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


                                   FORM 10-QSB


   [ X ]   Quarterly Report under Section 13 or 15(d) of the Securities Exchange
           Act of 1934 For the quarterly period ended June 30, 2008

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


                        Commission File Number 000-49735



                           INTRAOP MEDICAL CORPORATION

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


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

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

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


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

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes [X]      No [ ]

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

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 379,402,984 shares of $0.001 par value
Common Stock outstanding as of the date of this filing.

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


<PAGE>

                           INTRAOP MEDICAL CORPORATION

                                   FORM 10-QSB

                                TABLE OF CONTENTS

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

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

SIGNATURES....................................................................27




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


                                       2
<PAGE>

                         PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

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


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

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

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


Business Overview

         Intraop Medical Corporation, or IntraOp, was incorporated in Nevada on
November 5, 1999. Our business is the development, manufacture, marketing,
distribution and service of the Mobetron, a proprietary mobile electron-beam
cancer treatment system designed for use in intraoperative electron-beam
radiation therapy, or IOERT. Although intraoperative radiation therapy may be
delivered using a radiation source other than electrons, 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.


                                       3
<PAGE>

         Our strategy is to expand our customer base both in the United States
and internationally through direct and distributor sales channels and joint
ventures with health care providers. We also intend to continue our research and
development efforts for additional Mobetron applications 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
$1.8 million, and given our current low unit sales volume, our historical
results may vary significantly from period to period. For example, the sale of
even one additional Mobetron in any given period may substantially alter the
sales and cost numbers for that period, while the timing of such a sale often
cannot be predicted with accuracy. While we expect that our financial results
may ultimately become more predictable as sales increase and costs stabilize,
our financial results for the foreseeable future are likely to continue to vary
widely from period to period.

Critical Accounting Policies

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

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


                                       4
<PAGE>

Share-based Compensation Expense

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

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

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

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


                                       5
<PAGE>

         Results of Operations for the three months ended June 30, 2008 compared
to the three months ended June 30, 2007.

Revenue, Costs of Revenue and Gross Margins

<TABLE>
<CAPTION>

                                                            Three Months Ended June 30,
Revenue                                                    2008         2007       Change      Percent
------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>          <C>                 <C>
  Product sales                                      $2,031,319   $  992,509   $1,038,810          105%
  Service                                               108,864       96,176       12,688           13%
------------------------------------------------------------------------------------------------------
Total Revenue                                         2,140,183    1,088,685    1,051,498           97%
------------------------------------------------------------------------------------------------------

Costs of Revenue
------------------------------------------------------------------------------------------------------
  Product sales                                       1,855,614      911,183      944,431          104%
  Service                                                40,356       38,608        1,748            5%
------------------------------------------------------------------------------------------------------
Total Costs of Revenue                                1,895,970      949,791      946,179          100%
------------------------------------------------------------------------------------------------------

Gross Margin
------------------------------------------------------------------------------------------------------
  Product sales                                         175,705       81,326       94,379          116%
  Service                                                68,508       57,568       10,940           19%
------------------------------------------------------------------------------------------------------
Total Gross Margin                                   $  244,213   $  138,894   $  105,319           76%
======================================================================================================

</TABLE>

Product Sales

         Product sales revenue, which includes systems and accessories sales,
but excludes parts sold as part of our service business, included the first
Mobetron sales to both Latin America and Germany in the three months ended June
30, 2008, as compared to the sale of our first machine in China in the three
months ended June 30, 2007. CDT Strahleninstitut Koln, a renowned breast cancer
center in Cologne, Germany, and the first facility in Germany to perform
lumpectomies, selected the Mobetron primarily for advanced breast cancer
treatment. Colombia's Instituto Nacional de Cancerologia has more than 70 years
of experience of innovative cancer treatment experience and has helped implement
techniques for minimally invasive surgery for cancer and other diseases. Their
Pediatric Oncology Group is a leader in Colombia and one of the most highly
recognized in Latin America.

Service

         Service revenue for the three months ended June 30, 2008 and June 30,
2007, came from service contracts with five and six customers each at June 30,
2008 and June 30, 2007, respectively. We expect service revenue to grow in
relative proportion to U.S. based sales and to a lesser extent overseas sales,
as overseas distributors of the Mobetron are generally responsible for servicing
their own customers with parts supplied by us. Cost of service revenues
increased in the three months ended June 30, 2008, in comparison to the three
months ended June 30, 2007, primarily due to the costs of share based
compensation, as described below.


                                       6
<PAGE>

Operating Expenses

         A comparison of our operating expenses for the three months ended June
30, 2008 and June 30, 2007, follows:

<TABLE>
<CAPTION>

                                                    Three Months Ended June 30,
                                                  2008         2007       Change       Percent
     -----------------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>                  <C>
     Research and Development               $  422,337   $  169,045   $  253,292           150%
     General & Administrative                  544,302      668,052     (123,750)          -19%
     Sales and Marketing                       934,405      481,115      453,290            94%
     -----------------------------------------------------------------------------------------
     Total Operating Expenses               $1,901,044   $1,318,212   $  582,832            44%
     =========================================================================================

</TABLE>

         Share based compensation, particularly the non-cash cost of issuing
options to our employees and directors, was much higher in the three months
ended June 30, 2008, compared to the three months ended June 30, 2007. The
increase in share based compensation was primarily the result of new options
grants and option exercise price reductions granted in November 2007 to our
employees and directors following the significant dilution caused by equity
sales and other transactions entered into by us in August 2007 and completed in
October 2007, and the addition of new management as part of those transactions.
These expenses played a large part in increasing operating expenses in all of
the categories shown below:


                                                    Three months ended
                                                          June 30,
                                                       2008       2007
     -----------------------------------------------------------------
     Costs of revenue - Service                    $ 10,636   $    635
     Research and development                       107,958      4,974
     General and administrative                     101,425      6,329
     Sales and marketing                            219,070      5,992
     -----------------------------------------------------------------

                 Total                             $439,089   $ 17,930
     =================================================================


         Research and development expenses increased by approximately 150% in
the three months ended June 30, 2008, in comparison to the three months ended
June 30, 2007. The majority of this increase came from increases personnel and
consulting expenses with the remainder coming from increases in share based
compensation, as described above. We believe that research and development
expenses will continue to increase as we develop new products and applications
and continue our efforts to cut Mobetron production costs.


                                       7
<PAGE>

         General and administrative expenses decreased in the three months ended
June 30, 2008 compared to the three months ended June 30, 2007. Despite an
increase of $95,096 in share based compensation in the three months ended June
30, 2008 compared to the three months ended June 30, 2007, these expenses were
more than offset by the elimination of $145,326 of certain investor relations
and financial advisory services which we had under contract in the three months
ended June 30, 2007. Legal expenses, especially in the area of patent
protection, were $44,584 lower in the three months ended June 30, 2008 in
comparison to the three months ended June 30, 2007. Despite this quarter to
quarter decrease, we expect that general and administrative expenses will
continue to grow as sales increase.

         Sales and marketing expenses nearly doubled in the three months ended
June 30, 2008, in comparison to the three months ended June 30, 2007, as we
increased the number of employees and consultants in this area to fourteen
people by June 30, 2008. Consequently, expenses increased mainly due to the
increased cost of share based compensation as shown above, and increases in
personnel related expenses, including related travel and entertainment expenses
of $227,798.

         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 dollar weighted average borrowing rate is shown
below, based on the interest rates and outstanding balances of our various types
of debt, before debt discounts of $85,077, at June 30, 2008.

<TABLE>
<CAPTION>

                                                       Balance at
     Type of debt, before debt discounts             June 30,  2008     Interest Rate
     ---------------------------------------------------------------------------------
     <S>                                            <C>                          <C>
     Notes payable, related parties                 $       119,002               9.00%
     Product Financing Arrangement, inventory             3,385,032              12.00%
     Product Financing Arrangement, factoring             1,212,768              24.00%
     Senior debentures                                    1,083,333              10.00%
     Other notes                                            150,000               8.00%
     Other notes                                             44,367               9.00%
     ---------------------------------------------------------------------------------
     Total debt, before debt discounts              $     5,994,502
     Dollar weighted average borrowing rate                                      13.88%
     =================================================================================

</TABLE>


                                       8
<PAGE>

         Results of Operations for the nine months ended June 30, 2008 compared
to the nine months ended June 30, 2007.

Revenue, Costs of Revenue and Gross Margins

<TABLE>
<CAPTION>

                                         Nine months Ended June 30,
     Revenue                            2008          2007        Change        Percent
     ----------------------------------------------------------------------------------
<S>                              <C>           <C>           <C>                <C>
       Product sales             $ 5,824,186   $ 2,079,900   $ 3,744,286            180%
       Service                       291,278       317,223       (25,945)            -8%
     ----------------------------------------------------------------------------------
     Total Revenue               $ 6,115,464   $ 2,397,123   $ 3,718,341            155%
     ----------------------------------------------------------------------------------

     Costs of Revenue
     ----------------------------------------------------------------------------------
      Product sales             $ 4,642,606   $ 1,769,571   $ 2,873,035            162%
       Service                      181,552       137,057        44,495             32%
      ----------------------------------------------------------------------------------
    Total Costs of Revenue      $ 4,824,158   $ 1,906,628   $ 2,917,530            153%
     ----------------------------------------------------------------------------------

                                         Nine months Ended June 30,
     Gross Margin                       2008          2007        Change        Percent
     ----------------------------------------------------------------------------------
       Product sales             $ 1,181,580   $   310,329   $   871,251            281%
                                         20%           15%

       Service                       109,726       180,166       (70,440)           -39%
                                         38%           57%
     ----------------------------------------------------------------------------------
     Total Gross Margin          $ 1,291,306   $   490,495   $   800,811            163%
                                         21%           20%
     ==================================================================================

</TABLE>


Product Sales

         Product sales revenue, which includes systems and accessories sales,
but excludes parts sold as part of our service business, included Mobetron sales
to two U.S. customers and three overseas customers in the nine months ended June
30, 2008, as compared to two Mobetron sales in the nine months ended June 30,
2007, one system in Japan and another in China.

         The two U.S. sales in the nine months ended June 30, 2008, were both in
California, one to Stanford Hospital and Clinics in San Mateo County and the
other to St. Joseph's Hospital Cancer Center in Orange County, bringing our
total U.S. deliveries to ten machines. Stanford Hospital & Clinics is known
worldwide for advanced patient care provided by its physicians and staff,
particularly for the treatment of rare, complex disorders, including cancer. The
Mobetron will replace Stanford's former intraoperative radiation therapy system,
an orthovoltage x-ray machine, and will be used to treat a wide variety of
cancers, such as colorectal, gynecological, gastric, pancreatic, orthopedic,
pediatric, breast, and head and neck. St. Joseph's, which treats nearly 1,500
new cancers patients per year, recently became one of 16 hospitals named by the
National Cancer Institute to participate in a three-year pilot project for the
Institute's Community Cancer Centers Program, the only hospital on the West
Coast named for the study.


                                       9
<PAGE>

         Our overseas sales in the nine months ended June 30, 2008, were made to
CDT Strahleninstitut Koln in Germany and Colombia's Instituto Nacional de
Cancerologia, both as described above, and the Centro di Riferimento Oncologico
(CRO) in Aviano, Italy. CRO is the fourth Italian hospital to purchase the
Mobetron, and one of the few hospitals in Italy that has been given the status
of Institute for Research in the Cure of Cancer and Scientific Study. The CRO
treats more than 3,000 cancer patients per year. An analysis of our system sales
for the nine months ended June 30, 2008 and June 30, 2007 is as follows:

<TABLE>
<CAPTION>

                                                             Nine months Ended June 30,
Mobetron Systems Sales Analysis                           2008          2007       Change       Percent
-------------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>          <C>           <C>
Systems Sold                                                 5             2            3

  Systems Revenue                                   $5,674,242    $1,821,883
  Revenue per Mobetron System                        1,134,848       910,942   $  223,907            25%
  Materials cost per system sold                       744,559       698,572       45,987             7%

  Materials Margin Per System                          390,289       212,370      177,920            84%
                                                         34.39%        23.31%

  Labor, Overhead and Warranty                         785,150       300,620
  Labor Overhead and Warranty Per System               157,030       150,310        6,720             4%

Gross Margin per System                             $  233,259    $   62,060   $  171,200           276%
                                                            21%            7%
=======================================================================================================

</TABLE>

         Per system sales revenue for the nine months ended June 30, 2008,
(product sales less sales of accessories and less revenue recognized in the
current period but relating to systems sold in prior period) were well ahead of
per systems sales revenue for the nine months ended June 30, 2007. Materials
cost per system however was higher in the nine months ended June 30, 2008 than
in the nine months ended June 30, 2007, primarily due to the inclusion of
surgical tables in three of the sales in the nine months ended June 30, 2008,
compared to no included surgical tables for the sales in the nine months ended
June 30, 2007. Regardless of these higher materials costs, the significantly
higher per system sales revenue in the nine months ended June 30, 2008,
increased per system materials margins and overall gross margins.

Service

         The majority of service revenue for the nine months ended June 30, 2008
and June 30, 2007, came from annual service contracts with five and six
customers at June 30, 2008 and June 30, 2007, respectively. The number of
contracts however dropped to as low as three during the nine months ended June
30, 2008, as one of our distributors took on direct responsibility for service
of installed Mobetrons in its territory. We expect service revenue to grow in
relative proportion to U.S. based sales and to a lesser extent overseas sales,
as overseas distributors of the Mobetron are generally responsible for servicing
their own customers with parts supplied by us. Cost of service revenues
increased in the nine months ended June 30, 2008, in comparison to the nine
months ended June 30, 2007, primarily due to increased costs of share based
compensation, as described below.


                                       10
<PAGE>

Operating Expenses

         A comparison of our operating expenses for the nine months ended June
30, 2008 and June 30, 2007, follows:

<TABLE>
<CAPTION>

                                             Nine months Ended June 30,
                                          2008         2007       Change      Percent
     --------------------------------------------------------------------------------
<S>                                 <C>          <C>          <C>          <C>
     Research and Development       $1,240,650   $  495,808   $  744,842          150%
     General & Administrative        1,889,267    1,743,836      145,431            8%
     Sales and Marketing             3,488,782    1,388,599    2,100,183          151%
     --------------------------------------------------------------------------------
     Total Operating Expenses       $6,618,699   $3,628,243   $2,990,456           82%
     ================================================================================

</TABLE>


         Share based compensation, particularly the non-cash cost of
issuing options to our employees and directors, was much higher in the nine
months ended June 30, 2008, compared to the nine months ended June 30, 2007. The
increase in share based compensation was primarily the result of new options
grants and option exercise price reductions granted in November 2007 to our
employees and directors following the significant dilution caused by equity
sales and other transactions entered into by us in August 2007 and completed in
October 2007, and the addition of new management as part of those transactions.
These expenses played a large part in increasing operating expenses in all of
the categories shown below:


                                                          Nine months ended
                                                               June 30,
     ----------------------------------------------------------------------
                                                          2008         2007
     ----------------------------------------------------------------------
     Costs of revenue - Service                     $   40,648   $    2,088
     Research and development                          380,481       16,325
     General and administrative                        396,064       20,345
     Sales and marketing                               824,869       27,177
     ----------------------------------------------------------------------
     Total                                          $1,642,062   $   65,935
     ======================================================================


         Research and development expenses increased by approximately 150% in
the nine months ended June 30, 2008, in comparison to the nine months ended June
30, 2007. The majority of this increase came from a $120,000 non-recurring
charge for contracting an outside engineering firm to help us define future cost
reduction opportunities and feature upgrades for the Mobetron, increased
personnel and consulting costs of $192,723, and an increase of $364,156 in share
based compensation as described above. We believe that research and development
expenses will continue to increase over time as we develop new products and
applications and continue our efforts to cut Mobetron production costs.

         General and administrative expenses increased by approximately 8% in
the nine months ended June 30, 2008, compared to the nine months ended June 30,
2007. The majority of this increase was due to the increased cost of share based
compensation. Although we also experienced increases of $25,543 in legal
expenses related to our German patent protection suits and general corporate
matters as well as increases in travel related expenses of $37,261 for the nine
months ended June 30, 2008, compared to the nine months ended June 30, 2007,
these were more than offset by a decreases in other expenses, most notably,
$270,504 from the elimination of certain investor relations and financial
advisory services which we had under contract in the nine months ended June 30,
2007. We expect however that general and administrative expenses will continue
to grow as sales increase.


                                       11
<PAGE>

         Sales and marketing expenses increased by approximately 151% in the
nine months ended June 30, 2008, in comparison to the nine months ended June 30,
2007, as we increased the number of employees and consultants in this area to
fourteen people by June 30, 2008. Consequently, expenses increased mainly due to
the increased cost of share based compensation as show above, and increases in
personnel related expenses of $735,080, related travel and entertainment
expenses of $218,960, as well as increased promotion and advertising expenses of
$328,319. Of the increase in promotion and advertising, $150,000 was a
non-recurring charge related to certain expenses made on our behalf by one of
our European distributors.

         Interest Expense. A discussion of our interest expense is contained
above in the "Results of Operations for the three months ended June 30, 2008,
compared to the three months ended June 30, 2007."

Liquidity and Capital Resources

         We experienced net losses of $6,165,106 and $6,990,127 for the nine
months ended June 30, 2008 and June 30, 2007, respectively. In addition, we have
incurred substantial monetary liabilities in excess of monetary assets over the
past several years and, as of June 30, 2008, we have an accumulated deficit of
$40,206,765. 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 our sales efforts within
          the United States.

     o    Evaluating funding strategies in the public and private markets.

         Historically, management has been able to raise additional capital.
During the nine months ended June 30, 2008, we obtained capital through
borrowing under our lines of credit and the sale of common stock, the proceeds
of which were used for working capital and the repayment of liabilities. The
successful outcome of future financing activities cannot be determined at this
time and there is no assurance that if achieved, we will have sufficient funds
to execute our intended business plan or generate positive operating results.


                                       12
<PAGE>

Our primary cash inflows and outflows in the nine months ended June 30. 2008 and
June 30, 2007 were as follows:

<TABLE>
<CAPTION>

                                                 Nine months Ended June 30,
     Cash Flows                              2008           2007         Change
     --------------------------------------------------------------------------
<S>                                   <C>            <C>            <C>
     Provided by (Used in):
       Operating Activities           $(4,597,800)   $(1,828,957)   $(2,868,843)
       Investing Activities              (139,894)       (22,069)      (117,825)
       Financing Activities             4,752,396      1,757,746      2,994,650
     --------------------------------------------------------------------------
     Net Increase/(Decrease)          $    14,702    $   (93,280)   $   107,982
     ==========================================================================

</TABLE>

Operating Activities

         Net cash used for operating activities increased by $2,868,843 in the
nine months ended June 30, 2008, in comparison to the nine months ended June 30,
2007. Offsetting the net loss of $6,165,106 for the nine months ended June 30,
2008 were $1,762,474 of non-cash charges, primarily for share based
compensation. During the nine months ended June 30, 2007, the net loss of
$6,990,127 was similarly offset by non-cash charges of $1,850,202, primarily for
amortization of debt discounts, beneficial conversion features and issuance
costs related to our senior and convertible debentures, but also for issuances
of common stock, warrants, and options issued in lieu of cash compensation.
Additionally, large combined differences in other asset and liability accounts
of approximately $3,172,901 between the nine months ended June 30, 2008 and June
30, 2007, significantly affected operating cash flow during those two nine month
periods. These accounts, which include inventories, accounts receivable,
accounts payable, customer deposits, and deposits with vendors, are currently
subject to significant short term fluctuations and will continue to be volatile
because of our low volume, uncertain timing of Mobetron sales, and the large per
system cost of the Mobetron.

Investing Activities

         The increase in investing activities in the nine months ended June 30,
2008 compared to the nine months ended June 30, 2007, was due to the acquisition
of computer hardware and software, expenditures for leasehold improvements, and
the acquisition of capitalized engineering costs paid to third parties.

Financing Activities

         Through certain transactions completed in August and October 2007, we
changed our capital structure significantly. As a part of those transactions, we
eliminated $6.4 million face value of convertible debentures and related
beneficial conversion features and debt discounts due to warrants, $1,200,000 of
short-term debentures, $500,000 of promissory notes sold in April and May 2007,
and an additional $350,000 of related party debt. As a result of these
transactions which took place in October 2007, and subsequent equity sales in
the nine months ended June 30, 2008 we raised $5,602,793 of additional capital.


                                       13
<PAGE>

Debt and Lease Obligations

         At June 30, 2008, we had notes payable and obligations for leased
equipment from various sources as shown below. Interest rates on this 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.

<TABLE>
<CAPTION>

                                                                                 June 30,
                                                                                   2008
                                                                               -----------

<S>                                                                            <C>
     Notes payable, related parties, current                                   $   119,002
                                                                               ===========

     Product financing arrangement                                             $ 4,597,800
     Senior secured debentures                                                   1,083,333
     Other notes                                                                   194,367

     Less debt discounts due to warrants                                           (85,077)
                                                                               -----------

     Notes payable, net of debt discounts and beneficial conversion features     5,790,423

     Less current portion                                                       (5,790,423)
                                                                               -----------

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

</TABLE>

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

                                                                  June 30,
                                                                    2008
                                                                 ----------

     Capital lease for equipment                                 $    5,976

     Less: current portion                                           (2,414)
                                                                 ----------

     Capital lease obligations, net of current portion           $    3,562
                                                                 ==========






                  (Remainder of page intentionally left blank)




                                       14
<PAGE>

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

<TABLE>
<CAPTION>

     Period Ending September 30,                                 Capital    Operating
                                                                 Leases      Leases
     -------------------------------------------------------   ----------------------
<S>  <C>                                                       <C>          <C>
     2008                                                      $     645    $  59,852
     2009                                                          2,579      244,754
     2010                                                          2,579      233,838
     2011                                                            431           --
                                                               ----------------------
     Total minimum lease payments                                  6,234    $ 538,444
                                                                            =========

     Less: Amount representing interest
                                                                    (258)
                                                               ---------

     Present value of minimum lease payments                       5,976
     Less: Current portion                                        (2,414)
                                                               ---------
     Obligations under capital lease, net of current portion   $   3,562
                                                               =========

</TABLE>

Deferred Revenue Items

         Revenue under service agreements is deferred and recognized over the
term of the agreement, typically one year, on a straight line basis. As of June
30, 2008 deferred revenue was $155,449, which is included under accrued
liabilities.

Off-Balance Sheet Arrangements

         We had no off-balance sheet arrangements to report for the three and
nine months ended June 30, 2008.




                  (Remainder of page intentionally left blank)



                                       15
<PAGE>

                                  RISK FACTORS

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


                         RISKS RELATING TO OUR BUSINESS

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

         IntraOp is a medical device company that has experienced significant
operating losses, primarily due to the cost of substantial research and
development of its sole product, the Mobetron. Since inception, we have
generated about $28.4 million in revenue through June 30, 2008, however we
expect to continue to incur operating losses as well as negative cash flow from
operations in future periods. Our ability to achieve profitability will depend
upon our ability to sell the Mobetron at higher unit volumes and at higher
margins. Further, if the Mobetron and any other of our products do not gain
commercial acceptance, we may never generate significant revenues or achieve or
maintain profitability. As a consequence of these uncertainties, our independent
public accountants have expressed a "going concern" qualification in their audit
reports.

We have pledged all of our assets and issued a significant amount of our capital
stock as security for a loan.

         In August 2005, we entered into a revolving, $3,000,000, combined
inventory and factoring agreement, or product financing arrangement, under which
we pledged as collateral certain of our inventory and receivables. Pursuant to
further amendments to the product financing arrangement, as of June 30, 2008,
maximum availability under the line was $6,000,000.

         In August 2005, we borrowed $2,000,000 pursuant to 10% senior secured
debentures issued to two private lenders which are due at maturity on August 31,
2008. Among other terms, the 10% senior secured debentures are secured by a lien
on all of our assets not otherwise pledged under our product financing
arrangement. In addition we issued 1,600,000 shares of our common stock to the
holders of the 10% senior secured debentures as collateral for the loan. So long
as an event of default under the secured debentures has not occurred, we retain
voting rights over the shares pledged as collateral and the lenders are not
permitted to sell such shares.

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


                                       16
<PAGE>

We have significant additional capital and operating needs.

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

Our single product is subject to uncertain market acceptance.

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

We are dependent on key suppliers and have limited manufacturing experience.

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

         Though members of management have extensive experience in
manufacturing, to date we have not manufactured Mobetron systems ourselves. We
do not have experience manufacturing our products in the volumes that will be
necessary for us to achieve significant commercial sales. Any significant
interruption in our relationship with Accuray or CDS or any other key suppliers,
including subcontractors, would have a material adverse effect on our ability to
manufacture the Mobetron and, therefore, on our business, financial condition,
and results of operation. Further, to the extent that we are unable to negotiate
favorable contract terms or find alternate suppliers for key parts manufactured
by these suppliers, we may be subject to significant price increases for the
goods purchased from these suppliers resulting in a decrease in product margins
and profitability.

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

         We intend to continue to do our own final testing of the Mobetron. This
testing requires a specialized test facility. In September, 2005 we entered into
a lease for combined office, manufacturing, research and test facilities which
we believe are adequate for testing Mobetrons through 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.


                                       17
<PAGE>

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

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

         In June 2006, we brought suit at the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactures an
IOERT system marketed as the Liac, Info & Tech's German distributor, Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold for infringement of the
German subpart DE69428698 of our European Patent 700578, seeking damages and an
injunction against further infringement. A ruling on the case was made on August
23, 2007 in which we prevailed in enjoining the above named parties from selling
or distributing their product in Germany. The defendants in this case filed an
appeal on October 2, 2007. We responded to that appeal in May 2008, and a
hearing before the court is scheduled for December 10, 2008.

         In a related matter, on June 21, 2007, Gio-marco S.p.A., filed a
proceeding for nullification of that same German subpart DE69428698 of our
European Patent 0700578 with the German Federal Patent Court. Our response to
this filing was made in January 2008 with oral arguments expected to take place
no sooner than twelve months thereafter.

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

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

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

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

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



                                       18
<PAGE>

We are substantially dependent on certain key employees.

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

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

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

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

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

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

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

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


                                       19
<PAGE>

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

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

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

         As a result of the adoption of SFAS 123(R), our earnings for the
periods subsequent to our adoption of SFAS 123(R) were lower than they would
have been had we not 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 U.S. and abroad from a variety of sources, including universities, research
institutions, conventional medical linear accelerator manufacturers, other
medical device companies and pharmaceutical companies. Many of these potential
competitors have substantially greater technical, financial, and regulatory
resources than we do and are accordingly better equipped to develop,
manufacture, and market their products. If these companies develop and introduce
products and processes competitive with or superior to our products, we may not
be able to compete successfully against them.

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

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


                                       20
<PAGE>

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

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


We are subject to extensive government regulation.

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

         We are also subject to federal, state, and local regulations governing
the use, generation, manufacture, and testing of radiation equipment, including
periodic FDA inspections of manufacturing facilities to determine compliance
with FDA regulations. In addition, we must comply with federal, state, and local
regulations regarding the manufacture of healthcare products and radiotherapy
accelerators, including good manufacturing practices regulations, suggested
state regulations for the control of radiation, or SSRCR, and International
Electrotechnical Committee requirements, and similar foreign regulations and
state and local health, safety, and environmental regulations. Although we
believe that we have complied in all material respects with applicable laws and
regulations, we cannot assure that we will not be required to incur significant
costs in the future in complying with manufacturing and environmental
regulations. Any problems with our or our manufacturers' ability to meet
regulatory standards could prevent us from marketing the Mobetron or other
products.

We expect to be highly dependent on overseas sales.

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


                                       21
<PAGE>

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

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

         Despite the fact that more than 30,000 patients have received IOERT
treatment, and despite the promising results in selected clinical studies, IOERT
is not yet considered 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 U.S. may depend on increasing
reimbursement for IOERT services.

         Hospitals in the U.S. pay increasing attention to treatment costs,
return on assets, and time to investment recovery when making capital purchase
decisions. While IOERT is generally reimbursable, its rate of return on capital
invested compared to the rate of return for external beam and other radiotherapy
delivery systems may not be as favorable. While we are making efforts to
increase the rate of reimbursement to improve the rate of return on the capital
investment in the Mobetron for hospitals in the U.S., there is no assurance that
such an effort will be ultimately successful. Although Medicare reimbursement is
available for certain Mobetron treatments, and although Medicare has recently
established an additional billing code which may allow increased reimbursement
for patients who undergo Mobetron treatment, the rate of reimbursement under the
new code, if any, has not been set, and it may take a number of years before
Medicare has enough data to establish the reimbursement rate under the new code,
if any. Meanwhile, reimbursement under the already established codes, as with
all Medicare codes, is subject to change or elimination. Therefore, regardless
of positive clinical outcomes, the current U.S. reimbursement environment may
slow the widespread acceptance of IOERT and the Mobetron in the U.S. market.

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

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


                                       22
<PAGE>

                        RISKS RELATED TO OUR COMMON STOCK

The trading market for our common stock is limited.

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

Our stock price may be volatile.

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

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

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




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                                       23
<PAGE>

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

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

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

         Our common stock is currently listed for trading on the OTC Bulletin
Board, which is generally considered to be a less efficient market than markets
such as NASDAQ or other national exchanges, and which may cause difficulty in
conducting trades and difficulty in obtaining future financing. Further, our
securities are subject to the "penny stock rules" adopted pursuant to Section
15(g) of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
The penny stock rules apply to non-NASDAQ companies whose common stock trades at
less than $5.00 per share or which have tangible net worth of less than
$5,000,000 ($2,000,000 if the company has been operating for three or more
years). Such rules require, among other things, that brokers who trade "penny
stock" to persons other than "established customers" complete certain
documentation, make suitability inquiries of investors and provide investors
with certain information concerning trading in the security, including a risk
disclosure document and quote information under certain circumstances. Many
brokers have decided not to trade "penny stock" because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. If we remain subject to the
"penny stock rules" for any significant period, the market, if any, for our
securities may suffer. Because our securities are subject to the "penny stock
rules," investors will find it more difficult to dispose of our securities.
Further, for companies whose securities are traded in the OTC Bulletin Board, it
is more difficult to: (i) obtain accurate quotations, (ii) obtain coverage for
significant news events because major wire services, such as the Dow Jones News
Service, generally do not publish press releases about such companies, and (iii)
obtain needed capital.

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

         On April 23, 2008, our stockholders gave us the authority to effect a
one for twenty reverse stock split. We sought this authority because we believe
that the current very 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
because institutional investors and investment funds are generally reluctant to
invest in lower priced stocks and many brokerage firms are generally reluctant
to recommend lower priced stocks to their clients.

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

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


                                       24
<PAGE>

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


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

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

         From August 2007 through the date of this filing, we issued, after
adjusting for warrant exercises in that same period, 331,270,519 shares of
common stock and warrants to purchase 12,130,732 of common stock which have not
been registered with the SEC and may not be sold except pursuant to a
registration statement filed with the SEC or an exemption from registration,
such as SEC Rule 144. Pursuant to certain agreements entered into in August
2007, we have agreed to register 296,508,532 shares of common stock and warrants
to purchase 10,780,732 of common stock upon the demand of the majority of the
holders of those shares and warrants. The holders have not yet demanded
registration of their shares.


Item 3.  Controls and Procedures.

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

         There has been no change in our internal control over financial
reporting during the three months ended June 30, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


                                       25
<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         In June 2006, we brought suit in the District Court of
Dusseldorf, Germany against Info & Tech S.p.A., an Italian company which
manufactures an IOERT system marketed as the Liac, Info & Tech's German
distributor, Conmedica GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold for
infringement of the German subpart DE69428698 of our European Patent 700578,
seeking damages and an injunction against further infringement. A ruling on the
case was made on August 23, 2007 in which we prevailed in enjoining the above
named parties from selling or distributing their product in Germany. The
defendants in this case filed an appeal on October 2, 2007. We responded to that
appeal in May 2008, and a hearing before the court is scheduled for December 10,
2008.

         In a related matter, on June 21, 2007, Gio-marco S.p.A., filed a
proceeding for nullification of that same German subpart DE69428698 of our
European Patent 0700578 with the German Federal Patent Court. Our response to
this filing was made in January 2008 with oral arguments expected to take place
no sooner than twelve months thereafter.



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

         Not Applicable.

Item 3.  Defaults upon Senior Securities

         None.

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

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

Item 5.  Other Information

         None.

Item 6.  Exhibits

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

31.2     Certification of Chief Financial Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

32.1     Certification of Chief Executive Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002.

32.2     Certification of Chief Financial Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002.


                                       26
<PAGE>

                                   SIGNATURES

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

                                                 INTRAOP MEDICAL CORPORATION


Date:  August 7, 2008                  By: /s/  John P. Powers
                                          --------------------------------------
                                       John P. Powers, Chief  Executive
                                       Officer and President
                                       (Principal Executive Officer)

Date:  August 7, 2008
                                       By: /s/  Howard Solovei
                                           -------------------------------------
                                       Howard Solovei, Chief Financial
                                       Officer
                                       (Principal Financial Officer and
                                       Principal Accounting Officer)




                                       27
<PAGE>


                           Intraop Medical Corporation
             Index to Consolidated Financial Statements (Unaudited)
                For the Three and Nine Months Ended June 30, 2008


Consolidated Balance Sheet                                                   Q-2

Consolidated Statements of Operations                                        Q-3

Consolidated Statements of Cash Flows                                        Q-4

Notes to  Consolidated Financial Statements                                  Q-6


                                      Q-1
<PAGE>

<TABLE>
<CAPTION>

Intraop Medical Corporation
Consolidated Balance Sheet  - Unaudited
------------------------------------------------------------------------------------------
                                                                                 June 30,
                                                                                  2008
                                                                              ------------
ASSETS
Current assets:
<S>                                                                           <C>
  Cash and cash equivalents                                                   $    553,066
  Accounts receivable                                                              690,367
  Inventories, net                                                               1,443,822
  Inventories, under product financing arrangement                               4,356,166
  Prepaid expenses and other current assets                                         60,456
                                                                              ------------

         Total current assets                                                    7,103,877

Property and equipment, net                                                        188,347
Intangible assets, net                                                             291,532
Deferred financing cost                                                             38,706
Deposits                                                                           125,420
                                                                              ------------

         Total Assets                                                         $  7,747,882
                                                                              ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                           $  2,130,631
   Accrued liabilities                                                             662,638
   Capital lease obligations, current portion                                        2,414
   Notes payable, related parties, current portion                                 119,002
   Notes payable, other, current portion, net of unamortized debt discounts      5,790,423
                                                                              ------------

         Total current liabilities                                               8,705,108

   Capital lease obligations, net of current portion                                 3,562
                                                                              ------------

         Total liabilities                                                       8,708,670
                                                                              ------------

Stockholders' deficit:
  Common stock, $0.001 par value: 500,000,000 shares authorized;
     379,402,984 shares issued and outstanding                                     379,403
  Additional paid-in capital                                                    39,016,574
  Treasury stock, at cost, 600,000 shares at $.25 per share                       (150,000)
  Accumulated deficit                                                          (40,206,765)
                                                                              ------------

          Total stockholders' deficit                                             (960,788)
                                                                              ------------

             Total liabilities and stockholders' deficit                      $  7,747,882
                                                                              ============



              See accompanying notes to these financial statements.

</TABLE>

                                      Q-2
<PAGE>

<TABLE>
<CAPTION>

Intraop Medical Corporation
Consolidated Statements of Operations - Unaudited
--------------------------------------------------------------------------------------------------------
                                               Three months ended               Nine months ended
                                                    June 30,                         June 30,
                                            2008             2007              2008            2007
                                        -------------    -------------    -------------    -------------
Revenues:
<S>                                     <C>              <C>              <C>              <C>
  Product sales                         $   2,031,319    $     992,509    $   5,824,186    $   2,079,900
  Service                                     108,864           96,176          291,278          317,223
                                        -------------    -------------    -------------    -------------

Total revenues                              2,140,183        1,088,685        6,115,464        2,397,123
                                        -------------    -------------    -------------    -------------

Cost of revenues:
  Product sales                             1,855,614          911,183        4,642,606        1,769,571
  Service                                      40,356           38,608          181,552          137,057
                                        -------------    -------------    -------------    -------------

  Total cost of revenues                    1,895,970          949,791        4,824,158        1,906,628
                                        -------------    -------------    -------------    -------------

Gross margin                                  244,213          138,894        1,291,306          490,495
                                        -------------    -------------    -------------    -------------

Operating expenses:
  Research and development                    422,337          169,045        1,240,650          495,808
  General and administrative                  544,302          668,052        1,889,267        1,743,836
  Sales and marketing                         934,405          481,115        3,488,782        1,388,599
                                        -------------    -------------    -------------    -------------

 Total operating expenses                   1,901,044        1,318,212        6,618,699        3,628,243
                                        -------------    -------------    -------------    -------------

Loss from operations                       (1,656,831)      (1,179,318)      (5,327,393)      (3,137,748)


Other income                                   72,684         (116,887)         359,304         (174,863)
Gain on extinguishment of debt                     --               --           28,000              261
Interest income                                     5                4               16               17
Interest expense                             (333,092)      (1,349,140)      (1,193,257)      (3,677,794)
                                        -------------    -------------    -------------    -------------

Loss before taxes                          (1,917,234)      (2,645,341)      (6,133,330)      (6,990,127)


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

Net loss                                $  (1,917,510)   $  (2,645,341)      (6,165,106)   $  (6,990,127)
                                        -------------    -------------    -------------    -------------

Basic and diluted net loss per share
   available to common shareholders     $       (0.01)   $       (0.10)   $       (0.02)   $       (0.26)
                                        -------------    -------------    -------------    -------------
Weighted average number of shares
   in calculating net loss per share:
Basic and diluted                         369,761,958       26,468,381      328,708,689       26,391,458
                                        -------------    -------------    -------------    -------------

</TABLE>

              See accompanying notes to these financial statements.


                                      Q-3
<PAGE>

<TABLE>
<CAPTION>

Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited
----------------------------------------------------------------------------------
                                                       Nine months ended June 30,
                                                          2008            2007
                                                       -----------    -----------
Cash flows from operating activities:
<S>                                                    <C>            <C>
  Net loss                                             $(6,165,106)   $(6,990,127)
  Adjustments to reconcile net loss to net cash
   used for operating activities:
    Depreciation of property and equipment                  68,764         58,538
    Amortization of intangible assets                       56,247         55,035
    Amortization of beneficial conversion rights                --        926,937
    Amortization of debt discount                          199,697        899,824
    Amortization of debt issuance costs                    174,181        322,011
    Non-cash compensation  for options issued            1,949,825         80,738
    Non-cash compensation for warrants issued              (16,075)       462,519
    Non-cash compensation for common stock issued               --         48,000
Changes in assets and liabilities:
    Accounts receivable                                   (286,296)     3,131,230
    Inventories                                            810,009     (1,872,162)
    Prepaid expenses and other current assets               16,463         52,666
    Other assets                                           122,965        139,628
    Accounts payable                                    (1,381,454)       354,683
    Accrued liabilities                                   (169,316)       505,738
    Foreign exchange translation                            22,296         (4,215)
                                                       -----------    -----------

       Net cash (used for) operating activities         (4,597,800)    (1,828,957)
                                                       -----------    -----------

Cash flows used for investing activities:
  Acquisition of fixed assets                              (75,094)       (22,069)
  Acquisition of intangible assets                         (64,800)            --
                                                       -----------    -----------

      Net cash used for investing activities              (139,894)       (22,069)
                                                       -----------    -----------

Cash flows provided by financing activities:
    Proceeds from note payable, related party                   --        628,571
    Proceeds from note payable, other                    4,155,744      9,901,673
    Payments on note payable, related party                (37,828)            --
    Payments on note payable, other                     (4,968,313)    (8,772,498)
    Proceeds from obligation to issue stock              1,150,071             --
    Proceeds from issuance of common stock               4,452,722             --
                                                       -----------    -----------

         Net cash provided by financing activities       4,752,396      1,757,746
                                                       -----------    -----------

Net increase (decrease) in cash and cash equivalents        14,702        (93,280)
Cash and cash equivalents, at beginning of period          538,364        149,873
                                                       -----------    -----------

Cash and cash equivalents, at end of period            $   553,066    $    56,593
                                                       ===========    ===========

</TABLE>


              See accompanying notes to these financial statements.


                                      Q-4
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Cash Flows - Unaudited  (Continued)
--------------------------------------------------------------------------------
                                                      Nine months ended June 30,
                                                         2008         2007
                                                      -----------   -----------

Supplemental disclosure of cash flow information:
   Cash paid for interest                             $   805,080   $ 1,013,278
   Income taxes paid                                       31,776            --

Supplemental disclosure of non-cash investing
  and financing activities:
  Promissory notes and interest payable converted
     to common stock                                  $    54,900            --
  Accrued liabilities converted to notes payable      $   150,000            --



              See accompanying notes to these financial statements.






                  (Remainder of page intentionally left blank)


                                      Q-5
<PAGE>


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

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


Basis of Presentation:

The consolidated financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements and the accompanying notes are unaudited and
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended September 30, 2007. In the opinion of management, the consolidated
financial statements herein include adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position as of June 30, 2008, and the results of operations for the
three months and nine months ended June 30, 2008 and June 30, 2007. The results
of operations for the three months and nine months ended June 30, 2008 are not
necessarily indicative of the operating results to be expected for the full
fiscal year or any future periods.

Formation and Business of the Company:

Intraop Medical Corporation (the "Company") was organized under the laws of the
State of Nevada on November 5, 1999. The Company's business is the development,
manufacturing, marketing, and service of mobile electron beam treatment systems
designed for intraoperative electron-beam radiotherapy ("IOERT"). IOERT is the
application of radiation directly to a cancerous tumor and/or tumor bed during
surgery.

Basis of Consolidation:

For the three and nine months ended June 30, 2008 and June 30, 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 $1,917,510 and $2,645,341 for the three
months ended June 30, 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 June 30, 2008, had an accumulated deficit of
$40,206,765. These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern. In view of the matters
described above, recoverability of a major portion of the recorded asset amounts
shown in the accompanying consolidated balance sheet is dependent upon the
Company's ability to generate sufficient sales volume to cover its operating
expenses and to raise sufficient capital to meet its payment obligations.
Management is taking action to address these matters, which include:

     o    Retaining experienced management personnel with particular skills in
          the development and sale of its products and services.
     o    Developing new markets overseas and expanding its sales efforts within
          the United States.
     o    Evaluating funding strategies in the public and private markets.

Historically, management has been able to raise additional capital. During the
three months ended June 30, 2008, the Company obtained capital through the sale
of common stock of approximately $900,000. The consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts, or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence. The
successful outcome of future activities cannot be determined at this time and
there is no assurance that if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating results

Concentration of Credit Risk:

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

Use of Estimates:

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

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


                                      Q-7
<PAGE>

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

Revenue Recognition:

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

The Company recognized revenue on Mobetron service contracts with five Mobetron
customers during the three and nine months ended June 30, 2008. Similarly the
Company recognized revenue on Mobetron service contracts with six customers
during the three months and nine months ended June 30, 2007. Under these
agreements, customers typically 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 contracts, the Company recorded the contract price
as service contract liability.

Intangible Assets:

Intangible assets consist primarily of capitalized costs relating to a Japanese
device approval license for sale of the Mobetron and amounts paid for
non-recurring engineering expenses paid to third parties for the development of
Mobetron subsystems. Non-recurring engineering expenses related to the Mobetron
are amortized on a straight-line basis over their estimated useful lives of five
years. The medical device approval license has an indefinite life and therefore
is not subject to amortization.

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

The Company's evaluation of its intangible assets completed during the three
months ended September 30, 2007 resulted in no impairment losses.


                                      Q-8
<PAGE>

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

Income Taxes:

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

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

Basic and Diluted Loss per Share:

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

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

<TABLE>
<CAPTION>

                                        Three months ended                 Nine months ended
                                             June 30,                          June 30,
                                      2008             2007             2008             2007
                                  -------------    -------------    -------------    -------------

<S>                               <C>              <C>              <C>              <C>
Numerator
Net loss attributable to common
stockholders                      $  (1,917,510)   $  (2,645,341)   $  (6,165,106)   $  (6,990,127)

Denominator
Weighted average common shares
outstanding                         369,761,958       26,468,381      328,708,689       26,391,458
                                  -------------    -------------    -------------    -------------

Total shares, basic                 369,761,958       26,468,381      328,708,689       26,391,458
                                  =============    =============    =============    =============

Net loss per common share:
  Basic and diluted               $       (0.01)   $       (0.10)   $       (0.02)   $       (0.26)
                                  =============    =============    =============    =============

</TABLE>

                                      Q-9
<PAGE>

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

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

<TABLE>
<CAPTION>

                                            Three months ended       Nine months ended
                                                 June 30,                 June 30,
                                            2008         2007         2008        2007
                                         ----------   ----------   ----------   ----------
<S>                                      <C>           <C>         <C>           <C>
Debentures convertible to common stock           --   20,178,571           --   20,178,571
Options to purchase common stock         31,024,099    1,840,500   31,024,099    1,840,500
Warrants to purchase common stock        16,292,333   15,832,229   16,292,333   15,832,229
                                         ----------   ----------   ----------   ----------

Potential equivalent shares excluded     47,316,432   37,851,300   47,316,432   37,851,300
                                         ==========   ==========   ==========   ==========

</TABLE>

Comprehensive Loss:

Comprehensive loss consists of net loss and other gains and losses affecting
stockholders' equity that, under generally accepted accounting principles are
excluded from net loss in accordance with SFAS No. 130, Reporting Comprehensive
Income. The Company, however, does not have any components of other
comprehensive loss as defined by SFAS No. 130 and therefore, for the three
months and nine months ended June 30, 2008 and 2007, comprehensive loss is
equivalent to the Company's reported net loss. Accordingly, a statement of
comprehensive loss is not presented.

Segment:

The Company operates in a single business segment that includes the design,
development, and manufacture of the Mobetron. The Company does, however,
disclose revenue and long-lived assets by geographic location.

Reclassification:

The Company made certain reclassifications to the consolidated financial
statements for the three and nine months ended June 30, 2007 to conform to the
consolidated financial statements for the three and nine months ended June 30,
2008. There was no effect on previously reported net loss.

Recent Accounting Pronouncements:

In June 2008, the FASB issued FASB Staff Position ("FSP") on EITF No. 03-6-1,
"Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities." Under the FSP, unvested share-based payment awards
that contain rights to receive 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.


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

In September 2006, the FASB issued FAS No. 157, "Fair Value Measurements." FAS
No. 157 provides guidance for using fair value to measure assets and liabilities
and only applies when other standards require or permit the fair value
measurement of assets and liabilities. It does not expand the use of fair value
measurements. FAS No. 157, as issued, is effective for fiscal years beginning
after November 15, 2007. FASB Staff Position (FSP) FAS No. 157-2 was issued in
February 2008 and deferred the effective date of FAS No. 157 to fiscal years
beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities. Accordingly, as of October 1, 2008, the Company will adopt FAS No.
157 for financial assets and liabilities only. The Company is still in the
process of evaluating the impact that FAS No. 157 will have on its nonfinancial
assets and liabilities.


NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three customers represented 52.4%, 20.3% and 19.8% of accounts receivable at
June 30, 2008. Two customers accounted for 50.6% and 42.0% of net revenue for
the three months ended June 30, 2008. One customer accounted for 79% of net
revenue for the three months ended June 30, 2007. Five customers accounted for
23.5%, 21.0%, 17.7%, 16.0% and 14.7% of net revenue and two customers accounted
for 40.8% and 35.9% of net revenue for the nine months ended June 30, 2008 and
June 30, 2007, respectively.

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


                                      Q-11
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:

                                                                     June 30,
                                                                       2008
                                                                    ----------

  Finished goods                                                    $       --
  Work-in-progress                                                     769,783
  Purchased parts and raw material, net of reserves of $32,727         674,039
                                                                    ----------
                                                                    $1,443,822
                                                                    ==========

Inventory under product financing arrangement:

Inventory under product financing arrangements consists of the following:

                                                                     June 30,
                                                                       2008
                                                                    ----------

  Finished                                                          $  650,376
  goods
  Work-in-progress                                                   3,654,815
  Purchased parts and raw material                                      50,975
                                                                    ----------

                                                                    $4,356,166
                                                                    ==========

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

Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:

                                                                     June 30,
                                                                       2008
                                                                    ---------
  Property & equipment                                              $ 274,538
  Computer equipment                                                  173,209
  Furniture & fixtures                                                 64,307
  Leasehold improvements                                               37,420
                                                                    ---------
                                                                      549,474
  Less accumulated depreciation                                      (361,127)
                                                                    ---------
                                                                    $ 188,347
                                                                    =========

Included in property and equipment is an asset acquired under a capital lease
with an original cost of $11,742 as of June 30, 2008. Related accumulated
depreciation and amortization of this asset was $6,654 as of June 30, 2008.


                                      Q-12
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)


Intangible Assets:

Intangible Assets consist of the following:

                                                                     June 30,
                                                                       2008
                                                                    ---------

  Non-recurring engineering charges paid to third parties           $ 407,300
  Less accumulated amortization                                      (145,768)
                                                                    ---------
  Non-recurring engineering charges paid to third parties, net        261,532
  Medical device approval license not subject to amortization          30,000
                                                                    ---------
  Intangible assets, net                                            $ 291,532
                                                                    =========

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


Deferred financing cost:

Deferred financing costs consist of the following:

                                                                    June 30,
                                                                      2008
                                                                  -----------
  Deferred cost of debt issuances                                 $ 1,422,370
  Less accumulated amortization                                    (1,383,664)
                                                                  -----------
  Deferred financing cost, net                                    $    38,706
                                                                  ===========

Accrued Liabilities:

Accrued liabilities consist of the following:


                                                                      June 30,
                                                                        2008
                                                                      --------
  Contract advances                                                   $ 20,000
  Accrued interest payable                                              71,683
  Accrued warranty                                                     188,345
  Deferred revenue                                                     155,449
  Accrued wages and benefits payable                                   190,129
  Accrued sales tax and VAT payable                                     37,032
                                                                      --------

                                                                      $662,638
                                                                      ========


                                      Q-13
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

Warranty:

The warranty periods for the Company's products are generally the shorter of one
year from the date of acceptance or eighteen months from the date of delivery.
The Company is responsible for warranty obligations arising from its sales and
provides an estimate of its warranty obligation at the time of sale. The
Company's contract manufacturers are responsible for the costs of any
manufacturing defects. Management estimates and provides a reserve for warranty
upon sale of a Mobetron based on historical warranty repair expenses of the
Company's installed base of Mobetrons.

The following table summarizes the activity related to the Company's product
warranty liability, which is included in accrued liabilities above.

                                                                     June 30,
                                                                       2008
                                                                    ---------
  Warranty accrual at the beginning of period                       $ 140,705
  Additions to warranty accrual                                       100,000
  Actual product warranty expenditures                                (52,360)
                                                                    ---------

  Warranty accrual at the end of the period                         $ 188,345
                                                                    =========



NOTE 4 - BORROWINGS

Outstanding notes payable consist of the following:

                                                                      June 30,
                                                                        2008
                                                                    -----------

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


  Product financing arrangement                                     $ 4,597,800
  Senior secured debentures                                           1,083,333
  Other notes                                                           194,367

  Less debt discounts due to warrants                                   (85,077)
                                                                    -----------

  Notes payable, net of debt discounts and beneficial conversion
  features                                                            5,790,423

  Less current portion                                               (5,790,423)
                                                                    -----------

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


                                      Q-14
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Notes payable, related parties:

Notes payable to related parties of $119,002 at June 30, 2008, is related to a
promissory note issued to an officer of the Company. The note is due on demand
and bears interest at 9% per annum.

Product financing arrangements:

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

On September 17, 2007, the Company entered into amendment to the Product
Financing Arrangement to increase the availability under the agreement to
$6,000,000 and to extend the term of the agreement to September 16, 2009. The
Company also agreed to issue a 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 will be amortized into interest expense over a period of
two years.

At June 30, 2008 the outstanding principal balance under the Product Financing
Arrangement was $4,597,800.

Senior secured debentures

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

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


                                      Q-15
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

and are being amortized into interest expense over the remaining life of the
loan. In August 2007, the senior debenture holders opted for cashless exercise
of their remaining 2,400,000 warrants, resulting in the issuance of 1,800,000
shares of common stock.

The relative fair value of the warrants was determined using the Black-Scholes
option-pricing model and was recorded as a note discount and will be amortized
into interest expense over the life of the debentures. At June 30, 2008 the
outstanding principal balance under the senior secured debentures was $1,083,333
and the unamortized note discount related to the original warrant issuance was
$24,416.

Other notes:

The Company has a promissory note payable to a former director with an
outstanding principal balance of $44,367 at June 30, 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 principal balance of $150,000 at June 30, 2008. The note is
due on May 1, 2009 and bears interest at 8% per annum.


NOTE 5 - CAPITAL LEASE

Capital lease

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

                                                                     June 30,
                                                                       2008
                                                                    ---------

  Capital lease for equipment                                       $   5,976

  Less: current portion                                                (2,414)
                                                                    ---------

  Capital lease obligations, net of current portion                 $   3,562
                                                                    =========


NOTE 6 - COMMON STOCK

Shares Reserved for Future Issuance:

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

                                                                     June 30,
                                                                       2008
                                                                    ----------

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

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


                                      Q-16
<PAGE>

NOTE 6 - COMMON STOCK  (CONTINUED)

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

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

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

Sale of common stock:

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

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

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

In June 2008, the Company sold an aggregate of 12,000,000 shares of its common
stock for $900,000, to certain related parties.

Issuance of common stock upon exercise of warrants and options:

During the nine months ended June 30, 2008, holders of warrants to purchase an
aggregate of 10,000 shares of the Company's common stock exercised those
warrants for $900, and an officer of the Company exercised options to purchase
300,000 shares of common stock by forgiving $54,000 of principal and interest
under a promissory note payable to such officer by the Company.


                                      Q-17
<PAGE>

NOTE 7 - STOCK OPTIONS

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

--------------------------------------------------------------------------------
                                 Three months ended        Nine months ended
                                       June 30,                 June 30,
                                  2008         2007         2008         2007
                               ----------   ----------   ----------   ----------

Cost of revenues - Service     $   10,636   $      635   $   40,648   $    2,088
Research and development          107,958        4,974      380,481       16,325
General and administrative        101,425        6,329      396,064       20,345
Sales and marketing               219,070        5,992      824,869       27,177
                               ----------   ----------   ----------   ----------

Total                          $  439,089   $   17,930   $1,642,062   $   65,935
                               ==========   ==========   ==========   ==========

Increase (decrease) on:
Cash flows from operating
activities                             --           --           --           --
Cash flows from financing
activities                             --           --           --           --

During the three and nine months ended June 30, 2008, total share-based
compensation expense recognized in earnings before taxes was $439,088 and
$1,642,062 respectively and the total related recognized tax benefit was zero.
Additionally, total share-based compensation expense capitalized as part of
inventories for the three and nine months ended June 30, 2008 was $66,595 and
$280,043 respectively, and total share-based compensation expense applied to
warranty reserve for the three and nine months ended June 30, 2008 was $9,805
and $26,426 respectively.

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

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

<TABLE>
<CAPTION>

                                           Three months ended                        Nine months ended
                                                June 30,                                  June 30,
                                       2008                 2007                  2008                 2007
                                  ----------------     ----------------     ----------------     ----------------

<S>                                <C>                   <C>                 <C>                  <C>
Expected term (in years)            5.5 to 6.40            6.50 to 10          0.02 to 7             5.4 to 10
Risk-free interest rate            2.83% to 3.46%        4.53% to 6.63%      2.83% to 4.34%       4.53% to 4.66%
Expected volatility                 239% to 247%               178%           204% to 247%         173% to 178%
Expected dividend yield                  0%                     0%                  0%                   0%
Weighted average fair value
      at grant date                    $0.08                  $0.19               $0.13                $0.29

</TABLE>

                                      Q-18
<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)
                       -----------    -----------    -----------    -----------   -----------
Balance at
<S>                    <C>            <C>            <C>            <C>           <C>
 September 30, 2007      1,756,500      1,840,500    $      0.68

Granted                (31,210,327)    31,210,327           0.17

Authorized              42,062,664             --             --

Cancelled or expired     1,726,728     (1,726,728)         (0.66)

Exercised                       --       (300,000)          0.18

Balance at
 June 30, 2008          14,335,565     31,024,099    $      0.17           9.32   $         0
                       ===========    ===========
Exercisable at
 June 30, 2008                          6,321,121    $      0.19           8.67   $         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 $0.07 as of June 30, 2008, which would have
been received by the option holders had all option holders exercised their
options as of that date.

As of June 30, 2008 there was approximately $2,053,077 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 2.73 years.

Total options under the Plan at June 30, 2008, were as follows:

<TABLE>
<CAPTION>

                                                  Weighted
                                                  Average
    Option          Options Outstanding          Remaining         Options Exercisable
   Exercise                as of                Contractual               as of
    Price              June 30, 2008            Life (Years)          June 30, 2008
---------------    ----------------------     -----------------    --------------------
<S>                <C>                        <C>                  <C>
    $0.080                 648,000                  9.73                  194,250
     0.090               3,520,000                  9.93                   50,000
     0.180              26,645,599                  9.25                5,866,371
     0.350                  60,000                  8.52                   60,000
     0.580                  75,000                  7.44                   75,000
     0.800                  33,000                  3.50                   33,000
     1.250                  42,500                  6.06                   42,500
                   ---------------                                 --------------

    Total               31,024,099                                      6,321,121
                   ===============                                 ==============

</TABLE>

                                      Q-19
<PAGE>


NOTE 8 - WARRANTS

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

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

Balance at September 30, 2007     228,376,214    $       0.01    $  2,361,126
Warrants granted                           --              --              --
Warrants exercised               (212,039,781)             --            (900)
Warrants cancelled                         --              --              --
Warrants expired
                                      (44,100)          (1.25)        (55,125)
                                 ------------    ------------    ------------

Balance at June 30, 2008           16,292,333            0.14    $  2,305,101
                                 ============    ============    ============

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

Common stock warrants are comprised of the following:

                            Warrants Outstanding             Weighted Average
                                   as of                  Remaining Contractual
  Exercise Price               June 30, 2008                   Life (Years)
--------------------    ---------------------------     ------------------------
      $0.080                            13,809,142                3.93
       0.280                               400,000                4.01
       0.400                             1,675,000                2.34
       0.700                               119,100                2.17
       1.000                               100,000                2.77
       1.150                               100,000                3.38
       1.250                                20,000                1.65
       1.375                                69,091                0.50
                        ---------------------------
       Total                            16,292,333
                        ===========================

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

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


                                      Q-20
<PAGE>

NOTE 9 - EMPLOYEE BENEFIT PLAN

The Company maintains a 401(k) defined contribution plan that covers
substantially all of its employees. Participants may elect to contribute up to
the maximum limit imposed by federal tax law. The Company, at its discretion,
may make annual matching contributions to the plan. The Company has made no
matching contributions to the plan through June 30, 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          Nine months ended
                                   June 30,                   June 30,
                             2008          2007          2008          2007
                          ----------    ----------    ----------    ----------
  Europe                  $1,137,264    $   98,850    $2,155,837    $  327,524
  Asia                         3,095       869,000        55,232     1,836,883
  South America              900,000            --       900,000            --
  United States               99,824       120,835     3,004,395       232,716
                          ----------    ----------    ----------    ----------

  Total Revenue           $2,140,183    $1,088,685    $6,115,464    $2,397,123
                          ==========    ==========    ==========    ==========

The Company maintained long lived assets including property and equipment,
intangible assets, and leased equipment each net of applicable depreciation or
amortization in the following geographic areas during the three months ended
June 30, 2008:

                                Three months ended
                                   June 30, 2008
                              --------------------

       United States                    $ 474,009
       Europe                               3,685
       Asia                                 2,185
                              --------------------

       Total                            $ 479,879
                              ====================


NOTE 11 - SUBSEQUENT EVENTS

The following subsequent events occurred between July 1, 2008 and August 8,
2008.

The Company repaid $1,592,235 of principal due under its notes payable and
received loan proceeds of $1,442,170 under the Product Financing
Arrangement, and in exchange for certain amendments to the Product Financing
Arrangement, agreed to reduce the exercise price of 1,350,000 warrants for
common stock issued under this agreement from $0.08 per share to $0.065 per
share.



                                      Q-21