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 March 31, 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

<PAGE>

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):

Large accelerated    Accelerated    Non-accelerated    Smaller reporting
      filer |_|        filer |_|         filer |_|        company |X|
                                   (Do not check if a smaller reporting company)

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

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........18
   Item 4.  Controls and Procedures...........................................18

PART II - OTHER INFORMATION...................................................19
   Item 1.  Legal Proceedings.................................................19
   Item 1a. Risk Factors......................................................19
   Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.......31
   Item 3.  Defaults upon Senior Securities...................................31
   Item 4.  Submission of Matters to a Vote of Security Holders...............31
   Item 5.  Other Information.................................................31
   Item 6.  Exhibits..........................................................31
SIGNATURES....................................................................32

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


                                       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 March 31, 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 managements 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.

                                       5
<PAGE>

     We believe that the  following  accounting  policies fit the  definition of
critical accounting policies.  We use the specific  identification method to set
reserves  for  both  doubtful  accounts  receivable  and  the  valuation  of our
inventory,  and use  historical  cost  information  to  determine  our  warranty
reserves.  Further, in assessing the fair value of option and warrant grants, we
have valued these instruments based on the Black-Scholes  model,  which requires
estimates  of the  volatility  of our stock and the market  price of our shares,
which,  when there was no public  market for shares,  was based on  estimates of
fair value made by our Board of Directors.

Share-based Compensation Expense

     Effective January 1, 2006, we adopted the modified  prospective  transition
method under Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based  Payment,  or  SFAS  123(R),  which  requires  the  measurement  and
recognition of compensation  expense for all share-based  payment awards made to
employees and  directors,  including  stock options issued under our 2005 Equity
Incentive  Plan.  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  March  31,  2009,  there  was   approximately   $858,305  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 2.22 years.

                                       6
<PAGE>

     Results of Operation  for the three months ended March 31, 2009 compared to
the three months ended March 31, 2008.

Revenue, Costs of Revenue and Gross Margins

                                      Three months ended March 31,

     Revenue                         2009          2008         Change   Percent
     ---------------------------------------------------------------------------
       Product sales         $  1,068,880   $    60,124   $  1,008,756    1,678%

       Leasing                     30,000             -         30,000      100%

       Service                     98,619        53,553         45,066       84%
     ---------------------------------------------------------------------------
     Total Revenue           $  1,197,499   $   113,677   $  1,083,822      953%
     ---------------------------------------------------------------------------

     Costs of Revenue
     ---------------------------------------------------------------------------
       Product sales         $    904,701   $   141,813   $    762,888      538%

       Leasing(1)                  37,129             -         37,129      100%

       Service                     50,565        77,767        (27,202)     -35%
     ---------------------------------------------------------------------------
     Total Costs of Revenue  $    992,395   $   219,580   $    772,815      352%
     ---------------------------------------------------------------------------

                                      Three months ended March 31,

     Gross Margin                    2009          2008         Change
     ---------------------------------------------------------------------------
       Product sales         $    164,179   $   (81,689)  $    245,868      301%
                                        8%         -136%

       Leasing                     (7,129)            -         (7,129)    -100%
                                      -24%


       Service                     48,054       (24,214)        72,268      298%
                                       49%           45%
     ---------------------------------------------------------------------------
     Total Gross Margin      $    205,104   $  (105,903)  $    311,007      294%
                                       17%          -93%
     ===========================================================================
(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 March
31, 2009 we recognized  revenue for one Mobetron system sale compared to none in
the three months ended March 31, 2008.

     We received  purchase  orders for three  Mobetron  systems during the three
months ended March 31, 2009  compared to two during the three months ended March
31,  2008.  The revenue  for one of these  systems  was  recognized  when it was
shipped during the three months ended March 31, 2009, and we anticipate  that we
will  recognize  revenue on the  remaining  two  purchase  orders  when they are
shipped later this year.

                                       7
<PAGE>

Leasing Revenue

     Leasing  revenue  for the three  months  ended  March 31,  2009 was $30,000
compared to none  recognized  in the three months ended March 31, 2008.  This is
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.


Operating Expenses

     A comparison of our operating expenses for the three months ended March 31,
2009 and March 31, 2008 follows:

                                          Three months ended March 31,
                                     2009          2008         Change   Percent
     ---------------------------------------------------------------------------
     Research and
        Development          $    583,571   $   346,488   $    237,083       68%

     General and
        Administrative            459,673       626,196       (166,523)     -27%

     Sales and Marketing          569,264     1,204,108       (634,844)     -53%
     ---------------------------------------------------------------------------
     Total Operating
        Expenses             $  1,612,508   $ 2,176,792   $   (564,284)     -26%
     ===========================================================================

     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  March  31,  2009  versus  the  three  months  ended  March  31,  2008 and
represented a material portion of the reduction in operating  expenses set forth
above, except with respect to research and development. The following table sets
forth a comparison of the share based  compensation  expense incurred during the
three  months  ended March 31, 2009 as compared to the three  months ended March
31, 2008:

     ---------------------------------------------------------------------------
                                     Three months ended March 31,
                                     2009          2008         Change
     ---------------------------------------------------------------------------
     Cost of revenues -      $      8,648   $    13,345   $     (4,697)
        Service
     Research and development     125,303       122,282          3,021
     General and
        administrative             60,774       130,179        (69,405)
     Sales and marketing          107,741       275,457       (167,716)
     ---------------------------------------------------------------------------
     Total                   $    302,466   $   541,263   $   (238,797)
     ===========================================================================

     The decrease in share based compensation in all the above categories except
in case of research and development in the three months ended March 31, 2009 was
primarily  the result of options  expiring  during this  quarter due to employee
terminations  compared to new options  grants for new employees and directors in
the three  month  period  ended  March 31,  2008.  In the case of  research  and
development, the increase resulted from option grants made to four new employees
that were hired  during the three  months  ended March 31, 2009  pursuant to the
Company's policy to develop in-house production of Mobetron, which was offset to
some extent by the  reduction in share based  compensation  due to the increased
cancellation of options of terminated employees for the three months ended March
31, 2009 in comparison to the three months ended March 31, 2008.

                                       8
<PAGE>

     Research and development  expenses increased by $237,082,  or approximately
68%, in the three  months  ended March 31, 2009 as compared to the three  months
ended March 31, 2008. The majority of this increase  totaling $183,614 came from
personnel  related  cost, of which new hire cost is $64,633 and the remainder of
$118,981 is due to additional labor allocated to research and development.  Also
we experienced  an increase of $29,929 due to consulting  services in Europe and
$10,947  pertains to travel  related  expenditure  during the three months ended
March 31,  2009 in  comparison  to the three  months  ended March 31,  2008.  We
believe that  research and  development  expenses  will increase over time as we
develop new products and  applications  and continue our efforts to cut Mobetron
production costs.

     General and administrative expenses decreased by $166,523, or approximately
27%, in the three  months  ended March 31, 2009 as compared to the three  months
ended March 31,  2008.  The major  decrease  during three months ended March 31,
2009 in  comparison  to the three  months  ended  March 31,  2008 in general and
administrative  came from decreased cost of share based  compensation of $69,404
as  described  above.  Also  during the three  months  ended  March 31, 2009 the
management cost reduction  initiatives reduced the general travel expenditure by
$23,053,  legal fees by  $33,966,  insurance  cost by 11,514  and other  general
overhead expense by $28,586 compared to the three months ended March 31, 2008.

     Sales and marketing expenses  decreased by $634,844,  or approximately 53%,
in the three  months  ended March 31, 2009 as compared to the three months ended
March 31, 2008. A significant  portion of this decrease was due to the decreased
cost of share  based  compensation  of $167,716 as  explained  above.  Marketing
expenses  decreased  by $86,143  primarily  due to one time  marketing  expenses
incurred in Europe  during the three months  ended March 31, 2008.  In addition,
consulting fees decreased by $69,150 as a result of retaining fewer consultants,
payroll  related  cost  decreased  by $96,302  due to the reduced  sales  staff,
expenses  associated  with sales related  travel  decreased by $98,756 and sales
commissions  decreased by $102,500 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 March 31, 2009
decreased  by $49,112 in  comparison  to the three  months ended March 31, 2008.
This is mainly due to the  decreased  amortization  expense of $100,035 for debt
discounts  during the three  months  ended March 31, 2009 in  comparison  to the
three  months  ended  March 31,  2008,  which is offset by  additional  interest
expense of $50,923 on increased  factoring  borrowing and on increased borrowing
from different class of senior  debentures.  The debt discounts were recorded on
senior  secured  debentures  which were paid off during the three  months  ended
December 31, 2008.

     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 March 31, 2009 and at March 31, 2008.

                                       9
<PAGE>
<TABLE>
<CAPTION>
<S>                                      <C>               <C>        <C>               <C>
Type of debt, net debt discounts           Balance at     Interest      Balance at     Interest
                                         March 31, 2009    Rate       March 31, 2008     Rate
-----------------------------------------------------------------------------------------------
Notes payable, related parties           $      119,002    9.00%      $   119,002       9.00%
Product Financing Arrangement, inventory      1,457,922   12.00%        3,274,068      12.00%
Product Financing Arrangement, factoring      4,143,629   24.00%        2,291,068      24.00%
Senior debentures                             2,875,000   10.00%        1,166,667      10.00%
Other notes                                     150,000    8.00%                -           -
Other notes                                      44,367    9.00%           44,367       9.00%
-----------------------------------------------------------------------------------------------
Total debt, before debt discounts        $    8,789,920               $ 6,895,172
Dollar weighted average borrowing rate                    16.88%                       16.88%
===============================================================================================
</TABLE>

Results of  Operations  for the six months ended March 31, 2009  compared to the
six months ended March 31, 2008.

Revenue, Costs of Revenue and Gross Margins


                                          Six months Ended March 31,
     Revenue                         2009          2008        Change    Percent
     ---------------------------------------------------------------------------
       Product sales         $  2,162,499   $ 3,792,867   $ (1,630,368)     -43%
       Leasing                     30,000             -         30,000      100%
       Service                    203,266       182,414         20,852      -11%
     ---------------------------------------------------------------------------
     Total Revenue           $  2,395,765   $ 3,975,281   $ (1,579,516)      40%
     ---------------------------------------------------------------------------

     Costs of Revenue
     ---------------------------------------------------------------------------
       Product sales         $  1,898,962   $ 2,786,992   $   (888,030)     -32%
       Leasing                     37,129             -         37,129      100%
       Service                    100,130       141,196        (41,065)     -29%
     ---------------------------------------------------------------------------
     Total Costs of Revenue  $  2,036,221   $ 2,928,188   $   (891,967)     -30%
     ---------------------------------------------------------------------------

                                          Six months Ended March 31,
     Gross Margin                    2009          2008        Change    Percent
     ---------------------------------------------------------------------------
       Product sales         $    263,537   $ 1,005,875   $   (742,338)     -74%
                                      12%           27%

       Leasing                     (7,129)            -         (7,129)    -100%
                                     -24%

       Service                    103,136        41,218         61,918      150%
                                      51%           23%
     ---------------------------------------------------------------------------
     Total Gross Margin      $    359,544   $ 1,047,093   $   (687,549)     -66%
                                      15%           26%
     ===========================================================================

                                       10
<PAGE>

Product Sales

     Product sales revenue includes systems and accessories  sales, but excludes
parts sold as part of our service  business.  During six months  ended March 31,
2009 we received total purchase orders for five Mobetrons but recognized revenue
for only two systems sale compared to three  Mobetrons  sold in the three months
ended March 31, 2008.  We anticipate  that we will  recognize the revenue on the
remaining three purchase orders when shipped during the third and fourth quarter
of the current fiscal year.

     An analysis of our system  sales for the six months ended March 31, 2008 is
as follows:

                                          Six months Ended March 31,
Mobetron Systems Sales Analysis      2009          2008         Change   Percent
--------------------------------------------------------------------------------
Systems Sold                            2             3             -1

  Systems Revenue            $  2,025,600   $ 3,699,430   $ (1,673,830)     -45%

  Revenue per Mobetron
        System                  1,012,800     1,233,143       (220,343)     -18%

  Materials cost per system
        sold                      726,030       754,381        (28,351)      -4%

  Materials Margin Per
        System                    286,770       478,762       (191,992)     -40%
                                      28%           39%

  Labor, Overhead and
        Warranty                  360,522       414,370        (53,848)     -13%
  Labor Overhead and
        Warranty Per System       180,261       138,123         42,138       31%

Gross Margin per System      $    106,509   $   340,639   $   (234,130)     -69%
                                      11%           28%
================================================================================

     Per system sales revenue for the six months ended March 31, 2009,  (product
sales less sales of  accessories)  were well below per systems sales revenue for
the six months ended March 31, 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 lower in the six months  ended March 31,
2009 than in the six months  ended  March 31, 2008 due to the impact of our cost
reduction efforts in the top level assembly started shortly after the end of our
2007 fiscal year.

     Other costs of systems sales,  which include labor,  overhead and warranty,
increased by $42,138,  or 31%,  compared to the six months ended March 31, 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
three systems sold during the six months ended March 31, 2008.

Service

     The service revenue from annual service  contracts for the six months ended
March 31, 2009 was $203,266 in  comparison  to $182,414 for the six months ended
March 31, 2008.  The service  revenue for  as-requested  service calls and parts
sales to  customers  in the six months  ended  March 31, 2009 was $0 compared to
$51,334  during the six months ended March 31, 2008.  We  recognized  revenue on
service contracts for six customers,  during the six months ended March 31, 2009
compared to three  customers  for the six months ended March 31,  2008.  The six
service  customers during the first half of 2009  represented  three new service
contracts and 100% renewal of the three annual  service  contracts  from the six
months  ended  March 31,  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 six months ended March 31,
2009 and 2008.

                                       11
<PAGE>

     Cost of service revenues  decreased in the six months ended March 31, 2009,
in comparison to the six months ended March 31, 2008, primarily due to decreased
travel and training expenses related to our European customers and distributors.


Operating Expenses

     A comparison of our  operating  expenses for the six months ended March 31,
2009 and March 31, 2008 follows:

                                          Six months Ended March 31,
                                     2009          2008        Change    Percent
     ---------------------------------------------------------------------------
     Research and
        Development          $    993,618   $   818,313   $    175,305       21%

     General &
        Administrative          1,032,895     1,344,965       (312,070)     -23%

     Sales and Marketing        1,327,418     2,554,377     (1,226,959)     -48%
     ---------------------------------------------------------------------------
     Total Operating
        Expenses             $  3,353,931   $ 4,717,655   $ (1,363,724)     -29%
     ===========================================================================

     Share based compensation, particularly the non-cash cost of issuing options
to our employees and directors, was lower in the six months ended March 31, 2009
compared  to the six  months  ended  March 31,  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 six months ended March
31, 2009 as compared to the six months ended March 31, 2008:

     ---------------------------------------------------------------------------
                                       Six months ended March 31,
                                     2009          2008        Change
     ---------------------------------------------------------------------------
     Cost of revenues -      $     17,217   $    30,012   $    (12,795)
        Service
     Research and
        development               207,747       272,523        (64,776)
     General and
        administrative            122,509       294,639       (172,130)
     Sales and marketing          231,646       605,799       (374,153)
     ---------------------------------------------------------------------------
     Total                   $    579,119   $ 1,202,973   $   (623,854)
     ===========================================================================

     The decrease in share based compensation for the six months ended March 31,
2009  primarily  the result of new  options  grants and  option  exercise  price
reductions  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 to $0.18 per share in the exercise  price of options to

                                       12
<PAGE>

purchase  1,502,500  shares of common  stock,  (ii) the  issuance  of options to
purchase an additional  7,197,827 shares of common stock at an exercise price of
$0.18 per share to those option  holders,  and (iii) an initial grant of options
to  purchase  18,330,000  shares  of  common  stock to our  President  and Chief
Executive  Officer,  Mr. John Powers,  also with an exercise  price of $0.18 per
share.  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 $175,305,  or approximately
21%, in the six months  ended March 31, 2009 as compared to the six months ended
March 31, 2008.  The majority of this  increase  came from a $279,372  personnel
cost of three new  employees  hired in the third and fourth  fiscal  quarters of
2008, which was offset by $120,000 of non-recurring  charges incurred during six
months ended March 31, 2008 for contracting an outside  engineering firm to help
us define  future cost  reduction  opportunities  and feature  upgrades  for the
Mobetron.  Additionally  during the six months ended March 31, 2009, the Company
incurred  additional  travel related cost totaled $20,539 compared to six months
ended March 31, 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.

     General and administrative expenses decreased by $312,070, or approximately
23%, in the six months  ended March 31, 2009 as compared to the six months ended
March 31, 2008.  The majority of this decrease was due to the decreased  cost of
share based compensation  totaling  $172,130,  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 March 31, 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  March 31,  2008.  Due to the  continuous  effort to  curtail  the
expenditure,  the Company  recognized  a decrease  of $40,112 in legal  expenses
related to patent  protection suits and general  corporate  matters,  $54,069 in
accounting expenses,  $57,671 in administrative  related travel cost and $49,371
in insurance, utility and office maintenance cost for the six months ended March
31, 2009,  compared to the six months ended March 31, 2008. However the decrease
in costs were offset by a  increases  in  expenses  of $28,946  from  consulting
expenses and $26,791 increase in Board sitting fees.

     Sales and marketing expenses decreased by $1,226,959, or approximately 48%,
in the six months ended March 31, 2009 as compared to the six months ended March
31, 2008.  The majority of this decrease was due to the decreased  cost of share
based compensation of $374,153 as explained above.  Marketing spending decreased
by $301,087  primarily  due to one time  marketing  expenses  incurred in Europe
during the six months  ended March 31,  2008.  We also  decreased  the number of
employees and  consultants  in this area from fifteen staff in March 31, 2008 to
eleven  staff in March 31,  2009.  Consequently,  the wages  cost and  personnel
related expenses, including related travel and entertainment expenses, decreased
by $199,639  and  consultants  fees  decreased by  $140,093.  Sales  commissions
decreased by $153,769 due to the  revamping of commission  structure  during the
six months ended March 31, 2009. In addition, promotion and advertising expenses
decreased  by $34,733  compared to the  previous  six month  period  ended March
31,2008 .

     Interest  Expense.  Our interest expense for the six months ended March 31,
2009 decreased by $230,404 in comparison to the six months ended March 31, 2008.
This is mainly due to the  amortization of debt discounts  during the six months
ended  March 31, 2009 which was $26,040 in  comparison  to $273,128  for the six
months ended March 31, 2008.  The debt discounts were recorded on senior secured
debentures which were paid off during the three months ended December 31, 2008.

                                       13
<PAGE>

Liquidity and Capital Resources

     We  experienced  net losses of $3,600,443 and $4,216,096 for the six months
ended March 31,  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 March 31,  2009 we have an  accumulated  deficit  of
$46,281,529.  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 six months ended March 31, 2009, we obtained capital through borrowing under
our lines of credit and 10% secured  senior  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 six months  ended March 31.
2009 and 2008 were as follows:

     ---------------------------------------------------------------------------
                                       Six months Ended March 31,
     Cash Flows                      2009          2008       Change
     ---------------------------------------------------------------------------
     Provided by (Used for):
       Operating Activities  $ (3,030,843)  $(4,332,506)  $  1,301,663

       Investing Activities       (16,350)     (112,307)        95,957

       Financing Activities     2,972,053     4,903,610     (1,931,557)
     ---------------------------------------------------------------------------
     Net Increase/(Decrease) $    (75,140)  $   458,797   $   (533,937)
     ===========================================================================

Operating Activities

     Net cash used for operating  activities  decreased by $1,301,663 in the six
months ended March 31,  2009,  in  comparison  to the six months ended March 31,
2008.  Offsetting  the net loss of $3,600,443 for the six months ended March 31,
2009 were $759,685 of non-cash charges,  primarily for share based compensation.
During the six months  ended  March 31,  2008,  the net loss of  $4,216,096  was
similarly  offset by non-cash  charges of $1,762,474,  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  $1,649,285  between the six months  ended
March 31, 2009 and 2008 significantly  affected operating cash flow during those
two six 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.

                                       14
<PAGE>

Investing Activities

     The decrease in investing activities in the six months ended March 31, 2009
compared to the six months  ended March 31,  2008,  was due to the  conservative
effort of management to reduce the capital  expenditure.  Also during six months
ended March 31, 2008 the Company  capitalized  certain engineering costs paid to
third party and no such costs were  incurred  during six months  ended March 31,
2009.

Financing Activities

     During the six months ended March 31, 2009, the Company borrowed $2,875,000
by way of  secured  senior  debentures.  Between  March 31,  2008 and 2009,  the
company  also  increased  notes  payable to EU Capital by $35,416 and issued new
notes payable to BTH- China by $150,000. During the same period the Company also
repaid $1,166,667 to the previous secured debenture holders.

Senior Secured Debentures

     As of March 31, 2009,  we have issued 10% senior  secured  debentures in an
aggregate principal amount of $2,875,000 to four private lenders,  and may issue
up to $625,000 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) June 30, 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 $4,000,000.  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.

                                       15
<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 March 31, 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.

     Currently, we have one financed purchase order that has extended beyond the
6 month  limitation  described  above due to delays by the customer in obtaining
approval for the necessary treatment protocol and storage location that prevents
them from  accepting  delivery  of the  Mobetron  at this time.  We are  working
closely  with the  customer on these  issues and  recently  were  successful  in
obtaining  approval of the  treatment  protocol.  We  anticipate  resolving  the
storage  location  issue in the near  future.  In the  meantime,  we do not have
sufficient capital resources to repay this financed purchase order if the lender
were to demand repayment thereof,  unless we raise additional capital or find an
alternative customer to take delivery of this unit.

     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.

                                       16
<PAGE>

Debt and Lease Obligations

     At March  31,  2009,  we had  notes  payable  and  obligations  for  leased
equipment from various sources as shown below. Interest rates on such debt range
from 8% 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.

                                                                 March 31,
                                                                   2009
                                                             -------------------
     Notes payable, related parties, current                        $   119,002
                                                             -------------------

     Product financing arrangement                                  $ 5,601,551
     Senior secured debentures                                        2,875,000
     Other notes                                                        194,367

     Less debt discounts due to warrants
                                                                        (21,700)
                                                             -------------------

     Notes payable, net of debt discounts and beneficial
        conversion features                                           8,649,218

     Less current portion
                                                                     (8,649,218)
                                                             -------------------

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


     As of March 31, 2009,  future  minimum lease  payments that come due in the
fiscal years ended September 30 are as follows:

     Fiscal Year Ended September 30,            Capital Leases  Operating Leases
     ---------------------------------------   ----------------- ---------------
     2009                                              1,291           122,674
     2010                                              2,579           233,838
     2011                                                430                 -
                                               ----------------- ---------------
     Total minimum lease payments                      4,300         $ 356,512
                                                                 ===============

     Less: Amount representing interest                 (126)
                                               -----------------

     Present value of minimum lease payments           4,174
     Less: Current portion                            (2,476)
                                               -----------------
     Obligations under capital lease, net of
        current portion                              $ 1,698
                                               =================

                                       17
<PAGE>

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 March 31,
2009 deferred revenue was $255,073, which is included under accrued liabilities.

Off-Balance Sheet Arrangements

     We currently have no off-balance sheet arrangements.


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 March 31, 2009 that has materially affected, or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

                                       18
<PAGE>

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings

     In June 2006, we brought suit in the District Court of Dusseldorf,  Germany
against Info & Tech  S.p.A.,  an Italian  company  which  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,  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.

     The  Company  plans to  appeal  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.  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.

                                       19
<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 IntraOp.


                         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 $31.1
million in revenue through March 31, 2009. In addition, the Company has incurred
substantial  monetary  liabilities  in excess of  monetary  assets over the past
several  years  and,  as of  March  31,  2009,  had an  accumulated  deficit  of
$46,281,529. 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 March 31, 2009,
maximum availability under the line was $6,000,000.

     We have also issued 10% senior secured debentures in an aggregate principal
amount of  $2,875,000  to four  private  lenders,  and may issue up to  $625,000
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 June 30, 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.

                                       20
<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.

                                       21
<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,
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.

                                       22
<PAGE>

     The  Company  plans to  appeal  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.  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.

     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.

                                       23
<PAGE>

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.

     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

                                       24
<PAGE>

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

     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.

                                       25
<PAGE>


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.

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

     Despite  the fact  that more  than  30,000  patients  have  received  IOERT
treatment, and despite the promising results in selected clinical studies, IOERT
is not yet  considered  to be a  "standard  of care" by the  majority  of cancer
practitioners.  In fact,  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.

                                       26
<PAGE>

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 July 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  July  2009,   with  the  earliest   possible
reimbursement, upon approval, to occur in 2011.

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

                                       27
<PAGE>

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.

     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.

                                       28
<PAGE>

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

     We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. The payment of dividends on our
common stock will depend on earnings, financial condition and other business and
economic  factors  affecting  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  effect  the  overall  price and  liquidity  of a
company's securities.

Our  stockholders  have given us  authority to effect a  one-for-twenty  reverse
stock split, and we are seeking stockholder approval for a one-for-fifty reverse
stock split in lieu of such one-for-twenty split.

     At our 2008  annual  meeting of  stockholders,  which was held on April 23,
2008,  our  stockholders  approved the filing of an amendment to our articles of
incorporation that, if filed, would effect a one-for-twenty  reverse stock split
of the outstanding  shares of our common stock. We sought  authority to file the

                                       29
<PAGE>

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.

     Our  Board  of  Directors  has  thus  far  determined  not  to  effect  the
one-for-twenty  reverse stock split described above.  However,  we currently are
seeking stockholder approval to implement a one-for-fifty reverse stock split in
lieu of the one-for-twenty reverse stock split described above. The terms of and
reasons for the approval of the  one-for-fifty  reverse stock split would be the
same as those  described  above,  and the Board of Directors is inclined to file
the  amendment  to  our  articles  of   incorporation   effecting  the  proposed
one-for-fifty   reverse  stock  split  as  soon  as  it  receives  the  required
stockholder approval.

     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 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 are  seeking  stockholder  approval  for an  amendment  to  our  articles  of
incorporation to authorize a class of "blank check" preferred stock.

     We are  currently  seeking  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.

                                       30
<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  12,140,732 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

     The Company  defaulted on the  repayment of the  outstanding  principal and
interest  on its 10% senior  secured  debentures,  which had a maturity  date of
December 31, 2008.  The other  information  required by this Item was previously
disclosed in the Company's Current Report on Form 8-K, filed with the Securities
and Exchange Commission on April 13, 2009.

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

     None.

Item 5. Other Information

     None.

Item 6. Exhibits

Exhibit
Number                          Description
-------    --------------------------------------------------------------------
31.1       Certification of Chief Executive Officer pursuant to 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 .

                                       31
<PAGE>

                                   SIGNATURES

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


                                        INTRAOP MEDICAL CORPORATION


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

Date: May 14, 2009                      By: /s/ JK Hullett
                                            ------------------------
                                            JK Hullett, Chief Financial Officer
                                            (Principal Financial Officer and
                                            Principal Accounting Officer)


                                       32
<PAGE>

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

Intraop Medical Corporation
Consolidated Balance Sheet - Unaudited
--------------------------------------------------------------------------------
                                                       March 31,   September 30,
                                                         2009         2008 (1)
                                                     ------------- -------------
ASSETS
Current assets:
  Cash and cash equivalents                          $    207,376  $    282,516
  Accounts receivable                                   2,010,976       245,819
  Inventories, net                                        701,404     1,018,257
  Inventories, under product financing arrangement      2,082,773     3,849,339
  Prepaid expenses and other current assets                24,672        14,473
                                                     ------------- -------------

         Total current assets                           5,027,201     5,410,404

Property and equipment, net                               160,356       190,070
Leased equipment, net                                     823,950             -
Intangible assets, net                                    218,021       257,167
Deposits                                                   90,704        93,084
                                                     ------------- -------------

        Total Assets                                 $  6,320,232  $  5,950,725
                                                     ============= =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                  $  1,821,545  $  1,710,889
   Accrued liabilities                                    943,213       716,482
   Capital lease obligations, current portion               2,476         2,435
   Notes payable, related parties, current portion        119,002       119,002
   Notes payable, other, current portion, net of
    unamortized debt discounts                          8,649,218     5,649,917
                                                     ------------- -------------

         Total current liabilities                     11,535,454     8,198,725

   Capital lease obligations, net of current portion        1,698         2,946
   Notes payable, other, net of current portion,                -             -
    unamortized debt discounts and beneficial
    conversion features
                                                     ------------- -------------

         Total liabilities                             11,537,152     8,201,671
                                                     ------------- -------------

Stockholders' deficit:
  Common stock, $0.001 par value: 500,000,000 shares
   authorized;
     367,402,984 shares issued and outstanding            392,788       392,788
  Additional paid-in capital                           40,821,821    40,187,351
  Treasury stock, at cost, 600,000 shares at $.25
   per share                                             (150,000)     (150,000)
  Accumulated deficit                                 (46,281,529)  (42,681,085)
                                                     ------------- -------------

          Total stockholders' deficit                  (5,216,920)   (2,250,946)
                                                     ------------- -------------

             Total liabilities and stockholders'
              deficit                                $  6,320,232  $  5,950,725
                                                     ============= =============

(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>

Intraop Medical Corporation
Consolidated Statements of Operations - Unaudited
--------------------------------------------------------------------------------
                             Three months ended           Six months ended
                                  March 31,                   March 31,
                         --------------------------- ---------------------------
                             2009          2008          2009          2008
                         ------------- ------------- ------------- -------------
Revenues:
  Product sales          $  1,068,880  $     60,124  $  2,162,499  $  3,792,867
  Leasing                      30,000             -        30,000             -
  Service                      98,619        53,553       203,266       182,414
                         ------------- ------------- ------------- -------------

Total revenues              1,197,499       113,677     2,395,765     3,975,281
                         ------------- ------------- ------------- -------------

Cost of revenues:
  Product sales               904,701       141,813     1,898,962     2,786,992
  Leasing                      37,129             -        37,129             -
  Service                      50,565        77,767       100,130       141,196
                         ------------- ------------- ------------- -------------

  Total cost of revenues      992,395       219,580     2,036,221     2,928,188
                         ------------- ------------- ------------- -------------

Gross margin                  205,104      (105,903)      359,544     1,047,093
                         ------------- ------------- ------------- -------------

Operating expenses:
  Research and
   development                583,571       346,488       993,618       818,313
  General and
   administrative             459,673       626,196     1,032,895     1,344,965
  Sales and marketing         569,264     1,204,108     1,327,418     2,554,377
                         ------------- ------------- ------------- -------------

 Total operating
  expenses                  1,612,508     2,176,792     3,353,931     4,717,655
                         ------------- ------------- ------------- -------------

Loss from operations       (1,407,404)   (2,282,695)   (2,994,387)   (3,670,562)

Other income                  (32,507)       27,394        23,700       286,620
Gain on extinguishment
 of debt                            -        28,000             -        28,000
Interest income                     2             4             5            11
Interest expense             (343,512)     (392,624)     (629,761)     (860,165)
                         ------------- ------------- ------------- -------------

Loss before taxes          (1,783,421)   (2,619,921)   (3,600,443)   (4,216,096)

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

Net loss                 $ (1,783,421) $ (2,651,421)   (3,600,443)   (4,247,596)
                         ------------- ------------- ------------- -------------


Basic and diluted net
 loss per share
 available to common
 shareholders            $      (0.00) $      (0.01) $      (0.01) $      (0.01)
                         ------------- ------------- ------------- -------------
Weighted average number
 of shares in
 calculating net loss
 per share:
Basic and diluted         392,787,597   351,994,481   392,787,597   308,294,222
                         ------------- ------------- ------------- -------------

              See accompanying notes to these financial statements

                                      Q-3
<PAGE>


Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited
--------------------------------------------------------------------------------
                                                     Six months ended March 31,
                                                         2009          2008
                                                     ------------- -------------
Cash flows from operating activities:
  Net loss                                            ($3,600,443)  ($4,247,596)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
    Depreciation of property and equipment                 58,374        44,116
    Loss on disposal of fixed assets                        1,655             -
    Amortization of intangible assets                      39,146        36,203
    Amortization of debt discount                          26,040       147,631
    Amortization of debt issuance costs                         -       116,120
    Non-cash compensation for options issued              634,470     1,434,479
    Non-cash compensation for warrants issued                   -       -16,075
  Changes in assets and liabilities:
      Accounts receivable                              (1,765,157)   (1,420,693)
      Inventories                                       1,245,503       218,851
      Prepaid expenses and other current assets           (10,199)       10,719
      Other assets                                          2,380        36,861
      Accounts payable                                    110,656      (827,203)
      Accrued liabilities                                 226,732       111,787
      Foreign exchange translation                              -        22,294
                                                     ------------- -------------

Net cash (used for) operating activities               (3,030,843)   (4,332,506)
                                                     ------------- -------------

Cash flows used for investing activities:
  Acquisition of fixed assets                             (16,350)      (66,707)
  Acquisition of intangible assets                              -       (45,600)

                                                     ------------- -------------
Net cash used for investing activities                    (16,350)     (112,307)
                                                     ------------- -------------

Cash flows provided by financing activities:
  Proceeds from note payable, other                     6,373,531     2,862,533
  Payments on note payable, related party                       -       (37,828)
  Payments on note payable, other                      (3,401,478)   (2,623,842)
  Proceeds from obligation to issue stock                       -     1,150,071
  Proceeds from issuance of common stock                        -     3,552,676
                                                     ------------- -------------

    Net cash provided by financing activities           2,972,053     4,903,610
                                                     ------------- -------------

Net increase (decrease) in cash and cash equivalents      (75,140)      458,797
Cash and cash equivalents, at beginning of period         282,516       538,364
                                                     ------------- -------------

Cash and cash equivalents, at end of period          $    207,376  $    997,161
                                                     ============= =============

              See accompanying notes to these financial statements.

                                      Q-4
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited  (Continued)
--------------------------------------------------------------------------------
                                                      Six months ended March 31,
                                                      --------------------------
                                                         2009           2008
                                                      -----------    -----------

Supplemental disclosure of cash flow information:
   Cash paid for interest                              $  420,642     $ 265,249
   Income taxes paid                                            -        31,500

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


              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 March 31, 2009,  and the results of operations for the
three months and six months ended March 31, 2009 and March 31, 2008. The results
of  operations  for the three months and six months ended March 31, 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 six months ended March 31, 2009 and March 31, 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 $1,783,421  and $2,619,921 for the three
months ended March 31, 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 March 31,  2009,  had an  accumulated  deficit of
$46,281,529.  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 six
months  ended  March 31, 2009  respectively.  Similarly  the Company  recognized
revenue on service  contracts  for the service of the  Mobetron at the  customer
site with three customers during the three months and six months ended March 31,
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 ended March 31, 2009 and March
31,  2008 is $30,000  and $0,  respectively,  in rental  revenue  pursuant to an
operating  lease  between the Company  and a customer  entered  into in February
2009. Pursuant to the terms of lease, the rent 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,  thru a third party financier for $579,110 at
a fixed  interest  rate of 24%.  Each month the  interest is included in cost of
revenue.

The  leased  Mobetron  is being  depreciated  on a  straight  line base over the
expected life of 120 months.  The depreciation  expense is also included in cost
of revenue.

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

                                      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:

                                  Three months ended       Six months ended
                                ----------------------- -----------------------
                                       March 31,               March 31,
                                ----------------------- -----------------------
                                   2009        2008        2009        2008
                                ----------- ----------- ----------- -----------
Numerator
Net loss attributable to
 common stockholders             (1,783,421) (2,619,921) (3,600,443) (4,216,096)

Denominator
Weighted average common
  shares outstanding            392,787,597 351,994,481 392,787,597 308,294,222
                                ----------- ----------- ----------- -----------

Total shares, basic             392,787,597 351,994,481 392,787,597 308,294,222
                                =========== =========== =========== ===========

Net loss per common share:
  Basic and diluted                   (0.00)      (0.01)      (0.01)      (0.01)
                                =========== =========== =========== ===========


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

                                      Three months ended     Six months ended
                                     --------------------- ---------------------
                                           March 31,             March 31,
                                     --------------------- ---------------------
                                        2009       2008       2009       2008
                                     ---------- ---------- ---------- ----------

Options to purchase common stock     30,325,048 26,983,327 30,325,048 26,983,327
Warrants to purchase common stock    16,223,242 16,292,333 16,223,242 16,292,333
                                     ---------- ---------- ---------- ----------

Potential equivalent shares excluded 46,548,290 43,275,660 46,548,290 43,275,660
                                     ========== ========== ========== ==========

                                      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 six ended March 31, 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.

Reclassification:

The  Company  made  certain  reclassifications  to  the  consolidated  financial
statements  for the three  months and six months ended March 31, 2008 to conform
to the  consolidated  financial  statements  for the three months and six months
ended March 31, 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.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally  Accepted
Accounting  Principles,"  or SFAS  162.  SFAS  162  identifies  the  sources  of
accounting  principles  and framework for selecting the principles to be used in
the  preparation of financial  statements  that are presented in conformity with
generally accepted accounting principles in the United States. This Statement is
effective 60 days following the SEC's approval of the Public Company  Accounting
Oversight Board amendments to AU Section 411, " The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting  Principles," The Company does not
expect  SFAS  162 to  have a  material  impact  on  its  Consolidated  Financial
Statements.

                                      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.


NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three  customers  represented  52.2%,  37.6% and 3.5% of accounts  receivable at
March 31, 2009.  One customer  accounted  for 87.7% of net revenue for the three
months ended March 31, 2009.  Two customers  accounted for 37.0% and 9.9% of net
revenue for the three months ended March 31, 2008. Three customers accounted for
43.8%,  40.7% and 8.5% of net revenue and three  customers  accounted for 35.9%,
32.3% and 24.6% of net revenue for the six months ended March 31, 2009 and March
31, 2008, respectively.

Three suppliers  represented  28.2%,  5.2% and 4.8% of accounts payable at March
31, 2009. Purchases from these suppliers during the three months ended March 31,
2009  totaled  approximately  $0, $824 and $0.  Purchases  from these  suppliers
during the six months ended March 31, 2009 totaled approximately $0, $37,206 and
$0 respectively.

                                      Q-12
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:

                                           March 31,    September 30,
                                              2009           2008
                                         -------------- --------------

Finished goods                           $            -  $           -
Work-in-progress                                202,775        515,821
Purchased parts and raw material, net of
 reserves of $211,932 (at September 30,
 2008 $25,833)                                  498,629        502,436
                                         -------------- --------------

                                         $      701,404  $   1,018,257
                                         ============== ==============

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:

                                           March 31,    September 30,
                                              2009           2008
                                         -------------- --------------

Finished goods                           $            -  $     649,584
Work-in-progress                              1,831,798      3,148,780
Purchased parts and raw material                250,975         50,975
                                         --------------- -------------

                                         $    2,082,773  $   3,849,339
                                         =============== =============


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

Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:

                                            March 31,          September 30,
                                             2009                  2008
                                        -------------------- -------------------

Property & equipment                            $  278,184         $ 278,184
Computer equipment                                 140,389           133,365
Furniture & fixtures                                72,311            67,808
Leasehold improvements                              37,420            37,420
                                        -------------------- -------------------
                                                   528,304           516,777
Less accumulated depreciation                     (367,948)         (326,707)
                                        -------------------- -------------------
                                                $  160,356         $ 190,070
                                        ==================== ===================

                                      Q-13
<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 March 31,  2009 and as of
March 31, 2008. Related accumulated  depreciation and amortization of this asset
was $8,415 and $6,067 as of March 31, 2009 and March 31, 2008 respectively.

Intangible Assets:

Intangible Assets consist of the following:

                                               March 31,        September 30,
                                                 2009               2008
                                           ------------------ ------------------
Non-recurring engineering charges paid to
 third parties                              $        393,300  $         393,300
Less accumulated amortization                       (205,279)          (166,133)
                                           ------------------ ------------------
Non-recurring engineering charges paid to
 third parties, net                                  188,021            227,167
Medical device approval license not subject
 to amortization                                      30,000             30,000
                                           ------------------ ------------------
Intangible assets, net                      $        218,021  $         257,167
                                           ================== ==================

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:

                                               March 31,        September 30,
                                                 2009               2008
                                           ------------------ ------------------
    Contract advances                       $         46,563  $          84,000
    Accrued interest payable                         240,915            108,372
    Accrued warranty                                 138,090            161,947
    Deferred revenue                                 255,073            162,811
    Accrued wages and benefits payable               149,830            184,827
    Accrued sales tax payable                         12,742             14,525
    Other accrued liabilities                        100,000                  -
                                           ------------------ ------------------
                                            $        943,213  $         716,482
                                           ================== ==================


                                      Q-14
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Warranty:

The warranty periods for the Company's  products are generally one year from the
date of  acceptance,  but no  longer  than  eighteen  months  from  the  date of
delivery.  The Company is responsible for warranty  obligations arising from its
sales and  provides for an estimate of its  warranty  obligation  at the time of
sale. The Company's contract  manufacturers are responsible for the costs of any
manufacturing defects.  Management estimates and provides a reserve for warranty
upon sale of a 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.

                                                March 31,       September 30,
                                                 2009              2008
                                           ------------------ ------------------

    Warranty accrual at the beginning of
        period                              $        138,597  $         111,515
    Accrual for warranties during the
        period                                        40,000            240,000
    Actual product warranty expenditures             (40,507)          (189,568)
                                           ------------------ ------------------
    Warranty accrual at the end of the
        period                              $        138,090  $         161,947
                                           ================== ==================

NOTE 4 - BORROWINGS

Outstanding notes payable consist of the following:

                                                March 31,       September 30,
                                                 2009              2008
                                           ------------------ ------------------

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

Product financing arrangement               $      5,601,551  $       4,503,290
Senior secured debentures                          2,875,000          1,000,000
Other notes                                          194,367            194,367

Less debt discounts due to warrants                  (21,700)           (47,740)
                                           ------------------ ------------------

Notes payable, net of debt discounts and
 beneficial conversion features                    8,649,218          5,649,917

Less current portion                              (8,649,218)        (5,649,917)
                                           ------------------ ------------------

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

Notes payable, related parties:

Notes payable to related parties of $119,002 at March 31, 2009, is related to a
promissory note issued to an officer of the Company. The notFe is due on demand
and bears interest at 9% per annum.

                                      Q-15
<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.

At March 31, 2009 the outstanding  principal balance under the Product Financing
Arrangement was $5,601,551.

Senior secured debentures

As of March 31, 2009, the Company has issued 10% senior secured debentures in an
aggregate principal amount of $2,875,000 to four private lenders,  and may issue
up to $625,000 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) June 30, 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 $4,000,000.  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.

                                      Q-16
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Other notes:

The  Company  has a  promissory  note  payable  to a  former  director  with  an
outstanding  principal balance of $44,366 at March 31, 2009. This note is due on
demand and bears interest at 9% per annum.

Other notes also include a promissory note to the Company's Chinese  distributor
with an outstanding  balance of $150,000 at March 31, 2009.  This note is due on
May 1, 2009 and bears interest at 8% per annum.

NOTE 5 - CAPITAL LEASE

Capital lease

The Company leases equipment which is classified as capital lease  arrangements.
Capital lease obligations consist of the following:

                                                March 31,       September 30,
                                                 2009              2008
                                           ------------------ ------------------

  Capital lease for equipment               $          4,174  $           5,381

  Less: current portion                               (2,476)            (2,435)
                                           ------------------ ------------------
  Capital lease obligations, net of
        current portion                     $          1,698  $           2,946
                                           ================== ==================

NOTE 6 - COMMON STOCK

Shares Reserved for Future Issuance:

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

                                                March 31,       September 30,
                                                 2009              2008
                                           ------------------ ------------------

  2005 Equity Incentive Plan                      45,359,664         45,359,664
  Common stock warrants                           16,223,242         16,292,333
                                           ------------------ ------------------
  Capital lease obligations, net of
        current portion                           61,582,906         61,651,997
                                           ================== ==================


At  the  Company's   annual  meeting  of   stockholders  on  October  15,  2007,
stockholders approved an amendment to the Company's articles of incorporation to
increase the authorized number of shares of common stock from 100 million to 500
million  shares and also  approved an  amendment  to the  Company's  2005 Equity
Incentive  Plan to increase by 22,062,664  shares the number of shares of common
stock reserved for issuance  under the Plan. 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.

                                      Q-17
<PAGE>

NOTE 7 - STOCK OPTIONS

The table below summarizes the share-based compensation expense under SFAS
123(R):

                               Three months ended       Six months ended
                                    March 31,               March 31,
                             ----------------------- -----------------------
                                 2009        2008        2009        2008
                             ----------- ----------- ----------- -----------
Cost of revenues - Service         8,648      13,345      17,217      30,012
Research and development         125,303     122,282     207,747     272,523
General and administrative        60,774     130,179     122,509     294,639
Sales and marketing              107,741     275,457     231,646     605,799
                             ----------- ----------- ----------- -----------

Total                        $   302,466 $   541,263 $   579,119 $ 1,202,973
                             =========== =========== =========== ===========


During the three months and six months ended March 31, 2009,  total  share-based
compensation  expense  recognized  in earnings  before  taxes was  $265,371  and
$542,023  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 six months ended March 31, 2009 was $0 and
$39,649  respectively,  and total  share-based  compensation  expense applied to
warranty  reserve for the three  months and six months  ended March 31, 2009 was
$7,591 and $14,976 respectively.

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:

                           Three months ended            Six months ended
                                March 31,                   March 31,
                        ------------------------- ------------------------------
                             2009          2008        2009           2008
                        ------------------------- ------------------------------

Expected term (in years) 5.35 to 6.45           -  5.35 to 6.45     0.02 to 7
Risk-free interest rate 1.74% to 2.03%          - 1.74% to 2.63% 3.10% to 4.34%
Expected volatility      312% to 332%           -  284% to 332%   204% to 222%
Expected dividend yield       0%                -       0%             0%
Weighted average fair
 value at grant date         $0.03              -      $0.03          $0.16


                                      Q-18
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

Activity under the Plan is presented below:
<TABLE>
<CAPTION>
<S>                  <C> <C>       <C>                 <C>                <C>                  <C>
                                                                                        Weighted
                                                                                        Average
                                                                       Weighted        Remaining
                                  Shares                               Average        Contractual      Aggregate
                                 Available           Number of         Exercise          Term          Intrinsic
                                 for Grant            Shares            Price          (in years)       Value(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, 2008     14,515,565          30,844,099          $0.17                9.08              $0

Granted                           (2,830,000)          2,830,000           0.03
Authorized                                 -                   -              -
Cancelled or expired               3,349,051          (3,349,051)         (0.18)
Exercised                                  -                   -              -
                              ---------------     ---------------
Balance at March 31, 2009         15,034,616          30,325,048          $0.15                8.77              $0
                              ===============     ===============
Exercisable at
March 31, 2009                                        11,304,329          $0.16                8.61              $0
                                                  ===============
</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 $0.03 as of March 31,  2009,  which
     would have been  received  by the  option  holders  had all option  holders
     exercised their options as of that date.

As of March 31,  2009 there was  approximately  $858,305  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 2.22 years.

                                      Q-19
<PAGE>
NOTE 7 - STOCK OPTIONS (CONTINUED)

Total options under the Plan at March 31, 2009, comprised the following:

                    Options         Weighted Average
    Option         Outstanding          Remaining            Options Exercisable
   Exercise           as of          Contractual Life              as of
     Price       March 31, 2009           (Years)              March 31, 2009
--------------- -----------------  --------------------     --------------------
    $0.030              2,800,000         10.08                        1,100,000
     0.040                 30,000          9.54                            6,667
     0.080                645,000          8.99                          354,167
     0.090              3,480,000          9.18                          920,000
     0.180             23,339,548          8.55                        8,892,995
     0.800                  8,000          2.97                            8,000
     1.250                 22,500          5.58                           22,500
                -----------------                           --------------------

     Total             30,325,048                                     11,304,329
                =================                           ====================

NOTE 8 - WARRANTS

The following warrants are each exercisable for one share of common stock:
<TABLE>
<CAPTION>
<S>                  <C> <C>     <C>              <C>                 <C>
                                 Number of           Weighted         Aggregate Price
                                   Shares          Average Price
                               --------------     ---------------     ---------------
Balance at September 30, 2007    228,376,214      $         0.01      $    2,361,127
Warrants granted                   1,350,000                0.07              87,750
Warrants exercised              (212,039,781)                  -                (900)
Warrants cancelled                (1,350,000)              (0.08)           (108,000)
Warrants expired                     (44,100)              (1.25)            (55,125)
                               --------------     ---------------     ---------------

Balance at September 30, 2008     16,292,333                0.14      $    2,284,852
Warrants granted                           -                   -                   -
Warrants exercised                         -                   -                   -
Warrants cancelled                         -                   -                   -
Warrants expired                     (69,091)              (1.38)            (95,000)
                               --------------     ---------------     ---------------

Balance at March 31, 2009         16,223,242                0.14           2,189,852
                               ==============     ===============     ===============
</TABLE>

                                      Q-20
<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

Common stock warrants as of March 31, 2009 and September 30, 2008 are comprised
of the following:

                                                     Weighted
                                 Warrants             Average
                                Outstanding          Remaining
                                  as of             Contractual
     Exercise Price           March 31, 2009        Life (Years)
-------------------------     ---------------     ---------------
         $0.065                     1,350,000          3.46
          0.080                    12,459,142          3.15
          0.280                       400,000          3.25
          0.400                     1,675,000          1.59
          0.700                       119,100          1.42
          1.000                       100,000          2.02
          1.150                       100,000          2.62
          1.250                        20,000          0.90
                              ---------------
          Total                    16,223,242
                              ===============


                                                      Weighted
                                 Warrants             Average
                                Outstanding          Remaining
                                  as of             Contractual
     Exercise Price         September 30, 2008      Life (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           Number
                 September 30,
                ---------------  --------------
                     2009               100,000
                     2010             2,045,830
                     2011               887,500
                     2012            13,189,912
                     2013                     -
                                 --------------
                                     16,223,242
                                 ==============


                                      Q-21
<PAGE>

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 March 31, 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.

                     Three months ended                  Six months ended
                         March 31,                          March 31,
               ------------------------------     ------------------------------
                     2009           2008               2009            2008
               --------------- --------------     -------------- ---------------

Europe         $        44,595 $        9,850     $    1,077,015 $     1,018,574
Asia                 1,050,000         45,840          1,050,000          52,153
United States          102,904         57,987            199,750       2,904,554
South America                -              -             69,000               -
               --------------- --------------     -------------- ---------------
Total Revenue  $     1,197,499 $      113,677     $    2,395,765 $     3,975,281
               =============== ==============     ============== ===============

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
March 31, 2009:

                                        Three months ended
                                          March 31, 2009
                                      ------------------------
          United States                         $ 371,384
          Europe                                    2,917
          Asia                                      4,077
                                      ------------------------
          Total                                 $ 378,378
                                      ========================

                                      Q-22
<PAGE>

NOTE 11 - SUBSEQUENT EVENTS

The following subsequent events occurred between April 1, 2009 and May 14, 2009.

In April 2009, the Company and the 10% senior secured  debenture  holders agreed
to amend and restate the 10% senior  debentures to allow the Company to issue up
to an additional $1,500,000 aggregate principal amount of its 10% senior secured
debentures to additional investors.  In addition,  the Company and the debenture
holders  agreed to amend the  maturity  date to June 30,  2009,  and provide the
debenture  holders an option to covert into new securities of the next qualified
financing.  In  exchange,  the Company  issued  warrants to purchase  27,678,571
shares  of its  common  stock,  and the  debenture  holders  agreed to waive any
existing  defaults under the debentures,  including the Company's failure to pay
the  Debentures  when it become due and payable by the  Company on December  31,
2008.

In April  2009,  the  Company  issued  $225,000  under  the 10%  senior  secured
debentures  with a due date of June 30,  2009 to certain  related  parties.  The
Company has board  approval to issue another  $400,000 of the  $1,500,000  under
this facility.

The Company repaid $1,094,797 of principal due under its inventory financing and
received loan proceeds of $1,680,000 under the Product Financing Arrangement.

In May 2009,  the  Company  is  seeking  shareholder  approval  to  implement  a
one-for-fifty  reverse stock split in lieu of the  one-for-twenty  reverse stock
split, and 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.


                                      Q-23