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


                                   FORM 10-QSB


[X]  Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934 For the quarterly period ended March 31, 2008

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


                        Commission File Number 000-49735

                           INTRAOP MEDICAL CORPORATION

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


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

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

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


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

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

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

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 367,402,984 shares of $0.001 par value
Common Stock outstanding as of the date of this filing.

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



<PAGE>


                           INTRAOP MEDICAL CORPORATION

                                   FORM 10-QSB

                                TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION                                           3
Item 1. Financial Statements                                             3
Item 2. Management's Discussion and Analysis or Plan of Operation        3
Item 3. Controls and Procedures.                                        25

PART II - OTHER INFORMATION                                             26
Item 1. Legal Proceedings                                               26
Item 2. Unregistered Sales of Equity Securities and Use of
 Proceeds                                                               26
Item 3. Defaults upon Senior Securities                                 26
Item 4. Submission of Matters to a Vote of Security Holders             26
Item 5. Other Information                                               26
Item 6. Exhibits                                                        26

SIGNATURES                                                              27



INDEX TO FINANCIAL STATEMENTS                                          Q-1


                                       2
<PAGE>



                         PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

     The accompanying unaudited financial statements, listed on the index to
financial statements on page Q-1 and filed as part of this Form 10-QSB, have
been prepared in accordance with the instructions to Form 10-QSB and, therefore,
do not include all information and footnotes necessary for a complete
presentation of financial position, results of operations, cash flows, and
stockholders' deficit in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments considered necessary
for a fair presentation of the results of operations and financial position have
been included and all such adjustments are of a normal recurring nature.
Operating results for the three and six months ended March 31, 2008 are not
necessarily indicative of the results that can be expected for the year ending
September 30, 2008.


Item 2.  Management's Discussion and Analysis or Plan of Operation

      This discussion and analysis should be read in conjunction with our
audited financial statements and accompanying footnotes included in our Form
10-KSB in which we disclosed our financial results for the years ended September
30, 2007 and 2006 and such other reports as we file from time to time with the
SEC.

      This section contains forward-looking statements. These forward-looking
statements involve a number of risks and uncertainties, including those
identified in the section of this Form 10-QSB titled "Risk Factors" that may
cause actual results to differ materially from those discussed in, or implied
by, such forward-looking statements. Forward-looking statements within this Form
10-QSB are identified by words such as "believes," "anticipates," "expects,"
"intends," "may," and other similar expressions. However, these words are not
the only means of identifying such statements. In addition, any statements that
refer to expectations, projections or other characterizations of future events
or circumstances are forward-looking statements. We are not obligated and
expressly disclaim any obligation to publicly release any update to any
forward-looking statement. Actual results could differ materially from those
anticipated in, or implied by, forward-looking statements as a result of various
factors, including the risks outlined elsewhere in this report.


 Business Overview

      Intraop Medical Corporation, or IntraOp, was incorporated in Nevada on
November 5, 1999. 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, in this report 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 requiring 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,
Mobetron also can be used as a conventional radiotherapy electron-beam
accelerator.


                                       3
<PAGE>


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

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

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

     As the Mobetron, our primary product, has a list price of approximately
$1.8 million, and given our current low unit sales volume, our historical
results may vary significantly from period to period. For example, the sale of
even one additional Mobetron in any given period may substantially alter the
sales and cost numbers for that period, while the timing of such a sale often
cannot be predicted with accuracy. While we expect that our financial results
may ultimately become more predictable as sales increase and costs stabilize,
our financial results for the foreseeable future are likely to continue to vary
widely from period to period.

Critical Accounting Policies

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

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


                                       4
<PAGE>


Share-based Compensation Expense

      Effective January 1, 2006, we adopted the modified prospective transition
method under Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, or SFAS 123(R), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors, including stock options issued under our 2005 Equity
Incentive Plan. Upon adoption of SFAS 123(R), we elected to value our
share-based payment awards granted after January 1, 2006 using the Black-Scholes
option-pricing model, or the Black-Scholes model, which we previously used for
the pro forma information required under SFAS 123. For additional information,
see Notes 1 and 7 to the Unaudited Condensed Consolidated Financial Statements.

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

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

      As share-based compensation expense recognized in 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.


                                       5
<PAGE>


      Results of Operations for the three months ended March 31, 2008 compared
to the three months ended March 31, 2007.

Revenue, Costs of Revenue and Gross Margins

                           Three Months Ended March 31,
Revenue                       2008           2007            Change
---------------------------------------- ------------- -------------------
  Product sales                  60,124        942,248           (882,124)
  Service                        53,553        116,574            (63,021)
---------------------------------------- ------------- -------------------
Total Revenue                   113,677      1,058,822           (945,145)
---------------------------------------- ------------- -------------------

Costs of Revenue
---------------------------------------- ------------- -------------------
  Product sales                 141,813        778,030           (636,217)
  Service                        77,767         41,877             35,890
---------------------------------------- ------------- -------------------
Total Costs of Revenue          219,580        819,907           (600,327)
---------------------------------------- ------------- -------------------

Gross Margin
---------------------------------------- ------------- -------------------
  Product sales                 (81,689)       164,218           (245,907)
  Service                       (24,214)        74,697            (98,911)
---------------------------------------- ------------- -------------------
Total Gross Margin             (105,903)       238,915           (344,818)
======================================== ============= ===================


Product Sales

      Product sales revenue, which includes systems and accessories sales, but
excludes parts sold as part of our service business, included the first Mobetron
sale to our new Japanese distributor in the three months ended March 31, 2007 as
compared to only sales of accessories in the three months ended March 31, 2008.
Costs of revenue include certain overhead expenses that could not otherwise be
capitalized into inventory and therefore exceeded product sales revenue in the
three months ended March 31, 2008. Service

      Service revenue for the three months ended March 31, 2008 and March 31,
2007 came from annual service contracts which decreased from six contracts at
March 31, 2007 to three contracts at March 31, 2008, as one of our distributors
assumed direct responsibility for service of machines in its territory. We
expect service revenue to grow in relative proportion to U.S. based sales and to
a lesser extent overseas sales, as overseas distributors are generally
responsible for servicing their own customers with parts supplied by us. Cost of
service revenues increased in the three months ended March 31, 2008, in
comparison to the three months ended March 31, 2007, primarily due to increased
travel and training expenses related to our European customers and distributors,
and the costs of share based compensation, as described below.


                                       6
<PAGE>


Operating Expenses

      A comparison of our operating expenses for the three months ended March
31, 2008 and March 31, 2007 follows:

<TABLE>
<CAPTION>
<S>                                   <C>         <C>         <C>              <C>
                              Three Months Ended March 31,
                                   2008          2007       Change       Percent
---------------------------- ---------------- ----------- ----------- -------------
Research and Development              346,488     163,301     183,187          112%
General & Administrative              626,196     541,292      84,904           16%
Sales and Marketing                 1,204,108     588,109     615,999          105%
---------------------------- ---------------- ----------- ----------- -------------
Total Operating Expenses            2,176,792   1,292,702     884,090           68%
============================ ================ =========== =========== =============
</TABLE>


      Share based compensation, particularly the non-cash cost of issuing
options to our employees and directors, was much higher in the three months
ended March 31, 2008 compared to the three months ended March 31, 2007. The
increase in share based compensation was 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, and the addition of new management as part of those transactions.
These expenses played a large part in increasing operating expenses in all of
the categories shown below:


                                    Three months ended
                                         March 31,
                                    2008           2007
------------------------------- ------------- --------------

Cost of revenues - Service             13,345          1,050
Research and development              122,282          8,383
General and administrative            130,179         10,230
Sales and marketing                   275,457         15,339
------------------------------- ------------- --------------
         Total                   $    541,263  $      35,002
=============================== ============= ==============

      Research and development expenses increased by approximately 112% in the
three months ended March 31, 2008, in comparison to the three months ended March
31, 2007. The majority of this increase came from increases in share based
compensation, as described above, with the remainder spread among increased
personnel, consulting and materials costs. 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.


                                       7
<PAGE>


      General and administrative expenses increased in the three months ended
March 31, 2008 compared to the three months ended March 31, 2007. The majority
of this increase was due to the increased cost of share based compensation.
Although we also experienced various small increases in other components of
general and administrative expenses during the three months ended March 31,
2008, compared to the three months ended March 31, 2007, these were more than
offset by a decrease of $55,355 due to the elimination of certain investor
relations and financial advisory services which we had under contract in the
three months ended March 31, 2007. We expect however that general and
administrative expenses will continue to grow as overall staff and sales
increase.

      Sales and marketing expenses more than doubled in the three months ended
March 31, 2008, in comparison to the three months ended March 31, 2007, as we
increased the number of employees and consultants in this area to fifteen people
by March 31, 2008. Consequently, expenses increased mainly due to the increased
cost of share based compensation as shown above, and increases in personnel
related expenses, including related travel and entertainment expenses of
$316,780, as well as increased promotion and advertising expenses of $31,900.

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

      An estimate of our new dollar weighted average borrowing rate is shown
below based on the interest rates and outstanding balances of our various types
of debt, before debt discounts of $137,143, at March 31, 2008.



                                           Balance at
                                            March 31,
Type of debt, gross of debt discounts          2008       Interest Rate
----------------------------------------- -------------- ----------------
Notes payable, related parties                   119,002            9.00%
Product Financing Arrangement, inventory       3,274,068           12.00%
Product Financing Arrangement, factoring       2,291,068           24.00%
Senior debentures                              1,166,667           10.00%
Other notes                                       44,367            9.00%
----------------------------------------- -------------- ----------------
Total debt, net debt discounts                 6,895,172
Dollar weighted average borrowing rate                             15.58%
========================================= ============== ================


                                       8
<PAGE>



      Results of Operations for the six months ended March 31, 2008 compared to
the six months ended March 31, 2007.

Revenue, Costs of Revenue and Gross Margins

<TABLE>
<CAPTION>
<S>                     <C>             <C>             <C>                    <C>
                          Six months Ended March 31,
Revenue                     2008            2007            Change        Percent
---------------------- --------------- --------------- ---------------- -----------
  Product sales         $   3,792,867   $   1,087,391   $    2,705,476         249%
  Service                     182,414         221,047          (38,633)        -17%
---------------------- --------------- --------------- ---------------- -----------
Total Revenue           $   3,975,281   $   1,308,438   $    2,666,843         204%
---------------------- --------------- --------------- ---------------- -----------

Costs of Revenue
---------------------- --------------- --------------- ---------------- -----------
  Product sales         $   2,786,992   $     858,388   $    1,928,604         225%
  Service                     141,196          98,449           42,747          43%
---------------------- --------------- --------------- ---------------- -----------
Total Costs of Revenue  $   2,928,188   $     956,837   $    1,971,351         206%
---------------------- --------------- --------------- ---------------- -----------

                               Six months Ended March 31,
Gross Margin                     2008            2007            Change     Percent
---------------------- --------------- --------------- ---------------- -----------
  Product sales         $   1,005,875   $     229,003   $      776,872         339%
                                   27%             21%

  Service                      41,218         122,598          (81,380)        -66%
                                   23%             55%
---------------------- --------------- --------------- ---------------- -----------
Total Gross Margin      $   1,047,093   $     351,601   $      695,492         198%
                                   26%             27%
====================== =============== =============== ================ ===========
</TABLE>


Product Sales

      Product sales revenue, which includes systems and accessories sales, but
excludes parts sold as part of our service business, included Mobetron sales to
two U.S. customers and one overseas customer in the six months ended March 31,
2008 as compared to a single Mobetron sale in the six months ended March 31,
2007.

      The two U.S. sales in the six months ended March 31, 2008, were both in
California, one to Stanford Hospital and Clinics in San Mateo County and the
other to St. Joseph's Hospital Cancer Center in Orange County, bringing our
total U.S. deliveries to ten machines. Stanford Hospital & Clinics is known
worldwide for advanced patient care provided by its physicians and staff,
particularly for the treatment of rare, complex disorders, including cancer.
Mobetron will replace Stanford's former intraoperative radiation therapy system,
an orthovoltage x-ray machine, and will be used to treat a wide variety of
cancers, such as colorectal, gynecological, gastric, pancreatic, orthopedic,
pediatric, breast, and head and neck. St. Joseph's, which treats nearly 1,500
new cancers patients per year, recently became one of 16 hospitals named by the
National Cancer Institute to participate in a three-year pilot project for the
Institute's Community Cancer Centers Program, the only hospital on the West
Coast named for the study.


                                       9
<PAGE>


      Our overseas sale in the six months ended March 31, 2008, was made to
Centro di Riferimento Oncologico (CRO) in Aviano, Italy. CRO is the fourth
Italian hospital to purchase the Mobetron, and one of the few hospitals in Italy
that has been given the status of Institute for Research in the Cure of Cancer
and Scientific Study. The CRO treats more than 3,000 cancer patients per year.
An analysis of our system sales for the six months ended March 31, 2008 is as
follows:

<TABLE>
<CAPTION>
<S>                                    <C>             <C>         <C>               <C>
                                     Six months Ended March 31,
Mobetron Systems Sales Analysis        2008            2007         Change     Percent
---------------------------------- -------------- --------------- ---------- -----------
Systems Sold                                   3               1           2

  Systems Revenue                   $  3,699,430   $   1,021,822
  Revenue per Mobetron System          1,233,143       1,021,822   $ 211,321         21%
  Materials cost per system sold         754,381         709,434      44,947          6%

  Materials Margin Per System            478,762         312,388     166,374         53%
                                              39%             31%

  Labor, Overhead and Warranty           414,370         135,791
  Labor Overhead and Warranty Per
   System                                138,123         135,791       2,332          2%

Gross Margin per System             $    340,639   $     176,597   $ 164,042         93%
                                              28%             17%
================================== ============== =============== ========== ===========
</TABLE>


      Per system sales revenue for the six months ended March 31, 2008, (product
sales less sales of accessories and less revenue recognized in the current
period but relating to systems sold in prior period) were well ahead of per
systems sales revenue for the six months ended March 31, 2007. Materials cost
per system however was higher in the six months ended March 31, 2008 than in the
six months ended March 31, 2007, primarily due to the inclusion of surgical
tables in two of the sales in the six months ended March 31, 2008 compared to no
surgical table for the sale in the six months ended March 31, 2007. Regardless
of these higher materials costs, the significantly higher per system sales
revenue in the six months ended March 31, 2008 increased per system materials
margins and overall gross margins.

Service

      The majority of service revenue for the six months ended March 31, 2008
and March 31, 2007 came from annual service contracts which decreased from six
contracts at March 31, 2007 to three contracts at March 31, 2008, as our one of
our distributors took on direct responsibility for service of machines in its
territory. We expect service revenue to grow in relative proportion to U.S.
based sales and to a lesser extent overseas sales, as overseas distributors are
generally responsible for servicing their own customers with parts supplied by
us. Cost of service revenues increased in the six months ended March 31, 2008,
in comparison to the six months ended March 31, 2007, primarily due to increased
travel and training expenses related to our European customers and distributors
and costs of share based compensation, as described below.


                                       10
<PAGE>


Operating Expenses

      A comparison of our operating expenses for the six months ended March 31,
2008 and March 31, 2007 follows:

<TABLE>
<CAPTION>
<S>                           <C>           <C>              <C>                     <C>
                              Six months Ended March 31,
                                 2008            2007           Change        Percent
---------------------------- ------------- ---------------- -------------- --------------
Research and Development      $    818,313  $       326,763  $     491,550           150%
General & Administrative         1,344,965        1,075,781        269,184            25%
Sales and Marketing              2,554,377          907,486      1,646,891           181%
---------------------------- ------------- ---------------- -------------- --------------
Total Operating Expenses      $  4,717,655  $     2,310,030  $   2,407,625           104%
============================ ============= ================ ============== ==============
</TABLE>


      Share based compensation, particularly the non-cash cost of issuing
options to our employees and directors, was much higher in the six months ended
March 31, 2008 compared to the six months ended March 31, 2007. The increase in
share based compensation was 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,
and the addition of new management as part of those transactions. These expenses
played a large part in increasing operating expenses in all of the categories
shown below:


                                    Six months ended
                                        March 31,
                                    2008         2007
------------------------------- ------------ ------------

Cost of revenues - Service       $    30,012  $     1,453
Research and development             272,523       11,351
General and administrative           294,639       14,016
Sales and marketing                  605,799       21,185
------------------------------- ------------ ------------
         Total                   $ 1,202,973  $    48,005
=============================== ============ ============


      Research and development expenses increased by approximately 150% in the
six months ended March 31, 2008, in comparison to the six months ended March 31,
2007. The majority of this increase came from a $120,000 non-recurring charges
for contracting an outside engineering firm to help us define future cost
reduction opportunities and feature upgrades for the Mobetron and an increase of
$261,172 in share based compensation as described above. We believe that
research and development expenses will continue to increase over time as we
develop new products and applications and continue our efforts to cut Mobetron
production costs.

      General and administrative expenses increased by approximately 25% in the
six months ended March 31, 2008 compared to the six months ended March 31, 2007.
The majority of this increase was due to the increased cost of share based
compensation. Although we also experienced increases of $112,213 in legal
expenses related to our German patent protection suits and general corporate
matters as well as increases in accounting expenses for the six months ended
March 31, 2008, compared to the six months ended March 31, 2007, these were more
than offset by a decreases in expenses of $125,178 from the elimination of
certain investor relations and financial advisory services which we had under
contract in the six months ended March 31, 2007. We expect however that general
and administrative expenses will continue to grow as overall staff and sales
increase.


                                       11
<PAGE>


      Sales and marketing expenses increased by approximately 181% in the six
months ended March 31, 2008, in comparison to the six months ended March 31,
2007, as we increased the number of employees and consultants in this area to
fifteen people by March 31, 2008. Consequently, expenses increased mainly due to
the increased cost of share based compensation as show above, and increases in
personnel related expenses, including related travel and entertainment expenses,
of $717,055, as well as increased promotion and advertising expenses of
$355,244. Of the increase in promotion and advertising, $150,000 was a
non-recurring charge related to certain expenses made on our behalf by one of
our European distributors.

      Interest Expense. A discussion of our interest expense is contained above
in the "Results of Operations for the three months ended March 31, 2008 compared
to the three months ended March 31, 2007."

Liquidity and Capital Resources

      We experienced net losses of $4,216,096 and $4,344,785 for the six months
ended March 31, 2008 and 2007, respectively. In addition, we have incurred
substantial monetary liabilities in excess of monetary assets over the past
several years and, as of March 31, 2008, we have an accumulated deficit of
$38,289,254. 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, 2008, we obtained capital through borrowing under
our lines of credit and the sale of common stock, the proceeds of which were
used for working capital and the repayment of liabilities. The successful
outcome of future 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.


                                       12
<PAGE>


Our primary cash inflows and outflows in the six months ended March 31. 2008 and
2007 were as follows:

                             Six months Ended March 31,
Cash Flows                    2008             2007             Change
------------------------ ---------------- ---------------- ----------------
Provided by (Used for):
  Operating Activities    $   (4,332,506)  $   (1,035,919)  $   (3,296,587)
  Investing Activities          (112,307)         (11,140)        (101,167)
  Financing Activities         4,903,610          909,414        3,994,196
------------------------ ---------------- ---------------- ----------------
Net Increase/(Decrease)   $      458,797   $     (137,645)  $      596,442
======================== ================ ================ ================


Operating Activities

      Net cash used for operating activities increased by $3,296,585 in the six
months ended March 31, 2008, in comparison to the six months ended March 31,
2007. Offsetting the net loss of $4,216,096 for the six months ended March 31,
2008 were $1,762,474 of non-cash charges, primarily for share based
compensation. During the six months ended March 31, 2007, the net loss of
$4,344,785 was similarly offset by non-cash charges of $1,850,202, primarily for
amortization of debt discounts, beneficial conversion features and issuance
costs related to our senior and convertible debentures, but also for issuances
of common stock, warrants, and options issued in lieu of cash compensation.
Additionally, large combined differences in other asset and liability accounts
of approximately $3,306,047 between the six months ended March 31, 2008 and 2007
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.

Investing Activities

      The increase in investing activities in the six months ended March 31,
2008 compared to the six months ended March 31, 2007, was due to the acquisition
of computer hardware and software, expenditures for leasehold improvements, and
the acquisition of capitalized engineering costs paid to third parties.

Financing Activities

      Through certain transactions completed in August and October 2007, we
changed our capital structure significantly. As a part of those transactions, we
eliminated $6.4 million face value of convertible debentures and related
beneficial conversion features and debt discounts due to warrants, $1,200,000 of
short-term debentures, $500,000 of promissory notes sold in April and May 2007,
and an additional $350,000 of related party debt. As a result of the second
closing of these transactions in October 2007, and subsequent equity sales in
the six months ended March 31, 2008 we raised $4,702,747 of additional capital.


                                       13
<PAGE>



Debt and Lease Obligations

      At March 31, 2008, we had notes payable and obligations for leased
equipment from various sources as shown below. Interest rates on such debt range
from 9% on our promissory notes to 24% on our factored receivables financing. We
also lease office space and equipment under non-cancelable operating and capital
leases with various expiration dates through 2011.

                                                              March 31,
                                                                2008
                                                           ----------------

Notes payable, related parties, current                     $      119,002
                                                           ================
Product financing arrangement                               $    5,565,136
Senior secured debentures                                        1,166,667
Other notes                                                         44,366

Less debt discounts due to warrants                               (137,143)
                                                           ----------------

Notes payable, net of debt discounts and beneficial
 conversion features                                             6,639,026

Less current portion                                            (6,639,026)
                                                           ----------------

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


      As of March 31 2008, future minimum lease payments that come due in the
fiscal years ending September 30 are as follows:

Period Ending September 30,                       Capital Leases   Operating
                                                                     Leases
------------------------------------------------- -------------- --------------
2008                                               $      1,290   $     119,110
2009                                                      2,579         244,754
2010                                                      2,579         233,838
2011                                                        431               -

                                                  -------------- --------------
Total minimum lease payments                              6,879   $     597,702
                                                                 ==============

Less: Amount representing interest                         (312)
                                                  --------------

Present value of minimum lease payments                   6,567
Less: Current portion                                    (2,394)

                                                  --------------
Obligations under capital lease, net of current
 portion                                           $      4,173
                                                  ==============


                                       14
<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,
2008 deferred revenue was $152,244, which is included under accrued liabilities.

Off-Balance Sheet Arrangements

      We had no off-balance sheet arrangements to report for the three and six
months ended March 31, 2008.




                  (Remainder of page intentionally left blank)


                                       15
<PAGE>


                                  RISK FACTORS

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


                         RISKS RELATING TO OUR BUSINESS

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

      IntraOp is a medical device company that has experienced significant
operating losses in each year since the incorporation on March 9, 1993 of its
merger partner, Intraop Medical Inc., primarily due to the cost of substantial
research and development of its sole product, the Mobetron. Since inception, we
have generated about $26.6 million in revenue through March 31, 2008, however we
expect to continue to incur operating losses as well as negative cash flow from
operations in future periods. Our ability to achieve profitability will depend
upon our ability to sell 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 pledged all of our assets and issued a significant amount of our capital
stock as security for a loan.

      In August 2005, we entered into a revolving, $3,000,000, combined
inventory and factoring agreement, or product financing arrangement, under which
we pledged as collateral certain of our inventory and receivables. Pursuant to
further amendments to the product financing arrangement, as of March 31, 2008,
maximum availability under the line was $6,000,000.

      In August 2005, we borrowed $2,000,000 pursuant to 10% senior secured
debentures issued to two private lenders which are due at maturity in August
2008. Among other terms, the 10% senior secured debentures are secured by a lien
on all of our assets not otherwise pledged under our product financing
arrangement. In addition we issued 1,600,000 shares of our common stock to the
holders of the 10% senior secured debentures as collateral for the loan. So long
as an event of default under the secured debentures has not occurred, we retain
voting rights over the shares pledged as collateral and the lenders are not
permitted to sell such shares.

      Should a default occur under the product financing arrangement or the 10%
senior secured debentures, the lenders under those agreements would be entitled
to exercise their rights as secured creditors under the Uniform Commercial Code,
including the right to take possession of the pledged collateral, which in the
case of the 10% senior secured debentures would include all of our assets not
otherwise pledged under the product financing arrangement, and to sell those
assets at a public or private sale and also to sell the shares pledged as
collateral. In the event the lenders exercise those rights, we would have a very
short period of time in which to obtain adequate capital to satisfy the amount
of the obligations to the lenders to prevent the sale of our assets. For us to
obtain such capital in such a short period would result in very significant
dilution to the stockholders and if we are unable to obtain those funds, we
could be unable thereafter to operate, possibly resulting in a total loss of the
investment made by our stockholders.


                                       16
<PAGE>


We have significant additional capital and operating needs.

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

        We cannot assure that the Mobetron will gain broad commercial acceptance
or that commercial viability will be achieved; that future research and
development related to the Mobetron system will be successful or produce
commercially salable products; that other products 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 dependent on key suppliers and have limited manufacturing experience.

      CDS Engineering LLC, or CDS, manufactures the majority of each Mobetron.
Our accelerator guide is manufactured by Accuray Incorporated of Sunnyvale,
California. One of the founders of Accuray Incorporated, Donald A. Goer, is our
Chief Scientist.

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

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

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


                                       17
<PAGE>



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

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

      In June 2006, we brought suit at the District Court of Dusseldorf, Germany
against Info & Tech S.p.A., an Italian company which manufactures an IOERT
system marketed as the Liac, Info & Tech's German distributor, Conmedica GmbH,
and Conmedica's manager, Mr. Seigfried Kaufhold for infringement of the German
subpart DE69428698 of our European Patent 700578, seeking damages and an
injunction against further infringement. 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 this case filed an
appeal on October 2, 2007. Our response to this appeal is due by May 31, 2008,
and a hearing before the court is scheduled for December 10, 2008.

      In a related matter, on June 21, 2007, Gio-marco S.p.A., filed a
proceeding for nullification of that same German subpart DE69428698 of our
European Patent 0700578 with the German Federal Patent Court. Our response to
this filing was made in January 2008 with oral arguments expected to take place
approximately twelve months thereafter.

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

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

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

We could be subject to product liability claims for which we may have inadequate
insurance coverage.

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


                                       18
<PAGE>


We are substantially dependent on certain key employees.

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

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

Our limited resources may prevent us from developing additional products or
services.

      We have limited financial, management, research, and development
resources. Plans by us to develop additional products and services may require
additional management or capital which may not be available at the appropriate
time or at a reasonable cost. In addition, these products and services may
divert our resources from the development and marketing of 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 that could materially affect the reported
amounts of our assets, liabilities, revenues and expenses. We use the specific
identification method to set reserves for both doubtful accounts receivable and
the valuation of our inventory, and use historical cost information to determine
our warranty reserves. Further, in assessing the fair value of certain option
and warrant grants, we have valued these instruments based on the Black-Scholes
model which requires estimates of the volatility of our stock and the market
price of our shares, which prior to our merger at which time their was no public
market for shares, was based on estimates of fair value made by our Board of
Directors.


                                       19
<PAGE>



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

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

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

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


                         RISKS RELATING TO OUR INDUSTRY

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

      NRT, an Italian company, is offering a modified, non-shielded IOERT unit
called the Novac 7. This linear accelerator system was developed, in part, with
funding from the Italian government. The Novac 7 cannot achieve the higher
treatment energies offered by the Mobetron and requires mobile


                                       20
<PAGE>



shielding to be positioned around the surgical table prior to treatment. A
spin-off of NRT, called Info & Tech, which manufactures a system called the
Liac, is attempting to replace NRT in the market. Info & Tech has delivered a
small number of pre-commercial units to its customers. The features and
technology of the Liac system are very similar to that of the NRT system. Both
of these competitors have had some sales success, mainly in Italy, where we view
them as significant competition.

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


We are subject to extensive government regulation.

      The development, testing, manufacturing, and marketing of the Mobetron are
regulated by the United States Food and Drug Administration, or FDA, which
requires government clearance of such products before they are marketed. We
filed and received 510(k) pre-market notification clearance from the FDA in July
1998. We received clearance for sales in Japan, or JIS, in May 2000, and
received European EC Certificate approval, or CE Mark, on October 12, 2001.
However, we may need to obtain additional approvals from the FDA or other
governmental authorities if we decide to change or modify the Mobetron. In that
case, the FDA or other authorities, 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 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.


                                       21
<PAGE>


      Additionally, we have limited experience in many of the foreign markets in
which we plan to sell our goods and services. To succeed, we will have to
overcome cultural and language issues and expand our presence overseas. No
assurance can be given that we can meet these goals. We may be subject to
taxation in foreign jurisdictions, and transactions between any of our foreign
subsidiaries and us may be subject to U.S. and foreign withholding or other
taxes. We 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 by the majority of cancer practitioners to be a "standard
of care". In fact, IOERT may never develop into a "standard of care" for the
treatment of cancer, in which case the market potential for the Mobetron and
other IOERT techniques will remain limited. If the market remains limited, we
may not be able to achieve sustained profitability or profitability at all.

Our success in selling Mobetron systems in the U.S. may depend on increasing
reimbursement for IOERT services.

      Hospitals in the U.S. pay increasing attention to treatment costs, return
on assets, and time to investment recovery when making capital purchase
decisions. While IOERT is generally reimbursable, its rate of return on capital
invested compared to the rate of return for external beam and other radiotherapy
delivery systems may not be as favorable. While we are making efforts to
increase the rate of reimbursement to improve the rate of return on the capital
investment in the Mobetron for hospitals in the U.S., there is no assurance that
such an effort will be ultimately successful. Although Medicare reimbursement is
available for certain Mobetron treatments, and although Medicare has recently
established an additional billing code which 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 U.S. reimbursement environment may
slow the widespread acceptance of IOERT and the Mobetron in the U.S. market.

If our revenue stream were to become more dependent upon third party payors such
as insurance companies, our revenues could decrease and our business could
suffer.

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


                                       22
<PAGE>


                        RISKS RELATED TO OUR COMMON STOCK

The trading market for our common stock is limited.

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

Our stock price may be volatile.

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

   o     technological innovations;
   o     introductions or withdrawals of new products and services by us or
         our competitors;
   o     additions or departures of key personnel;
   o     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.


                                       23
<PAGE>


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

      We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial condition and
other business and economic factors affecting it at such time as the board of
directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on 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 listed for trading on the OTC Bulletin
Board, which is generally considered to be a less efficient market than markets
such as NASDAQ or other national exchanges, and which may cause difficulty in
conducting trades and difficulty in obtaining future financing. Further, our
securities are subject to the "penny stock rules" adopted pursuant to Section
15(g) of the Securities Exchange Act of 1934, as amended, or 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
securities may suffer. Because our securities are subject to the "penny stock
rules," investors will find it more difficult to dispose of our securities.
Further, for companies whose securities are traded in the OTC Bulletin Board, it
is more difficult to: (i) obtain accurate quotations, (ii) obtain coverage for
significant news events because major wire services, such as the Dow Jones News
Service, generally do not publish press releases about such companies, and (iii)
obtain needed capital.

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

      On April 23, 2008, our stockholders gave us the authority to effect a one
for twenty reverse stock split. We sought this authority because we believe that
the current number of outstanding shares of our common stock is undesirable and
that the current market value per share of our common stock has reduced the
effective marketability of the shares of our common stock because 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.

      The reverse stock split may not have any of the desired consequences
described above. Specifically, we cannot assure you that: (i) after the reverse
stock split 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 a national stock 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.


                                       24
<PAGE>


      The Board of Directors will have the authority to determine the exact
timing of the effective date of the reverse stock split, without further
stockholder approval. Such timing will be determined in the judgment of the
Board of Directors. The Board of Directors also reserves 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 of the amendment to the articles of incorporation with
the Secretary of State of the State of Nevada, the Board of Directors, in its
sole discretion, determines that the reverse stock split is no longer in the
best interests of IntraOp and its stockholders.

      The liquidity of our common stock could be affected adversely by the
reduced number of shares outstanding after the reverse stock split. Although we
believe that a higher stock price may help generate investor interest, there can
be no assurance that the reverse stock split will 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.


A sale of a substantial number of shares of our common stock may cause the price
of our common stock to decline.

      If our stockholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding options
or warrants, the market price of our common stock could fall. These sales also
may make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem reasonable or appropriate.

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


Item 3.  Controls and Procedures.

         As of the end of the period covered by this Quarterly Report on Form
10-QSB, we evaluated, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
the effectiveness of our disclosure controls and procedures, as such term is
defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective to insure that information we are
required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms
(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, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


                                       25
<PAGE>



                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

            In June 2006, we brought suit in the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactures an
IOERT system marketed as the Liac, Info & Tech's German distributor, Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold for infringement of the
German subpart DE69428698 of our European Patent 700578, seeking damages and an
injunction against further infringement. 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 this case filed an
appeal on October 2, 2007. Our response to this appeal is due by May 31, 2008,
and a hearing before the court is scheduled for December 10, 2008.

      In a related matter, on June 21, 2007, Gio-marco S.p.A., filed a
proceeding for nullification of that same German subpart DE69428698 of our
European Patent 0700578 with the German Federal Patent Court. Our response to
this filing was made in January 2008 with oral arguments expected to take place
approximately twelve months thereafter.


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

      None.

Item 3.  Defaults upon Senior Securities

      None.

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

      We held our annual meeting of stockholders on April 23, 2008. A summary of
the matters voted upon and the results of such vote were reported in our Form
8-K filed with the SEC on April 28, 2008.

Item 5.  Other Information

      None.

Item 6.  Exhibits

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


                                       26
<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 9, 2008                   By:    /s/   John P. Powers
                                        ------------------------
                                            John P. Powers, Chief  Executive
                                            Officer and President
                                           (Principal Executive Officer)

Date:  May 9, 2008
                                     By:    /s/   Howard Solovei
                                            --------------------
                                            Howard Solovei, Chief Financial
                                            Officer
                                            (Principal Financial Officer and
                                            Principal Accounting Officer)


                                       27
<PAGE>


                           Intraop Medical Corporation
            Index to Consolidated Financial Statements (Unaudited)
                  For the Three Months Ended March 31, 2008


Consolidated Balance Sheet                                              Q-2
Consolidated Statements of Operations                                   Q-3
Consolidated Statements of Cash Flows                                   Q-4
Notes to  Consolidated Financial Statements                             Q-6


                                      Q-1
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                 <C>
Intraop Medical Corporation
Consolidated Balance Sheet - Unaudited
-----------------------------------------------------------------------------------
                                                                      March 31,
                                                                        2008
                                                                  -----------------
ASSETS
Current assets:
  Cash and cash equivalents                                         $      997,161
  Accounts receivable                                                    1,824,764
  Inventories, net                                                       1,438,683
  Inventories, under product financing arrangement                       4,952,462
  Prepaid expenses and other current assets                                 66,200
                                                                  -----------------

         Total current assets                                            9,279,270

Property and equipment, net                                                204,607
Intangible assets, net                                                     292,377
Deferred financing cost                                                     96,766
Deposits                                                                   211,524
                                                                  -----------------

        Total Assets                                                $   10,084,544
                                                                  =================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                 $    2,684,882
   Accrued liabilities                                                   1,093,738
   Capital lease obligations, current portion                                2,394
   Notes payable, related parties, current portion                         119,002
   Notes payable, other, current portion, net of unamortized debt
    discounts                                                            6,639,026
                                                                  -----------------

         Total current liabilities                                      10,539,042

   Capital lease obligations, net of current portion                         4,173
   Notes payable, other, net of current portion, unamortized debt
    discounts                                                                    -
       and beneficial conversion features
                                                                  -----------------

         Total liabilities                                              10,543,215
                                                                  -----------------

Stockholders' deficit:
  Common stock, $0.001 par value: 500,000,000 shares authorized;
     367,402,984 shares issued and outstanding                             367,403
  Additional paid-in capital                                            37,613,180
  Treasury stock, at cost, 600,000 shares at $.25 per share               (150,000)
  Accumulated deficit                                                  (38,289,254)
                                                                  -----------------

          Total stockholders' deficit                                     (458,671)
                                                                  -----------------

             Total liabilities and stockholders' deficit            $   10,084,544
                                                                  =================
</TABLE>


              See accompanying notes to these financial statements.


                                      Q-2
<PAGE>


<TABLE>
<CAPTION>
<S>                              <C>            <C>              <C>              <C>
Intraop Medical Corporation
Consolidated Statements of Operations - Unaudited
-------------------------------------------------------------------------------------------------
                                      Three months ended                Six months ended
                                          March 31,                         March 31,
                               -------------------------------- ---------------------------------
                                    2008            2007             2008             2007
                               --------------- ---------------- ---------------- ----------------
Revenues:
  Product sales                  $     60,124   $      942,248   $    3,792,867   $    1,087,391
  Service                              53,553          116,574          182,414          221,047
                               --------------- ---------------- ---------------- ----------------

Total revenues                        113,677        1,058,822        3,975,281        1,308,438
                               --------------- ---------------- ---------------- ----------------

Cost of revenues:
  Product sales                       141,813          778,030        2,786,992          858,388
  Service                              77,767           41,877          141,196           98,449
                               --------------- ---------------- ---------------- ----------------

  Total cost of revenues              219,580          819,907        2,928,188          956,837
                               --------------- ---------------- ---------------- ----------------

Gross margin                         (105,903)         238,915        1,047,093          351,601
                               --------------- ---------------- ---------------- ----------------

Operating expenses:
  Research and development            346,488          163,301          818,313          326,763
  General and administrative          626,196          541,292        1,344,965        1,075,781
  Sales and marketing               1,204,108          588,109        2,554,377          907,486
                               --------------- ---------------- ---------------- ----------------

 Total operating expenses           2,176,792        1,292,702        4,717,655        2,310,030
                               --------------- ---------------- ---------------- ----------------

Loss from operations               (2,282,695)      (1,053,787)      (3,670,562)      (1,958,429)

Other income                           27,394           (1,463)         286,620          (57,976)
Gain on extinguishment of debt         28,000              261           28,000              261
Interest income                             4                6               11               13
Interest expense                     (392,624)      (1,296,698)        (860,165)      (2,328,654)
                               --------------- ---------------- ---------------- ----------------

Loss before taxes                  (2,619,921)      (2,351,681)      (4,216,096)      (4,344,785)

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

Net loss                         $ (2,651,421)  $   (2,351,681)      (4,247,596)  $   (4,344,785)
                               --------------- ---------------- ---------------- ----------------

Basic and diluted net loss per
 share
   available to common
    shareholders                 $      (0.01)  $        (0.09)  $        (0.01)  $        (0.16)
                               --------------- ---------------- ---------------- ----------------
Weighted average number of
 shares
   in calculating net loss per
    share:
Basic and diluted                 351,994,481       26,377,172      308,294,222       26,352,996
                               --------------- ---------------- ---------------- ----------------
</TABLE>

              See accompanying notes to these financial statements.


                                      Q-3
<PAGE>

<TABLE>
<CAPTION>
<S>                                                <C>              <C>
Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited
--------------------------------------------------------------------------------
                                                     Six months ended March 31,
                                                       2008             2007
                                                  ---------------- ----------------
Cash flows from operating activities:
  Net loss                                         $   (4,247,596)  $   (4,344,785)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
    Depreciation of property and equipment                 44,116           38,939
    Amortization of intangible assets                      36,203           36,690
    Amortization of beneficial conversion rights                -          611,628
    Amortization of debt discount                         147,631          463,461
    Amortization of debt issuance costs                   116,120          215,244
    Non-cash compensation for options issued            1,434,479           57,721
    Non-cash compensation for warrants issued             (16,075)         396,520
    Non-cash compensation for common stock issued               -           30,000
  Changes in assets and liabilities:
      Accounts receivable                              (1,420,693)       2,314,528
      Inventories                                         218,851       (1,222,403)
      Prepaid expenses and other current assets            10,719           49,178
      Other assets                                         36,861           90,828
      Accounts payable                                   (827,203)         119,180
      Accrued liabilities                                 111,787          111,567
      Foreign exchange translation                         22,294           (4,215)
                                                  ---------------- ----------------

      Net cash (used for) operating activities         (4,332,506)      (1,035,919)
                                                  ---------------- ----------------

Cash flows used for investing activities:
  Acquisition of fixed assets                             (66,707)         (11,140)
  Acquisition of intangible assets                        (45,600)               -

                                                  ---------------- ----------------
      Net cash used for investing activities             (112,307)         (11,140)
                                                  ---------------- ----------------

Cash flows provided by financing activities:
    Proceeds from note payable, related party                   -          278,571
    Proceeds from note payable, other                   2,862,533        6,069,314
    Payments on note payable, related party               (37,828)               -
    Payments on note payable, other                    (2,623,842)      (5,438,471)
    Proceeds from obligation to issue stock             1,150,071                -
    Proceeds from issuance of common stock              3,552,676                -
                                                  ---------------- ----------------

          Net cash provided by financing
           activities                                   4,903,610          909,414
                                                  ---------------- ----------------

Net increase (decrease) in cash and cash
 equivalents                                              458,797         (137,645)
Cash and cash equivalents, at beginning of period         538,364          149,871
                                                  ---------------- ----------------

Cash and cash equivalents, at end of period        $      997,161   $       12,226
                                                  ================ ================
</TABLE>

              See accompanying notes to these financial statements.


                                      Q-4
<PAGE>

<TABLE>
<CAPTION>
<S>                                                 <C>            <C>
Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited  (Continued)
-----------------------------------------------------------------------------------
                                                      Six months ended March 31,
                                                    -------------------------------
                                                        2008            2007
                                                    -------------  ----------------

Supplemental disclosure of cash flow information:
  Cash paid for interest                                $265,249       $ 689,348
  Income taxes paid                                       31,500               -

Supplemental disclosure of non-cash investing
  and financing activities:
  Promissory notes and interest payable converted
     to common stock                                    $ 54,900               -
</TABLE>


            See accompanying notes to these financial statements.







                 (Remainder of page intentionally left blank)




                                      Q-5
<PAGE>

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

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


Basis of Presentation:

The consolidated financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements and the accompanying notes are unaudited and
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended September 30, 2007. In the opinion of management, the consolidated
financial statements herein include adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position as of March 31, 2008, and the results of operations for the
three months and six months ended March 31, 2008 and March 31, 2007. The results
of operations for the three months and six months ended March 31, 2008 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. In July 1998, the Company obtained FDA 510(k) clearance on its initial
product, the Mobetron. The business of Intraop Medical, Inc is now the sole
business of the Company.


Basis of Consolidation:

For the three and six months ended March 31, 2007, the consolidated financial
statements include the accounts of Intraop Medical Corporation and its wholly
owned subsidiary, Intraop Medical Services, Inc. In April 2007 the Company
formed Intraop Medical Europe Ltd., a United Kingdom registered corporation in
which Intraop Medical Corporation is the majority shareholder. Consequently, for
the three months and six months ended 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 $2,619,921 and $2,351,681 for the three
months ended March 31, 2008 and 2007, 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, 2008, had an accumulated deficit of
$38,289,254. These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern. In view of the matters
described above, recoverability of a major portion of the recorded asset amounts
shown in the accompanying consolidated balance sheet is dependent upon the
Company's ability to generate sufficient sales volume to cover its operating
expenses and to raise sufficient capital to meet its payment obligations.
Management is taking action to address these matters, which include:

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

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

      o     Evaluating funding strategies in the public and private markets.

Historically, management has been able to raise additional capital. During the
three months ended March 31, 2008, the Company obtained capital through the sale
of common stock and exercise of warrants of approximately $3,006,272. 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 three and six customers during the three
months and six months ended March 31, 2008 respectively. Similarly 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, 2007. Under these agreements, customers agree to a one-year service
contract for which they receive warranty-level labor and either full coverage or
a credit for a certain contracted dollar amount for service-related parts. On
contracts with credit for service-related parts, the Company recorded a
liability for parts equal to the amount of the parts credit contracted for by
the customer with the remainder of the contract price recorded as labor related
service contract liability. On full coverage contract, the Company recorded the
contract price as service contract liability.

Intangible Assets:

Intangible assets consist primarily of capitalized costs relating to a Japanese
device approval license for sale of 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
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, 2007 resulted in no impairment losses.

                                      Q-8
<PAGE>

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

Income Taxes:

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

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized for deductible temporary differences and operating loss, and tax
credit carry forwards. A valuation allowance is established to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized. The Company has recorded a full valuation allowance
against its deferred tax assets.

Basic and Diluted Loss per Share:

In accordance with SFAS No. 128, Earnings per Share, basic loss per share is
computed by dividing the loss attributable to common stockholders by the
weighted average number of common shares outstanding during the period. Basic
net loss per share excludes the dilutive effect of stock options or warrants and
convertible notes. Further, basic and diluted net loss per share was the same
for all periods presented because the inclusion of potential dilutive shares in
the calculation of net loss per share on a fully diluted basis would have
resulted in a lower net loss per share, creating in anti-dilutive effect.

The following table sets forth the computation of basic and diluted net loss per
common share:
<TABLE>
<CAPTION>
<S>                                          <C>          <C>          <C>          <C>
                                               Three months ended         Six months ended
                                             ------------------------- -------------------------
                                                     March 31,                 March 31,
                                             ------------------------- -------------------------
                                                 2008         2007         2008         2007
                                             ------------ ------------ ------------ ------------

Numerator
Net loss attributable to common
stockholders                                  (2,619,921)  (2,351,681)  (4,216,096)  (4,344,785)

Denominator
Weighted average common shares outstanding    351,994,481   26,377,172  308,294,222   26,352,996
                                             ------------ ------------ ------------ ------------


Total shares, basic                           351,994,481   26,377,172  308,294,222   26,352,996
                                             ============ ============ ============ ============

Net loss per common share:
  Basic and diluted                                (0.01)       (0.09)       (0.01)       (0.16)
                                             ============ ============ ============ ============
</TABLE>

                                      Q-9
<PAGE>

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

The potential dilutive shares, which are excluded from the determination of
basic and diluted net loss per share as their effect is anti-dilutive, are as
follows:
<TABLE>
<CAPTION>
<S>                                      <C>          <C>          <C>         <C>
                                           Three months ended         Six months ended
                                         ------------------------  -----------------------
                                                March 31,                March 31,
                                         ------------------------  -----------------------
                                            2008         2007        2008         2007
                                         -----------  -----------  ----------  -----------

Debentures convertible to common                  -   20,178,571           -   20,178,571
stock
Options to purchase common stock         26,983,327    1,902,500   26,983,327   1,902,500
Warrants to purchase common stock        16,292,333   15,427,189   16,292,333  15,427,189
                                         -----------  -----------  ----------  -----------

Potential equivalent shares excluded     43,275,660   37,508,260   43,275,660  37,508,260
                                         ===========  ===========  ==========  ===========
</TABLE>


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, 2008 and 2007, 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, 2007 to conform
to the consolidated financial statements for the three months and six months
ended March 31, 2008. There was no effect on previously reported net loss.

Recent Accounting Pronouncements:

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

                                      Q-10
<PAGE>

 NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three customers represented 68.7%, 20.2% and 9.3% of accounts receivable at
March 31, 2008. Two customers accounted for 37.0% and 9.9% of net revenue for
the three months ended March 31, 2008. One customer accounted for 90.3% of net
revenue for the three months ended March 31, 2007. Three customers accounted for
35.9%, 32.3% and 24.6% of net revenue and two customers accounted for 86.6% and
6.2% of net revenue for the six months ended March 31, 2008 and March 31, 2007,
respectively.

Three suppliers represented 32.5%, 25.0% and 16.9% of accounts payable at March
31, 2008. Purchases from these suppliers during the three months ended March 31,
2008 totaled approximately $0, $661,993 and $408,037. Purchases from these
suppliers during the six months ended March 31, 2008 totaled approximately $0,
$1,228,394 and $423,911 respectively.


NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:

                                                                  March 31,
                                                                    2008
                                                               --------------

 Finished goods                                                  $         -
 Work-in-progress                                                    759,833
 Purchased parts and raw material, net of reserves of $32,727        678,850
                                                               --------------

                                                                 $ 1,438,683
                                                               ==============

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:

                                                                  March 31,
                                                                    2008
                                                               --------------

 Finished goods                                                   $ 1,299,661
 Work-in-progress                                                   3,448,901
 Purchased parts and raw material                                     203,900
                                                               --------------
                                                                  $ 4,952,462
                                                               ==============

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.

                                      Q-11
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:

                                                      March 31,
                                                         2008
                                                    -------------
 Property & equipment                                  $ 270,990
 Computer equipment                                      168,370
 Furniture & fixtures                                     64,307
 Leasehold improvements                                   37,420
                                                    -------------
                                                         541,087
 Less accumulated depreciation                          (336,480)
                                                    -------------
                                                       $ 204,607
                                                    =============

Included in property and equipment is an asset acquired under capital lease
obligations with an original cost of $11,742 as of March 31, 2008. Related
accumulated depreciation and amortization of this asset was $6,067 as of March
31, 2008.


Intangible Assets:

Intangible Assets consist of the following:

                                                       March 31,
                                                         2008
                                                    --------------

 Non-recurring engineering charges paid to third       $ 388,100
 parties
 Less accumulated amortization                          (125,723)
                                                    --------------
 Non-recurring engineering charges paid to third         262,377
 parties, net
 Medical device approval license not subject to           30,000
 amortization
                                                    --------------
 Intangible assets, net                                $ 292,377
                                                    ==============

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.


Deferred financing cost:

Deferred financing costs consist of the following:

                                                       March 31,
                                                         2008
                                                     --------------
   Deferred cost of debt issuances                    $ 1,422,370
   Less accumulated amortization                       (1,325,604)
                                                     --------------
   Deferred financing cost, net                       $    96,766
                                                     ==============

                                      Q-12
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Accrued Liabilities:

Intangible Assets consist of the following:


                                                     March 31,
                                                        2008
                                                    -------------
  Contract advances                                   $ 557,692
  Accrued interest payable                               73,064
  Accrued warranty                                      140,705
  Deferred revenue                                      152,244
  Accrued wages and benefits payable                    160,138
  Accrued sales tax payable                               9,895
                                                    -------------

                                                    $ 1,093,738
                                                    =============

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 of Mobetrons.

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

                                                     March 31,
                                                       2008
                                                    ----------
  Warranty accrual at the beginning of period        $ 179,047
  Additions to warranty accrual                             --
  Actual product warranty expenditures                 (38,342)
                                                    -----------

  Warranty accrual at the end of the period          $ 140,705
                                                    ===========

                                      Q-13
<PAGE>

NOTE 4 - BORROWINGS

Outstanding notes payable consist of the following:

                                                          March 31,
                                                             2008
                                                       --------------

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


  Product financing arrangement                           $ 5,565,136
  Senior secured debentures                                 1,166,667
  Other notes                                                  44,366

  Less debt discounts due to warrants
                                                             (137,143)
                                                       --------------

  Notes payable, net of debt discounts and beneficial
  conversion features                                       6,639,026

  Less current portion
                                                           (6,639,026)
                                                       --------------

  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, 2008, is related to a
promissory note issued to an officer of the Company. The note is due on demand
and bears interest at 9% per annum.

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.

In January 2007, the Company agreed to reduce the exercise price of warrants to
purchase 769,230 shares of common stock previously issued to the lender in
connection with the Product Financing Arrangement and subsequent amendments
thereto, from $0.52 per share to $0.28 per share. The Company also agreed to
extend the expiration date of the warrants from May 31, 2008 to August 31, 2010.
The fair value of the price reduction and extension of expiration period of
$58,927 was recorded as a note discount and was amortized into interest expense.

In April 2007, the Company entered into an amendment to the Product Financing
Arrangement to increase the ratio of borrowing relative to the amount of
financed collateral. Under the terms of the amendment, the Company granted to
the lender a warrant to purchase 100,000 shares of common stock at

                                      Q-14
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)


an exercise price of $0.40 per share with an expiration date three years from
the date of issuance. The fair value of $15,004 attributable to the warrant was
recorded as a note discount and was amortized into interest expense.

As of June 30, 2007, the Company entered into an amendment to the Product
Financing Arrangement, to temporarily increase the available borrowing under the
Product Financing Arrangement to $5,000,000 through August 31, 2007. As of
August 16, 2007 the Company entered into a further amendment to the Product
Financing Arrangement to extend the increased availability of $5,000,000 through
September 30, 2007, for which the Company paid a restructuring fee of $130,000.

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

On September 17, 2007, the Company entered into amendment to the Product
Financing Arrangement to increase the availability under the agreement to
$6,000,000 and to extend the term of the agreement to 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.

At March 31, 2008 the outstanding principal balance under the Product Financing
Arrangement was $5,565,136.

Senior secured debentures

In August 2005, the Company sold $2,000,000 of senior secured debentures to
certain investors. The debentures bear interest at 10% per annum, payable
monthly, and have a three year term. Principal in the amount of $27,778 is due
monthly, with the remaining balance due at maturity. The debentures are secured
by a security interest in substantially all of the Company's assets, other than
those pledged to others under the Product Financing Arrangement. In addition,
the Company issued 1,600,000 shares of common stock to the holders of the
debentures as security for the debentures, which the Company estimated had a
fair market value of $0.55 per share at the time of issuance. As a further
inducement, the Company granted the holders of the debentures warrants to
purchase 2.5 million shares of common stock at an exercise price of $0.40 per
share with an expiration date of August 31, 2010.

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

                                      Q-15
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)


The relative fair value of the warrants was determined using the Black-Scholes
option-pricing model and was recorded as a note discount and will be amortized
into interest expense over the life of the debentures. At March 31, 2008 the
outstanding principal balance under the senior secured debentures was $1,166,667
and the unamortized note discount related to the original warrant issuance was
$63,483.

Other notes:

The Company has a promissory note payable to a former director with an
outstanding principal balance of $44,366 at March 31, 2008. This note is due on
demand and bears interest at 9% 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,
                                                                2008
                                                          ---------------

      Capital lease for equipment                                $  6,567

      Less: current portion                                        (2,394)
                                                          ---------------

      Capital lease obligations, net of current portion         $   4,173
                                                          ===============





                 (Remainder of page intentionally left blank)

                                      Q-16
<PAGE>

NOTE 6 - COMMON STOCK

Shares Reserved for Future Issuance:

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

                                                      March  31,
                                                         2008
                                                  ---------------

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

      Total                                         61,651,997
                                                  ===============

At the Company's annual meeting of stockholders on October 15, 2007,
stockholders approved an amendment to the Company's 2005 Equity Incentive Plan
(the "Plan") to increase by 22,062,664 shares the number of shares of common
stock reserved for issuance under the Plan. On December 3, 2007, the Board of
Directors 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.

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

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

Sale of common stock

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

In January 2008 the Company sold 100,000 shares of its common stock for $8,000
to an officer of the Company.

In January and February 2008, the Company sold an aggregate of 42,832,460 shares
of its common stock for $2,998,273, to certain third parties.

Issuance of common stock upon exercise of warrants and options:

During the six months ended March 31, 2008, holders of warrants to purchase an
aggregate of 10,000 shares of the Company's common stock exercised those
warrants for $900, and an officer of the Company exercised options to purchase
300,000 shares of common stock by forgiving $54,000 of principal and interest
under a promissory note payable to such officer by the Company.

                                      Q-17
<PAGE>

NOTE 7 - STOCK OPTIONS

The table below summarizes the share-based compensation expense under SFAS
123(R):
<TABLE>
<CAPTION>
<S>                                     <C>           <C>           <C>             <C>
-----------------------------------------------------------------------------------
                                           Three months ended             Six months ended
                                               March 31,                      March 31,
                                          2008          2007             2008          2007

Cost of revenues - Service                 13,345         1,050          30,012        1,453
Research and development                  122,282         8,383         272,523       11,351
General and administrative                130,179        10,230         294,639       14,016
Sales and marketing                       275,457        15,339         605,799       21,185
                                       -----------   -----------   -------------   ---------

Total                                   $ 541,263      $ 35,002     $ 1,202,973     $ 48,005
                                       ===========   ===========   =============   =========

Increase (decrease) on:
Cash flows from operating activities            -             -               -           -
Cash flows from financing activities            -             -               -           -
</TABLE>

During the three months and six months ended March 31, 2008, total share-based
compensation expense recognized in earnings before taxes was $541,263 and
$1,202,974 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, 2008 was $93,302
and $213,448 respectively, and total share-based compensation expense applied to
warranty reserve for the three months and six months ended March 31, 2008 was
$8,563 and $16,620 respectively.

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

The fair values of options granted under the Plan were estimated at the date of
grant using the Black-Scholes model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
<S>                            <C>            <C>               <C>            <C>
                                     Three months ended              Six months ended
                                         March 31,                       March 31,
                               ------------------------------  -----------------------------
                                    2008            2007            2008            2007
                               ------------------------------  -----------------------------

Expected term (in years)              -         5.40 to 6.40     0.02 to 7       5.4 to 6.4
Risk-free interest rate               -        4.65% to 4.66%  3.10% to 4.34%  4.65% to 4.66%
Expected volatility                   -            172.65%      204% to 222%       172.65%
Expected dividend yield               -              0%              0%              0%
Weighted average fair value
        at grant date                 -            $0.30           $0.16           $0.30
</TABLE>

                                      Q-18
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

Activity under the Plan is presented below:
                                                        Weighted
                                                        Average
                                            Weighted   Remaining    Aggregate
                   Shares                   verage     Contractua   Intrinsic
                 Available     Number of   AExercise      Term        Value
                 for Grant      Shares       Price     (in years)l     (1)
                ------------- ------------ ----------- ----------- ------------
Balance at         1,756,500   1,840,500      $ 0.68
September 30,
2007
Granted          (27,090,327) 27,090,327        0.18
Authorized        42,062,664           -           -
Cancelled or       1,647,500  (1,647,500)     (0.68)
expired
Exercised                  -    (300,000)       0.18
                ------------- ------------
Balance at        18,376,337  26,983,327      $ 0.18         9.46  $     1,000
March 31, 2008
                ============= ============
Exercisable at
  March 31, 2008               4,308,193      $ 0.20         8.45   $      483
                              ============

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value,
which is computed based on the difference between the exercise price and the
Company's closing stock price of $0.10 as of March 31, 2008, which would have
been received by the option holders had all option holders exercised their
options as of that date.

As of March 31, 2008 there was approximately $2,269,569 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 2.98 years.

         Total options under the Plan at March 31, 2008, comprised the
following:


                         Options        Weighted         Options
                       Outstanding       Average       Exercisable
         Option           as of         Remaining         as of
         Exercise       March 31,      Contractual      March 31,
           Price          2008         Life (Years)       2008
         ----------  ----------------  -------------  --------------
          $0.080               50,000      9.51           24,139
           0.180           26,722,827      9.48        4,073,554
           0.350               60,000      8.76           60,000
           0.580               75,000      7.69           75,000
           0.800               33,000      3.75           33,000
           1.250               42,500      6.31           42,500
                     ----------------                 --------------
           Total           26,983,327                     4,308,193
                     ================                 ==============

                                      Q-19
<PAGE>

NOTE 8 - WARRANTS

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

                                                   Weighted
                                   Number of        Average        Aggregate
                                    Shares           Price           Price
                                 --------------   ------------   --------------

 Balance at September 30, 2007    228,376,214         $ 0.01        $ 2,361,126
 Warrants granted                          -              -                   -
 Warrants exercised              (212,039,781)            -                (900)
 Warrants cancelled                        -              -                   -
 Warrants expired                     (44,100)         (1.25)           (55,125)
                                 --------------   ------------   --------------
 Balance at March 31, 2008         16,292,333           0.14        $ 2,305,101
                                 ==============   ============   ==============

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

Common stock warrants are comprised of the following:

                                 Warrants         Weighted Average
                               Outstanding           Remaining
              Exercise            as of           Contractual Life
               Price          March 31, 2008          (Years)
            -------------   -------------------  -------------------
              $0.080                13,809,142          4.18
               0.280                   400,000          4.25
               0.400                 1,675,000          2.59
               0.700                   119,100          2.42
               1.000                   100,000          3.02
               1.150                   100,000          3.62
               1.250                    20,000          1.90
               1.375                    69,091          0.75
                            -------------------
               Total                16,292,333
                            ===================

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

                         Fiscal Year
                            Ending
                         September 30,      Number
                        ---------------  ------------
                             2008                  -
                             2009            169,091
                             2010          2,045,830
                             2011            887,500
                             2012         13,189,912
                                         ------------
                                          16,292,333
                                         ============

                                      Q-20
<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, 2008.


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,
                       --------------------------  ------------------------
                           2008          2007          2008         2007
                       ------------  ------------  -----------  -----------

Europe                   $   9,850    $   36,515    $1,018,574   $ 228,674
Asia                        45,840       955,650        52,153     967,883
United States               57,987        66,657     2,904,554     111,881
                       ------------  ------------  ----------- -----------
Total Revenue             $113,677    $1,058,822    $3,975,281  $1,308,438
                       ============  ============  =========== ===========


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, 2008:

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

       United States          $ 490,242
       Europe                     4,327
       Asia                       2,415
                          -----------------

       Total                  $ 496,984
                          =================


NOTE 11 - SUBSEQUENT EVENTS

The following subsequent events occurred between April 1, 2008 and May 9, 2008.

At the Company's annual meeting of stockholders held on April 23, 2008,
stockholders approved an amendment to the Plan, which amendment was previously
approved by the Board of Directors on December 3, 2007, to increase the number
of shares of common stock reserved for issuance under the Plan by an additional
20,000,000 shares.

The Company repaid $811,778 of principal due under its notes payable and
received loan proceeds of $166,987 under the Product Financing Arrangement.


                                      Q-21