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


                                   FORM 10-QSB


[X]      Quarterly  Report under Section 13 or 15(d) of the Securities  Exchange
         Act of 1934 For the quarterly period ended March 31, 2007

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


                        Commission File Number 000-49735



                           INTRAOP MEDICAL CORPORATION

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


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

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

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



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

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

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

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 26,377,172 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........................................29

PART II - OTHER INFORMATION................................................30
   Item 1.  Legal Proceedings..............................................30
   Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds....30
   Item 3.  Defaults upon Senior Securities................................31
   Item 4.  Submission of Matters to a Vote of Security Holders............31
   Item 5.  Other Information..............................................31
   Item 6.  Exhibits.......................................................31

SIGNATURES.................................................................32

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

                                       2
<PAGE>



                         PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

         The accompanying unaudited financial statements, listed on the index to
financial statements on page Q-1 and filed as part of this Form 10-QSB, have
been prepared in accordance with the instructions to Form 10-QSB and, therefore,
do not include all information and footnotes necessary for a complete
presentation of financial position, results of operations, cash flows, and
stockholders' deficit in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments considered necessary
for a fair presentation of the results of operations and financial position have
been included and all such adjustments are of a normal recurring nature.
Operating results for the three and six months ended March 31, 2007 are not
necessarily indicative of the results that can be expected for the year ending
September 30, 2007.


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, 2006 AND 2005 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, formerly Digitalpreviews.com,
Inc., was organized under the laws of the State of Nevada on November 5, 1999.
IntraOp's initial purpose was to engage in a consulting and seminar business. In
September 2003, in anticipation of negotiating a potential merger with Intraop
Medical, Inc., a privately-held Delaware corporation, we formally abandoned our
consulting and seminar business operations, which from inception through March
9, 2005, generated no revenue and during which time we were considered to be a
development stage company. On March 9, 2005, we completed the merger with
Intraop Medical, Inc. pursuant to the terms of an Agreement and Plan of
Reorganization dated February 24, 2004, or the Merger Agreement, by and between
IntraOp and Intraop Medical, Inc., pursuant to which Intraop Medical, Inc. was
merged with and into IntraOp, and IntraOp remained as the surviving corporation.
As a result of the merger, we acquired all of the assets and assumed all of the
obligations of Intraop Medical, Inc. Such assets consisted of, without
limitation, all of Intraop Medical, Inc.'s cash and cash equivalents, accounts
receivables, inventory, prepaid expenses, property and equipment, leased
equipment, intangible assets (including patents, certain installment


                                       3
<PAGE>



payments for license rights to acquire certain technology, amounts paid to third
parties for manufacturing and design rights as well as design rights and
manufacturing/ design instructions in connection with Mobetron, Intraop Medical,
Inc.'s product, and a certain medical device approval license).

         In connection with the consummation of the merger and pursuant to the
merger agreement, each of the issued and outstanding shares of Intraop Medical,
Inc.'s preferred stock and common stock were cancelled and extinguished and
automatically converted into the right to receive one corresponding share of our
common stock. As a result of the merger, 14,175,028 shares of our common stock
were issued to stockholders of Intraop Medical, Inc. in exchange for their
shares of preferred stock and common stock. Additionally, as of March 9, 2005 we
assumed (i) 1,023,611 options reserved under Intraop Medical, Inc.'s stock
option plan which were exercisable within 60 days of the closing date for the
merger; (ii) warrants exercisable for 926,291 shares of our common stock; and
(iii) convertible promissory notes convertible into 1,540,795 shares of our
common stock. Additionally, we sold 795,000 shares of our common stock to
certain consultants in consideration for services provided in connection with
the consummation of the Merger. All of these securities were issued in reliance
upon the exemption from securities registration afforded by the provisions of
Regulation D, as promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

         As a result of the merger with Intraop Medical, Inc., we now
manufacture, market and distribute Mobetron, a proprietary mobile electron-beam
cancer treatment system designed for use in IOERT. The IOERT procedure involves
the direct application of radiation to a tumor and/or tumor bed while a patient
is undergoing surgery for cancer. Mobetron is designed to be used without
requiring additional shielding in the operating room, unlike conventional
equipment adapted for the IOERT procedure. Mobetron system can be moved from
operating room to operating room, thereby increasing its utilization and cost
effectiveness. In addition to IOERT, Mobetron system also can be used as a
conventional radiotherapy electron-beam accelerator.

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

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

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


                                       4
<PAGE>



As 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 any accuracy. While we expect that our financial results may
ultimately become more predictable as sales increase and costs stabilize, our
financial results for the foreseeable future are likely to continue to vary
widely from period to period.

CRITICAL ACCOUNTING POLICIES

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

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

     Additionally, we entered into registration rights agreements pursuant to
our issuance of our senior and convertible debentures and warrants on August 31,
2005 and October 25, 2005. Pursuant to the registration rights agreements, we
agreed to file a resale registration statement covering the resale of the shares
issuable to the investors upon the exercise of their warrants and conversion of
their debentures by September 30, 2005 and November 24, 2005, respectively. At
inception, the registration rights agreements required us to pay monthly
liquidated damages if:

         o        a registration statement was not filed on or prior to
                  September 30, 2005 and November 24, 2005, respectively, or

         o        we failed to file with the Securities and Exchange Commission
                  a request for acceleration in accordance with Rule 461
                  promulgated under the Securities Act, within five trading days
                  of the date that we are notified by the Commission that a
                  registration statement will not be "reviewed," or not subject
                  to further review, or


                                       5
<PAGE>

         o        prior to its effectiveness date, we failed to file a
                  pre-effective amendment and otherwise respond in writing to
                  comments made by the Commission in respect of such
                  registration statement within 10 calendar days after the
                  receipt of comments by or notice from the Commission that such
                  amendment is required for a registration statement to be
                  declared effective, or
         o        a registration statement filed or required to be filed
                  hereunder was not declared effective by the Commission by
                  December 29, 2005 and February 22, 2006, respectively, or
         o        after December 29, 2005 and February 22, 2006, respectively, a
                  registration statement ceases for any reason to remain
                  continuously effective as to all registrable securities for
                  which it is required to be effective, or the investors are not
                  permitted to utilize the prospectus therein to resell such
                  registrable securities for 10 consecutive calendar days but no
                  more than an aggregate of 15 calendar days during any 12-month
                  period.

     The amount of monthly liquidated damages equals 2.0% of the aggregate
purchase price paid by the investors for any registrable securities held by the
investors. Late payment beyond seven days is subject to interest at an annual
rate of 18%.

     We evaluated the liquidated damages feature of the registration rights
agreements in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"). The liquidated damages qualify as embedded derivative instruments
at issuance and, because they do not qualify for any scope exception within SFAS
133, they were required by SFAS 133 to be recorded as derivative financial
instruments. Further, in accordance with EITF 05-04, "The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No.
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", we also evaluated whether the
registration rights agreements, the senior and convertible debentures, and
associated warrants should be combined into and accounted for as a single unit
or accounted for as separate financial agreements. In considering the
appropriate treatment of these instruments, we observed that:

         o        Although entered into contemporaneously, the debentures,
                  warrants and registration rights agreements are nevertheless
                  separate legal agreements.
         o        Payment of the liquidated damages penalties under the
                  registration rights agreements does not alter the investors'
                  rights under either the warrant or debenture agreements. The
                  debentures and warrants have values which are based on their
                  interest rate and the relation between their conversion price
                  or exercise price and the value of our common stock. This
                  value is independent of any payment for liquidated damages
                  under the registration rights agreements, which is based on
                  how long the shares remain unregistered.
         o        The various agreements do not relate to the same risk. The
                  risk inherent in the debentures relates to our ability to
                  repay these instruments as and when they come due or to the
                  extent converted into common stock, to the price of our common
                  stock. The warrants similarly bear risk related to the value
                  of our common stock. The liquidated damages penalty under the
                  registration rights agreements relates to the risk of IntraOp
                  filing a registration statement and having it declared
                  effective.

     Thus, in light of the above facts and circumstances and in accordance with
guidance in EITF 05-4, View C, we evaluated and treated the registration rights
agreements, senior and convertible debentures and associated warrants as
separate free standing agreements.


                                       6
<PAGE>

         Upon execution, the registration rights agreements had no initial fair
value. In subsequent periods, the carrying value of the derivative financial
instrument related to the registration rights agreements will be adjusted to its
fair value at each balance sheet date and any change since the prior balance
sheet date will be recognized as a component of other income/(expense).

         The estimated fair value of the registration rights agreements was
determined using the discounted value of the expected future cash flows. At
September 30, 2005 and November 24, 2005, we were not able to file a
registration statement with the SEC or have it declared effective as required by
the dates specified in the registration rights agreements. However, in January
2006, we obtained an amendment to the registration rights agreements to extend
the required filing date of our initial registration statement to January 27,
2006, a deadline that we met, and to extend the required effectiveness date of
that same initial registration statement to March 31, 2006, a deadline we did
not meet, and to waive all amounts potentially due under the liquidated damages
clause which would have been due but for the waiver. On April 18, 2006 we
obtained a further amendment to the registration rights agreements to further
extend the required effectiveness date of our initial registration statement to
May 15, 2006 for investors subject to the August 31, 2005 registration rights
agreements and extend to May 30, 2006 the date on which we must have an
effective registration statement for 50% of the registrable shares for investors
who were signatory to the October 25, 2005 registration rights agreements, both
deadlines we met. On June 19, 2006, we met the requirements to have an effective
registration statement for all shares required to be registered pursuant to the
registrations right agreements. We believe that, in the future, we will be able
to meet the registration requirements of the registration rights agreements and
that in the event we cannot, and assuming we are making reasonable efforts to
file and have a registration statement declared effective, the holders of the
debentures will waive the liquidated damages required under the registration
rights agreements. As a result, at March 31, 2007, we assigned no value to the
potential liquidated damages under the registration rights agreements.

         EITF 05-04 offers multiple views on the question of whether a
registration rights agreement should be combined as a unit with the underlying
financial instruments and be evaluated as a single instrument. EITF 05-04 does
not reach a consensus on this question and allows for treatment as a combined
unit (Views A and B) as well as separate freestanding financial instruments
(View C). On September 15, 2005, the FASB staff postponed further discussion of
EITF 05-04. As of March 31, 2007 the FASB has still not rescheduled EITF 05-04
for discussion.

         In conjunction with our issuance of senior and convertible debentures
and the related warrants and registration rights, we adopted View C of EITF
05-04. Accordingly, the registration rights agreements, the warrants associated
with the senior and convertible debentures, the debentures themselves, as well
as certain features of the debentures were evaluated as stand alone financial
instruments. This treatment resulted in classification of the warrants and
certain features of the debentures as equity while the registration rights
agreements and other features of the debentures were treated as derivative
liabilities. Derivative liability treatment requires adjusting the carrying
value of the instrument to its fair value at each balance sheet date and
recognizing any change since the prior balance sheet date as a component of
other income / (expense). The recorded value of such derivative liabilities can
fluctuate significantly based on fluctuations of the market value of our
underlying securities, as well as on the volatility of our stock price during
the term used for observation and the term remaining for the underlying
financial instruments. We believe that should the FASB staff reach a consensus
on EITF 05-04 and select combined unit treatment (View A or B), the debt
features of the debentures and associated warrants previously classified as
equity will have to be evaluated as a combined unit with the registration rights
agreements. This combination will result in these instruments being treated as
derivative liabilities requiring periodic reevaluation of fair value with
potentially significant fluctuation in fair value from period to period.
Accordingly, this consensus could have a significant effect on our financial
statements.


                                       7
<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. Our financial statements as of March 31, 2007 and
for the three and six months ended March 31, 2007 reflect the effect of SFAS
123(R). In accordance with the modified prospective transition method, our
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123(R). Share-based compensation expense
recognized is based on the value of the portion of share-based payment awards
that is ultimately expected to vest. Share-based compensation expense recognized
in our Condensed Consolidated Statements of Operations (Unaudited) during the
three and six months ended March 31, 2007, included compensation expense for
share-based payment awards granted prior to, but not yet vested as of, December
31, 2005 based on the grant date fair value estimated in accordance with the pro
forma provisions of SFAS 123 and compensation expense for the share-based
payment awards granted subsequent to January 1, 2006 based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(R). In
conjunction with the adoption of SFAS 123(R), we elected to attribute the value
of share-based compensation to expense using the straight-line attribution
method. Share-based compensation expense related to stock options was $35,003
and $48,005, before taxes on earnings, respectively, for the three and six
months ended March 31, 2007. During the three and six months ended March 31,
2007, there was no share-based compensation expense related to stock options
recognized under the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, or
APB 25. See Note 7 to the Unaudited Condensed Consolidated Financial Statements
for additional information.

         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 SAB107. 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 option
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.

                                       8
<PAGE>

         As share-based compensation expense recognized in the Unaudited
Consolidated Statements of Operations for the three and six months ended March
31, 2007, is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were estimated based on our
historical experience. In our pro-forma information required under SFAS 123 for
the periods prior to January 1, 2006, we accounted for forfeitures as they
occurred. If factors change and we employ different assumptions in the
application of SFAS 123(R) in future periods, the compensation expense that we
record under SFAS 123(R) may differ significantly from what we have recorded in
the current period.

         As of March 31, 2007, there was $34,813 of total unrecognized
compensation expense related to stock options granted under our 2005 Equity
Incentive Plan. This unrecognized compensation expense is expected to be
recognized over a weighted average period of 1.25 years.











                  (Remainder of page intentionally left blank)



                                       9
<PAGE>



RESULTS OF OPERATION FOR THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2006.

REVENUE, COSTS OF REVENUE AND GROSS MARGINS

                                               QUARTER ENDED MARCH 31,
                                     2007         2006        CHANGE     PERCENT
--------------------------------------------------------------------------------
REVENUE
  Product sales                      942,248      872,202       70,046        8%
  Leasing                               --         71,959      (71,959)      --
  Service                            116,574      158,156      (41,582)     -26%
--------------------------------------------------------------------------------
TOTAL REVENUE                      1,058,822    1,102,317      (43,495)      -4%
--------------------------------------------------------------------------------
COSTS OF REVENUE
  Product sales                      778,030      761,432       16,598        2%
  Leasing                               --           --           --         --
  Service                             41,877      161,135     (119,258)     -74%
--------------------------------------------------------------------------------
TOTAL COSTS OF REVENUE               819,907      922,567     (102,660)     -11%
================================================================================


PRODUCT SALES

         Product sales revenue, which includes systems and accessories sales,
but excludes parts sold as part of our service business, was approximately 8%
higher in the three months ended March 31, 2007 in comparison to the three
months ended March 31, 2006, due mainly to a relatively large credit of $92,500
given to our Italian distributor for return of certain distributor spare parts
in three months ended March 31, 2006. Gross margins on our product sales for the
three months ended March 31, 2007 were $164,218, or 17% of product sales revenue
versus $110,770, or 13% of revenue for the three months ended March 31, 2006.
The low gross margins were primarily due to the low selling prices of the single
Mobetron systems we sold in each of the three months ended March 31, 2006 and
March 31, 2007. Both systems were sold through overseas distributors which enjoy
large discounts from Mobetron list price and, in the case of the system sold in
the three months ended March 31, 2006, the system was sold into the very
competitive Italian marketplace. Although distributor sales prices will continue
to be lower than those we receive from selling direct to the customer, we are
working to raise our sales price to distributors.

LEASING

         Leasing revenue in the three months ended March 31, 2006 is comprised
of revenue recognized on a Mobetron system leased to our customer in Eindhoven,
Holland, which lease ended on January 1, 2006, however, we continued to
recognize certain revenue upon lease termination in the three months ended March
31, 2006. We had no leasing transactions in the three months ended March 31,
2007.


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<PAGE>



SERVICE

         The majority of service revenue for the three months ended March 31,
2007 came from six annual service contracts, with the balance from as-requested
service calls and parts sales to customers. In the three months ended March 31,
2006, only three customers had annual service contracts with us, however an
expensive, one-time repair under one of those contracts added over $100,000 of
service revenue and a corresponding amount of expense during the period. We
expect service revenue to grow in relative proportion to U.S. based sales.
Overseas distributors are generally responsible for servicing their own
customers with parts supplied by us, though we also recently obtained direct
contracts with a few of their customers in Europe, which revenue is included in
the three months ended March 31, 2007.

OPERATING EXPENSES

         A comparison of our operating expenses for the three months ended March
31, 2007 and March 31, 2006 are as follows:
<TABLE>
<CAPTION>
                                      QUARTER ENDED MARCH 31,
                                       2007               2006             CHANGE            PERCENT
-----------------------------------------------------------------------------------------------------
<S>                                 <C>                <C>               <C>                     <C>
Research and Development            163,301            177,323           (14,022)               -8%
General & Administrative            541,292            521,081            20,211                 4%
Sales and Marketing                 588,109            194,910           393,199               202%
-----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES          1,292,702            893,314           399,388                45%
=====================================================================================================
</TABLE>


         RESEARCH AND DEVELOPMENT expenses decreased by approximately 8% in the
three months ended March 31, 2007, in comparison to three months ended March 31,
2006, as we completed work on the various cost reduction and enhancement
projects for Mobetron. Examples of these projects include final development of
our new modulator, which is currently undergoing production cut-in and which
will decrease build cost and increase reliability of this Mobetron component,
and the addition of a motorized transport for the Mobetron which allows for
easier movement of Mobetron between operating rooms within a facility. Both of
these projects were accomplished largely through the use of contract engineering
services supplied by a Mobetron parts vendor, allowing us to continue to keep
our research and development staff and overhead as low as possible. Regardless,
we believe that research and development expenses will increase over time as we
develop new products and applications and continue our cost cutting efforts.

         GENERAL AND ADMINISTRATIVE expenses increased by approximately 4% in
the three months ended March 31, 2007 versus the three months ended March 31,
2006. The increase was largely due higher rental and operating expenses of our
new facilities in Sunnyvale, California.

         SALES AND MARKETING expenses tripled in the three months ended March
31, 2007 in comparison to the three months ended March 31, 2006, mainly due to
increased personnel expenses, as we added three new sales people in the United
States and one in Germany. We also greatly increased our spending on new sales
material and branding for Mobetron. We expect sales and marketing expenses to
continue to increase as we expand our Mobetron sales efforts.



                                       11
<PAGE>



         INTEREST EXPENSE. We completed the post-merger restructuring of our
debt in August through November 2005 through the sale of our senior and
convertible debentures, the addition of our product financing arrangement (see
Note 4 to our financial statements included in this filing) and the repayment of
certain pre-merger borrowings. We account for the warrants and beneficial
conversion features related to these transactions as discounts from the face
value of the notes and amortize these discounts into interest expense (a
non-cash expense) over the life of the debt instruments. To better understand
our annualized cost of borrowing, the table below presents our notes payable and
capital leases gross of these discounts as our interest bearing obligations, and
our interest expense gross of the amortization of these discounts as our
adjusted interest expense. On this basis, our estimated annual borrowing cost
rose from 9.46% to 10.06%, respectively, during the three months ended March 31,
2006 and March 31, 2007 as we borrowed more under our higher interest rate
factoring arrangements.


<TABLE>
<CAPTION>

                                                                    QUARTER ENDED MARCH 31,
 INTEREST BEARING OBLIGATIONS                                       2007               2006          CHANGE
 -----------------------------------------------------------------------------------------------------------
 Notes payable and capital lease obligations,
<S>                                                               <C>               <C>
 current and non-current, net discounts                           10,523,655        5,529,218

 Addback debt discounts and beneficial conversion features         3,755,640        6,188,386
 -----------------------------------------------------------------------------------------------------------
 Interest bearing obligations                                     14,279,295       11,717,604     2,561,691
 ===========================================================================================================

 INTEREST EXPENSE                                                       2007             2006        CHANGE
 -----------------------------------------------------------------------------------------------------------
 Interest Expense                                                  1,296,698        1,124,348       172,350

 Amortization of debt issuance costs, debt discounts due to
 warrants. and beneficial conversion features                        937,586          847,127        90,459
 -----------------------------------------------------------------------------------------------------------
 Adjusted interest expense                                           359,112          277,221        81,891
 Annualized adjusted interest expense                              1,436,448        1,108,884
 Interest bearing obligations                                     14,279,295       11,717,604
 Estimated annual borrowing cost                                      10.06%            9.46%
 ===========================================================================================================
</TABLE>


                                       12
<PAGE>




RESULTS OF OPERATION FOR THE SIX MONTHS ENDED MARCH 31, 2007 COMPARED TO THE SIX
MONTHS ENDED MARCH 31, 2006.

REVENUE, COSTS OF REVENUE AND GROSS MARGINS

<TABLE>
<CAPTION>

                                              SIX MONTHS ENDED MARCH 31,
REVENUE                             2007               2006          CHANGE       PERCENT
------------------------------------------------------------------------------------------
<S>                            <C>                <C>                <C>              <C>
  Product sales                1,087,391          1,923,456          (836,065)       -43%
  Leasing                              -            134,127          (134,127)         --
  Service                        221,047            177,739            43,308         24%
------------------------------------------------------------------------------------------
TOTAL REVENUE                  1,308,438          2,235,322          (926,884)       -41%
------------------------------------------------------------------------------------------

COSTS OF REVENUE
----------------------------------------- ------------------ -----------------------------
  Product sales                  858,388          1,678,679          (820,291)       -49%
  Leasing                              -             38,323           (38,323)         --
  Service                         98,449            174,368           (75,919)       -44%
----------------------------------------- ------------------ -----------------------------
TOTAL COSTS OF REVENUE           956,837          1,891,370          (934,533)       -49%
----------------------------------------- ------------------ -----------------------------
</TABLE>


PRODUCT SALES

         The disparity in product sales revenue, which includes systems and
accessories sales, but excludes parts sold as part of our service business,
between the six months ended March 31, 2007 and March 31, 2006 resulted from the
sale of only one Mobetron system in the three months ended March 31, 2007,
versus the sale of two Mobetron systems in the period ended March 31, 2006. We
remain confident however in our ability to accelerate our pace of Mobetron
sales. We currently have firm orders for the delivery of four Mobetrons to
prestigious hospital centers: Stanford Hospital & Clinics in Stanford,
California, Beijing Tumor Hospital, China, and Centro Riferimento Oncologico, in
Aviano Italy, and St. Vincent Hospital in Indianapolis, Indiana. Further, in the
last half of our 2006 fiscal year, we expanded our sales force through the
addition of three new sales people in the United States and one in Germany. We
expect to see results from these additional people shortly and have maintained
inventory levels consistent with our anticipated higher demand for our product.

         Gross margins on our product sales for the six months ended March 31,
2007 were $229,003, or 21% of product sales revenue versus $244,777, or 13% of
revenue for the six months ended March 31, 2006. The gain in gross margin
percentage was due to higher per system revenues and slightly lower per system
labor, overhead and warranty costs for the six months ended March 31, 2007
versus March 31, 2006.

LEASING

         Leasing revenue in the six months ended March 31, 2006 is comprised of
revenue recognized on a Mobetron system leased to our customer in Eindhoven,
Holland, which lease ended on January 1, 2006. We had no leasing transactions in
the six months ended March 31, 2007.


                                       13
<PAGE>



SERVICE

         The majority of service revenue for the six months ended March 31, 2007
came from six annual service contracts, with the balance from as-requested
service calls and parts sales to customers. In the six months ended March 31,
2006, only three customers had annual service contracts with us, however an
expensive, one-time repair under one of those contracts added over $100,000 of
service revenue and a corresponding amount of expense during the period. We
expect service revenue to grow in relative proportion to U.S. based sales.
Overseas distributors are generally responsible for servicing their own
customers with parts supplied by us, though we also recently obtained direct
contracts with a few of their customers in Europe, which revenue is included in
the six months ended March 31, 2007.

OPERATING EXPENSES

         A comparison of our operating expenses for the six months ended March
31, 2007 and March 31, 2006 are as follows:

<TABLE>
<CAPTION>
                                            SIX MONTHS ENDED MARCH 31,
                                     2007          2006           CHANGE         PERCENT
-----------------------------------------------------------------------------------------
<S>                               <C>               <C>            <C>               <C>
Research and Development          326,763           295,480        31,283            11%
General & Administrative        1,018,781           972,422        46,359             5%
Sales and Marketing               964,486           374,151       590,335           158%
-----------------------------------------------------------------------------------------
Total Operating Expenses        2,310,030         1,642,053       667,977            41%
=========================================================================================
</TABLE>


         RESEARCH AND DEVELOPMENT expenses, increased by approximately 11% in
the six months ended March 31, 2007, in comparison to the six months ended March
31, 2006, as we continued work on the various cost reduction and enhancement
projects for Mobetron. Examples of these projects include final development of
our new modulator, which is currently undergoing production cut-in and which
will decrease build cost and increase reliability of this Mobetron component,
and the recently completed addition of a motorized transport for the Mobetron
which allows for easier movement of Mobetron between operating rooms within a
facility. Both of these projects were accomplished largely through the use of
contract engineering services supplied by a Mobetron parts vendor allowing us to
continue to keep our research and development staff and overhead as low as
possible.

         GENERAL AND ADMINISTRATIVE expenses increased by approximately 5% in
the six months ended March 31, 2007 versus the six months ended March 31, 2006.
The increase was largely due to hiring in this area and higher rental expenses
at our new facilities in Sunnyvale, California, which together increased general
and administrative expenses by $90,205 in the six months, ended March 31, 2007
versus the six months ended March 31, 2006. These increases were largely offset
by reductions in legal and other professional fees incurred as part of our
senior and convertible debenture financings completed in the six months ended
March 31, 2006.

         SALES AND MARKETING expenses increased by 158% in the six months ended
March 31, 2007 in comparison to the six months ended March 31, 2006, mainly due
to increased personnel expenses, as we added three new sales people in the
United States and one in Germany. We also greatly increased our spending on new
sales material and branding for Mobetron. We expect sales and marketing expenses
to continue to increase as we expand our Mobetron sales efforts.



                                       14
<PAGE>




         INTEREST EXPENSE. We completed the post-merger restructuring of our
debt in August through November 2005 through the sale of our senior and
convertible debentures, the addition of our product financing arrangement (see
Note 4 to our financial statements included in this filing) and the repayment of
certain pre-merger borrowings. We account for the warrants and beneficial
conversion features related to these transactions as discounts from the face
value of the notes and amortize these discounts into interest expense (a
non-cash expense) over the life of the debt instruments. To better understand
our annualized cost of borrowing, the table below presents our notes payable and
capital leases gross of these discounts as our interest bearing obligations, and
our interest expense gross of the amortization of these discounts as our
adjusted interest expense. On this basis, our estimated annual borrowing cost of
9.50% and 9.64%, respectively, during the six months ended March 31, 2007 and
March 31, 2006 were roughly equivalent.


<TABLE>
<CAPTION>
                                                                    SIX MONTHS ENDED MARCH 31,
INTEREST BEARING OBLIGATIONS                                          2007        2006         CHANGE
--------------------------------------------------------------------------------------------------------
Notes payable and capital lease obligations
<S>                                                             <C>             <C>          <C>
current and non-current, net discounts                          10,523,655      5,529,218

Addback debt discounts and beneficial conversion features        3,755,640      6,188,386
--------------------------------------------------------------------------------------------------------
Interest bearing obligations                                    14,279,295     11,717,604    2,561,691
========================================================================================================

INTEREST EXPENSE                                                      2007           2006        CHANGE
--------------------------------------------------------------------------------------------------------
Interest Expense                                                 2,328,654      2,052,010      276,644

Amortization of debt issuance costs, debt discounts due to
warrants and beneficial conversion features                      1,650,570      1,487,397      163,173

-------------------------------------------------------------------------------------------------------
Adjusted interest expense                                          678,084        564,613      113,471
Annualized adjusted interest expense                             1,356,168      1,129,226
Interest bearing obligations                                    14,279,295     11,717,604
Estimated annual borrowing cost                                       9.50%          9.64%
========================================================================================================
</TABLE>






                  (Remainder of page intentionally left blank)





                                       15
<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

         We experienced net losses of $4,344,785 and $3,319,596 for the six
months ended March 31, 2007 and 2006, respectively. In addition, we have
incurred substantial monetary liabilities in excess of monetary assets over the
past several years and, as of March 31, 2007, had an accumulated deficit of
$32,359,696. 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 our products and services.

o Developing new markets, primarily in Europe and Asia, and expanding our sales
efforts.

o Evaluating funding strategies in the public and private markets.

         Historically, management has been able to raise additional capital.
During the fiscal year 2006, we obtained an additional $4.5 million through the
sale of convertible debentures and $1,245,716 through the exercise of warrants
related to these debentures, while during the six months ended March 31, 2007,
we raised an additional $1.2 million of debenture financing and are pursuing
other longer term sources of capital. The successful outcome of future
activities cannot be determined at this time and there is no assurance that if
achieved, we will have sufficient funds to execute our business plan or generate
positive operating results.

Our primary cash inflows and outflows for the six months ended March 31, 2007
and March 31, 2006 were as follows:


<TABLE>
<CAPTION>
                                              SIX MONTHS ENDED MARCH 31,
 CASH FLOWS                                   2007                2006            CHANGE
 ------------------------------------------------------------------------------------------
 Provided by (Used in):
<S>                                       <C>                <C>                 <C>
   Operating Activities                   (1,035,921)        (2,693,190)         1,657,269
   Investing Activities                      (11,140)          (163,016)           151,876
   Financing Activities                      909,414          2,933,555         (2,024,141)
 ------------------------------------------------------------------------------------------
 Net Increase/(Decrease)                    (137,647)            77,349           (214,996)
 ==========================================================================================
</TABLE>


OPERATING ACTIVITIES

         Net cash used in operating activities decreased by $1,657,269 in the
six months ended March 31, 2007 in comparison to the six months ended March 31,
2006. Significantly offsetting our net loss of $4,344,785 for the six months
ended March 31, 2007 were $1,850,201 of non-cash charges, primarily for
amortization of debt discounts, beneficial conversion features and issuance
costs related to our senior and convertible debentures, but also for common
stock, options, and warrants issued in lieu of compensation. During the six
months ended March 31, 2006, our net loss of $3,319,596 was similarly offset by
non-cash charges of $1,529,622. Additionally, large combined changes in our
asset and liability accounts of approximately $2.36 million between the six
months ended March 31, 2007 and March 31, 2006 significantly affected operating
cash flow during those two six month periods. These accounts, which include
inventories, accounts receivable, accounts payable, customer deposits, and
deposits with vendors, are currently subject to significant short term
fluctuations and will continue to be volatile because of our low volume of
Mobetron sales and large per system cost of Mobetron. For example, during the
six months ended March 31, 2007 we collected approximately $3.47 million of
accounts receivable for Mobetrons sold late in the prior fiscal year.


                                       16
<PAGE>

INVESTING ACTIVITIES

         The difference in investing activity in the six months ended March 31,
2007 versus the six months ended March 31, 2006 was primarily the result of the
acquisition of fixed assets related to our move and expansion into our new
headquarters, manufacturing, and test facilities in October 2005.

FINANCING ACTIVITIES

         From October 2005 through November 2005, we raised $4.5 million of
convertible debentures, which along with $2.5 million of similar convertible
debentures and $2 million in senior debentures raised at the end of fiscal year
2005, completing a significant change and improvement to our capital structure.
However, because no scheduled principal amortization is required on the
convertible debentures until their maturity three years from date of issuance,
and because only $333,333 of scheduled principal amortization per annum is
required on the senior debentures, our capital structure is much more stable.
Additionally, we made use of borrowings under our product financing arrangement
and Inventory finance arrangement, as further described in Note 4 to our
financial statements hereto, to finance inventory and receivables ahead of
anticipated stronger demand for Mobetron. During the six months ended March 31,
2007 we raised $1.2 million under our short-term debenture program, while the
majority of the remainder of our borrowing during this period was related to
receivables and inventory finance under our product financing arrangement and
inventory financing arrangement. Similarly, the majority of our debt repayments
were related to our product financing arrangement.





                  (Remainder of page intentionally left blank)


                                       17
<PAGE>


DEBT AND LEASE OBLIGATIONS

         At March 31, 2007, we had notes payable and obligations for leased
equipment from various sources as shown below. Interest rates on such debt range
from 7% on our convertible debentures 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>

                                                                           MARCH 31,
                                                                             2007
                                                                          -----------

<S>                                                                       <C>
Notes payable, related parties, current                                   $   821,528

Less debt discounts due to warrants                                           (20,922)
                                                                          -----------

   Notes payable, related parties, net unamortized debt
       discounts                                                          $   800,606
                                                                          ===========


Convertible debentures                                                    $ 6,400,000
Product financing arrangement                                               4,337,824
Senior secured debentures                                                   1,500,000
Short term debentures                                                         971,429
Other notes                                                                   239,635

Less debt discounts due to warrants                                        (1,807,118)
Less beneficial conversion features                                        (1,927,600)
                                                                          -----------

Notes payable, net of debt discounts and beneficial conversion features     9,714,170

Less current portion                                                       (5,671,625)
                                                                          -----------

   Notes payable, other, net of current portion, unamortized debt
       discounts and beneficial conversion features                       $ 4,042,545
                                                                          ===========
</TABLE>






                  (Remainder of page intentionally left blank)



                                       18
<PAGE>



         As of March 31, 2007, future minimum lease payments that come due in
the fiscal years ending September 30 are as follows:

<TABLE>
<CAPTION>

     Period Ending September 30,                               Capital Leases   Operating Leases
     ------------------------------------------------------------------------------------------------
<S>                                                                 <C>       <C>
     2007                                                              $ 1,290   $   115,545
     2008                                                                2,579       237,625
     2009                                                                2,579       244,754
     2010                                                                2,579       233,838
     2011                                                                  431       -
                                                              --------------------------------------
     Total minimum lease payments                                        9,458   $   831,762
                                                                                 ===================
     Less: Amount representing interest                                   (579)
                                                              ------------------

     Present value of minimum lease payments                             8,879
     Less: Current portion                                              (2,314)

                                                              ------------------
     Obligations under capital lease, net of current portion           $ 6,565
                                                              ==================
</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 March
31, 2007 deferred revenue was $185,470, which is included under accrued
liabilities.

OFF-BALANCE SHEET ARRANGEMENTS

         We had no off-balance sheet arrangements to report for the three or six
months ended March 31, 2007.









                  (Remainder of page intentionally left blank)


                                       19
<PAGE>



                                  RISK FACTORS

         Stockholders should carefully consider the following risk factors,
together with the other information included and incorporated by reference in
this Form 10-QSB.

                         RISKS RELATING TO OUR BUSINESS

WE HAVE BEEN IN OPERATION FOR OVER 10 YEARS AND HAVE NEVER BEEN PROFITABLE.

         IntraOp is a medical device company that has experienced significant
operating losses in each year since the incorporation on March 9, 1993 of its
merger partner, Intraop Medical Inc., primarily due to the cost of substantial
research and development of its sole product, Mobetron. Since inception, we have
generated about $19.9 million in revenue through March 31, 2007, 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 Mobetron at higher unit volumes and at higher margins.
It is possible that Mobetron and any other products of IntraOp will never gain
full commercial acceptance, and as a result 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 borrowed $2,000,000 pursuant to 10% senior secured
debentures issued to two private lenders which are due at maturity in August
2008. Among other terms, the 10% senior secured debentures are secured by a lien
on all of our assets not otherwise pledged under our Revolving Line. 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.

         In August 2005, we also entered into a revolving, $3,000,000, combined
inventory and factoring agreement, or Revolving Line, under which we pledged as
collateral certain of our inventory and receivables. On June 1, 2006 we entered
into an amendment to the Revolving Line to increase the line to $4,000,000. On
August 14, 2006 and September 14, 2006, we further amended the Revolving Line to
increase the line to $4,500,000 through November 14, 2006 after which time the
amount available under the line reverts to $4,000,000. In October 2006, we
entered into a $700,000 inventory financing agreement, or Inventory Financing
Arrangement, under which we pledged as collateral certain of our inventory. On
March 14, 2007, we amended the Inventory Finance Arrangement to increase the
amount of financing available under the agreement to $750,000.

         Should a default occur under the Revolving Line, Inventory 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, and to sell those assets at a public or private sale
and also to sell the shares pledged as collateral. In the event the lenders
exercise those rights, we would have a very short period of time in which to
obtain adequate capital to satisfy the amount of the obligations to the lenders
to prevent the sale of our assets. For us to obtain such capital in such a short
period would result in very significant dilution to the stockholders and if we
are unable to obtain those funds, we could be unable thereafter to operate,
possibly resulting in a total loss of the investment made by our stockholders.


                                       20
<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 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 ability to continue to operate will
require us to obtain additional funds over the coming year.

OUR SINGLE PRODUCT IS SUBJECT TO UNCERTAIN MARKET ACCEPTANCE.

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

WE ARE DEPENDENT ON KEY SUPPLIERS AND HAVE LIMITED MANUFACTURING EXPERIENCE.

         We have entered into an agreement with CDS Engineering LLC, or CDS, for
the manufacture of the majority of Mobetron system, while the accelerator guide,
a key component of Mobetron, is manufactured by Accuray Incorporated of
Sunnyvale, California. The modulator, another key component of Mobetron, is
manufactured by TPI systems. One of the founders of Accuray Incorporated, Donald
A. Goer, is our President and CEO.

         Though members of management have extensive experience in
manufacturing, to date we have not manufactured Mobetron system 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, CDS, TPI Systems or any other key
suppliers, including subcontractors, would have a material adverse effect on our
ability to manufacture Mobetron and, therefore, on our business, financial
condition, and results of operation.

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

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

                                       21
<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.

         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 Mobetron and requires mobile 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.

         The Liac system has been offered to at least one customer in Germany
and we have notified Info & Tech and its German distributor, Conmedica GmbH,
that the Liac system infringes on our intellectual property and demanded that
Liac desist from this infringement. In June 2006, we brought suit in the
District Court of Dusseldorf, Germany against Info & Tech S.p.A., Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold, for infringement of our
German Patent 700578, seeking damages and an injunction against further
infringement.


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.



                                       22
<PAGE>




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.

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 Executive Officer. The loss of the
services of one or more of these key people could have a material adverse effect
on us. We have employment agreements with Dr. Goer and 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 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.



                                       23
<PAGE>




         In June 2005, the Financial Accounting Standards Board Emerging Issues
Task Force issued EITF 05-04, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Under EITF 05-04, liquidated damages clauses may qualify
as freestanding financial instruments for treatment as a derivative liability.
Furthermore, EITF 05-04 addresses the question of whether a registration rights
agreement should be combined as a unit with the underlying financial instruments
and be evaluated as a single instrument. EITF 05-04 does not reach a consensus
on this question and allows for treatment as a combined unit (Views A and B) as
well as separate freestanding financial instruments (View C). On September 15,
2005, the FASB staff postponed further discussion of EITF 05-04. As of March 31,
2007, the FASB has still not rescheduled EITF 05-04 for discussion.

         In conjunction with our issuance of senior and convertible debentures
and the related warrants and registration rights, we adopted View C of EITF
05-04. Accordingly, the registration rights agreements, the warrants associated
with the senior and convertible debentures, the debentures themselves, as well
as certain features of the debentures were evaluated as stand alone financial
instruments. This treatment resulted in classification of the warrants and
certain features of the debentures as equity while the registration rights
agreements and other features of the debentures were treated as derivative
liabilities. Derivative liability treatment requires adjusting the carrying
value of the instrument to its fair value at each balance sheet date and
recognizes any change since the prior balance sheet date as a component of other
income/(expense). The recorded value of such derivative liabilities can
fluctuate significantly based on fluctuations of the market value of our
underlying securities, as well as on the volatility of our stock price during
the term used for observation and the term remaining for the underlying
financial instruments. We believe that should the FASB staff reach a consensus
on EITF 05-04 and select combined unit treatment (View A or B), the debt
features of the debentures and associated warrants previously classified as
equity will have to be evaluated as a combined unit with the registration rights
agreements. This combination will result in these instruments being treated as
derivative liabilities requiring periodic reevaluation of fair value with
potentially significant fluctuation in fair value from period to period.
Accordingly, this consensus could have a significant effect on our financial
statements.

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

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.


                                       24
<PAGE>




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

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



                         RISKS RELATING TO OUR INDUSTRY

WE ARE SUBJECT TO INTENSE COMPETITION.

         Conventional medical linear accelerator manufacturers have more
substantial histories, backgrounds, experience, and records of successful
operations; possess greater financial, technical, marketing, and other
resources; and have more employees and more extensive facilities than we now
have, or will have in the foreseeable future. These companies 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 Mobetron and requires mobile 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 our products, and that our technologies and products would not be
rendered less competitive or obsolete by such developments.


                                       25
<PAGE>




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 subject to competition in the
U.S. and abroad from a variety of sources, including universities, research
institutions, and medical device and other 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.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.

         The development, testing, manufacturing, and marketing of 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 Mobetron. In that
case, the FDA or other authorities may not 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 practice, or GMP, regulations,
suggested state regulations for the control of radiation, or SSRCR, and
International Electrotechnical Committee, or IEC, 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 Mobetron or other products.

WE EXPECT TO BE HIGHLY DEPENDENT ON OVERSEAS SALES.

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

         Additionally, we have limited experience in many of the foreign markets
in which we plan to sell our goods and services. To succeed, we will have to
overcome cultural and language issues and expand our presence overseas by hiring
and managing additional staff and opening overseas offices to meet our sales,
manufacturing, and customer support goals. 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 also may


                                       26
<PAGE>



encounter difficulties due to longer customer payment cycles and encounter
greater difficulties in collecting accounts receivable from our overseas
customers. Further, should we discontinue any of our international operations,
we may incur material costs to cease those operations. An inability to expand
our overseas presence or manage the risks inherent in that expansion could have
a material adverse affect on our business, financial condition, and results of
operations.

IOERT TREATMENT MAY NOT BECOME A "STANDARD OF CARE" FOR CANCER TREATMENT.

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

OUR SUCCESS IN SELLING OUR 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 return for external beam and other radiotherapy
delivery systems may not be as favorable. While the Company is making efforts to
increase the rate of reimbursement to improve the rate of return on the capital
investment in Mobetron for hospitals in the U.S., there is no assurance that
such an effort will be ultimately successful. Therefore, regardless of positive
clinical outcomes, the current U.S. reimbursement environment may slow the
widespread acceptance of IOERT and 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 and affect our ability to make interest and principal payments under
our notes. We cannot assure that such legislation will not restrict hospitals'
ability to purchase equipment such as Mobetron or that such legislation will not
have a material adverse affect on our ability to sell Mobetron and our business
prospects and financial condition.



                                       27
<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   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.

         Because we have a limited operating history with little revenues to
date, any one of these factors may be considered material. Our stock price may
fluctuate widely as a result of any of the above.

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

WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON
STOCK.

         We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial condition and
other business and economic factors affecting 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 your 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


                                       28
<PAGE>




securities are subject to the "penny stock rules" adopted pursuant to Section
15(g) of the Securities Exchange Act of 1934, as amended, or Exchange Act. The
penny stock rules apply to non-NASDAQ companies whose common stock trades at
less than $4.00 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.

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. We
recently completed four registration statements resulting in a total of
68,378,224 shares of our common stock being registered, including shares
resulting from the conversion of convertible securities and the exercise of
warrants, and we expect, within the next month, to register a minimum of up to
an additional 4,982,143 shares of our common stock related to our convertible
debentures, 3,597,000 shares of our common stock resulting from the exercise of
options, and 2,021,420 shares of our common stock resulting from the exercise of
warrants, which upon registration with the SEC will also be freely tradable.


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 are effective to insure that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934 is properly recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.

         There has been no change in our internal control over financial
reporting during the three or six months ended March 31, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.



                                       29
<PAGE>




                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         On April 21, 2006, DLA Piper Gray Cary US LLP, or DLA Piper, notified
us that it had filed an arbitration proceeding against us with the American
Arbitration Association, claiming that we owe it legal fees and costs in the
amount of $445,909 for services rendered. We disputed the amount of fees and
costs claimed. Arbitration of this case was stayed by agreement of the parties,
and the parties agreed to mediation that took place on August 10, 2006.
Regardless, we continue to carry an account payable to DLA Piper on our balance
sheet in an amount satisfactory to meet DLA Piper's claim. We are continuing to
negotiate a settlement of this dispute with DLA Piper.

         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 our
German Patent 700578, seeking damages and an injunction against further
infringement. Oral proceedings took place on October 31, 2006, with further
proceedings to take place before the court in July 2007..

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         During the three months ended March 31, 2007, we issued and sold the
following securities:

                  On January 10, 2007, we issued 8% debentures in an aggregate
principal amount of $1,200,000 and associated warrants to purchase common stock,
pursuant to a securities purchase agreement dated as of January 10, 2007.
Pursuant to the securities purchase agreement, the purchasers of our 8%
debentures received warrants to purchase an aggregate of 1,285,708 shares of our
common stock. The warrants have an exercise price, subject to certain
adjustments, of $0.28 per share and are exercisable at any time on or prior to
the fifth anniversary date of the warrants.

         In addition, the exercise price of warrants and the conversion price of
the 7% convertible debentures issued by us in 2005 and held by the purchasers of
the 8% debentures were reduced from $0.40 per share to $0.28 per share in
connection with the 8% debenture financing. The conversion price of 7%
convertible debentures in the aggregate principal amount of $3,900,000 and
warrants to purchase an aggregate of 5,625,000 of common stock were affected by
this price adjustment. The reduction in the conversion price of the convertible
debentures from $0.40 per share to $0.28 per share could result in an additional
4,178,571 shares being issued if all of these debentures were converted to
common stock.

         The issuances of the securities described above were deemed to be
exempt from registration under the Act in reliance on Section 4(2) of the Act as
transactions by an issuer not involving any public offering. In addition, the
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access, through their relationships with Intraop, to information about
Intraop. No underwriters were used in connection with these sales and issuances.


                                       30
<PAGE>


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS

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


                                       31
<PAGE>




                                   SIGNATURES

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

                                     INTRAOP MEDICAL CORPORATION


Date: May 14, 2007                   By: /s/   DONALD A. GOER
                                        ----------------------------------------
                                             Donald A. Goer, Chief Executive
                                             Officer and President
                                             (Principal Executive Officer)


Date: May 14, 2007                   By: /s/   HOWARD SOLOVEI
                                        ----------------------------------------
                                             Howard Solovei, Chief Financial
                                             Officer
                                             (Principal Financial Officer and
                                             Principal Accounting Officer)


                                       32
<PAGE>

                           INTRAOP MEDICAL CORPORATION
             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                    FOR THE THREE MONTHS ENDED MARCH 31, 2007

<TABLE>
<CAPTION>

<S>                                                                                       <C>
Consolidated Balance Sheet as of March 31, 2007 (Unaudited)                               Q-2

Consolidated Statements of Operations for the three months and six months ended
March 31, 2007 and March 31, 2006 (Unaudited)                                             Q-3

Consolidated Statements of Cash Flows for the six months ended March 31, 2007
and March 31, 2006 (Unaudited)                                                            Q-5

Notes to Consolidated Financial Statements (Unaudited)                                    Q-7

</TABLE>

                                      Q-1
<PAGE>



<TABLE>
<CAPTION>
INTRAOP MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET  - UNAUDITED
                                                                                MARCH 31,
                                                                                  2007
                                                                              ------------
ASSETS
Current assets:
<S>                                                                           <C>
  Cash and cash equivalents                                                   $     12,226
  Accounts receivable                                                            1,288,364
  Inventories, net                                                               1,468,027
  Inventories, under product financing arrangement                               2,989,993
  Prepaid expenses and other current assets                                         84,208
                                                                              ------------
         Total current assets                                                    5,842,818

Property and equipment, net                                                        208,184
Intangible assets, net                                                             319,670
Deferred financing cost                                                            625,719
Deposits                                                                           280,042
                                                                              ------------
        Total Assets                                                          $  7,276,433
                                                                              ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                           $  3,241,981
   Accrued liabilities                                                           1,368,914
   Capital lease obligations, current portion                                        2,314
   Notes payable, related parties, current portion                                 800,606
   Notes payable, other, current portion, net of unamortized debt discounts      5,671,625
                                                                              ------------
         Total current liabilities                                              11,085,440

   Capital lease obligations, net of current portion                                 6,565
   Notes payable, other, net of current portion, unamortized debt discounts
       and beneficial conversion features                                        4,042,545
                                                                              ------------
          Total liabilities                                                     15,134,550
                                                                              ------------
Commitments and contingencies (see note 9)

Stockholders' deficit:
  Common stock, $0.001 par value: 100,000,000 shares authorized;
     26,377,172 shares issued and outstanding                                       26,377
  Additional paid-in capital                                                    24,625,202
  Treasury stock, at cost, 600,000 shares at $.25 per share                       (150,000)
  Accumulated deficit                                                          (32,359,696)
                                                                              ------------
          Total stockholders' deficit                                           (7,858,117)
                                                                              ------------
             Total liabilities and stockholders' deficit                      $  7,276,433
                                                                              ============
</TABLE>
              See accompanying notes to these financial statements.

                                      Q-2
<PAGE>

INTRAOP MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED


<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED         SIX MONTHS ENDED
                                                 MARCH 31,                 MARCH 31,
                                       ------------------------------------------------------------
                                          2007             2006            2007            2006
                                       ------------    ------------    ------------    ------------
Revenues:
<S>                                    <C>             <C>             <C>             <C>
  Product sales                        $    942,248    $    872,202    $  1,087,391    $  1,923,456
  Leasing                                      --            71,959            --           134,127
  Service                                   116,574         158,156         221,047         177,739
                                       ------------    ------------    ------------    ------------
Total revenues                            1,058,822       1,102,317       1,308,438       2,235,322
                                       ------------    ------------    ------------    ------------
Cost of revenues:
  Product sales                             778,030         761,432         858,388       1,678,679
  Leasing                                      --              --              --            38,323
  Service (1)                                41,877         161,135          98,449         174,368
                                       ------------    ------------    ------------    ------------
  Total cost of revenues                    819,907         922,567         956,837       1,891,370
                                       ------------    ------------    ------------    ------------
Gross margin                                238,915         179,750         351,601         343,952
                                       ------------    ------------    ------------    ------------
Operating expenses:
  Research and development (1)              163,301         177,323         326,763         295,480
  General and administrative (1)            541,292         521,081       1,018,781         972,422
  Sales and marketing (1)                   588,109         194,910         964,486         374,151
                                       ------------    ------------    ------------    ------------
 Total operating expenses                 1,292,702         893,314       2,310,030       1,642,053
                                       ------------    ------------    ------------    ------------

Loss from operations                     (1,053,787)       (713,564)     (1,958,429)     (1,298,101)

Other income                                 (1,463)        (24,093)        (57,976)         (3,252)
Gain on extinguishment of debt                  261          28,214             261          28,214
Interest income                                   6           5,553              13           5,553
Interest expense                         (1,296,698)     (1,124,348)     (2,328,654)     (2,052,010)
                                       ------------    ------------    ------------    ------------
Loss before taxes                        (2,351,681)     (1,828,238)     (4,344,785)     (3,319,596)

Provision for income taxes (1)                 --              --              --              --
                                       ------------    ------------    ------------    ------------
Net loss                               $ (2,351,681)   $ (1,828,238)   $ (4,344,785)   $ (3,319,596)
                                       ------------    ------------    ------------    ------------
Basic and diluted net loss per share
   available to common shareholders    $      (0.09)   $      (0.09)   $      (0.16)   $      (0.16)
                                       ------------    ------------    ------------    ------------
Weighted average number of shares in
 calculating net loss per share:
Basic and diluted                        26,377,172      20,517,301      26,352,996      20,379,398
                                       ------------    ------------    ------------    ------------
</TABLE>

(1)      Includes the following amounts related to share-based compensation
         expense of stock options:


                                      Q-3
<PAGE>




INTRAOP MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (CONTINUED)

<TABLE>
<CAPTION>


                                                            THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                   MARCH 31,                   MARCH 31,
                                                           ------------------------------------------------------
                                                             2007           2006             2007           2006



<S>                                                          <C>             <C>             <C>             <C>
Cost of revenues - Service                                   1,050           2,604           1,453           2,604
Research and development                                     8,383          23,011          11,351          23,011
General and administrative                                  10,230          25,668          14,016          25,668
Sales and marketing                                         15,339          21,112          21,185          21,112
                                                           -------         -------         -------         -------
            Total                                          $35,002         $72,395         $48,005         $72,395
                                                           =======         =======         =======         =======
</TABLE>



              See accompanying notes to these financial statements.




                  (Remainder of page intentionally left blank)



                                      Q-4
<PAGE>





INTRAOP MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

<TABLE>
<CAPTION>

                                                                   SIX MONTHS ENDED MARCH 31,

                                                                   2007                2006
                                                               -----------          ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                            <C>                  <C>
   Net loss                                                    $(4,344,785)         $(3,319,596)
   Adjustments to reconcile net loss to net cash
     used for operating activities:
      Depreciation of property and equipment                        38,937               22,056
      Amortization of intangible assets                             36,690                2,923
      Amortization of beneficial conversion rights                 611,628              581,765
      Amortization of debt discount                                796,990              616,551
      Amortization of debt issuance costs                          123,900              119,260
      Non-cash compensation  for options issued                     62,884               69,302
      Non-cash compensation for warrants issued                    149,172               88,822
      Non-cash compensation for common stock issued                 30,000               81,001
      Non-cash revenue received on leased equipment                   --                (62,168)
      Non-cash gain on extinguishment of debt                         --                (28,214)
      Non-cash interest expense                                       --                 38,324
   Changes in assets and liabilities:
         Accounts receivable                                     2,314,528              453,641
         Inventories                                            (1,222,403)            (377,082)
         Prepaid expenses and other current assets                  49,178              (32,669)
         Other assets                                               90,828             (365,702)
         Accounts payable                                          119,180             (130,307)
         Accrued liabilities                                       111,567             (464,173)
         Foreign exchange translation                               (4,215)              13,076
                                                               -----------          -----------
         Net cash (used for) operating activities               (1,035,921)          (2,693,190)
                                                               -----------          -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
   Acquisition of fixed assets                                     (11,140)            (163,016)
                                                               -----------          -----------
         Net cash used for investing activities                    (11,140)            (163,016)
                                                               -----------          -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
     Proceeds from note payable, related party                     278,571               50,000
     Proceeds from note payable, other                           5,934,516            5,498,290
     Payments on note payable, related party                          --               (341,789)
     Payments on note payable, other                            (5,303,673)          (1,936,378)
     Debt issuance costs                                              --               (339,568)
     Proceeds from issuance of common stock                           --                  3,000
                                                               -----------          -----------
             Net cash provided by financing activities             909,414            2,933,555
                                                               -----------          -----------
Net increase (decrease) in cash and cash equivalents              (137,645)              77,349
Cash and cash equivalents, at beginning of period                  149,871               43,441
                                                               -----------          -----------
Cash and cash equivalents, at end of period                    $    12,226          $   120,790
                                                               ===========          ===========
</TABLE>

              See accompanying notes to these financial statements.


                                      Q-5
<PAGE>

INTRAOP MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED  (CONTINUED)

<TABLE>
<CAPTION>

                                                          SIX MONTHS ENDED MARCH 31,
                                                       ---------------------------------
                                                            2007              2006
                                                       ---------------     -------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S>                                                         <C>               <C>
   Cash paid for interest                                   $ 689,348         $ 652,053
   Income taxes paid

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:
  Leased equipment reclassified to inventory                        -           631,114
  Promissory notes and interest payable converted
     to common stock                                                -           250,000

</TABLE>

              See accompanying notes to these financial statements.







                  (Remainder of page intentionally left blank)



                                      Q-6
<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 Intraop Medical
Corporation, a Nevada corporation (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
or omitted pursuant to such rules and regulations. These consolidated financial
statements and the accompanying notes are unaudited and should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
September 30, 2006. In the opinion of management, the consolidated financial
statements herein include adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position as of March 31, 2007, results of operations for the three months and
six months ended March 31, 2007 and March 31, 2006. The results of operations
for the three months and six months ended March 31, 2007 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:

The Company was organized under the laws of the State of Nevada on November 5,
1999 under the name DigitalPreviews.com. On January 21, 2004, the Company filed
a Certificate of Amendment with the Secretary of State of Nevada to change the
name of the Company from DigitalPreviews.com, Inc. to Intraop Medical
Corporation. On March 9, 2005, Intraop Medical Corporation merged with Intraop
Medical, Inc. Until this date, Intraop Medical Corporation had been seeking
viable business opportunities but had not commenced operations and was
considered a development stage company as defined in Statement of Financial
Accounting Standards No. 7.

Intraop Medical, Inc., was incorporated in Delaware in March 1993 to develop,
manufacture, market, and service mobile electron beam treatment systems designed
for intraoperative electron-beam radiotherapy ("IOERT"). IOERT is the
application of radiation directly to a cancerous tumor and/or tumor bed during
surgery. In July 1998, the Company obtained FDA 510(k) clearance on its initial
product, Mobetron. The business of Intraop Medical, Inc is now the sole business
of the Company.

HISTORY:

On March 9, 2005, the Company acquired all the outstanding shares of Intraop
Medical, Inc., a privately-held Delaware corporation in exchange for an
aggregate of 14,175,028 shares of its common stock. The merger transaction was a
tax-free exchange of stock. All of the outstanding common and preferred stock of
Intraop Medical, Inc. was exchanged on a one-for-one basis with the Company's
common stock, and the Company assumed all obligations under outstanding options,
warrants and convertible securities of Intraop Medical, Inc. The acquisition has
been accounted for as a reverse merger (recapitalization), with Intraop Medical,
Inc. deemed to be the accounting acquirer. Accordingly, the historical financial
statements presented herein are those of Intraop Medical, Inc., as adjusted to
give effect to any difference


                                      Q-7
<PAGE>




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

in the par value of the issuer's and the accounting acquirer's stock with an
offset to capital in excess of par value, and those of Intraop Medical
Corporation (the legal acquirer) since the merger. The retained earnings of the
accounting acquirer have been carried forward after the acquisition and Intraop
Medical, Inc.'s basis of assets and liabilities were carried over in the
recapitalization.

BASIS OF CONSOLIDATION:

For the three months and six months ended March 31, 2006, the consolidated
financial statements include the accounts of Intraop Medical Corporation and its
wholly owned subsidiary, Intraop Medical Services, Inc. and IMS Louisville LLC.
As of October 1, 2006, IMS Louisville, LLC was dissolved and all of its
remaining assets and liabilities were assumed by Intraop Medical Corporation.
Consequently, for the three months and six months ended March 31, 2007, the
consolidated financial statements include the accounts of Intraop Medical
Corporation and its wholly owned subsidiary, Intraop Medical Services, Inc. All
significant inter-company balances and transactions have been eliminated in
preparation of the consolidated financial statements.

GOING CONCERN:

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the United States,
which contemplate continuation of the Company as a going concern. However, the
Company has experienced net losses of $2,351,681 and $1,828,238 for the quarters
ended March 31, 2007 and 2006, respectively. In addition, the Company has
incurred substantial monetary liabilities in excess of monetary assets over the
past several years and, as of March 31, 2007, has an accumulated deficit of
$32,359,696. 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 (primarily in Europe and Asia) and
                  expanding its sales efforts.
         o        Evaluating funding strategies in the public and private
                  markets.

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



                                      Q-8
<PAGE>




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

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. Three
customers represented 73.2%, 24.3% and 1.9% of accounts receivable at March 31,
2007. The Company reviews the credit quality of its customers but does not
require collateral or other security to support customer receivables. One
customer accounted for 90.3% and 76.9% of net revenue for the three months ended
March 31, 2007 and 2006 respectively. Two customers accounted for 86.6% and 6.2%
and for 45.5% and 38.5% of net revenue for the six months ended March 31, 2007
and 2006, respectively.

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.

REVENUE RECOGNITION:

Revenue is recognized when earned in accordance with applicable accounting
standards, including Staff Accounting Bulletins 104, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS ("SAB 104"), and the interpretive guidance issued by the
Securities and Exchange Commission and EITF issue number 00-21, ACCOUNTING FOR
REVENUE ARRANGEMENTS WITH MULTIPLE ELEMENTS, of the FASB's Emerging Issues Task
Force. The Company recognizes revenue on sales of machines upon delivery,
provided there are no uncertainties regarding installation or acceptance,
persuasive evidence of an arrangement exists, the sales price is fixed or
determinable, and collection of the related receivable is reasonably assured.
Revenue from maintenance is recognized as services are completed or over the
term of the maintenance agreements. Revenue from the leasing of machines is
recognized over the term of the lease agreements.

The Company recognized revenue on service contracts for the service of Mobetrons
at the customer site with six institutions during the three months and six
months ended March 31, 2007 and three institutions during the three months and
six months ended March 31, 2006. Under these agreements, customers agree to a
one-year service contract for which they receive warranty-level labor and either
full coverage or a credit for a certain contracted dollar amount for
service-related parts. On contracts with credit for service-related parts, the
Company recorded a liability for parts equal to the amount of the parts credit
contracted for by the customer with the remainder of the contract price recorded
as labor related service contract liability. On full coverage contract, the
Company recorded the contract price as service contract liability.


                                      Q-9
<PAGE>


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

INTANGIBLE ASSETS:

Intangible assets consist primarily of amounts paid for manufacturing and design
rights related to the Mobetron and a medical device approval license. These
manufacturing and design rights 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 its fiscal
quarter ended September 30, 2006 resulted in no impairment losses.

INCOME TAXES:

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

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 carryforwards. 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. Diluted net loss per share was the same as basic net loss per
share for all periods presented, since the effect of any potentially dilutive
securities is excluded, as they are anti-dilutive due to the Company's net
losses.


                                      Q-10
<PAGE>



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

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

<TABLE>
<CAPTION>

                                                           THREE MONTHS ENDED                      SIX MONTHS ENDED
                                                   ----------------------------------     ---------------------------------
                                                                MARCH 31,                              MARCH 31,
                                                   ----------------------------------     ---------------------------------
                                                       2007                2006              2007                  2006
                                                   ------------        --------------     ----------------     ------------

Numerator
<S>                                                  <C>                 <C>               <C>                 <C>
Net loss available to common stockholders            (2,351,681)         $ (1,828,238)     (4,344,785)         $ (3,319,596)

Denominator
Weighted average common shares outstanding           26,377,172            20,517,301      26,352,996            20,379,398
                                                   ------------          ------------     -----------          ------------
Total shares, basic                                  26,377,172            20,517,301      26,352,996            20,379,398
                                                   ============          ============     ===========          ============
Net loss per common share:
  Basic and diluted                                       (0.09)         $      (0.09)          (0.16)         $      (0.16)
                                                   ============          ============     ===========          ============
</TABLE>


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

<TABLE>
<CAPTION>

                                                  THREE MONTHS ENDED                  SIX MONTHS ENDED
                                             ------------------------------     --------------------------
                                                       MARCH 31,                         MARCH 31,
                                             ------------------------------     --------------------------
                                                2007               2006            2007           2006
                                             ------------     -------------     ------------   -----------
<S>                                           <C>               <C>              <C>            <C>
Debentures convertible to common stock        20,178,571        17,500,500       20,178,571     17,500,000
Options to purchase common stock               1,902,500         1,689,500        1,902,500      1,689,500
Warrants to purchase common stock             15,427,189        22,923,174       15,427,189     22,923,174
                                             ------------     -------------     ------------   -----------

Potential equivalent shares excluded          37,508,260        42,112,674       37,508,260     42,112,674
                                             ============     =============     ============   ===========
</TABLE>


STOCK-BASED COMPENSATION:

Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), SHARE-BASED PAYMENT ("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 and restricted stock based on their fair values. SFAS 123(R) supersedes
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"), which the Company previously followed in accounting for
stock-based awards. In March 2005, the SEC issued STAFF ACCOUNTING BULLETIN NO.
107 ("SAB 107") to provide guidance on SFAS 123(R). The Company has applied SAB
107 in its adoption of SFAS 123(R). See Note 7 for a detailed discussion of SFAS
123(R).

                                      Q-11
<PAGE>

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

On November 10, 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. FAS 123(R)-3 TRANSITION ELECTION RELATED TO ACCOUNTING
FOR TAX EFFECTS OF SHARE-BASED PAYMENT AWARDS. The Company has elected to adopt
the "short-cut" method provided in the FASB Staff Position for calculating the
tax effects of share-based compensation pursuant to SFAS 123(R). The "short-cut"
method includes simplified methods to establish the beginning balance of the
additional paid-in capital pool ("APIC pool") related to the tax effects of
share-based compensation, and to determine the subsequent impact on the APIC
pool and the Consolidated Statements of Cash Flows of the tax effects of
share-based compensation awards that are outstanding upon adoption of SFAS
123(R).

COMPREHENSIVE LOSS:

Comprehensive loss consists of net loss and other gains and losses affecting
stockholders' equity that, under generally accepted accounting principles are
excluded from net loss in accordance with Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME. The Company, however, does
not have any components of other comprehensive loss as defined by SFAS No. 130
and therefore, for the three months and six months ended March 31, 2007 and
2006, respectively, 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 disclose
geographic area data, which is based on product shipment destination. The
geographic summary of long-lived assets is based on physical location.

RECLASSIFICATION:

The Company made certain reclassifications to the consolidated financial
statements for the three months and six months ended March 31, 2006 to conform
to the presentation of the consolidated financial statements for the period
ended three months and six months ended March 31, 2007. There was no effect on
previously reported net loss.

RECENT ACCOUNTING PRONOUNCEMENTS:

In February 2007, the Financial Accounting Standards Board (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 January 1, 2008. The Company is
currently assessing the potential impact that the adoption of SFAS 159 will have
on its financial statements.

In June 2006, the FASB issued FIN 48, ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES--AN INTERPRETATION OF FASB STATEMENT NO. 109. Companies are required to
apply FIN 48 as of the first annual reporting period that begins after December
15, 2006. The Company does not believe adoption of FIN 48 will have a material
effect on its consolidated financial position, results of operations or cash
flows.



                                      Q-12
<PAGE>




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

In September 2006, the FASB issued FAS No. 13-2, ACCOUNTING FOR A CHANGE OR
PROJECTED CHANGE IN THE TIMING OF CASH FLOWS RELATING TO INCOME TAXES GENERATED
BY A LEVERAGED LEASE TRANSACTION. Companies are required to apply Statement 13-2
as of the first annual reporting period that begins after December 15, 2006. The
Company does not believe adoption of FAS No. 13-2 will have a material effect on
its consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS.
Companies are required to apply Statement 157 as of the first annual reporting
period that begins after November 15, 2007. The Company does not believe
adoption of SFAS No. 157 will have a material effect on its consolidated
financial position, results of operations or cash flows.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (SAB
108), CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS, which addresses how
uncorrected errors in previous years should be considered when quantifying
errors in current-year financial statements. SAB 108 requires companies to
consider the effect of all carry over and reversing effects of prior-year
misstatements when quantifying errors in current-year financial statements and
the related financial statement disclosures. SAB 108 must be applied to annual
financial statements for the first fiscal year ending after November 15, 2006.
The Company is currently assessing the impact of adopting SAB 108 but does not
expect that it will have a material impact on its consolidated financial
position, results of operations or cash flows.

On September 29, 2006, the FASB issued SFAS No.158, EMPLOYERS' ACCOUNTING FOR
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS--AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88, 106, AND 132(R). SFAS No. 158 requires an entity to
recognize in its statement of financial position the over funded or under funded
status of a defined benefit postretirement plan measured as the difference
between the fair value of plan assets and the benefit obligation. Furthermore,
SFAS No. 158 requires that an entity use a plan measurement date that is the
same as its fiscal year-end. An entity will be required to disclose additional
information in the notes to financial statements about certain effects on net
periodic benefit cost in the upcoming fiscal year that arise from delayed
recognition of the actuarial gains and losses and the prior service costs and
credits. The requirement to recognize the funded status of a defined benefit
postretirement plan and the related disclosure requirements is effective for
fiscal years ending after December 15, 2006. The requirement to change the
measurement date to the year-end reporting date is for fiscal years ending after
December 15, 2008. The Company does not anticipate this statement will have any
impact on its consolidated financial position, results of operations or cash
flows.

                                      Q-13
<PAGE>



NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three customers represent 73.2%, 24.4% and 1.9% of accounts receivable at March
31, 2007. One customer accounted for 90.3% and 90.9% of net revenue for the
three months ended March 31, 2007 and 2006 respectively. Two customers accounted
for 86.6% and 6.2% and for 45.5% and 38.5% of net revenue for the six months
ended March 31, 2007 and March 31, 2006, respectively.

Three suppliers represented 33.0%, 28.3% and 15.8% of accounts payable at March
31, 2007. Purchases from these suppliers during the three months ended March 31,
2007 totaled approximately $0, $875,327 and $0 respectively and $0, $1,618,810
and $0 during the six months ended March 31, 2007 respectively.

NOTE 3 - BALANCE SHEET COMPONENTS

INVENTORY:

Inventory consists of the following:

                                                                MARCH 31,
                                                                  2007
                                                           ------------------
  Finished goods                                             $             -
  Work-in-progress                                                 1,000,696
  Purchased parts and raw material, net of reserves
   of $10,159                                                        467,331
                                                           ------------------
                                                             $     1,468,027
                                                           ==================


INVENTORIES, UNDER PRODUCT FINANCING ARRANGEMENT:

Inventories under product financing arrangements consist of the following:

                                                                MARCH 31,
                                                                  2007
                                                           ------------------
  Finished goods                                             $       596,033
  Work-in-progress                                                 1,986,155
  Purchased parts and raw material                                   407,805
                                                           ------------------
                                                             $     2,989,993
                                                           ==================

On April 10, 2006, the Company entered into an amendment to the Revolving Line
(see Note 4) to clarify and amend certain terms and conditions pursuant to which
the Company can obtain financing under the Revolving Line. Under the amendment
to the Revolving Line (the "Product Financing Arrangement"), ownership of the
inventory financed is transferred to the lender. From time to time, the Company
may subsequently repurchase financed inventory from the lender at a price equal
to the original transfer price plus interest.

On October 3, 2006, the Company entered into an Inventory Financing Arrangement
(see Note 4) pursuant to which the Company can obtain inventory financing. Under
the Inventory Financing Arrangement, ownership of the inventory financed is
transferred to the lender, however, the Company may subsequently repurchase
financed inventory from the lender at a price equal to the original transfer
price plus interest.


                                      Q-14
<PAGE>




NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

PROPERTY AND EQUIPMENT AND LEASED EQUIPMENT:

Property and Equipment and Leased Equipment consist of the following:

                                                                MARCH 31,
                                                                  2007
                                                           ------------------
  Equipment                                                  $       265,496
  Computer equipment                                                 125,362
  Furniture & fixtures                                                64,306
  Leasehold improvements                                               5,707
                                                           ------------------
                                                                     460,871
  Less accumulated depreciation                                     (252,687)
                                                           ------------------
                                                             $       208,184
                                                           ==================

Included in property and equipment is an asset acquired under capital lease
obligations with an original cost of $11,742 as of March 31, 2007. Related
accumulated depreciation and amortization of this asset was $3,718 as of March
31, 2007.

INTANGIBLE ASSETS:

Intangible Assets consist of the following:

                                                                MARCH 31,
                                                                  2007
                                                           ------------------
  Mobetron related manufacturing and design rights          $        551,728
  Less accumulated amortization                                     (262,058)
                                                           ------------------
  Mobetron related manufacturing and design rights,
   net                                                               289,670
  Medical device approval license not subject to
   amortization                                                       30,000
                                                           ------------------
  Intangible assets, net                                    $        319,670
                                                           ==================

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

DEFERRED FINANCING COST:

                                                               MARCH 31,
                                                                 2007
                                                           ------------------
         Debt issuance cost                                  $     1,286,906
         Less accumulated amortization                              (661,187)
                                                           ------------------
         Deferred financing cost, net                        $       625,719
                                                           ==================



                                      Q-15
<PAGE>



NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

   ACCRUED LIABILITIES:

A summary is as follows:

                                                               MARCH 31,
                                                                 2007
                                                           ------------------
         Contract advances                                   $       416,500
         Accrued interest payable                                    266,768
         Accrued warranty                                            114,324
         Deferred revenue                                            185,470
         Accrued personal paid leave                                 116,232
         Accrued sales tax payable                                    65,050
         Accrued royalty payable                                     100,000
         Other accrued liabilities                                   104,570
                                                           ------------------
                                                             $     1,368,914
                                                           ==================

WARRANTY:

The Company generally warrants Mobetron systems from the date of shipment
through the earliest to occur of (a) one year from the date of acceptance or (b)
18 months from the date of shipment. The Company is responsible for warranty
obligations arising from its sales and provides for an estimate of its warranty
obligation at the time of sale. The Company's contract manufacturers are
responsible for the costs of any manufacturing defects. Management estimates and
provides a reserve for warranty upon sale of a new machine based on historical
warranty repair expenses of the Company's installed base.

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

                                                               MARCH 31,
                                                                 2007
                                                           ------------------

         Warranty accrual at the beginning of period         $       133,272
         Accrual for warranties during the period                     14,291
         Actual product warranty expenditures                        (33,239)
                                                           ------------------
         Warranty accrual at the end of the period           $       114,324
                                                           ==================

                                      Q-16
<PAGE>




NOTE 4 - BORROWINGS
<TABLE>
<CAPTION>

Outstanding notes payable were as follows:
                                                                                  MARCH 31,
                                                                                    2007
                                                                              ------------------
<S>                                                                             <C>
     Notes payable, related parties, current                                    $       821,528
     Less debt discounts due to warrants                                                (20,922)
                                                                              ------------------
        Notes payable, related parties, net unamortized debt
            discounts                                                           $       800,606
                                                                              ==================
     Convertible debentures                                                     $     6,400,000
     Product financing arrangement                                                    4,337,824
     Senior secured debentures                                                        1,500,000
     Short term debentures                                                              971,429
     Other notes                                                                        239,635
     Less debt discounts due to warrants                                             (1,807,118)
     Less beneficial conversion features                                             (1,927,600)
                                                                              ------------------
     Notes payable, net of debt discounts and beneficial conversion features          9,714,170

     Less current portion                                                            (5,671,625)
                                                                              ------------------
        Notes payable, other, net of current portion, unamortized debt
            discounts and beneficial conversion features                        $     4,042,545
                                                                              ==================
</TABLE>

NOTES PAYABLE, RELATED PARTIES:

Notes payable to related parties of $800,606 at March 31, 2007 includes $592,958
related to notes issued to an officer of the Company. These notes are due on
demand and bear interest at 9% per annum. The remaining $228,570 of notes
payable to related parties, are related to certain short term debentures issued
in January 2007 to certain officers and directors of the Company, or entities
controlled by them, in January 2007. These debentures bear interest at 8% per
annum and mature on May 9, 2007. Subsequent to March 31, 2007, the holders of
these debentures agreed to extend the maturity date until June 30, 2007. As a
further inducement to enter into the short-term debentures, the Company granted
warrants to the holders to purchase 244,895 shares of the Company's common stock
exercisable at the rate of $0.28 and expiring in January, 2012.


CONVERTIBLE DEBENTURES

In August 2005, the Company sold $2,500,000 of convertible debentures to certain
investors. The debentures are convertible into the Company's common stock at
$0.40 per share at the option of the debenture holders and bear interest at 7%
per annum, payable quarterly. The debentures have a term of three years with
principal due in full at maturity. As a further inducement, the Company granted
the


                                      Q-17
<PAGE>



NOTE 4 - BORROWINGS (CONTINUED)

holders of the debentures warrants to purchase 3.125 million shares of the
Company's common stock, the unexercised balance of which expired September 30,
2006, and warrants to purchase 3.125 million shares of the Company's common
stock, expiring August 31, 2010. Both sets of warrants are exercisable at $0.40
per share

In October 2005, the Company sold an additional $2,500,000 of convertible
debentures to certain investors. The debentures are convertible into Company
common stock at $0.40 per share at the option of the note holders and bear
interest at 7% per annum, payable quarterly. The debentures have a term of three
years with principal due in full at maturity. As a further inducement, the
Company granted the holders of the convertible debentures short-term warrants to
purchase 3.125 million shares of its common stock, the unexercised balance of
which expired November 2006, and warrants to purchase 3.125 million shares of
its common stock, expiring October 2010. Both sets of warrants are exercisable
at $0.40 per share.

In November 2005, the Company sold an additional $2,000,000 of convertible
debentures to certain investors. The debentures are convertible to Company
common stock at $0.40 per share at the option of the note holders and bear
interest at 7% per annum, payable quarterly. The debentures have a term of three
years with principal due in full at maturity. As a further inducement, the
Company granted the holders of the convertible debentures short-term warrants to
purchase 2.5 million shares of its common stock, the unexercised balance of
which expired December 2006, and warrants to purchase 2.5 million shares of its
common stock expiring November 4, 2010. Both sets of warrants are exercisable at
$0.40 per share.

The convertible debentures and associated warrants include a price reset
provision. Under this provision the conversion price of the debentures and the
exercise price of the warrants would be adjusted to take into account the effect
of certain dilutive events. The price reset provision of the convertible
debentures and associated warrants would be triggered if the following events
occur:

         o        the payment of a dividend in the form of common stock or other
                  equivalent equity security, or the occurrence of a stock
                  split, reverse stock split, or reclassification of common
                  stock. Upon such event, the conversion price of the debentures
                  and the exercise price of the warrants would be adjusted by a
                  percentage equal to the percentage of the Company outstanding
                  common shares prior to the event over the Company outstanding
                  common shares and other equivalent equity securities after the
                  event.
         o        the re-pricing, sale, or right to re-price or buy the
                  Company's common stock or equivalent instrument at a price
                  less than the conversion price. Upon such event, the
                  conversion price of the debentures and the exercise price of
                  the warrants would be adjusted to the price of the Company
                  common stocks or other equivalent equity securities involved
                  in the triggering event.
         o        the making of distribution of cash, evidence of indebtedness,
                  cash other or other assets, or rights to any equity securities
                  to the holders of the Company's common stock. Upon such event,
                  the conversion price of the debentures and the exercise price
                  of the warrants would be adjusted by a percentage equal to the
                  percentage change in the Company common stock price resulting
                  from this event.
         o        the occurrence of a transaction for the merger, sale, tender
                  offer, or recapitalization of the Company. Upon such event,
                  the conversion price of the debentures and the exercise price
                  of the warrants would be adjusted to allow the holders of the
                  convertible debentures to receive upon conversion, the same
                  consideration received by the holder of the Company common


                                      Q-18
<PAGE>

                  stocks at the time of the triggering event.

NOTE 4 - BORROWINGS (CONTINUED)

Pursuant to the registration rights agreements with the holders of the
convertible debentures dated August 31, 2005 and October 25, 2005, the Company
was required to file by September 30, 2005 and November 24, 2005 respectively, a
resale registration statement covering the resale of the shares issuable to the
investors upon the conversion of their debt and the exercise of their warrants.
The Company has filed the required registration statement. The registration
rights agreements required the Company to pay monthly liquidated damages if:

         o        a registration statement was not filed on or prior to
                  September 30, 2005 and November 24, 2005, respectively, or
         o        the Company fails to file with the Commission a request for
                  acceleration in accordance with Rule 461 promulgated under the
                  Securities Act, within five trading days of the date that the
                  Company is notified by the Commission that a registration
                  statement will not be "reviewed," or not subject to further
                  review, or
         o        prior to its effectiveness date, the Company fails to file a
                  pre-effective amendment and otherwise respond in writing to
                  comments made by the Commission in respect of such
                  registration statement within 10 calendar days after the
                  receipt of comments by or notice from the Commission that such
                  amendment is required in order for a registration statement to
                  be declared effective, or
         o        a registration statement filed or required to be filed, is not
                  declared effective by the Commission by December 29, 2005 and
                  February 22, 2006, respectively, or
         o        after December 29, 2005 and February 22, 2006, respectively, a
                  registration statement ceases for any reason to remain
                  continuously effective as to all registrable securities for
                  which it is required to be effective, or the investors are not
                  permitted to utilize the prospectus therein to resell such
                  registrable securities for 10 consecutive calendar days but no
                  more than an aggregate of 15 calendar days during any 12-month
                  period.

The amount of monthly liquidated damages equals 2.0% of the aggregate purchase
price paid by the investors for any registrable securities held by the
investors. Seven day late payment of the damages is subject to interest at an
annual rate of 18%. At March 31, 2007 the Company determined the maximum
potential liquidated damages to be approximately, $1,504,645.

The Company evaluated the liquidated damages feature of the registration rights
agreements in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"). The liquidated damages provisions qualify as embedded derivative
instruments at issuance and, because they do not qualify for any scope exception
within SFAS 133, they were required by SFAS 133 to be recorded as derivative
financial instruments. Further, in accordance with EITF 05-04, "The Effect of a
Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF
Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the Company also evaluated
whether the registration rights agreements, the convertible debentures, and
associated warrants should be combined into and accounted for as a single unit
or accounted for as separate financial agreements.



                                      Q-19
<PAGE>




NOTE 4 - BORROWINGS (CONTINUED)

In considering the appropriate treatment of these instruments, the Company
observed that:

         o        Although entered into contemporaneously, the debentures,
                  warrants and registration rights agreements are nevertheless
                  separate legal agreements.
         o        Payment of liquidated damages penalties under the registration
                  rights agreements does not alter the investors' rights under
                  either the warrant or debenture agreements. The debentures and
                  warrants have values which are based on their interest rate
                  and the relation between their conversion price or exercise
                  price and the value of the Company's common stock. This value
                  is independent of any payment for liquidated damages under the
                  registration rights agreements, which is based on how long the
                  shares remain unregistered.
         o        The various agreements do not relate to the same risk. The
                  risk inherent in the debentures relates to the Company's
                  ability to repay these instruments as and when they come due
                  or to the extent converted into common stock, to the price of
                  the Company's common stock. The warrants similarly bear risk
                  related to the value of the Company common stock. The
                  liquidated damages penalty under the registration rights
                  agreements relates to the risk of the Company filing a
                  registration statement and having it declared effective.

Thus, in light of the above facts and circumstances and accordance with guidance
in EITF 05-4, View C, the Company evaluated and treated the registration rights
agreements, convertible debentures and associated warrants as separate free
standing agreements.

At issuance of the convertible debentures on August 31, 2005, October 31, 2005
and November 4, 2005, the Company assigned no initial fair value to the
registration rights agreements. In subsequent periods, the carrying value of the
derivative financial instrument related to the registration rights agreements
will be adjusted to its fair value at each balance sheet date and any change
since the prior balance sheet date will be recognized as a component of other
income/ (expense).

The estimated fair value of the registration rights agreements was determined
using the discounted value of the expected future cash flows. At September 30,
2005 and November 24, 2005, the Company was not able to have a registration
statement declared effective by the SEC as required by the registration rights
agreements. However, in January 2006, the Company obtained an amendment to the
registration rights agreements to extend the required filing date of the
Company's initial registration statement to January 27, 2006, a deadline that
the Company met, and to extend the required effectiveness date of that same
initial registration statement to March 31, 2006, a deadline the Company did not
meet, and to waive all amounts potentially due under the liquidated damages
clause which would have been due but for the waiver. On April 18, 2006 the
Company obtained a further amendment to the registration rights agreements to
further extend the required effectiveness date of its initial registration
statement to May 15, 2006 for investors subject to the August 31, 2005
registration rights agreement and extend to May 30, 2006 the date on which the
Company must have an effective registration statement for 50% of the
registerable shares for investors who were signatories to the October 25, 2005
registration rights agreement, both deadlines the Company met. On June 19, 2006,
the Company met the requirements to have an effective registration statement for
all shares required to be registered pursuant to the registrations right
agreements. The Company believes that, in the future, it will be able to meet
the registration requirements of the registration rights agreements and that, in
the event it cannot, and assuming the Company is making reasonable efforts to
file and have a registration statement declared effective, the holders of the
debentures will waive the liquidated damages required under the registration
rights agreements. As a result, at March 31, 2007, the Company assigned no value
to the potential liquidated damages.


                                      Q-20
<PAGE>


NOTE 4 - BORROWINGS (CONTINUED)

In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"), certain features of the convertible debentures are not clearly and
closely related to the characteristics of the convertible debentures. SFAS133
requires that, unless they qualify under a scope exemption, these features be
recorded as derivative financial instruments. In accordance with the guidelines
provided by SFAS133 and EITF 00-19, the following convertible debentures
features qualified for a scope exemption under SFAS133 and were recorded as
equity instruments:

         o        Beneficial conversion features: these debentures are
                  convertible at the option of the holder with the following
                  provisions:
         o        the conversion can be at anytime on or prior to maturity;
         o        holders of the convertible debentures are subject to certain
                  conversion restrictions; and o the conversion price is subject
                  to a conversion price reset provision.

The value of the beneficial conversion features, $4,044,212, was limited to the
relative fair value of the debentures and will be amortized to interest over the
life of the debentures.

Only the debt acceleration provision upon default features of the convertible
debentures did not qualify for a scope exception under SFAS133. Accordingly,
they were required by SFAS 133 to be accounted for separately from the debt
instrument and recorded as derivative financial instruments.

At issuance of the convertible debentures on August 31, 2005, October 25, 2005,
October 31, 2005 and November 4, 2005, the derivative features of the
convertible debentures had no initial fair value as the Company estimated the
probability of occurrence of these features to be nil or extremely low. In
subsequent periods, the carrying value of the derivative financial instrument
related to the derivative features of the convertible debentures will be
adjusted to its fair value at each balance sheet date and any change since the
prior balance sheet date will be recognized as a component of other income /
(expense).

As of March 31, 2007, the Company assigned no value to the derivative features
of the convertible debentures, as the Company believes the probability of
occurrence of a default under the debentures to be nil or extremely low.

The estimated fair value of the derivative features was determined using the
probability weighted averaged expected cash flows methodology. Accordingly, the
fair value of the derivative features can fluctuate significantly based on
changes in the Company estimates of the probability of occurrence of a default
on the debentures and their then outstanding balance.

The relative fair value of the warrants issued was determined using the
Black-Scholes option-pricing model.

The relative fair value of the warrants, the debentures conversion feature and
the debentures derivative features were recorded as a note discount and will be
amortized to interest over the life of the debentures.

From July to August 2006, the Company temporarily reduced the exercise price of
6 million short term warrants associated with the convertible debentures from
$0.40 to $0.30 per share for a 15 day period. The fair value attributable to the
short term warrants repricing was recorded as a note discount and amortized into
interest over the life of the debentures.

                                      Q-21
<PAGE>


NOTE 4 - BORROWINGS (CONTINUED)

In January 2007, a result of the issuance of new short term debentures, the
Company agreed to lower the exercise price of 5,625,000 long term warrants held
by the certain convertible debenture holders from $0.40 per share to $0.28 per
share for the remainder of the life of the warrants. The fair value attributable
to the warrant repricing was recorded as a note discount and will be amortized
into interest over the life of the debentures. In addition, the Company also
agreed as part of the issuance of the January 2007 short term debentures, to
lower the conversion price on $3.9 million of outstanding principal under the
convertible debentures from $0.40 per share to $0.28 per share. The fair value
of the change in beneficial conversion features was recorded as a note discount
and will be amortized to interest over the life of the debentures

The Company evaluated the change in fair value of the conversion option brought
out by modifying the convertible debt agreement in accordance with EITF 05-07
and EITF 96-19. The Company determined that the present value of the original
debt instrument's cashflow varied less than 10% from the present value of the
modified debt. Accordingly, the modification did not result in debt
extinguishment, and was subject to EITF 96-19 modification accounts. The change
in fair value of the conversion option is treated as an adjustment to interest
expense over the remaining term of the debt.

At March 31, 2007 the outstanding principal balances of the convertible
debentures were $6,400,000 and the unamortized note discount was as follows:

<TABLE>
<CAPTION>

Relative fair value of warrants allocated to note discount
<S>                                                                                     <C>
Debentures issuance -- August 2005                                                      $  1,081,138
Debentures issuance --October 2005                                                           995,963
Debenture issuance -- November 2005                                                          748,267
Temporary warrant repricing - July and August 2006                                           119,113
Warrant repricing -- January 2007                                                             26,693
                                                                                      ---------------
Total relative fair value of warrants allocated to note discount                           2,971,174
Less accumulated amortization                                                             (1,554,831)
                                                                                      ---------------
Note discount related to warrants, net                                                  $  1,416,343
                                                                                      ===============
Relative fair value of beneficial conversion features  allocated to note discount
Debentures issuance -- August 2005                                                      $  1,418,862
Debentures issuance --October 2005                                                         1,487,797
Debenture issuance -- November 2005                                                          998,267
Conversion price reset -- January 2007                                                       139,286
                                                                                      ---------------

Total relative fair value of beneficial conversion features allocated to note discount     4,044,212
Less accumulated amortization                                                             (2,116,612)
                                                                                      ---------------

Note discount related to beneficial conversion features, net                            $  1,927,600
                                                                                      ===============
</TABLE>


                                      Q-22
<PAGE>



NOTE 4 - BORROWINGS (CONTINUED)

INVENTORY AND RECEIVABLES FINANCING ARRANGEMENTS:

In August 2005, the Company entered into a $3,000,000 revolving combined
inventory financing and international factoring agreement (the "Revolving Line")
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 financings and
24% per annum on factoring related borrowings under the line. The loan is
secured by a lien on the financed inventory and receivables. As a further
inducement to provide the financing, the Company also agreed to grant the lender
a warrant, which included piggyback registration rights, for 576,923 shares of
its common stock at an exercise price of $0.52 per share. The warrant has a two
year term. The fair value attributable to the warrant of $123,209 was recorded
as a note discount and will be amortized to interest over a one year period from
issuance.

On April 10, 2006, the Company entered into an amendment to the Revolving Line
to clarify and amend certain terms and conditions pursuant to which the Company
can obtain financing under the Revolving Line. Under the amendment to the
Revolving Line (the "Product Financing Arrangement"), 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 interest.

On June 1, 2006, the Company entered into an amendment to the Product Financing
Arrangement, increasing the debt facility available under the Product Financing
Arrangement to $4,000,000. Under the terms of the amendment, the Company granted
to the lender warrants to purchase 192,307 shares of its common stock at an
exercise price of $0.52 per share with an expiration date of May 31, 2008 and a
fair value of $77,264. Additionally, the Company agreed to extend by one year to
August 15, 2007, the expiration date of 576,923 warrants previously issued to
the lender representing a fair value of $45,945. The fair value attributable to
the warrant and to the expiration date extension was recorded as a note discount
and will be amortized to interest over a one year period.

In January 2007, the Company agreed to reduce the price of the previously issued
warrants from $0.52 per share to $0.28 per share. The Company also agreed to
extend the expiration date of the warrants from May 31, 2008 to August 31, 2010.
The fair value of the price reduction and extension of expiration period of
$58,927 was recorded as a note discount and will be amortized into interest over
a period of the notes payable. At March 31, 2007 the outstanding principal
balance under this agreement was $3,587,838 and the unamortized note discount
was $52,809.


In October 2006, the Company entered into a stand-alone, $700,000 revolving
inventory agreement (the "Inventory Financing Arrangement") and drew down the
entire $700,000 available under the line. Under the terms of the agreement, the
Company agreed to pay interest at the rate of 12% per annum on inventory
financing under the line. 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 interest.
On March 14, 2007 the Company entered into an amendment to the Inventory
Financing Arrangement, increasing the debt facility available to $750,000. The
outstanding balance under the Inventory Financing Arrangement at March 31, 2007
was $750,000.



                                      Q-23
<PAGE>



NOTE 4 - BORROWINGS (CONTINUED)


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. In
addition, the Company issued 1,600,000 shares of its 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. As a further inducement, the Company
granted the holders of the debentures warrants to purchase 2.5 million shares of
its common stock at an exercise price of $0.40 per share with an expiration date
of August 31, 2010.

The warrants associated with the senior debentures include a price reset
provision. Under this provision the exercise price of the warrants would be
adjusted to take into account the effect of certain dilutive events. The price
reset provision of the warrants associated with the senior debentures would be
triggered if the following events occur:

         o        the payment of a dividend in the form of common stock or other
                  equivalent equity security, or the occurrence of a stock
                  split, reverse stock split, or reclassification of common
                  stock. Upon such event, the exercise price of the warrants
                  would be adjusted by a percentage equal to the percentage of
                  the Company outstanding common shares prior to the event over
                  the Company outstanding common shares and other equivalent
                  equity securities after the event.
         o        the re-pricing, sale, or right to re-price or buy the
                  Company's common stock or equivalent instrument at a price
                  less than the conversion price. Upon such event, the exercise
                  price of the warrants would be adjusted to the price of the
                  Company common stocks or other equivalent equity securities
                  involved in the triggering event.
         o        the making of distribution of cash, evidence of indebtedness,
                  cash other or other assets, or rights to any equity securities
                  to the holders of the Company's common stock. Upon such event,
                  the exercise price of the warrants would be adjusted by a
                  percentage equal to the percentage change in the Company
                  common stock price resulting from this event.
         o        the occurrence of a defined event of default under the senior
                  debentures, upon which event the exercise price of the
                  warrants would be reduced to one cent per share.
         o        the occurrence of a transaction for the merger, sale, tender
                  offer, or recapitalization of the Company. Upon such event,
                  the exercise price of the warrants would be adjusted to allow
                  the holders of the warrants to receive upon conversion, the
                  same consideration received by the holder of the Company
                  common stocks at the time of the triggering event.

Pursuant to the registration rights agreement with the holders of the senior
debentures dated August 31, 2005, the Company agreed to file by September 30,
2005, a resale registration statement covering the resale of the shares issuable
to the holders of the senior debentures upon the exercise of their warrants. The
registration rights agreement required the Company to pay monthly liquidated
damages if:

         o        a registration statement was not filed on or prior to
                  September 30, 2005, or
         o        the Company fails to file with the Commission a request for
                  acceleration in accordance with Rule 461 promulgated under the
                  Securities Act, within five trading days of the date that the
                  Company is notified by the Commission that a registration
                  statement will not be "reviewed," or not subject to further
                  review, or


                                      Q-24
<PAGE>




NOTE 4 - BORROWINGS (CONTINUED)

         o        prior to its effectiveness date, the Company fails to file a
                  pre-effective amendment and otherwise respond in writing to
                  comments made by the Commission in respect of such
                  registration statement within 10 calendar days after the
                  receipt of comments by or notice from the Commission that such
                  amendment is required in order for a registration statement to
                  be declared effective, or
         o        a registration statement filed or required to be filed is not
                  declared effective by the Commission by December 29, 2005, or
         o        after December 29, 2005 a registration statement ceases for
                  any reason to remain continuously effective as to all
                  registrable securities for which it is required to be
                  effective, or the investors are not permitted to utilize the
                  prospectus therein to resell such registrable securities for
                  10 consecutive calendar days but no more than an aggregate of
                  15 calendar days during any 12-month period.

The amount of monthly liquidated damages equals 2.0% of the aggregate purchase
price paid by the investors for any registrable securities held by the
investors. Late payment beyond seven days is subject to interest at an annual
rate of 18%. At March 31, 2007, the Company determined the maximum potential
liquidated damages to be approximately, $523,762.

The Company evaluated the liquidated damages feature of the registration rights
agreement in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"). The liquidated damages qualify as embedded derivative instruments
at issuance and, because they do not qualify for any scope exception within SFAS
133, they were required by SFAS 133 to be recorded as derivative financial
instruments. Further, in accordance with EITF 05-04, "The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No.
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the Company also evaluated
whether the registration rights agreement, the senior debentures, and associated
warrants should be combined into and accounted for as a single unit or accounted
for as separate financial agreements. In considering the appropriate treatment
of these instruments, the Company observed that:

         o        Although entered into contemporaneously, the debentures,
                  warrants and registration rights agreements are nevertheless
                  separate legal agreements.
         o        Payment of the liquidated damages penalties under the
                  registration rights agreement does not alter the investors'
                  rights under either the warrant or debenture agreements. The
                  debentures and warrants have values which are based on their
                  interest rate and the relation between their conversion price
                  or exercise price and the value of the Company's common stock.
                  This value is independent of any payment for liquidated
                  damages under the registration rights agreement, which is
                  based on how long the shares remain unregistered.
         o        The two agreements do not relate to the same risk. The risk
                  inherent in the debentures relates to the Company ability to
                  repay these instruments as and when they come due or to the
                  extent converted into common stock, to the price of the
                  Company's common stock. The warrants similarly bear risk
                  related to the value of the Company common stock. The
                  liquidated damages penalty under the registration rights
                  agreement relates to the risk of the Company filing a
                  registration statement and having it declared effective.


                                      Q-25
<PAGE>




NOTE 4 - BORROWINGS (CONTINUED)

Thus, in light of the above facts and circumstances and accordance with guidance
in EITF 05-4, View C, the Company evaluated and treated the registration rights
agreement, senior debentures and associated warrants as separate free standing
agreements.

At issuance of the senior debentures on August 31, 2005, the Company assigned no
initial fair value to the registration rights agreement. In subsequent periods,
the carrying value of the derivative financial instrument related to the
registration rights agreement will be adjusted to its fair value at each balance
sheet date and any change since the prior balance sheet date will be recognized
as a component of other income/ (expense).

The estimated fair value of the registration rights agreement was determined
using the discounted value of the expected future cash flows. At September 30,
2005, the Company was not able to have a registration statement declared
effective by the SEC as required by the registration rights agreement. However,
in January 2006, the Company obtained an amendment to the registration rights
agreement to extend the required filing date of the Company's initial
registration statement to January 27, 2006, a deadline that the Company met, and
to extend the required effectiveness date of that same initial registration
statement to March 31, 2006, a deadline the Company did not meet, and to waive
all amounts potentially due under the liquidated damages clause which would have
been due and payable but for the waiver. On April 18, 2006 the Company obtained
a further amendment to the registration rights agreement to further extend the
required effectiveness date of its initial registration statement to May 15,
2006, a deadline the Company met. On June 19, 2006, the Company met the
requirements to have an effective registration statement for all shares required
to be registered pursuant to the registrations right agreement. The Company
believes that, in the future, it will be able to meet the registration
requirements of the registration rights agreement and that in the event it
cannot, and assuming the Company is making reasonable efforts to file and have a
registration statement declared effective, the holders of the debentures will
waive the liquidated damages required under the registration rights agreement.
As a result, at March 31, 2007, the Company assigned no value to the potential
liquidated damages.

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
to interest over the life of the debentures. At March 31, 2007 the outstanding
principal balance under the senior secured debentures was $1,500,000 and the
unamortized note discount was $249,048.

SHORT TERM DEBENTURES

In January 2007 the Company sold $971,430 of short-term debentures to certain
existing convertible debenture holders. These short term debentures bear
interest at 8% per annum and mature on May 9, 2007. Subsequent to March 31,
2007, the holders of these debentures agreed to extend the maturity date until
June 30, 2007. As a further inducement to purchase the short term debentures,
the Company granted to the purchasers warrants to purchase 1,040,813 shares of
the Company's common stock at an exercise price of $0.28 per share and expiring
in January 2012. Additionally, the Company also agreed to reduce from $0.40 per
share to $0.28 per share, the conversion price of $3,900,000 of convertible
debentures held by the short term debenture purchasers and to reduce the
exercise price of warrants to purchase 5,625,000 shares of common stock
associated with the convertible debentures from $0.40 per share to $0.28 per
share. The Company has agreed to file a registration statement for the new
warrants associated with the short term debentures and the additional shares
which would result from the conversion of the convertible debentures at the new
conversion price.



                                      Q-26
<PAGE>



NOTE 4 - BORROWINGS (CONTINUED)

OTHER NOTES:

The Company has a twelve month payment arrangement with a vendor in the original
amount of $312,500 related to the acquisition of certain Mobetron design rights.
The payment arrangement bears interest of 10% per annum. At March 31, 2007, the
principal balance outstanding under this payment arrangement was $24,965.

The Company has notes payable to two individuals. These notes are due on demand
and bear interest at 9% per annum. At March 31, 2007, the outstanding principal
balance under the notes was $214,670.

NOTE 5 - CAPITAL LEASE

CAPITAL LEASE

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

                                                                   MARCH 31
                                                                     2007
                                                                --------------
         Capital lease for equipment                              $     8,879
         Less: current portion                                         (2,314)
                                                                --------------
         Capital lease obligations, net of current portion        $     6,565
                                                                ==============

NOTE 6 - COMMON STOCK

SHARES RESERVED FOR FUTURE ISSUANCE:

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


                                                                   MARCH 31
                                                                     2007
                                                                --------------
         2005 Equity Incentive Plan                                 3,597,000
         Common stock warrants                                     15,427,189
                                                                --------------
         Total                                                     19,024,189
                                                                ==============

ISSUANCE OF COMMON STOCK AS CONSIDERATION FOR SERVICES:

On April 7, 2006, the Company entered into an agreement with Emerging Markets
Consulting, LLC ("EMC") pursuant to which it issued 100,000 shares of its common
stock to EMC having a market value of $70,000, which expense was recorded as a
component of general and administrative expense. Further pursuant to the
agreement, the Company agreed, upon the first day of the second six-month term
of the agreement, should the Company not cancel the agreement, to issue to EMC
an additional 100,000 shares of common stock. In December 2006, the Company
issued and expensed the additional 100,000 shares of common stock which had a
market value of $30,000.


                                      Q-27
<PAGE>




NOTE 7 - STOCK OPTIONS

In 1995, the Company adopted the 1995 Stock Option Plan (the "Plan") and
reserved 2,400,000 shares of common stock for issuance under the Plan. On
December 7, 2005, the Company's Board of Directors voted to amend and restate
the Company's 1995 Stock Option Plan to among other things, (a) extend the
expiration date of the Plan to December 7, 2015; (b) change the name of the plan
to the "Intraop Medical Corporation 2005 Equity Incentive Plan" (the "New Plan")
and (c) increase the number of shares reserved under the New Plan from 2,400,000
shares to 4,000,000 shares.

Under the New Plan, incentive options to purchase the Company's common stock may
be granted to employees at prices not lower than fair market value at the date
of grant as determined by the Board of Directors. In addition, incentive or
non-statutory options may be granted to persons owning more than 10% of the
voting power of all classes of stock at prices no lower than 110% of the fair
market value at the date of grant as determined by options (no longer than ten
years from the date of grant, five years in certain instances). Options granted
generally vest at a rate of 33% per year and have 10-year contractual terms.

Effective January 1, 2006, the Company 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 the Company's
employees and directors including stock options under the New Plan. The
Company's financial statements for the three months and six months ended March
31, 2007, reflect the effect of SFAS 123(R). In accordance with the modified
prospective transition method, the Company's financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R). Share-based compensation expense recognized is based on the value
of the portion of share-based payment awards that is ultimately expected to
vest. Share-based compensation expense recognized in the Company's Consolidated
Statements of Operations during the three months ended March 31, 2007 included
compensation expense for share-based payment awards granted prior to, but not
yet vested, as of December 31, 2005 based on the grant date fair value estimated
in accordance with the pro forma provisions of SFAS 123 and compensation expense
for the share-based payment awards granted subsequent to December 31, 2005 based
on the grant date fair value estimated in accordance with the provisions of SFAS
123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to
attribute the value of share-based compensation to expense using the
straight-line attribution. Share-based compensation expense related to stock
options for the three months and six months ended March 31, 2007, was $35,003
and $48,005 respectively. The corresponding amounts for the three months and six
months ended March 31, 2006 were $72,395 and $72,395 respectively.

Upon adoption of SFAS 123(R), the Company elected to value its share-based
payment awards granted after January 1, 2006 using the Black-Scholes
option-pricing model, which was previously used for its pro-forma information
required under SFAS 123. 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. The Company's options have characteristics significantly
different from those of traded options, and changes in the assumptions can
materially affect the fair value estimates.


                                      Q-28
<PAGE>



NOTE 7 - STOCK OPTIONS (CONTINUED)

The fair value of options granted under the Plan and the New Plan were estimated
at the date of grant using the Black-Scholes model with the following weighted
average assumptions:
<TABLE>
<CAPTION>

                                        THREE MONTHS ENDED                     SIX MONTHS ENDED
                                             MARCH 31,                             MARCH 31,
                               -----------------------------------   -----------------------------------
                                    2007                 2006              2007                2006
                               -----------------------------------   -----------------------------------

<S>                              <C>                   <C>            <C>                   <C>
Expected term (in years)         5.40 to 6.40            6.5            5.4 to 6.4           4 to 10
Risk-free interest rate         4.65% to 4.66%          4.79%         4.65% to 4.66%      4.41% to 4.79%
Expected volatility                172.65%             106.82%            172.65%       103.37% to 106.82%
Expected dividend yield               0%                 0%                 0%                  0%
  Weighted average fair
   value at grant date              $0.30               $0.54              $0.30              $1.07
</TABLE>

The expected term of stock options represents the weighted-average period the
stock options are expected to remain outstanding. The expected term is based on
the observed and expected time to post-vesting exercise and forfeitures of
options by employees. Upon the adoption of SFAS 123(R), the Company determined
the expected term of stock options using the simplified method as allowed under
SAB107.

Prior to January 1, 2006, the Company determined the expected term of stock
options based on the option vesting period. Upon the adoption of SFAS 123(R),
the Company used historical volatility measured over a period equal to the
option expected terms in deriving its expected volatility assumption as allowed
under SFAS 123(R) and SAB 107. Prior to January 1, 2006, the Company also used
its historical stock price volatility in accordance with SFAS 123 for purposes
of its pro-forma information. The risk-free interest rate assumption is based
upon observed interest rates appropriate for the term of the Company's stock
options. The expected dividend assumption is based on the Company's history and
expectation of dividend payouts.
As share-based compensation expense recognized in the Consolidated Statements of
Operations for the three months ended March 31, 2007 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 historical experience. In the
Company's pro forma information required under SFAS 123 for the periods prior to
January 1, 2006, the Company accounted for forfeitures as they occurred.

                                      Q-29
<PAGE>



NOTE 7 - STOCK OPTIONS (CONTINUED)

The effect of recording share-based compensation expense for the three months
ended March 31, 2007 is as follows:

<TABLE>
<CAPTION>

                                                                                      THREE MONTHS         SIX MONTHS
                                                                                          ENDED              ENDED
                                                                                     MARCH 31, 2007      MARCH 31, 2007
                                                                                   ------------------  ------------------
<S>                                                                                  <C>                 <C>
Stock-based compensation expense related to employee stock options and employee      $      35,003       $      48,005
stock purchases
Tax benefit                                                                                 --                  --
                                                                                   ------------------  ------------------
Net decrease in net earnings                                                         $      35,003       $      48,005
                                                                                   ==================  ==================

Effect on:
Cash flows from operating activities                                                        --                  --
Cash flows from financing activities                                                        --                  --

Effect on:
Net earnings per share -- Basic                                                      $      --           $      --

                                                                                   ==================  ==================
Net earnings per share -- Diluted                                                    $      --           $      --
                                                                                   ==================  ==================

</TABLE>

Total share-based compensation expense capitalized as part of inventories for
the three months and six months ended March 31, 2007 was $4,875 and $6,478
respectively. Total share-based compensation expense applied to warranty reserve
for the three months and six months ended March 31, 2007 was $509 and $704
respectively.

Activity under the New Plan is presented below:

<TABLE>
<CAPTION>
                                                                                    WEIGHTED
                                                                                    AVERAGE
                                                                      WEIGHTED      REMAINING     AGGREGATE
                                         SHARES                       AVERAGE      CONTRACTUAL    INTRINSIC
                                       AVAILABLE      NUMBER OF       EXERCISE        TERM          VALUE
                                       FOR GRANT       SHARES          PRICE       (IN YEARS)        (1)
                                     -------------  -------------  -------------  -------------  -------------
<S>                                     <C>            <C>           <C>                  <C>
Balance at September 30, 2006           1,857,000      1,740,000     $     0.71           6.13             --
Granted                                  (170,000)       170,000           0.35             --             --
Authorized                                     --             --             --             --             --
Cancelled or expired                        7,500         (7,500)         (0.50)            --         (2,625)
Exercised                                      --             --             --             --             --
                                     -------------  -------------  -------------  -------------  -------------
Balance at March 31, 2007               1,694,500      1,902,500     $     0.68           6.02     $       --
                                     -------------  -------------  -------------  -------------  -------------
Exercisable at  March 31, 2007                         1,581,709     $     0.72           5.41     $       --
                                     =============  =============  =============  =============  =============

</TABLE>

                                     Q-30

<PAGE>




NOTE 7 - STOCK OPTIONS (CONTINUED)

 (1) The aggregate intrinsic value represents the total pre-tax intrinsic value,
based on the Company's closing stock price of $0.19 as of March 31, 2007, which
would have been received by the option holders had all option holders exercised
their options as of that date.


Total options outstanding under the New Plan at September 30, 2006, comprised
the following:

<TABLE>
<CAPTION>

                              OPTIONS                 WEIGHTED                         OPTIONS
                            OUTSTANDING                AVERAGE                      EXERCISABLE
    OPTION                     AS OF                  REMAINING                         AS OF
 EXERCISE PRICE           SEPTEMBER 30, 2006     CONTRACTUAL LIFE (YEARS)         SEPTEMBER 30, 2006
 -----------------        -------------------    ------------------------         ------------------
<S>                            <C>                         <C>                          <C>
  $0.500                       97,000                      1.87                           97,000
   0.540                       50,500                      9.36                           40,875
   0.550                      300,000                      1.20                          300,000
   0.580                      602,000                      9.19                          380,194
   0.700                        3,500                      9.36                              777
   0.800                      377,000                      5.55                          377,000
   0.880                      120,000                      4.55                          120,000
   1.250                      160,000                      7.64                          135,333
   1.375                       30,000                      7.51                           25,000
                            ---------                                               --------------
  Total                     1,740,000                                                  1,476,180
                            =========                                               ==============
</TABLE>

         Total options outstanding under the New Plan at March 31, 2007,
comprised the following:
<TABLE>
<CAPTION>

                              OPTIONS                 WEIGHTED                       OPTIONS
                            OUTSTANDING                AVERAGE                     EXERCISABLE
    OPTION                     AS OF                  REMAINING                       AS OF
 EXERCISE PRICE           MARCH  31, 2007        CONTRACTUAL LIFE (YEARS)          MARCH 31, 2007
 -----------------        -------------------    ------------------------         ----------------
<S>                           <C>                         <C>                           <C>
  $0.350                      170,000                      9.77                           40,278
   0.500                       89,500                      1.51                           89,500
   0.540                       50,500                      8.86                           42,625
   0.550                      300,000                      0.70                          300,000
   0.580                      602,000                      8.69                          435,528
   0.700                        3,500                      8.86                            1,361
   0.800                      377,000                      5.06                          377,000
   0.880                      120,000                      4.05                          120,000
   1.250                      160,000                      7.14                          147,917
   1.375                       30,000                      7.01                           27,500
                            ---------                                              ---------------
   Total                    1,902,500                                                  1,581,709
                            =========                                              ===============

</TABLE>


SFAS 123(R) requires the Company to present pro forma information for the
comparative period prior to the adoption as if it had accounted for all of its
stock options under the fair value method of SFAS 123.

                                      Q-31
<PAGE>



NOTE 7 - STOCK OPTIONS (CONTINUED)

The following table illustrates the pro forma information regarding the effect
on net earnings and net earnings per share if the Company had accounted for the
share-based employee compensation under the fair value method of accounting:


<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED                      SIX MONTHS ENDED
                                                             MARCH 31,                              MARCH 31,
                                                       2007              2006               2007                 2006
                                                ----------------------------------      ----------------------------------
Net loss available to common stockholders,
<S>                                             <C>                  <C>               <C>                   <C>
  as reported                                   $  (2,351,681)       $  (1,828,238)    $  (4,344,785)        $  (3,319,596)
Compensation recognized under APB 25                     --                   --                --                    --
Compensation recognized under SFAS 123                   --                   --                --                (347,029)
                                                -----------------------------------     -----------------------------------
Pro-forma net loss available to common
             stockholders                       $  (2,351,681)       $  (1,828,238)     $  (4,344,785)       $  (3,666,625)
                                                ===================================     ===================================

Net loss per share:
             Basic and diluted - as reported    $       (0.09)       $       (0.09)     $       (0.16)       $       (0.16)
                                                ===================================     ===================================
             Basic and diluted - pro-forma      $       (0.09)       $       (0.09)     $       (0.16)       $       (0.18)
                                                ===================================     ===================================

</TABLE>



NOTE 8 - WARRANTS

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

<TABLE>
<CAPTION>
                                                        WEIGHTED
                                        NUMBER OF       AVERAGE         AGGREGATE
                                         SHARES          PRICE            PRICE
                                     --------------  --------------  --------------

<S>                                     <C>            <C>             <C>
Balance at September 30, 2006           17,371,428     $      0.44     $ 7,614,574
Warrants granted                         8,618,259            0.29       2,575,767
Warrants exercised                             --               --              --
Warrants cancelled                      (7,232,551)          (0.41)     (2,960,384)
Warrants expired                        (3,329,947)          (0.46)     (1,522,379)
                                     --------------  --------------  --------------

Balance at March 31, 2007              15,427,189             0.37     $ 5,707,578
                                     ==============  ==============  ==============

</TABLE>

                                      Q-32

<PAGE>



NOTE 8 - WARRANTS (CONTINUED)

The outstanding warrants are comprised of the following:


<TABLE>
<CAPTION>
                     WARRANTS           WEIGHTED AVERAGE
                    OUTSTANDING             REMAINING
  EXERCISE             AS OF            CONTRACTUAL LIFE
    PRICE          MARCH 31, 2007           (YEARS)
-------------  --------------------  ---------------------
   <S>                   <C>                  <C>
   $0.280                7,679,938            3.71
    0.400                7,100,000            3.50
    0.700                  119,100            3.42
    1.000                  100,000            4.02
    1.150                  100,000            4.63
    1.250                  259,060            1.30
    1.375                   69,091            1.76
               --------------------
    Total               15,427,189
               ====================

</TABLE>

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

<TABLE>
<CAPTION>
                  FISCAL YEAR
                    ENDING
                  SEPTEMBER 30,           NUMBER
                -----------------    --------------
                      <S>                   <C>
                      2007                  44,960
                      2008                  44,100
                      2009                 219,091
                      2010               7,220,830
                      2011               6,512,500
                      2012               1,385,708
                                     --------------
                                        15,427,189
                                     ==============

</TABLE>

On April 7, 2006, the Company entered into an agreement with Emerging Markets
Consulting, LLC. Pursuant to the agreement, the Company issued to EMC a
five-year warrant to purchase 100,000 shares of common stock at an exercise
price of $1.00 per share. As per the agreement, upon the commencement of the
second six-month term, on November 14, 2006 the Company issued to EMC an
additional five-year warrant to purchase 100,000 shares of stock at a price of
$1.15 per share. The fair value of these warrants of $56,865 and $27,002 was
recorded as marketing expense in the year ended September 30, 2006 and in the
six months ended March 31, 2007, respectively.



                                      Q-33
<PAGE>



NOTE 8 - WARRANTS (CONTINUED)

The values of the warrants issued were determined using the Black-Scholes
option-pricing model based on the following assumptions:

                                               THREE MONTHS ENDED
                                                 MARCH 31, 2007
                                             -----------------------

              Expected life (in years)               1 to 4
              Risk-free interest rate            3.29% to 4.72%
              Expected volatility              174.09% to 174.77%
              Expected dividend yield                  0%

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 a
maximum of 15% of their annual compensation (subject to a maximum limit imposed
by federal tax law). The Company, at its discretion, may make annual matching
contributions to the plan. The Company has made no matching contributions to the
plan through March 31, 2007.

NOTE 10 - OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Net revenues by geographic area are presented based upon the region of
destination. No region represented 10% or more of net revenues for any of the
periods presented. Net revenues by geographic area were as follows:

                         THREE MONTHS ENDED              SIX MONTHS ENDED
                             MARCH 31,                       MARCH 31,
                     ---------------------------   ---------------------------
                         2007           2006           2007           2006
                     ------------   ------------   ------------   ------------
Europe                $   36,515     $  941,045     $  228,674     $2,015,479
Asia                     955,650             --        967,883             --
United States             66,657        161,272        111,881        219,843
                     ------------   ------------   ------------   ------------
Total Revenue         $1,058,822     $1,102,317     $1,308,438     $2,235,322
                     ============   ============   ============   ============


Long lived assets includes property and equipment, intangible assets, and leased
equipment each net of applicable depreciation or amortization residing in the
following countries as at March 31, 2007.

                                          THREE MONTHS
                                              ENDED
                                         MARCH 31, 2007
                                       -----------------

           United States                  $     521,516
           Europe                                 4,946
           Asia                                   1,392
                                       -----------------
           Total                          $     527,854
                                       =================


                                      Q-34
<PAGE>

 NOTE 11 - SUBSEQUENT EVENTS

The following subsequent events occurred between April 1, 2007 and May 11, 2007.

In April, 2007, the Company issued a warrant to purchase 100,000 shares of its
common stock to E.U. Capital Venture, Inc. in consideration for an increase in
the advance rate under the Product Financing Arrangement from 90% of cost of
inventory to $700,000 per financed Mobetron. The warrant has a term of three
years and an exercise price equal to $0.40 per share.

In April 2007, the Company entered into an agreement with Emerging Markets
Consulting, LLC, or EMC, for EMC to provide certain investor relations services
to the Company. Pursuant to the agreement, among other consideration EMC
received 100,000 shares of the Company's common stock and a five-year warrant to
purchase up to 100,000 shares of common stock at an exercise price of $0.40 per
share.

In April 2007, the Company agreed to enter into a short-term unsecured note
financing in an aggregate amount of up to $500,000. The notes are unsecured,
bear interest at 10% per annum and are due and payable ninety days from the date
of issuance. Each holder of a note will receive a warrant to purchase that
number of shares of the Company's common stock equal to 20% of the face amount
of the note divided by $0.40. The warrants have a term of three years and an
exercise price equal to $0.40 per share. The Company has issued $500,000 of such
notes and 250,000 warrants under this program to date.

In May 2007, the Company entered into an amendment agreement with the holders of
the 8% short-term debentures. Pursuant to the amendment, the maturity date of
the debentures was extended until June 30, 2007, and the date required to file
the registration statement for the new warrants associated with these debentures
and the additional shares which would result from the conversion of the
convertible debentures at the new conversion price was extended until May 20,
2007.

The Company made the following payments of principal on it notes payable:
$1,551,158 under the Product Financing Arrangement, $27,778 due under the 10%
senior secured debentures and $189 due under the capital leases. Additionally
the Company received proceeds from notes payable of $1,690,122 under the Product
Financing Arrangement.


                                      Q-35