                 2008
                                                                            -----------------    -------------------

  Finished goods                                                                $          -        $       649,584
  Work-in-progress                                                                 1,385,116              3,148,780
  Purchased parts and raw material                                                   568,907                 50,975
                                                                            -----------------    -------------------

                                                                                $  1,954,023        $     3,849,339
                                                                            =================    ===================
</TABLE>

Under the Company's Inventory and Product Financing Arrangement (see Note 4),
only the title to the financed inventory is transferred to the lender. The
lender may not sell, dispose of, pledge, grant an interest in, or otherwise
encumber the inventory and must hold such Factored Inventory free and clear of
all liens and encumbrances for later repurchase by the Company at a price equal
to the price that the lender paid to the Company plus any unpaid fees.


Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:
<TABLE>
<CAPTION>
<S>                                     <C>                      <C>
                                             June 30,              September 30,
                                               2009                     2008
                                        --------------------     -------------------

Property & equipment                             $  284,316               $ 278,184
Computer equipment                                  140,389                 133,365
Furniture & fixtures                                 72,312                  67,808
Leasehold improvements                               37,420                  37,420
                                        --------------------     -------------------
                                                    534,437                 516,777
Less accumulated depreciation                      (388,236)               (326,707)
                                        --------------------     -------------------
                                                 $  146,201               $ 190,070
                                        ====================     ===================
</TABLE>

                                      Q-14
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Included in property and equipment is an asset acquired under capital lease
obligations with an original cost of $11,742 as of June 30, 2009 and as of
September 30, 2008. Related accumulated depreciation and amortization of this
asset was $9,002 and $7,241 as of June 30, 2009 and September 30, 2008
respectively.

Leased Equipment:

Leased Equipment consists of the following:
<TABLE>
<CAPTION>
<S>                                                                        <C>                     <C>
                                                                              June 30,              September 30,
                                                                                2009                     2008
                                                                         --------------------     -------------------
Mobetron leased to a customer                                                $      837,916          $          -
Less accumulated depreciation                                                       (34,913)
                                                                                                                -
                                                                         --------------------     -------------------
                                                                             $      803,003          $          -
                                                                         ====================     ===================
</TABLE>

Intangible Assets:

Intangible Assets consist of the following:

<TABLE>
<CAPTION>
<S>                                                                               <C>                      <C>
                                                                             June 30,            September 30,
                                                                               2009                  2008
                                                                          ---------------      ------------------

Non-recurring engineering charges paid to third parties                   $     398,300          $      393,300
Less accumulated amortization                                                  (224,934)               (166,133)
                                                                          ---------------      ------------------
Non-recurring engineering charges paid to third parties, net                    173,366                 227,167
Medical device approval license not subject to amortization                      30,000                  30,000
                                                                          ---------------      ------------------
Intangible assets, net                                                    $     203,366          $      257,167
                                                                          ===============      ==================
</TABLE>

The Company's historical and projected revenues are related to the sale and
servicing of the Company's sole product, the Mobetron. Should revenues from the
sale of the Mobetron 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.

Accrued Liabilities:

A summary is as follows:

<TABLE>
<CAPTION>
<S>                                                                               <C>                      <C>
                                                                             June 30,            September 30,
                                                                               2009                  2008
                                                                          ---------------      ------------------
    Contract advances                                                       $   414,718           $      84,000
    Accrued interest payable                                                    460,081                 108,372
    Accrued warranty                                                            134,020                 161,947
    Deferred revenue                                                            168,749                 162,811
    Accrued wages and benefits payable                                          170,898                 184,827
    Accrued sales tax payable                                                    12,203                  14,525
    Other accrued liabilities                                                    40,000                       -
                                                                          ---------------      ------------------

                                                                            $ 1,400,669           $     716,482
                                                                          ===============      ==================
</TABLE>

                                      Q-15
<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 Mobetron 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.
<TABLE>
<CAPTION>
<S>                                                                         <C>                  <C>
                                                                              June 30,            September 30,
                                                                                2009                   2008
                                                                           ---------------      -------------------
Warranty accrual at the beginning of period                                    $ 138,090           $      111,515
Accrual for warranties during the period                                          40,000                  240,000
Actual product warranty expenditures                                             (44,070)                (189,568)
                                                                           ---------------      -------------------

Warranty accrual at the end of the period                                      $ 134,020           $      161,947
                                                                           ===============      ===================
</TABLE>


NOTE 4 - BORROWINGS

Outstanding notes payable consist of the following:
<TABLE>
<CAPTION>
<S>                                                                          <C>                  <C>
                                                                               June 30,            September 30,
                                                                                 2009                   2008
                                                                            ---------------      -------------------

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


Product financing arrangement                                                  $  5,339,065         $   4,503,290
Senior secured debentures                                                         3,600,000             1,000,000
Other notes                                                                          44,367               194,367

Less debt discounts due to warrants                                                (516,495)              (47,740)
                                                                            ---------------      -------------------

Notes payable, net of debt discounts and beneficial
    conversion features                                                           8,466,937             5,649,917

Less current portion                                                             (8,466,937)           (5,649,917)
                                                                            ---------------      -------------------

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

Notes payable, related parties:

Notes payable to related parties of $119,002 at June 30, 2009, 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.

                                      Q-16
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Product financing arrangements:

In August 2005, the Company entered into a $3,000,000 revolving combined
inventory financing and accounts receivable 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 financing and 24% per annum on accounts receivable financing under the
agreement. The loan is secured by a lien on the financed inventory and
receivables. 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 accrued interest.

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 September 16, 2009. The
Company also 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.

On July 3, 2008 the Company entered into an amendment to the Product Financing
Arrangement, to increase by approximately six months the amount of time certain
inventory may remain as collateral under the Purchase Agreement. The Company
agreed to reduce the exercise price of 1,350,000 warrants from $0.08 to $0.065
per shares, which were previously issued on September 17, 2007. The fair value
of $99 attributable to the warrant was recorded as a note discount and was
amortized to interest.

In May 2009 the Company terminated and replaced its accounts receivable
factoring portion of its Product Financing Arrangement with a new financial
institution. The terms of this new agreement are similar as the previous
agreement bearing interest at 24% per annum.

On June 30, 2009 the Company entered into an amendment to the loan agreement
with the 10% senior secured debenture holders. Pursuant to the agreement, the
Company agreed to reduce the price of 1,083,515 warrants issued on August 17,
2007 from $0.08 to $0.028, and also the price of 1,350,000 warrants issued on
September 17, 2007 from $0.065 to $0.028. The change in the fair value of $897
attributable to the warrant repricing was recorded as a note discount and was
amortized to interest over the remaining term.

At June 30, 2009 the outstanding principal balance under the Product Financing
Arrangement was $5,339,065.

                                      Q-17
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)


Senior secured debentures

The Company calculates the fair value of warrants issued with convertible
securities using the Black Scholes valuation method. The total proceeds received
in the sale of preferred stock or debt and related warrants is allocated among
these financial instruments based on their relative fair values. The debt
discount arising from assigning a portion of the total proceeds to the warrants
issued is recognized as interest expense from the date of issuance to the
earlier of the maturity date of the debt or the conversion dates using the
effective yield method. Additionally, when issuing convertible debt, including
convertible debt issued with detachable warrants, the Company tests for the
existence of a beneficial conversion feature in accordance with Financial
Accounting Standards Board ("FASB") Emerging Issues Task Force Issue ("EITF")
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, and FASB EITF No. 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments (EITF No.
00-27). The Company records the amount of any beneficial conversion feature
("BCF"), calculated in accordance with these accounting standards, whenever it
issues convertible debt that has conversion features at fixed rates that are in
the money using the effective per share conversion price when issued. The
calculated amount of the BCF is accounted for as a contribution to additional
paid-in capital and as a debt discount that is recognized as interest expense
from the date of issuance to the earlier of the maturity date of the debt or the
conversion dates using the effective yield method. The maximum amount of BCF
that can be recognized is limited to the amount that will reduce the net
carrying amount of the debt to zero.

As of June 30, 2009, the Company concluded the initial closing of a private
placement of senior secured debentures and warrants. The Company has issued 10%
senior secured debentures in an aggregate principal amount of $3,600,000 to six
private accredited investors and lenders (collectively "Lenders"), and may issue
up to $1,400,000 aggregate principal amount of such debentures in the future
under the terms of the debenture purchase agreement that we have entered into
with such Lenders. These debentures mature on the earlier of (i) December 31,
2009 or (ii) the date the Company closes an issuance, or series of issuances, of
promissory notes convertible into shares of its common stock with gross
aggregate proceeds received by the Company of not less than $6,000,000 (other
than the 10% senior secured debentures). The 10% senior secured debentures will
convert at the option of the holder into shares of preferred stock in the event
that we close an issuance, or series of issuances, of shares of preferred stock
with gross aggregate proceeds received by us of not less than $1,000,000 at a
conversion price equal to the price per share paid by the investors purchasing
such securities. Interest on the outstanding principal amount of the debentures
accrues at 10% per annum, payable monthly. The 10% senior secured debentures are
secured by a lien on all of our assets not otherwise pledged under our Product
Financing Arrangement.

The proceeds are to be used for working capital purposes.

Pursuant to EITF No. 00-27 and EITF No. 98-5, the Company considered the
potential contingent effect of a beneficial conversion feature of the Senior
Secured debentures issued in June 2009 private placement. Accordingly, the
contingent conversion option does not require it to recognize unless the
triggering event occurs and the contingency is resolved, and neither has
occurred as of June 30, 2009.

                                      Q-18
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Additionally, the Company granted warrants to these debenture holders to
purchase 32,142,857 shares of common stock at an exercise price of $0.028 per
share with expiration date ranging from March 31, 2014 to June 23, 2014. The
Company calculated the value of the warrants at the date of the transaction,
being approximately $742,557 under the Black-Scholes option-pricing method.
(assumption: volatility 337%, risk free rate 1.9% and zero dividends yield). The
Company allocated the $3.6 million in gross proceeds between the convertible
debentures and the warrants based on their fair values. The Company has reported
the debt discount as a direct reduction to the face amount of the debt. The
discount had accreted over the life of the outstanding debentures. The values
allocated to the warrants were recorded as a credit to additional paid in
capital.


Other notes:

The Company has a promissory note payable to a former director with an
outstanding principal balance of $44,367 at June 30, 2009. This note is due on
demand and bears interest at 9% per annum.

During the three months ending June 30, 2009 the Company repaid a $150,000
promissory note and $10,000 in interest thereon held by its Chinese distributor
by way of a set off on a sale of Mobetron.


NOTE 5 - CAPITAL LEASE

Capital lease

The Company leases equipment which is classified as capital lease arrangements.
Capital lease obligations consist of the following:
<TABLE>
<CAPTION>
<S>                                                              <C>                          <C>
                                                                     June 30,                  September 30,
                                                                       2009                        2008
                                                               ---------------------       ----------------------

  Capital lease for equipment                                       $      3,564               $        5,381

  Less: current portion                                                   (2,498)                      (2,435)
                                                               ---------------------       ----------------------

  Capital lease obligations, net of current portion                 $       1,066              $        2,946
                                                               =====================       ======================
</TABLE>

                                      Q-19
<PAGE>

NOTE 6 - COMMON STOCK

Shares Reserved for Future Issuance:

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

<TABLE>
<CAPTION>
<S>                                                                       <C>                            <C>
                                                                     June 30,                  September 30,
                                                                       2009                        2008
                                                               ---------------------       ----------------------

  2005 Equity Incentive Plan                                       45,359,664                  45,359,664
  Common stock warrants                                            48,366,100                  16,292,333
                                                               ---------------------       ----------------------

  Total                                                            93,725,764                  61,651,997
                                                               =====================       ======================
</TABLE>


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 (the "Plan") to increase by 22,062,664 shares the number of
shares of common stock reserved for issuance under the Plan. At the Company's
annual meeting of stockholders on April 23, 2008, stockholders approved an
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.


NOTE 7 - STOCK OPTIONS

The table below summarizes the share-based compensation expense under SFAS
123(R):
<TABLE>
<CAPTION>
<S>                                    <C>                   <C>                 <C>                 <C>
  -----------------------------------------------------------------------------------------------------------------
                                                Three months ended                      Nine months ended
                                                     June 30,                                June 30,
                                             2009                2008                 2009                2008

  Cost of revenues - Service              $      6,421         $    10,636        $     23,638        $     40,648
  Research and development                      60,116             107,958             230,767             380,481
  General and administrative                    49,217             101,425             171,726             396,064
  Sales and marketing                           74,951             219,070             306,597             824,869
                                        ---------------     ----------------    ---------------     ---------------

              Total                       $    190,705         $   439,089        $    732,728        $  1,642,062
                                        ===============     ================    ===============     ===============
</TABLE>


During the three months and nine months ended June 30, 2009, total share-based
compensation expense recognized in earnings before taxes was $190,705 and
$732,728 respectively and the total related recognized tax benefit was zero.
Additionally, total share-based compensation expense capitalized as part of
inventories for the three months and nine months ended June 30, 2009 was $30,014
and $106,759 respectively, and total share-based compensation expense applied to
warranty reserve for the three months and nine months ended June 30, 2009 was
$6,338 and $21,314 respectively.

                                      Q-20
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

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

                                    ----------------------------------------    -------------------------------------------
                                           2009                2008                    2009                  2008
                                    ------------------- --------------------    -------------------- ----------------------

Expected term (in years)                    -               5.5 to 6.4             5.35 to 6.45            0.02 to 7
Risk-free interest rate                     -             2.83% to 3.46%           1.74% to 2.63%        2.83% to 4.34%
Expected volatility                         -              239% to 247%            284% to 332%          204% to 247%
Expected dividend yield                     -                   0%                      0%                    0%
Weighted average fair value
    at grant date                           -                  $0.08                   $0.03                 $0.13
</TABLE>


Activity under the Plan is presented below:
<TABLE>
<CAPTION>
<S>                           <C>               <C>                  <C>                <C>             <C>
                                                                                         Weighted
                                                                                         Average
                                                                                        Remaining
                                  Shares                               Weighted        Contractual         Aggregate
                                Available          Number of        Average Exercise       Term         Intrinsic Value
                                for Grant            Shares             Price           (in years)            (1)
                             -----------------  -----------------  -----------------  ---------------  ------------------
Balance at September 30, 2007       1,756,500         1,840,500            $ 0.68               5.44
Granted                           (31,210,327)       31,210,327              0.17
Authorized                         42,062,664                 -                -
Cancelled or expired                1,906,728        (1,906,728)            (0.66)
Exercised                                   -          (300,000)             0.18
                             -----------------  -----------------
Balance at September 30,           14,515,565        30,844,099            $ 0.17               9.08          $        0
2008

Granted                            (2,830,000)        2,830,000              0.03
Authorized                                  -                 -                -
Cancelled or expired                4,096,616        (4,096,616)            (0.17)
Exercised                                   -                 -                -
                             -----------------  -----------------
Balance at June 30, 2009           15,782,181        29,577,483            $ 0.15               8.53          $        0
                             =================  =================
Exercisable at                                       13,012,195            $ 0.15               8.44          $        0
  June 30, 2009
                                                =================
</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 $0.02 as of June 30, 2009, which would have
been received by the option holders had all option holders exercised their
options as of that date.

                                      Q-21
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

As of June 30, 2009 there was approximately $526,267 of total unrecognized
compensation expense related to outstanding stock options. This unrecognized
compensation expense is expected to be recognized over a weighted average period
of 1.97 years.

Total options under the Plan at June 30, 2009, comprised the following:

<TABLE>
<CAPTION>
<S>           <C>                <C>              <C>
                  Options          Weighted           Options
               Outstanding         Average         Exercisable
  Option          as of           Remaining           as of
 Exercise     June 30, 2009      Contractual      June 30, 2009
  Price                          Life (Years)
----------  ------------------  --------------  -----------------
    $0.030           2,800,000            9.83          1,616,667
     0.040              30,000            9.29              9,167
     0.080             545,000            8.73            346,806
     0.090           3,330,000            8.93          1,151,667
     0.180          22,841,983            8.31          9,857,388
     0.800               8,000            2.73              8,000
     1.250              22,500            5.33             22,500
            ------------------                  -----------------

  Total             29,577,483                         13,012,195
            ==================                  =================
</TABLE>

NOTE 8 - WARRANTS

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

 Balance at September 30, 2007        228,376,214     $        0.010     $    2,361,127
 Warrants granted                       1,350,000              0.065             87,750
 Warrants exercised                  (212,039,781)                 -               (900)
 Warrants cancelled                    (1,350,000)            (0.080)          (108,000)
 Warrants expired                         (44,100)            (1.250)           (55,125)
                                 -----------------  -----------------  -----------------

 Balance at September 30, 2008         16,292,333     $        0.140     $    2,284,852
 Warrants granted                      34,576,373              0.028            968,138
 Warrants exercised                             -                  -                  -
 Warrants cancelled                    (2,433,515)            (0.072)          (174,431)
 Warrants expired                         (69,091)            (1.375)           (95,000)
                                 -----------------  -----------------  -----------------

Balance at June 30, 2009               48,366,100     $        0.062     $    2,983,559
                                 =================  =================  =================
</TABLE>

                                      Q-22
<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

Common stock warrants as of June 30, 2009 and September 30, 2008 are comprised
of the following:

                        Warrants
                      Outstanding           Weighted Average
                         as of                 Remaining
   Exercise          June 30, 2009          Contractual Life
     Price                                      (Years)
---------------  ----------------------  ----------------------
  $       0.028              34,576,373                    4.80
          0.080              11,375,627                    2.90
          0.280                 400,000                    3.01
          0.400               1,675,000                    1.34
          0.700                 119,100                    1.17
          1.000                 100,000                    1.77
          1.150                 100,000                    2.38
          1.250                  20,000                    0.65

                 ----------------------
     Total                   48,366,100
                 ======================


                        Warrants
                      Outstanding           Weighted Average
                         as of                 Remaining
   Exercise        September 30, 2008       Contractual Life
     Price                                      (Years)
---------------  ----------------------  ----------------------
  $       0.065               1,350,000                    3.96
          0.080              12,459,142                    3.65
          0.280                 400,000                    3.75
          0.400               1,675,000                    2.09
          0.700                 119,100                    1.92
          1.000                 100,000                    2.52
          1.150                 100,000                    3.12
          1.250                  20,000                    1.40
          1.375                  69,091                    0.25

                 ----------------------
     Total                   16,292,333
                 ======================

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
                   --------------------     -------------------
                          2009                     100,000
                          2010                   2,045,830
                          2011                     887,500
                          2012                  13,189,912
                          2013                           -
                          2014                  32,142,857

                                            -------------------
                                                48,366,099
                                            ===================

                                      Q-23
<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

As of June 30, 2009, the Company has issued 10% senior secured debentures in an
aggregate principal amount of $3,600,000 to six private lenders. As an
inducement, the Company granted warrants to these debenture holders to purchase
32,142,857 shares of common stock at an exercise price of $0.028 per share with
an expiration date ranging from March 31, 2014 to June 23, 2014.

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 June 30, 2009.


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.
<TABLE>
<CAPTION>
<S>                         <C>                   <C>                         <C>                    <C>
                                        Three months ended                              Nine months ended
                                             June 30,                                       June 30,
                          -------------------- -- -----------------------    ------------------ -- ------------------
                                 2009                      2008                    2009                  2008
                          --------------------    -----------------------    ------------------    ------------------


   Europe                         $    47,940                $ 1,137,264           $ 1,124,954           $ 2,155,837
   Asia                             1,050,000                      3,095             2,100,000                55,232
   South America                            -                    900,000                69,000               900,000
   United States                      128,891                     99,824               328,642             3,004,395
                          --------------------    -----------------------    ------------------    ------------------

   Total Revenue                  $ 1,226,831                $ 2,140,183           $ 3,622,596           $ 6,115,464
                          ====================    =======================    ==================    ==================
</TABLE>


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
June 30, 2009:

                                        Three months ended
                                           June 30, 2009
                                      ------------------------

          United States                     $     343,684
          Europe                                    2,397
          Asia                                      3,682
                                      ------------------------

          Total                             $     349,763
                                      ========================


                                      Q-24

<PAGE>

NOTE 11 - SUBSEQUENT EVENTS

The following subsequent events occurred between July 1, 2009 and August 14,
2009.

The Company repaid $840,000 of principal due under its purchase order financing
and received loan proceeds of $350,000 under the inventory financing
arrangement.

The Company borrowed an additional $350,000 under its 10% senior debenture
agreement.

The Company announced 2 new purchase orders from its distributor in China
marking our fifth and six Mobetrons to be sold in China.


                                      Q-25