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


                                    FORM 10-Q


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

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

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

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

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

<PAGE>

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

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 392,787,597 shares of $0.001 par value
Common Stock outstanding as of the date of this filing.











                                       2
<PAGE>


                           INTRAOP MEDICAL CORPORATION

                                    FORM 10-Q

                                TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION.................................................4
   Item 1.  Financial Statements...............................................4
   Item 2.  Management's Discussion and Analysis or Plan of Operation..........4
   Item 3.  Quantitative and Qualitative Disclosures About Market Risk........14
   Item 4.  Controls and Procedures...........................................14

PART II - OTHER INFORMATION...................................................15
   Item 1.  Legal Proceedings.................................................15
   Item 1a.  Risk Factors.....................................................15
   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..........................................................27
SIGNATURES....................................................................28



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





                                       3
<PAGE>

                         PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

         The accompanying unaudited financial statements, listed on the index to
financial statements on page Q-1 and filed as part of this Form 10-Q, have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a complete presentation of
financial position, results of operations, cash flows, and stockholders' deficit
in conformity with generally accepted accounting principles. In the opinion of
management, all adjustments considered necessary for a fair presentation of the
results of operations and financial position have been included and all such
adjustments are of a normal recurring nature. Operating results for the three
months ended December 31, 2008 are not necessarily indicative of the results
that can be expected for the year ending September 30, 2009.


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

         This discussion and analysis should be read in conjunction with our
audited financial statements and accompanying footnotes included in our Form
10-K in which we disclosed our financial results for the years ended September
30, 2008 and 2007 and such other reports as we file from time to time with the
SEC.

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


 Business Overview

         Intraop Medical Corporation, or the Company, was incorporated in Nevada
on November 5, 1999. Our business is the development, manufacture, marketing,
distribution and service of the Mobetron, a proprietary mobile electron-beam
cancer treatment system designed for use in intraoperative electron-beam
radiation therapy, or IOERT. Although intraoperative radiation therapy may be
delivered using a radiation source other than electrons, we use the term IOERT
to mean both intraoperative radiation therapy in general and, in the case of the
Mobetron, specifically intraoperative electron-beam radiation therapy. The IOERT
procedure involves the direct application of radiation to a tumor and/or tumor
bed while a patient is undergoing surgery for cancer. The Mobetron is designed
to be used without additional shielding in the operating room, unlike
conventional equipment adopted for the IOERT procedure. The Mobetron can be
moved from operating room to operating room, thereby increasing its utilization
and cost effectiveness. In addition to IOERT, the Mobetron also can be used as a
conventional radiotherapy electron-beam accelerator.

                                       4
<PAGE>

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

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

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

         As the Mobetron, our primary product, has a list price of approximately
$1.5 million, and given our current low unit sales volume, our historical
results may vary significantly from period to period. For example, the sale of
one additional Mobetron in any given period may substantially alter the sales
and cost numbers for that period, while the timing of such a sale often cannot
be predicted with accuracy. While we expect that our financial results may
ultimately become more predictable as sales increase and costs stabilize, our
financial results for the foreseeable future are likely to continue to vary
widely from period to period.

Critical Accounting Policies

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

         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

                                       5
<PAGE>

have valued these instruments based on the Black-Scholes model, which requires
estimates of the volatility of our stock and the market price of our shares,
which, when there was no public market for shares, was based on estimates of
fair value made by our Board of Directors.

Share-based Compensation Expense

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

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

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

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

         As of December 31, 2008, there was approximately $1,295,880 of total
unrecognized compensation expense related to stock options granted under our
2005 Equity Incentive Plan. This unrecognized compensation expense is expected
to be recognized over a weighted average period of 2.43 years.

                                       6
<PAGE>

         Results of Operation for the three months ended December 31, 2008
compared to the three months ended December 31, 2007.
<TABLE>
<CAPTION>

Revenue, Costs of Revenue and Gross Margins

                                     Three months ended December 31,
Revenue                                2008            2007             Change     Percent
------------------------------------------------------------------------------------------
    <S>                                <C>             <C>               <C>          <C>
  Product sales               $   1,093,619   $   3,732,743   $    (2,639,124)        -71%
  Service                           104,647         128,861           (24,214)        -19%
------------------------------------------------------------------------------------------
Total Revenue                 $   1,198,266   $   3,861,604   $    (2,663,338)        -69%
------------------------------------------------------------------------------------------

Costs of Revenue
------------------------------------------------------------------------------------------
  Product sales               $     994,261   $   2,645,179   $    (1,650,918)        -62%
  Service                            49,565          63,429           (13,864)        -22%
------------------------------------------------------------------------------------------
Total Costs of Revenue        $   1,043,826   $   2,708,608   $    (1,664,782)        -61%
------------------------------------------------------------------------------------------

                                     Three months ended December 31,
Gross Margin                           2008            2007             Change
------------------------------------------------------------------------------------------
  Product sales               $      99,358   $   1,087,564   $      (988,206)        -91%
                                          9%             29%

  Service                            55,082          65,432           (10,350)        -16%
                                         53%             51%
------------------------------------------------------------------------------------------
Total Gross Margin            $     154,440   $   1,152,996   $      (998,556)        -87%
                                         13%             30%
==========================================================================================
</TABLE>

Product Sales

         Product sales revenue includes systems and accessories sales, but
excludes parts sold as part of our service business. During the three months
ended December 31, 2008 we received purchase orders for three Mobetrons but
recognized revenue for only one system sale compared to two Mobetrons sold to
U.S. customers and one Mobetron sold to an overseas customer in the three months
ended December 31, 2007. We anticipate that we will recognize the remaining two
purchase orders when shipped during the second and third quarter of this fiscal
year.
         The Mobetron sold during the three months ended December 31, 2008 is to
a leading hospital in Germany, University Hospital Giessen and Marburg, that
treats more than 300 newly diagnosed breast cancer patients per year. Nearly 80
per cent of these patients receive breast conservation surgery and are possible
candidates for local radiation therapy using the Mobetron. This is our second
unit in Germany.

                                       7
<PAGE>

An analysis of our system sales for the three months ended December 31, 2008 is
as follows:
<TABLE>
<CAPTION>

                                          Three Months Ended December 31,
Mobetron Systems Sales Analysis               2008            2007       Change Percent
-----------------------------------------------------------------------------------------
    <S>                                        <C>             <C>         <C>     <C>
Systems Sold                                     1               3          (2)

  Systems Revenue                      $   976,575   $   3,699,465
  Revenue per Mobetron System              976,575       1,233,155    (256,580)      -21%
  Materials cost per system sold           698,539         765,520      66,981         9%

  Materials Margin Per System              278,036         467,635    (189,599)      -41%
                                                28%             38%

  Labor, Overhead and Warranty             222,146         326,236
  Labor Overhead and Warranty Per
   System                                  222,146         108,745    (113,401)     -104%

Gross Margin per System                $    55,890   $     358,890    (303,000)      -84%
                                                 6%             29%
=========================================================================================
</TABLE>


         Per system sales revenue for the three months ended December 31, 2008
(product sales less sales of accessories and less revenue recognized in the
current period but relating to systems sold in prior period) is lower in the
three months ended December 31, 2008 as compared to the three months ended
December 31, 2007 primarily due to a strengthening dollar and a below-market
sales price offered to our European distributor to increase our presence in
Germany. Materials cost per system was comparatively lower in the three months
ended December 31, 2008 than in the three months ended December 31, 2007 due to
the impact of our cost reduction efforts in the top level assembly started
shortly after the end of our 2007 fiscal year.

         Other costs of systems sales, which include labor, overhead and
warranty, increased by $113,401, or 104%, compared to the three months ended
December 31, 2007. This is due to increase overhead allocation for share based
compensation and extended testing. The machine sold in the three months ended
December 31, 2008, originally earmarked for the dermatology market, had to be
converted back for regular use, which extended its time in inventory and
resulted in the incurrence of additional overhead allocation compared to the
three systems sold during the three months ended December 31, 2007.

Service

         The majority of service revenue for the three months ended December 31,
2008 and December 31, 2007 came from annual service contracts, with the balance
of service revenue coming from as-requested service calls and parts sales to
customers. During the three months ended December 31, 2008 we had six service
contracts compared to five in the three months ended December 31, 2007. We

                                       8
<PAGE>

expect service revenue to grow in relative proportion to U.S.-based sales and to
lesser extent overseas sales. Overseas distributors are generally responsible
for servicing their own customers with parts supplied by us, though we also
obtain direct contracts with a few customers in Europe, which revenue is
included in the three months ended December 31, 2008 and 2007.


Operating Expenses

         A comparison of our operating expenses for the three months ended
December 31, 2008 and December 31, 2007 follows:
<TABLE>
<CAPTION>
                                      Three months ended December 31,
                                         2008            2007            Change   Percent
-----------------------------------------------------------------------------------------
   <S>                                   <C>             <C>              <C>       <C>
Research and Development       $      410,047   $     471,825   $      (61,778)      -13%
General & Administrative              573,222         718,769         (145,547)      -20%
Sales and Marketing                   758,154       1,350,269         (592,115)      -44%
-----------------------------------------------------------------------------------------
Total Operating Expenses       $    1,741,423   $   2,540,863   $     (799,440)      -31%
=========================================================================================
</TABLE>

         Share based compensation, which consists mainly of the non-cash cost of
 issuing options to our employees and directors, was lower in the three months
 ended December 31, 2008 versus the three months ended December 31, 2007 and
 played a large part in decreasing operating expenses in all of the categories
 shown above:

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

         Cost of revenues                       $  8,569         $  16,667
         Research and development                 82,444           150,241
         General and administrative               61,735           164,460
         Sales and marketing                     123,905           330,342
                                              ----------         -----------
                     Total                     $ 276,653         $ 661,710
                                              ==========         ===========

         The decrease in share based compensation in the three months ended
December 31, 2008 was primarily the result of options expiring during this
quarter due to employee terminations compared to new and re-priced options
grants for new and existing employees and directors in the three month period
ended December 31, 2007. Following the significant dilution created by the
equity sales and other transactions entered into by us in August 2007 and
completed in October 2007, our Board of Directors approved (i) a reduction to
$0.18 per share in the exercise price of options to purchase 1,502,500 shares of
common stock previously issued to certain holders with exercise prices between
$0.22 to $1.375 per share, (ii) the issuance of options to purchase an
additional 7,197,827 shares of common stock at an exercise price of $0.18 per

                                       9
<PAGE>

share to those same option holders, and (iii) an initial grant of options to
purchase 18,330,000 shares of common stock to our new President and Chief
Executive Officer, Mr. John Powers, also with an exercise price of $0.18 per
share. Under SFAS 133(R), the cost of these grants is estimated to be
approximately $3,712,750 amortized over approximately four years with immediate
vesting for the re-priced options equivalent to the previous vesting schedule.
         Research and development expenses decreased by approximately 13% in the
three months ended December 31, 2008, in comparison to the three months ended
December 31, 2007. The majority of this decrease, totalling $67,797, came from
share based compensation as described above. We believe that research and
development expenses will increase over time as we develop new products and
applications and continue our efforts to cut Mobetron production costs.

         General and administrative expenses decreased by approximately 20% in
the three months ended December 31, 2008 versus the three months ended December
31, 2007. The majority of this decrease was due to the decreased cost of share
based compensation of $102,725 as described above. Management cost reduction
initiatives reduced overall G&A expense by additional $42,822 or 6% compared to
the three months ended December 31, 2007.

         Sales and marketing expenses decreased by 44% in the three months ended
December 31, 2008 in comparison to the three months ended December 31, 2007. The
majority of this decrease was due to the decreased cost of share based
compensation of $206,437 as explained above. Marketing spend decreased by
$222,414 primarily due to one time marketing expenses incurred in Europe during
the three months ended December 31, 2007. In addition, consulting fees decreased
by $72,335 and sales commission by $51,269 due to lower sales volume, and the
revamping of our commission structure during the three months ended December 31,
2008.

         Interest Expense. Our senior debentures and our product financing
arrangement represent the majority of our debt and directly affect interest
expense accordingly. Our product financing arrangement has two classes of
borrowings: borrowings related to financed inventory prior to sale to a customer
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 found
below based on the interest rates and outstanding balances of our various types
of debt at December 31, 2008.

                                                  Balance at
                                                  December 31,
       Type of debt, net debt discounts              2008       Interest Rate
    --------------------------------------------------------------------------
    Notes payable, related parties               $   119,002            9.00%
    Product Financing Arrangement, inventory       2,656,320           12.00%
    Product Financing Arrangement, factoring       2,487,032           24.00%
    Senior debentures                              2,000,000           10.00%
    Other notes                                      150,000            8.00%
    Other notes                                       44,367            9.00%
    --------------------------------------------------------------------------
    Total debt, before debt discounts           $  7,456,721
    Dollar weighted average borrowing rate                             15.32%
    ==========================================================================


                                       10
<PAGE>

Liquidity and Capital Resources

         We experienced net losses of $1,817,022 and $1,627,675 for the three
months ended December 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 December 31, 2008, had an accumulated deficit of
$44,498,105. 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 three months ended December 31, 2008, we obtained capital through the
issuance of senior secured debentures, the proceeds of which were used for
working capital and the repayment of liabilities. The successful outcome of
future activities cannot be determined at this time and there is no assurance
that if achieved, we will have sufficient funds to execute our intended business
plan or generate positive operating results.

Our primary cash inflows and outflows in the three months ended December 31,
2008 and 2007 were as follows:

                               Three months ended December 31,
  Cash Flows                        2008               2007            Change
--------------------------------------------------------------------------------
  Provided by (Used in):
    Operating Activities    $    (1,875,410)    $   (2,246,842)   $     371,432
    Investing Activities            (13,081)           (29,808)          16,727
    Financing Activities          1,639,459          2,242,799         (603,340)
--------------------------------------------------------------------------------
  Net Increase/(Decrease)   $      (249,032)    $      (33,851)   $    (215,181)
================================================================================

Operating Activities

         Net cash used for operating activities decreased by $371,432 in the
three months ended December 31, 2008 in comparison to the three months ended
December 31, 2007. Offsetting our net loss of $1,817,022 for the three months
ended December 31, 2008 were $379,694 of non-cash charges, primarily for share
based compensation. During the three months ended December 31, 2007, our net
loss of $1,627,675 was similarly offset by non-cash charges of $966,117,
primarily for stock based compensation. Additionally, large combined differences
in other asset and liability accounts of approximately $1,147,200 between the
three months ended December 31, 2008 and 2007 significantly affected operating
cash flow during those two three 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 timing of
Mobetron sales and large per system cost of Mobetron.

                                       11
<PAGE>

Investing Activities

         The decrease in investing activities in the three months ended December
31, 2008 versus the three months ended December 31, 2007, was primarily due to
the cost saving measures taken by management in the three months ended December
31, 2008.

Financing Activities

         During the three months ended December 31, 2008, the Company borrowed
$2,000,000 by way of secured senior debentures. Between December 31, 2008 and
2007, the Company also increased notes payable to EU Capital by $186,307 and
BTH-China by $150,000 and repaid $1,250,000 to the previous secured debenture
holders.

Debt and Lease Obligations

         At December 31, 2008, we had notes payable and obligations for leased
equipment from various sources as shown below. Interest rates on such debt range
from 8% on our promissory notes to 24% on our factored receivables financing. We
also lease office space and equipment under non-cancelable operating and capital
leases with various expiration dates through 2011.



                                                            December 31,
                                                                2008
                                                          ---------------

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


 Product financing arrangement                               $ 5,143,352
 Senior secured debentures                                     2,000,000
 Other notes                                                     194,367

 Less debt discounts due to warrants                             (34,720)
                                                          ---------------

 Notes payable, net of debt discounts and beneficial
  conversion features                                          7,302,999

 Less current portion                                         (7,302,999)
                                                          ---------------

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


                                       12
<PAGE>


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

Fiscal Year Ended September 30,                           Capital     Operating
                                                           Leases      Leases
-------------------------------------------------------  ----------   ----------
2009                                                          1,934      183,714
2010                                                          2,579      233,838
2011                                                            431            -
                                                         ----------   ----------
Total minimum lease payments                                  4,944     $417,552
                                                                      ==========

Less: Amount representing interest                             (165)
                                                         -----------
Present value of minimum lease payments                       4,779
Less: Current portion                                        (2,455)

                                                         -----------
Obligations under capital lease, net of current portion      $2,324
                                                         ===========



Deferred Revenue Items

         Revenue under service agreements is deferred and recognized over the
term of the agreement, typically one year, on a straight line basis. As of
December 31, 2008 deferred revenue was $214,647, which is included under accrued
liabilities.

Off-Balance Sheet Arrangements

         We currently have no off-balance sheet arrangements.









                  (Remainder of page intentionally left blank)






                                       13
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.  Controls and Procedures.

         As of the end of the period covered by this Quarterly Report on Form
10-Q, we evaluated, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
the effectiveness of our disclosure controls and procedures, as such term is
defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective to insure that information we are
required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms
(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 December 31, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.










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                                       14
<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         In June 2006, we brought suit in the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactured an
IOERT system marketed as the Liac, Info & Tech's German distributor, Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold, for infringement of the
German subpart DE69428698 of our European Patent 700578, seeking damages and an
injunction against further infringement. A ruling on the case was made on August
23, 2007 in which we prevailed in enjoining the above named parties from selling
or distributing their product in Germany. The defendants in the case filed an
appeal on October 2, 2007. We responded to that appeal in May 2008. In September
2008, we were notified by the court that one of the defendants, Info & Tech, had
informed the court that their company was bankrupt. The proceedings continued
against the other two defendants and a hearing was held before the Appeals Court
on December 18, 2008. The Court dismissed Info & Tech as a defendant due to
their bankruptcy and denied a petition by the remaining defendants to suspend
the infringement proceedings pending a final outcome in the nullification suit
described below. The Appeals Court will render its decision in the infringement
suit on April 2, 2009.

         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. The Court hearing on this procedure is
scheduled for March 5, 2009.

Item 1a.  Risk Factors

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

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

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


                                       15
<PAGE>

                         RISKS RELATING TO OUR BUSINESS

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

         We are a medical device company that has experienced significant
operating losses, primarily due to the cost of substantial research and
development of our primary product, the Mobetron. Since inception, we have
generated about $31.1 million in revenue through December 31, 2008. In addition,
the Company has incurred substantial monetary liabilities in excess of monetary
assets over the past several years and, as of December 31, 2008, had an
accumulated deficit of $44,498,105. We expect to continue to incur operating
losses as well as negative cash flow from operations in future periods. Our
ability to achieve profitability will depend upon our ability to sell the
Mobetron at higher unit volumes and at higher margins. Further, if the Mobetron
and any other of our products do not gain commercial acceptance, we may never
generate significant revenues or achieve or maintain profitability. As a
consequence of these uncertainties, our independent public accountants have
expressed a "going concern" qualification in their audit reports.


We have significant short-term and long-term capital and operating needs.

         We have significant short-term and long-term capital and operating
needs. Unless we are able to raise additional capital in the near future, we
will be unable to satisfy our short-term and long-term liabilities. Equity or
debt financing sufficient to satisfy such liabilities may not be available on
terms favorable to us or at all. Our ability to raise additional capital may be
adversely affected by ongoing general financial conditions. We have spent, and
provided we are able to raise sufficient capital, will continue to spend,
substantial funds on development, marketing, research, and commercialization
related to the Mobetron and the day-to-day operation of our company. In the past
we received funds from payments by distributors and customers, proceeds from the
sale of equity securities and debt instruments, and government grants.

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

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

         In October 2008, we repaid $1,000,000 to retired our then outstanding
senior secured debentures and raised an additional $1,000,000 in working capital
through the issuance of new 10% senior secured debentures to three private
lenders. These debentures had a maturity date of December 31, 2008. We are
currently in payment default under these debentures, but expect to enter into an
amendment thereto whereby the maturity date will move to June 30, 2009, and the
debentures will be made convertible, at the holder's discretion, into equity
issued by the Company in a subsequent financing. Among other terms, the 10%
senior secured debentures are secured by a lien on all of our assets not
otherwise pledged under our product financing arrangement. Currently, the
Company does not have sufficient capital resources to retire the 10% senior
secured debentures if the holders were to demand repayment thereof.

          Upon a default under the product financing arrangement or the 10%
senior secured debentures, the lenders under those agreements would be entitled
to exercise their rights as secured creditors under the Uniform Commercial Code,
including the right to take possession of the pledged collateral and to sell
those assets at a public or private sale and also to sell the shares of our
subsidiaries pledged as collateral. In the event the lenders exercise those

                                       16
<PAGE>

rights, we would have a very short period of time in which to obtain adequate
capital to satisfy the amount of the obligations to the lenders to prevent the
sale of our assets. For us to obtain such capital in such a short period could
result in very significant dilution to our stockholders and if we are unable to
obtain those funds, we could be unable thereafter to operate, possibly resulting
in a total loss of the investment made by our stockholders.

We have significant additional capital and operating needs.

         We have spent, and will continue to spend, substantial funds on
development, marketing, research, and commercialization related to the Mobetron
and the day-to-day operation of our company. In the past we received funds from
payments by distributors and customers, proceeds from the sale of equity
securities and debt instruments, and government grants. Any additional secured
indebtedness would require the consent of our senior lenders. Equity or debt
financing may not be available on terms favorable to us or at all, in which case
we may be unable to meet our expenses.

Our primary product is subject to uncertain market acceptance.

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

We are currently dependent on one key supplier.

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

         Any significant interruption in our relationship with Accuray or any
other supplier, including subcontractors, could have a material adverse effect
on our ability to manufacture the Mobetron and, therefore, on our business,
financial condition, and results of operation. Further, to the extent that we
are unable to negotiate favorable contract terms or find alternate suppliers for
key parts manufactured by these suppliers, we may be subject to significant
price increases for the goods purchased from these suppliers, resulting in a
decrease in product margins and profitability.

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

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

         We continue to do our own final testing of the Mobetron. This testing
requires a specialized test facility. In September, 2005, we entered into a

                                       17
<PAGE>

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

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

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

         In June 2006, we brought suit in the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactured an
IOERT system marketed as the Liac, Info & Tech's German distributor, Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold, for infringement of the
German subpart DE69428698 of our European Patent 700578, seeking damages and an
injunction against further infringement. A ruling on the case was made on August
23, 2007 in which we prevailed in enjoining the above-named parties from selling
or distributing their product in Germany. The defendants in the case filed an
appeal on October 2, 2007. We responded to that appeal in May 2008. In September
2008, we were notified by the court that one of the defendants, Info & Tech, had
informed the court that their company was bankrupt. The proceedings continued
against the other two defendants, and a hearing was held before the Appeals
Court on December 18, 2008. The Court dismissed Info & Tech as a defendant due
to their bankruptcy and denied a petition by the remaining defendants to suspend
the infringement proceedings pending a final outcome in the nullification suit
described below. The Appeals Court will render its decision in the infringement
suit on April 2, 2009.

         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. The Court hearing on this procedure is
scheduled for March 5, 2009.

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

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

         If we discover that our products violate third-party proprietary
rights, we cannot assure you that we would be able to obtain licenses to
continue offering such products without substantial reengineering or that any
effort to undertake such reengineering would be successful, that any such
licenses would be available on commercially reasonable terms, if at all, or that
litigation regarding alleged infringement could be avoided or settled without
substantial expense and damage awards. Any claims against us relating to the
infringement of third-party proprietary rights, even if not meritorious, could

                                       18
<PAGE>

result in the expenditure of significant financial and managerial resources and
in injunctions preventing us from distributing certain products. Such claims
could materially adversely affect our business, financial condition, and results
of operations.

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

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

We are substantially dependent on certain key employees.

         We believe that our success will depend to a significant extent upon
the efforts and abilities of a relatively small group of management personnel,
particularly Donald A. Goer, 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, and Mr. Powers and have purchased "key
person" life insurance for Dr. Goer in the amount of $5,000,000, of which
$3,000,000 has been pledged to holders of our 10% senior secured debentures as
security for our obligations under the debentures.

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



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

         We have limited financial, management, research, and development
resources. Plans by us to develop additional products and services may require
additional management or capital that may not be available at the appropriate
time or at a reasonable cost. In addition, these products and services may
divert our resources from the development and marketing of the Mobetron system,
which could decrease our revenue and potential earnings.

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

         Estimates and assumptions used in our financial statements are based on
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. These estimates and assumptions also
require the application of certain accounting policies, many of which require
estimates and assumptions about future events and their effect on amounts
reported in the financial statements and related notes.

                                       19
<PAGE>

         We periodically review our accounting policies and estimates and make
adjustments when facts and circumstances dictate. Actual results may differ from
these estimates under different assumptions or conditions. Any differences may
have a material impact on our financial condition and results of operations.

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

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

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

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

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


                         RISKS RELATING TO OUR INDUSTRY

We are subject to intense competition, and our industry is subject to rapid,
unpredictable, and significant technological change.

         The medical device industry is subject to rapid, unpredictable, and
significant technological change. Our business is also subject to competition in
the United States and abroad from a variety of sources, including universities,

                                       20
<PAGE>

research institutions, conventional medical linear accelerator manufacturers,
other medical device companies and pharmaceutical companies. Many of these
potential competitors have substantially greater technical, financial, and
regulatory resources than we do and are accordingly better equipped to develop,
manufacture, and market their products. If these companies develop and introduce
products and processes competitive with or superior to our products, we may not
be able to compete successfully against them.

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

         NRT, an Italian company, is offering a modified, non-shielded IOERT
unit called the Novac 7. This linear accelerator system was developed, in part,
with funding from the Italian government. The Novac 7 cannot achieve the higher
treatment energies offered by the Mobetron and requires mobile shielding to be
positioned around the surgical table prior to treatment. A spin-off of NRT,
called Info & Tech manufactured a system called the Liac in an attempt to
replace the Novac 7 in the market. Info & Tech delivered a small number of
pre-commercial units to its customers but has now filed for bankruptcy. Sordina,
SpA has acquired the assets of Info & Tech and we believe Sordina will continue
to market and develop the product. The features and technology of the Liac
system are very similar to that of the NRT system. NRT and Sordina are both
developing higher energy versions of their systems so that they can be more
competitive with the features of the Mobetron. Both of these competitors have
had some sales success, mainly sales of Liac in Italy, where we view the Novac 7
and the Liac as significant competition

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


We are subject to extensive government regulation.

         The development, testing, manufacturing, and marketing of the Mobetron
are regulated by the U.S. Food and Drug Administration, or FDA, which requires
government clearance of such products before they are marketed. We filed and
received 510(k) pre-market notification clearance from the FDA in July 1998. We
received clearance for sales in Japan, or JIS, in May 2000, received European EC
Certificate approval, or CE Mark, on October 12, 2001 and received the approval
to market and sell in China, or SFDA, on November 23, 2003. However, we may need
to obtain additional approvals from the FDA or other governmental authorities if
we decide to change or modify the Mobetron. In that case, the FDA or other
authorities, at their discretion, could choose not to grant any new approvals.
In addition, if we fail to comply with FDA or other regulatory standards, we
could be forced to withdraw our products from the market or be sanctioned or
fined.

         We are also subject to federal, state, and local regulations governing
the use, generation, manufacture, and testing of radiation equipment, including
periodic FDA inspections of manufacturing facilities to determine compliance
with FDA regulations. In addition, we must comply with federal, state, and local
regulations regarding the manufacture of healthcare products and radiotherapy

                                       21
<PAGE>

accelerators, including good manufacturing practices regulations, suggested
state regulations for the control of radiation, or SSRCR, and International
Electrotechnical Committee requirements, and similar foreign regulations and
state and local health, safety, and environmental regulations. Although we
believe that we have complied in all material respects with applicable laws and
regulations, we cannot assure you that we will not be required to incur
significant costs in the future in complying with manufacturing and
environmental regulations. Any problems with our or our manufacturers' ability
to meet regulatory standards could prevent us from marketing the Mobetron or
other products.

We expect to be highly dependent on overseas sales.

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

         Additionally, we have limited experience in many of the foreign markets
in which we plan to sell our goods and services. To succeed, we will have to
overcome cultural and language issues and expand our presence overseas. No
assurance can be given that we can meet these goals. We may be subject to
taxation in foreign jurisdictions, and transactions between any of our foreign
subsidiaries and us may be subject to U.S. and foreign withholding or other
taxes. We may also encounter difficulties due to longer customer payment cycles
and encounter greater difficulties in collecting accounts receivable from our
overseas customers. Further, should we discontinue any of our international
operations, we may incur material costs to cease those operations. An inability
to expand our overseas presence or manage the risks inherent in that expansion
could have a material adverse affect on our business, financial condition, and
results of operations.

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

         Despite the fact that more than 30,000 patients have received IOERT
treatment, and despite the promising results in selected clinical studies, IOERT
is not yet considered to be a "standard of care" by the majority of cancer
practitioners. In fact, IOERT may never develop into a "standard of care" for
the treatment of cancer, in which case the market potential for the Mobetron and
other IOERT techniques will remain limited. If the market remains limited, we
may not be able to achieve sustained profitability or profitability at all.

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

         Hospitals in the United States pay increasing attention to treatment
costs, return on assets, and time to investment recovery when making capital
purchase decisions. The current U.S. reimbursement rates for treatment of
advance cancers and breast cancers using IOERT are relatively low, which
potentially makes the rate of return on capital invested in Mobetron less
favorable compared to the rate of return for external beam and other
radiotherapy delivery systems. While we are making efforts to increase the rate
of reimbursement to improve the rate of return on the capital investment in the
Mobetron for hospitals in the United States, there is no assurance that such an
effort will be ultimately successful. Although Medicare reimbursement is
available for certain Mobetron treatments, and although Medicare has recently
established an additional billing code that may allow increased reimbursement
for patients who undergo Mobetron treatment, the rate of reimbursement under the
new code, if any, has not been set, and it may take a number of years before

                                       22
<PAGE>

Medicare has enough data to establish the reimbursement rate under the new code,
if any. Meanwhile, reimbursement under the already established codes, as with
all Medicare codes, is subject to change or elimination. Therefore, regardless
of positive clinical outcomes, the current United States reimbursement
environment may slow the widespread acceptance of IOERT and the Mobetron in the
U.S. market.

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

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

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

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


                        RISKS RELATED TO OUR COMMON STOCK

The trading market for our common stock is limited.

                                       23
<PAGE>

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

Our stock price may be volatile.

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

         o   technological innovations;
         o   introductions or withdrawals of new products and services by us or
             our competitors;
         o   additions or departures of key personnel;
         o   large sales of our common stock;
         o   our ability to integrate operations, technology, products and
             services;
         o   our ability to execute our business plan;
         o   operating results below expectations;
         o   loss of any strategic relationship;
         o   industry developments;
         o   changes in the regulatory environment;
         o   economic and other external factors; and
         o   period-to-period fluctuations in our financial results.

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

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

         We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial condition and
other business and economic factors affecting the value of our common stock at
such time as the Board of Directors may consider relevant. If we do not pay
dividends, our common stock may be less valuable because a return on a
stockholder's investment will only occur if our stock price appreciates.

Our common stock may be deemed penny stock with a limited trading market.

         Our common stock is currently quoted for trading on the OTC Bulletin
Board, which is generally considered to be a less efficient market than markets
such as NASDAQ or other national exchanges, and which may cause difficulty in
conducting trades and difficulty in obtaining future financing. Further, our
securities are subject to the "penny stock rules" adopted pursuant to Section
15(g) of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
The penny stock rules apply to non-NASDAQ companies whose common stock trades at
less than $5.00 per share or which have tangible net worth of less than
$5,000,000 ($2,000,000 if the company has been operating for three or more
years). Such rules require, among other things, that brokers who trade "penny
stock" to persons other than "established customers" complete certain
documentation, make suitability inquiries of investors and provide investors
with certain information concerning trading in the security, including a risk

                                       24
<PAGE>

disclosure document and quote information under certain circumstances. Many
brokers have decided not to trade "penny stock" because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. If we remain subject to the
"penny stock rules" for any significant period, the market, if any, for our
common stock may suffer. Because our common stock is subject to the "penny stock
rules," investors will find it more difficult to dispose of our shares. Further,
for companies whose securities are traded on the OTC Bulletin Board, it is more
difficult to: (i) obtain accurate quotations; (ii) obtain coverage for
significant news events because major wire services, such as the Dow Jones News
Service, generally do not publish press releases about such companies; and (iii)
obtain needed capital.

Our stock may lose access to a viable trading market.

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

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

         At our 2008 annual meeting of stockholders, which was held on April 23,
2008, our stockholders approved the filing of an amendment to our Articles of
Incorporation that, if filed, would effect a one-for-twenty reverse stock split
of the outstanding shares of our common stock. We sought authority to file the
amendment because we believe that the current large number of outstanding shares
of our common stock is undesirable and that the current low market value per
share of our common stock has reduced the effective marketability of the shares
of our common stock as institutional investors and investment funds are
generally reluctant to invest in lower priced stocks and many brokerage firms
are generally reluctant to recommend lower priced stocks to their clients.

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

         Currently, our Board of Directors is not inclined to file the amendment
to our articles of incorporation effecting the reverse one-for-twenty stock
split until longer term funding is in place.

         We cannot assure you that if we file the amendment to our articles of
incorporation effecting the reserve stock split: (i) the market price of our
common stock will increase proportionately to reflect the ratio for the reverse
stock split; (ii) the market price of our common stock will not decrease to its
pre-split level; (iii) our market capitalization will be equal to the market
capitalization before the reverse stock split; or (iv) we will be able to
achieve listing of our common stock on NASDAQ or another national exchange. The

                                       25
<PAGE>

market price of our common stock may be based on other factors that are
unrelated to the number of shares outstanding, including our future performance.

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

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

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

         From August 2007 through the date of this filing, we issued, after
adjusting for warrant exercises in that same period, 366,310,425 shares of
common stock and warrants to purchase 12,140,732 shares of common stock, which
in each case have not been registered with the SEC and may not be sold except
pursuant to a registration statement filed with the SEC or an exemption from
registration, such as SEC Rule 144. Pursuant to certain agreements entered into
in August 2007, we have agreed to register 296,508,532 shares of common stock
and warrants to purchase 10,780,732 shares of common stock upon the demand of
the majority of the holders of those shares and warrants. The holders have not
yet demanded registration of their shares.


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

         None


Item 3.  Defaults upon Senior Securities

         The Company has defaulted on the repayment of its 10% senior
debentures, which had a maturity date of December 31, 2008. We expect to enter
into an amendment thereto whereby the maturity date will move to June 30, 2009,
and the debentures will be convertible, at the holder's discretion, into equity
issued by the Company in a subsequent financing.

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

         None.

Item 5.  Other Information

         None.

                                       26
<PAGE>

Item 6.  Exhibits

Exhibit
Number                                 Description
-------   ----------------------------------------------------------------------
31.1      Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2      Certification of Chief Financial Officer pursuant to
32.1      Section 1350 Certification of Chief Executive Officer .
32.2      Section 1350 Certification of Chief Financial Officer .







                                       27
<PAGE>

                                   SIGNATURES

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

                                INTRAOP MEDICAL CORPORATION


Date:  February 13, 2009        By: /s/   John P. Powers
                                    -----------------------------------
                                      John P. Powers, Chief  Executive Officer
                                      and President
                                      (Principal Executive Officer)


Date:  February 13, 2009        By: /s/ JK Hullett
                                    -----------------------------------
                                      JK Hullett, Chief Financial Officer
                                      (Principal Financial Officer and Principal
                                      Accounting Officer)







                                       28
<PAGE>


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


Consolidated Balance Sheets                                        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>

IntraOp Medical Corporation
Consolidated Balance Sheets - Unaudited
------------------------------------------------------------------------------------------------------------------
                                                                               December 31,       September 30,
                                                                                  2008               2008 (1)
                                                                             -----------------  ------------------
 <S>                                                                                 <C>                <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                     $      33,484       $     282,516
  Accounts receivable                                                               1,273,283             245,819
  Inventories, net                                                                    833,429           1,018,257
  Inventories, under product financing arrangement                                  3,574,442           3,849,339
  Prepaid expenses and other current assets                                            20,093              14,473
                                                                             -----------------  ------------------

  Total current assets                                                              5,734,731           5,410,404

Property and equipment, net                                                           180,690             190,070
Intangible assets, net                                                                237,594             257,167
Deposits                                                                               62,752              93,084
                                                                             -----------------  ------------------

  Total Assets                                                                  $   6,215,767           5,950,725
                                                                             =================  ==================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                             $   1,875,621       $   1,710,889
   Accrued liabilities                                                                656,692             716,482
   Capital lease obligations, current portion                                           2,455               2,435
   Notes payable, related parties, current portion                                    119,002             119,002
   Notes payable, other, current portion, net of unamortized debt discounts         7,302,999           5,649,917
                                                                             -----------------  ------------------

  Total current liabilities                                                         9,956,769           8,198,725

   Capital lease obligations, net of current portion                                    2,324               2,946
   Notes payable, other, net of current portion, unamortized debt discounts
       and beneficial conversion features                                                   -                   -
                                                                             -----------------  ------------------

  Total liabilities                                                                 9,959,093           8,201,671
                                                                             -----------------  ------------------

Stockholders' deficit:
  Common stock, $0.001 par value: 500,000,000 shares authorized;
     392,787,597 shares issued and outstanding                                        392,788             392,788
  Additional paid-in capital                                                       40,511,991          40,187,351
  Treasury stock, at cost, 600,000 shares at $.25 per share                          (150,000)           (150,000)
  Accumulated deficit                                                             (44,498,105)        (42,681,085)
                                                                             -----------------  ------------------

  Total stockholders' deficit                                                      (3,743,326)         (2,250,946)
                                                                             -----------------  ------------------

  Total liabilities and stockholders' deficit                                   $   6,215,767       $   5,950,725
                                                                             =================  ==================

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

                               See accompanying notes to these financial statements.
</TABLE>

                                       Q-2
<PAGE>

IntraOp Medical Corporation
Consolidated Statements of Operations - Unaudited
-----------------------------------------------------------------------------
                                                  Three months ended
                                                     December 31,
                                          -----------------------------------
                                                2008                2007
                                          ---------------  ------------------

Revenues:
  Product sales                             $  1,093,619        $  3,732,743
  Service                                        104,647             128,861
                                          ---------------  ------------------

  Total revenues                               1,198,266           3,861,604
                                          ---------------  ------------------

Cost of revenues:
  Product sales                                  994,261           2,645,179
  Service                                         49,565              63,429
                                          ---------------  ------------------

  Total cost of revenues                       1,043,826           2,708,608
                                          ---------------  ------------------

Gross margin                                     154,440           1,152,996
                                          ---------------  ------------------

Operating expenses:
  Research and development                       410,047             471,825
  General and administrative                     573,222             718,769
  Sales and marketing                            758,154           1,350,269
                                          ---------------  ------------------

  Total operating expenses                     1,741,423           2,540,863
                                          ---------------  ------------------

Loss from operations                          (1,586,983)         (1,387,867)

Other income                                      56,207             259,226
Interest income                                        3                   7
Interest expense                                (286,249)           (467,541)
                                          ---------------  ------------------

Loss before taxes                             (1,817,022)         (1,596,175)

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

Net loss                                    $ (1,817,022)       $ (1,627,675)
                                          ===============  ==================

Basic and diluted net loss per share
   available to common shareholders         $      (0.00)       $      (0.01)
                                          ===============  ==================
Weighted average number of shares in
  calculating net loss per share:
  Basic and diluted                          392,787,597         265,068,966
                                          ===============  ==================


              See accompanying notes to these financial statements.


                                       Q-3
<PAGE>

<TABLE>
<CAPTION>

IntraOp Medical Corporation
Consolidated Statements of Cash Flows - Unaudited
-----------------------------------------------------------------------------------------
                                                      Three months ended December 31,
                                                   --------------------------------------
                                                        2008                  2007
                                                   ----------------  --------------------
            <S>                                          <C>                   <C>
Cash flows from operating activities:
  Net loss                                            $ (1,817,022)         $ (1,627,675)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
   Depreciation of property and equipment                   22,461                21,363
   Amortization of intangible assets                        19,573                17,938
   Amortization of debt discount                            13,020                92,636
   Amortization of debt issuance costs                           -                58,060
   Non-cash compensation for options issued                324,640               792,195
   Non-cash compensation for warrants issued                     -               (16,075)
  Changes in assets and liabilities:
     Accounts receivable                                (1,027,462)           (2,381,218)
     Inventories                                           459,725             1,565,269
     Prepaid expenses and other current assets              (5,620)               14,146
     Other assets                                           30,332               (12,266)
     Accounts payable                                      164,732              (807,975)
     Accrued liabilities                                   (59,789)               36,760
                                                   ----------------  --------------------

     Net cash used for operating activities             (1,875,410)           (2,246,842)
                                                   ----------------  --------------------

Cash flows used for investing activities:
  Acquisition of fixed assets                              (13,081)              (29,808)
                                                   ----------------  --------------------

     Net cash used for investing activities                (13,081)              (29,808)
                                                   ----------------  --------------------

Cash flows provided by financing activities:
    Proceeds from note payable, other                    4,507,579             1,870,946
    Payments on note payable, related party                      -               (37,828)
    Payments on note payable, other                     (2,868,120)           (1,317,794)
    Proceeds from issuance of common stock                       -             1,727,475
                                                   ----------------  --------------------

         Net cash provided by financing activities       1,639,459             2,242,799
                                                   ----------------  --------------------

Net decrease in cash and cash equivalents                 (249,032)              (33,851)
Cash and cash equivalents, at beginning of period          282,516               538,364
                                                   ----------------  --------------------

Cash and cash equivalents, at end of period           $     33,484          $    504,513
                                                   ================  ====================

              See accompanying notes to these financial statements.
</TABLE>

                                       Q-4
<PAGE>

<TABLE>
<CAPTION>

IntraOp Medical Corporation
Consolidated Statements of Cash Flows - Unaudited  (Continued)
-------------------------------------------------------------------------------------------------------
                                                                     Three months ended December 31,
                                                                    -----------------------------------
                                                                        2008                2007
                                                                    --------------     ----------------
           <S>                                                          <C>                  <C>
Supplemental disclosure of cash flow information:
   Cash paid for interest                                               $ 233,914             $ 316,073
   Income taxes paid                                                            -                31,500

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

</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 or omitted pursuant to such rules and regulations. These consolidated
financial statements and the accompanying notes are unaudited and should be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2008. In the opinion of management, the consolidated financial
statements herein include adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position as of December 31, 2008, and the results of operations for the three
months ended December 31, 2008 and December 31, 2007. The results of operations
for the three months ended December 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,
manufacture, marketing, and service of mobile electron beam treatment systems
designed for IntraOperative electron-beam radiotherapy ("IOERT"). IOERT is the
application of radiation directly to a cancerous tumor and/or tumor bed during
surgery.

Basis of Consolidation:

For the three months ended December 31, 2008 and December 31, 2007, the
consolidated financial statements include the accounts of IntraOp Medical
Corporation, IntraOp Medical Services, Inc. and IntraOp Medical Europe Ltd. All
significant inter-company balances and transactions have been eliminated in
preparation of the consolidated financial statements.




                                       Q-6
<PAGE>

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

Going Concern:

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the United States,
which contemplate continuation of the Company as a going concern. However, the
Company has experienced net losses of $1,817,022 and $1,627,675 for the three
months ended December 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 December 31, 2008, had an accumulated deficit
of $44,498,105. These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern. In view of the matters
described above, recoverability of a major portion of the recorded asset amounts
shown in the accompanying consolidated balance sheet is dependent upon the
Company's ability to generate sufficient sales volume to cover its operating
expenses and to raise sufficient capital to meet its payment obligations.
Management is taking action to address these matters, which include:

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

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

          o    Evaluating funding strategies in the public and private markets.

Historically, management has been able to raise additional capital. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence. The successful outcome of future activities
cannot be determined at this time and there is no assurance that if achieved,
the Company will have sufficient funds to execute its intended business plan or
generate positive operating results

Concentration of Credit Risk:

The Company maintains its cash in bank accounts, which at times may exceed
federally insured limits. The Company has not experienced any losses on such
accounts. Credit risk with respect to accounts receivable is concentrated due to
the limited number of transactions recorded in any particular period. See Note 2
for further discussion of these concentrations.

Use of Estimates:

The preparation of consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the amounts in
the financial statements and accompanying notes. Actual results could differ
from those estimates.


                                       Q-7
<PAGE>

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

Management makes estimates that affect reserves for allowance for doubtful
accounts, deferred income tax assets, estimated useful lives of property and
equipment, and accrued expenses, fair value of equity instruments and reserves
for any other commitments or contingencies. Any adjustments applied to estimates
are recognized in the period in which such adjustments are determined.

Revenue Recognition:

Revenue is recognized when earned in accordance with applicable accounting
standards, including Staff Accounting Bulletins 104, Revenue Recognition in
Financial Statements ("SAB 104"), and the interpretive guidance issued by the
Securities and Exchange Commission and EITF issue number 00-21, Accounting for
Revenue Arrangements with Multiple Elements, of the FASB's Emerging Issues Task
Force. The Company recognizes revenue on sales of machines upon delivery,
provided there are no uncertainties regarding installation or acceptance,
persuasive evidence of a binding sales agreement exists, the sales price is
fixed or determinable, and collection of the related receivable is reasonably
assured. Revenue from maintenance is recognized as maintenance services are
completed or over the term of the maintenance agreements. Revenue from the
leasing of machines is recognized over the term of the lease agreements.

The Company recognized revenue on service contracts for the service of Mobetron
at the customer site with six customers during the three months ended December
31, 2008 and five customers during the three months ended December 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 Mobetron and amounts paid for certain
non-recurring engineering expenses paid to third parties for the development of
certain Mobetron subsystems. Non-recurring engineering expenses related to the
Mobetron are amortized on a straight-line basis over their estimated useful
lives of five years. The medical device approval license has an indefinite life
and therefore is not subject to amortization.

The Company evaluates the carrying value of its intangible assets during the
fourth fiscal quarter of each year and between annual evaluations if events
occur or circumstances change that would more likely than not reduce the fair
value of the asset below its carrying amount. Such circumstances could include,
but are not limited to: (1) a significant adverse change in legal factors or in
business climate, (2) unanticipated competition, or (3) an adverse action or
assessment by a regulator.

The Company's evaluation of its intangible assets completed during three months
ended September 30, 2008 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 Financial Accounting
Standards Board Statements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the establishment of a deferred
tax asset or liability for the recognition of future deductible or taxable
amounts and operating loss and tax credit carry forwards. Deferred tax expense
or benefit is recognized as a result of timing differences between the
recognition of assets and liabilities for book and tax purposes during the year.

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

Basic and Diluted Loss per Share:

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

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

                                                   Three months ended
                                                       December 31,
                                           ------------------------------------
                                                 2008                2007
                                           ----------------  ------------------
Numerator
Net loss available to common stockholders   $   (1,817,022)    $    (1,627,675)

Denominator
Weighted average common shares outstanding     392,787,597         265,068,966

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

Total shares, basic                            392,787,597         265,068,966
                                           ================  ==================
Net loss per common shares
  Basic and diluted                         $        (0.00)    $         (0.01)
                                           ================  ==================




                                       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:
                                                  Three months ended
                                                     December 31,
                                        ---------------------------------------
                                               2008                 2007
                                        -------------------    ----------------

Options to purchase common stock                30,342,677          26,993,327
Warrants to purchase common stock               16,223,242          16,336,433
                                        -------------------    ----------------

Potential equivalent shares excluded            45,565,919          43,329,760
                                        ===================    ================


Comprehensive Loss:

Comprehensive loss consists of net loss and other gains and losses affecting
stockholders' equity that, under generally accepted accounting principles are
excluded from net loss in accordance with Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. The Company, however, does
not have any components of other comprehensive loss as defined by SFAS No. 130
and therefore, for the three months ended December 31, 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
geographic area data based on product shipment destination. The geographic
summary of long-lived assets is based on physical location.

Recent Accounting Pronouncements:

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

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



                                       Q-10
<PAGE>

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


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

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

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

NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three customers represent 77.1%, 6.9% and 4.4%of accounts receivable at December
31, 2008. Three customers accounted for 81.5%, 8.7% and 5.8% of net revenue for
the three months ended December 31, 2008. Three customers accounted for 36.9%,
33.2%, and 25.4% of net revenue for the three months ended December 31, 2007.

Three suppliers represented 29.4%, 5.9% and 4.6% of accounts payable at December
31, 2008. Purchases from these suppliers during the three months ended December
31, 2008 totaled approximately $0, $36,383 and $0. Purchases from these
suppliers during the three months ended December 31, 2007 totaled approximately
$0, $3,685 and $15,874 respectively.



                                       Q-11
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS
Inventory:

Inventory consists of the following:

                                            December 31,         September 30,
                                                2008                 2008
                                         ------------------    ----------------

  Finished goods                                 $        -       $         -

  Work-in-progress                                  318,489           515,821
  Purchased parts and raw material,
    net of reserves of $211,932
    (at September 30, 2008 $25,833)                 514,940           502,436
                                         ------------------    ----------------

                                                 $  833,429       $ 1,018,257
                                         ==================    ================

Pursuant to our final settlement agreement with CDS Corporation, the Company
received certain spares and manufacturing components valued at $179,206. This
inventory from CDS is considered slow moving; thus a provision in the full
amount has been made for slow moving and obsolescence.

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:

                                            December 31,         September 30,
                                                2008                 2008
                                         ------------------    ----------------

  Finished                                       $  837,916        $  649,584
  goods
  Work-in-progress                                2,485,551         3,148,780
  Purchased parts and raw material                  250,975            50,975
                                         ------------------    ----------------

                                                $ 3,574,442       $ 3,849,339
                                         ==================    ================

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

Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:

                                            December 31,         September 30,
                                                2008                  2008
                                         ------------------    ----------------

  Property & equipment                           $  278,184        $  278,184
  Computer equipment                                139,002           133,365
  Furniture & fixtures                               72,312            67,808
  Leasehold improvements                             37,420            37,420
                                         ------------------    ----------------
                                                    526,918           516,777
  Less: accumulated depreciation                   (346,228)         (326,707)
                                         ------------------    ----------------
                                                 $  180,690        $  190,070
                                         ==================    ================


                                       Q-12
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Included in property and equipment is an asset acquired under a capital lease
with an original cost of $11,742 as of December 31, 2008 and as of December 31,
2007. Related accumulated depreciation and amortization of this asset was $7,828
and $5,480 as of December 31, 2008 and December 31, 2007 respectively.

Intangible Assets:

Intangible Assets consist of the following:

                                            December 31,         September 30,
                                                2008                 2008
                                         ------------------    ---------------

  Non-recurring engineering charges
    paid to third parties                        $  393,300        $  393,300
  Less accumulated amortization                    (185,706)         (166,133)
                                         ------------------    ---------------
  Mobetron related manufacturing and
    design rights, net                              207,594           227,167
  Medical device approval license not
    subject to amortization                          30,000            30,000
                                         ------------------    ---------------
  Intangible assets, net                          $ 237,594         $ 257,167
                                         ==================    ===============

The Company's historical and projected revenues are related to the sale and
servicing of the Company's sole product, the Mobetron. Should revenues of the
Mobetron product in future periods be significantly less than management's
expectation, the benefit from the Company's Mobetron related intangibles would
be limited and may result in an impairment of these assets.

 Accrued Liabilities:

A summary is as follows:

                                           December 31,          September 30,
                                               2008                  2008
                                         ------------------    ----------------
   Contract advances                           $   15,000          $   84,000
   Accrued interest payable                       136,660             108,372
   Accrued warranty                               138,597             161,947
   Deferred revenue                               214,647             162,811
   Accrued wages and benefits payable             137,298             184,827
   Accrued sales tax payable                       14,490              14,525
                                         ------------------    ----------------

                                               $  656,692          $  716,482
                                         ==================    ================

Warranty:

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


                                       Q-13
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)


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

                                                December 31,      September 30,
                                                    2008              2008
                                               ------------    ---------------
Warranty accrual at the beginning of period      $  161,947        $  111,515
Accrual for warranties during the period             20,000         240,000
Actual product warranty expenditures                (43,350)       (189,568)
                                               ------------    ---------------

Warranty accrual at the end of the period        $  138,597      $  161,947
                                               ============    ===============


NOTE 4 - BORROWINGS

Outstanding notes payable were as follows:

                                              December 31,       September 30,
                                                 2008                2008
                                            ---------------    --------------

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


Product financing arrangement                  $  5,143,352       $ 4,503,290
Senior secured debentures                         2,000,000         1,000,000
Other notes                                         194,367           194,367

Less debt discounts due to warrants                 (34,720)          (47,740)
                                            ---------------    --------------

Notes payable, net of debt discounts              7,302,999         5,649,917

Less: current portion                            (7,302,999)       (5,649,917)
                                            ---------------    --------------

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

Notes payable, related parties:

Notes payable to related parties of $119,002 at December 31, 2008 and September
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.


                                       Q-14
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Product financing arrangements:

In August 2005, the Company entered into a $3,000,000 revolving combined
inventory financing and accounts receivable factoring agreement (the "Product
Financing Arrangement") with a financial institution. Under the terms of the
agreement, the Company agreed to pay interest at the rate of 12% per annum on
inventory financing and 24% per annum on accounts receivable financing under the
agreement. The loan is secured by a lien on the financed inventory and
receivables. In April 2006, the Company entered into an amendment to the Product
Financing Arrangement to clarify and amend certain terms and conditions pursuant
to which the Company can obtain financing under the agreement. Pursuant to the
amendment, ownership of the inventory financed is transferred to the lender.
From time to time, the Company may repurchase financed inventory from the lender
at a price equal to the original transfer price plus accrued interest.

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

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

At December 31, 2008 the outstanding principal balance under the Product
Financing Arrangement was $5,143,352.

Senior secured debentures

In October 2008, the Company sold $2,000,000 10% senior secured debentures with
a maturity date of December 2008. Of the $2,000,000, one of the related parties
invested $1,375,000 and remainder of $625,000 was invested by two outside
investors. The debentures bear interest at 10% per annum, payable monthly. The
original maturity date of December 31, 2008 has been amended by the parties to
June 30, 2009. 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.

Other notes:

The Company has a promissory note payable to a former director with an
outstanding principal balance of $44,367 at December 31, 2008. This note is due
on demand and bears interest at 9% per annum.

Other notes also include a promissory note to the Company's Chinese distributor
with an outstanding balance of $150,000 at December 31, 2008. This note is due
on May 1, 2009 and bears interest at 8% per annum.

                                       Q-15
<PAGE>

NOTE 5 - CAPITAL LEASE

Capital lease

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

                                           December 31,            September 30,
                                              2008                    2008
                                        -----------------      -----------------

  Capital lease for equipment                   $  4,779              $  5,381

  Less: current portion                           (2,455)               (2,435)
                                        -----------------      -----------------

  Capital lease obligations, net
   of current portion                           $  2,324                $2,946
                                        =================      =================


NOTE 6 - COMMON STOCK

Shares Reserved for Future Issuance:

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

                                            December 31,         September 30,
                                                2008                  2008
                                         ----------------      -----------------

  2005 Equity Incentive Plan                   45,359,664           45,359,664
  Common stock warrants                        16,223,242           16,292,333
                                         ----------------      -----------------

  Total                                        61,582,906           61,651,997
                                         ================      =================



At the Company's annual meeting of stockholders on October 15, 2007,
stockholders approved an amendment to the Company's articles of incorporation to
increase the authorized number of shares of common stock from 100 million to 500
million shares and also approved an amendment to the Company's 2005 Equity
Incentive Plan to increase by 22,062,664 shares the number of shares of common
stock reserved for issuance under the Plan. At the Company's annual meeting of
stockholders on April 23, 2008, stockholders approved an amendment to the Plan
to increase the number of shares of common stock reserved for issuance under the
Plan by an additional 20,000,000 shares.



                                       Q-16
<PAGE>

NOTE 7 - STOCK OPTIONS

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

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

Cost of revenues - Service         $      8,569      $         16,667
Research and development                 82,444               150,241
General and administrative               61,735               164,460
Sales and marketing                     123,905               330,342
                                 -------------------------------------

Total                               $   276,653       $       661,710
                                 =====================================


During the three months ended December 31, 2008 and 2007, total share-based
compensation expense recognized in earnings before taxes was $276,653 and
$661,710 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 ended December 31, 2008 and 2007 was $39,649
and $120,146 respectively, and total share-based compensation expense applied to
warranty reserve for the three months ended December 31, 2008 and 2007 was
$7,385 and $8,057 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:

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

Expected term (in years)                   5.45                 0.03 to 10
Risk-free interest rate                   2.63%               3.10% to 4.34%
Expected volatility                        284%                207% to 222%
Expected dividend yield                     0%                      0%
Weighted average fair value
      at grant date                       $0.15                    $0.16





                                       Q-17
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

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

Granted                    (30,000)        30,000          0.04

Authorized                       -              -             -

Cancelled or expired       531,422       (531,422)        (0.18)

Exercised                        -              -             -
                     --------------  -------------
Balance at
December 31, 2008       15,016,987     30,342,677     $    0.17          8.83       $      0
                     ==============  =============
Exercisable at
 December 31, 2008                     10,152,275     $    0.18          8.42       $      0
                                     =============
</TABLE>

 (1) The aggregate intrinsic value represents the total pre-tax intrinsic value,
which is computed based on the difference between the exercise price and the
Company's closing stock price of $0.03 as of December 31, 2008, which would have
been received by the option holders had all option holders exercised their
options as of that date.

As of December 31, 2008 there was approximately $1,295,880 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 2.43 years.


                                       Q-18
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

Total options under the Plan at December 31, 2008, were as follows:
<TABLE>
<CAPTION>
                                                    Weighted
                                                     Average
     Option           Options Outstanding           Remaining           Options Exercisable
    Exercise                 as of                 Contractual                 as of
     Price             December 31, 2008           Life (Years)          December 31, 2008
 ---------------    ------------------------     -----------------    ------------------------
       <S>                      <C>                    <C>                         <C>
     $0.040                    30,000                  9.79                        4,167
      0.080                   648,000                  9.23                      302,083
      0.090                 3,520,000                  9.42                      633,333
      0.180                26,114,177                  8.75                    9,182,192
      0.800                     8,000                  3.22                        8,000
      1.250                    22,500                  5.82                       22,500
                    ------------------------                          ------------------------

     Total                 30,342,677                                         10,152,275
                    ========================                          ========================
</TABLE>

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       2,361,127
 Warrants granted                     1,350,000             0.07          87,750
 Warrants exercised               (212,039,781)                -           (900)
 Warrants cancelled                 (1,350,000)           (0.08)       (108,000)
 Warrants expired                      (44,100)           (1.25)        (55,125)
                               ----------------  ---------------  --------------
 Balance at September 30, 2008       16,292,333            $0.14      $2,284,852
 Warrants granted                             -                -               -
 Warrants exercised                           -                -               -
 Warrants cancelled                           -                -               -
 Warrants expired                      (69,091)           (1.25)        (95,000)
                               ----------------  ---------------  --------------

 Balance at December 31, 2008        16,223,242             0.14      $2,189,852
                               ================  ===============  ==============




                                       Q-19
<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

The common stock warrants as of December 31, 2008 and September 30, 2008 are
comprised of the following:

                            Warrants Outstanding              Weighted Average
                                   as of                   Remaining Contractual
   Exercise Price            December 31, 2008                 Life (Years)
 --------------------    ---------------------------     -----------------------
       $0.065                     1,350,000                        3.70
        0.080                    12,459,142                        3.40
        0.280                       400,000                        3.50
        0.400                     1,675,000                        1.84
        0.700                       119,100                        1.67
        1.000                       100,000                        2.27
        1.150                       100,000                        2.87
        1.250                        20,000                        1.15

                         ---------------------------
        Total                    16,223,242
                         ===========================


                            Warrants Outstanding             Weighted Average
                                   as of                   Remaining Contractual
   Exercise Price                September 30, 2008            Life (Years)
 --------------------    ---------------------------     -----------------------
       $0.065                     1,350,000                        3.96
        0.080                    12,459,142                        3.65
        0.280                       400,000                        3.75
        0.400                     1,675,000                        2.09
        0.700                       119,100                        1.92
        1.000                       100,000                        2.52
        1.150                       100,000                        3.12
        1.250                        20,000                        1.40
        1.375                         69,091                       0.25
                         ---------------------------
         Total                    16,292,333
                         ===========================


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

                      Fiscal Year
                        Ending
                     September 30,               Number
                  --------------------     ----------------
                         2009                      100,000
                         2010                    2,045,830
                         2011                      887,500
                         2012                   13,189,912
                         2013                            -
                                           ----------------

                                                16,223,242
                                           ================

                                       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 December 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
                                             December 31,
                               --------------------------------------------
                                     2008                     2007
                               ------------------      --------------------

         Europe                  $  1,032,419            $   1,008,724
         Asia                               -                    6,312
         United States                 96,847                2,846,568
         South America                 69,000                        -
                               ------------------      -------------------

         Total Revenue           $  1,198,266            $   3,861,604
                               ==================      ===================


The Company maintained long lived assets includes property and equipment,
intangible assets, and leased equipment each net of applicable depreciation or
amortization in the following geographic areas during the three months ended
December 31, 2008:

                                        Three months ended
                                         December 31, 2008
                                      ------------------------

          United States                         $ 412,471
          Europe                                    2,404
          Asia                                      3,409
                                      ------------------------

          Total                                 $ 418,284
                                      ========================


NOTE 11 - SUBSEQUENT EVENTS

The following subsequent events occurred between January 1, 2009 and February
13, 2009.

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

The Company repaid $180,000 of principal due under its Product Financing
Arrangement.


                                       Q-21