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

                                   FORM 10-KSB
(Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                  For the fiscal year ended September 30, 2007

                                       OR

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

        For the transition period from _______________ to _______________

                        Commission file number 000-49735

                           INTRAOP MEDICAL CORPORATION
                           ---------------------------
           (Name of small business issuer as specified in its charter)

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

    570 Del Rey Avenue Sunnyvale, California                 94086
    ---------------------------------------------       ---------------
    (Address of principal executive offices)              (Zip Code)

    Issuer's Telephone Number:                        (408) 636-1020
    -------------------------------------------     -------------------

Securities registered under Section 12(b) of the Exchange Act:  None.

Securities registered pursuant to Section 12(g) of the Act:

                                                   Name of each exchange
                                                    on which registered
             Title of each class                ---------------------------
             -------------------

        Common Stock, $.001 par value               OTC Bulletin Board



<PAGE>

     Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. |_|

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 120-2 of the Exchange Act. Yes |_| No |X|

     Issuer's revenues for its most recent fiscal year were $3,947,657.

     As of November 30, 2007, the Issuer had 322,985,524 shares of common stock
outstanding. The approximate aggregate market value of the shares of common
stock held by non-affiliates of Issuer, based on the closing price of our common
stock on November 30, 2007 of $0.15 per share of common stock, was approximately
$16,845,590.(1)

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

(1) For purposes of this Report, shares held by non-affiliates were determined
by aggregating the number of shares held by officers and directors of the
Issuer, and by others who, to Issuer's knowledge, own 5% or more of Issuer's
common stock, , and subtracting those shares from the total number of shares
outstanding. The price quotations supplied by the OTC Bulletin Board represent
prices between dealers and do not include retail mark-up, markdown or commission
and do not represent actual transactions.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

     Transitional Small Business Disclosure Format (check one): Yes |_| No |X|




<PAGE>

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                                TABLE OF CONTENTS

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Item Number and Caption                                                     Page
-----------------------                                                     ----

PART I.......................................................................  4
  ITEM 1.  DESCRIPTION OF BUSINESS...........................................  4
  ITEM 2.  DESCRIPTION OF PROPERTY........................................... 11
  ITEM 3.  LEGAL PROCEEDINGS................................................. 11
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 12

PART II...................................................................... 13
  ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES..........13
  ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......... 14
  ITEM 7.  FINANCIAL STATEMENTS.............................................. 35
  ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE......................................... 35
  ITEM 8A. CONTROLS AND PROCEDURES........................................... 36
  ITEM 8B. OTHER INFORMATION................................................. 36

PART III..................................................................... 37
  ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
            CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE
            EXCHANGE ACT..................................................... 37
  ITEM 10. EXECUTIVE COMPENSATION............................................ 43
  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT AND RELATED STOCKHOLDER MATTERS....................... 49
  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
            INDEPENDENCE..................................................... 52
  ITEM 13. EXHIBITS.......................................................... 53
  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................ 60

SIGNATURES................................................................... 61


                                       3
<PAGE>


                                     PART I

Item 1.       DESCRIPTION OF BUSINESS

Overview

     Intraop Medical Corporation, or IntraOp, was incorporated in Nevada on
November 5, 1999 under the name Digitalpreviews.com to engage in a consulting
and seminar business. We did not generate any revenue from our consulting and
seminar business and in September 2003, we formally abandoned our consulting and
seminar business. We changed our name to "Intraop Medical Corporation" on
January 21, 2004. On March 9, 2005, we completed a merger with Intraop Medical,
Inc., a privately-held manufacturer of a cancer treatment system, pursuant to
which Intraop Medical, Inc. was merged with and into IntraOp and Intraop
Medical, Inc.'s business became our sole business. Since the merger, our
business has been to develop, manufacture, market, distribute and service
Mobetron, a proprietary mobile electron-beam cancer treatment system designed
for use in intraoperative electron-beam radiation therapy, or IOERT. Although
intraoperative radiation therapy may be delivered using a radiation source other
than electrons, in this report we use the term IOERT to mean both intraoperative
radiation therapy in general and in the case of Mobetron, specifically
intraoperative electron-beam radiation therapy. The IOERT procedure involves the
direct application of radiation to a tumor and/or tumor bed while a patient is
undergoing surgery for cancer. Mobetron is designed to be used without requiring
additional shielding in the operating room, unlike conventional equipment
adopted for the IOERT procedure. Mobetron can be moved from operating room to
operating room, thereby increasing its utilization and cost effectiveness. In
addition to IOERT, Mobetron also can be used as a conventional radiotherapy
electron-beam accelerator.

     IOERT has been demonstrated as an effective therapy for a wide range of
cancers. IOERT is the direct application of radiation to the cancer tumor or
tumor bed during surgery. Because normal tissues are displaced and protected,
the effective dose to the tumor is substantially increased. A single, two-minute
IOERT treatment can often eliminate several weeks of conventional
pre/post-operative external beam radiation treatments while producing better
results. In more than 30,000 patients treated since the 1970's, IOERT
dramatically increased both local control and survival in patients with such
diverse diseases as colorectal, gastric, head and neck, pediatric, and
gynecological cancers. Encouraging studies also show IOERT to be an effective
treatment of lung and early stage breast cancer.

     The applicability of IOERT has been limited by the high cost and logistical
burden of existing radiation therapy equipment which requires costly and
isolated shielded rooms. Mobetron greatly reduces or eliminates these barriers
because it is relatively light, mobile, and self-shielded. The device can be
used in nearly any operating room environment.

     We engineer and test Mobetron, but contract out to manufacture Mobetron, a
low personnel, low overhead strategy. Resources are concentrated in engineering,
R&D, marketing, sales and service.

     We have strong systems and device patents for Mobetron. We have also
received U.S. Food and Drug Administration 510k approval, CE Mark (Europe), and
JIS approval (Japan). We distribute directly in the U.S. and through a network
of distributors and sales agents worldwide.

Intraoperative Electron-beam Radiation Therapy (IOERT)

     Each year, more than 1.4 million people in the United States are diagnosed
with cancer and more than 550,000 patients die of the disease. Of the patients
diagnosed with cancer, approximately 60% receive external beam radiotherapy
treatments, either with or without surgery. Despite the best conventional
radiation, surgical and chemotherapy techniques, about 1/3 of all cancer
patients will have a recurrence of cancer at the tumor site. If cancer recurs at
or near the site of the original tumor, the chances of survival are
significantly reduced.

                                       4
<PAGE>

     IOERT, a well-known and widely used treatment, involves the application of
radiation directly to the tumor or the tumor bed during surgery, as opposed to
radiation treatment applied either before surgery or after patient recovery from
surgery. In IOERT procedures radiation is directly applied to the area
immediately surrounding the tumor during surgery, either just prior to or just
after its removal, allowing the surrounding normal tissue to be retracted out of
the radiation beam or shielded from it. This direct application of radiation to
the tumor site during surgery increases the effective dose to the tumor
substantially. This technique has shown to dramatically increase the survival
rates for colorectal, gastric, head and neck, gynecological and other types of
cancer.

     Currently, approximately 200 health centers worldwide conduct IOERT
treatments. In many studies, IOERT has demonstrated often dramatically improved
treatment outcomes for advanced cancer patients over conventional radiotherapy
alone. Although IOERT is widely considered to have great potential, the
limitations of existing equipment and facilities have severely limited its use.
Very few hospitals have operating rooms that are specially shielded for
radiation, a "dedicated O.R.". A dedicated O.R. requires a fully fitted O.R.
plus a conventional radiation machine and expensive, heavy shielding. The
construction and equipment cost for a single dedicated O.R. can exceed $3.5
million. The significant weight, about 100 tons including the concrete
shielding, and reduced usability of these rooms limit their economic and
practical feasibility.

     For this reason, most of the 200 hospitals that conduct IOERT do so by
performing the surgery in the O.R. and then transporting the patient, still
under anesthesia and with the surgical site open, to its radiation facility.
There, the radiation portion of the treatment is given with conventional
equipment, after which the patient is transported back to the O.R. for the
completion of the operation. This process is often called "heroic transport".

     Heroic transport adds about one and a half hours to the surgical procedure
and requires that the conventional radiotherapy accelerator and room be
specially prepared and available for the IOERT patient. Heroic transport
involves complex logistics, increases patient risk, requires a significant
commitment of facilities and personnel, and severely limits the number of
patients that can be treated. Some hospitals have constructed a dedicated O.R.
in the basement to reduce the transportation distance. But these basement O.R.'s
are remote from the surgical center, creating staffing and logistical
difficulties. Thus, IOERT has largely been restricted to the treatment of
advanced cancer patients who have few other chances for successful treatment.

     We are the only company that has developed a mobile, self-shielded IOERT
system, which allows for IOERT in traditional operating rooms. Unlike other
IOERT systems, Mobetron uses several patented technologies to enable IOERT
without requiring a dedicated O.R. or heroic transport. Mobetron can be easily
moved between conventional operating rooms or shared between hospitals,
increasing system usage and cost effectiveness. Mobetron is designed to make
IOERT significantly less time-consuming, less costly and less risky to
administer to the patient. By making IOERT practical, we expect that Mobetron
will greatly expand IOERT beyond advanced disease and into early stage and other
prevalent cancers such as lung and breast.

Market Size for Mobetron Applied IOERT

     Traditionally, IOERT has been restricted to advanced and recurrent cancers
where conventional therapeutic approaches have been largely ineffective. The
number of Mobetrons needed to address this demand segment can be calculated from
the current cancer incidence and failure of traditional therapeutic approaches.

                                       5
<PAGE>

     In the United States, there are approximately 1.4 million new cancer cases
per year. Approximately 60%, or 840,000 patients, will receive radiation at some
point in their treatment. Of the cancer patients treated with radiation each
year, 29% are treated with the aim of palliation (i.e. pain relief) and 71%, or
596,000 patients, are treated with a curative attempt. Of the radiation patients
treated with curative intent, 44%, or 262,000 patients fail, either locally or
regionally, implying that improved radiation treatment is still needed. It is
this quarter of a million patients that fail from curative radiation therapy
treatment that is the initial target population suitable for the intensified
radiation therapy that can be delivered by Mobetron at the time of surgery. If
we assume that 1/3 of these patients have cancers that are amenable to IOERT,
and that a single-site based Mobetron utilized at 60% will treat 150 patients
per year, the number of Mobetrons needed in the U.S. for the target population
is 580 units. Geographical and age distribution of the cancer patients in the
U.S. will increase this number by about 20%, or a total of 750 units. Since the
U.S. is approximately half the world's market for health care items, the total
world Mobetron market for advanced disease is approximately 1,400 units.

     As Mobetron is proven to make IOERT application simpler and less costly,
applications of IOERT to earlier stage disease may be expected to develop. This
is because IOERT during surgery for earlier stage disease can reduce the amount
of follow-on therapy by at least two weeks, resulting in a lower cost of cancer
treatment. Reducing the cost of cancer treatments is a positive factor in both
private health care markets, such as the United States, and in socialized
medicine markets such as Europe.

     Furthermore, because IOERT delivers some or all of the radiation treatment
at the time of surgery, higher utilization or decreased need for conventional
equipment can be achieved because of the reduced number of radiation treatments
per patient required. This is particularly true in socialized markets, such as
Eastern Europe and China that have concentrated centers of cancer radiation
treatment delivery and a lower ratio of conventional equipment per cancer
patient than in the United States. Improving utilization of existing radiation
equipment for cancer treatment would likely be viewed as a positive factor in
these markets. This use of IOERT in earlier stage disease could add demand for
another 500 to 700 units world-wide, bringing the market for Mobetrons to
approximately 2,000 systems.

Mobetron IOERT

     Using existing technology, a small number of medical centers have
constructed fully shielded operating rooms to house a conventional linear
accelerator, typically weighing about 18,000 pounds, for use in IOERT
procedures. The construction and equipment cost for a dedicated IOERT operating
room can exceed $3.5 million per operating room. The significant weight, about
100 tons including the concrete shielding, and reduced usability of these rooms
limit their economic and practical feasibility.

     Mobetron is designed to make IOERT significantly less time-consuming, less
costly and less risky to administer. Mobetron is a mobile IOERT administration
device comprised of a relatively lightweight, movable electron-beam accelerator
mounted on a rotating C-arm. Special designs in the accelerator system and C-arm
eliminate the need to add costly shielding to the walls or floor of the
operating room.

     Mobetron can be moved from one O.R. to another, allowing Mobetron to be
shared among several operating rooms in the same hospital or, even among
hospitals. In contrast to traditional IOERT, Mobetron IOERT brings the equipment
to the patient rather than transporting the patient to the equipment.

     This mobility expands the range of patients treated, decreases patient risk
and increases the cost-effectiveness of IOERT. Additional advantages of using
Mobetron over traditional IOERT solutions include: safer application, quicker
delivery during surgery, shorter surgery times, and greater availability for
patients.

                                       6
<PAGE>

     Development work on the first Mobetron system began in November 1993 by
Intraop Medical, Inc. Major features of the accelerator system were demonstrated
in August 1994, and by April 1995, a full working laboratory prototype of
Mobetron was completed. In September 1996, Mobetron system was introduced at the
Sixth International Intraoperative Radiotherapy Symposium in San Francisco.
After extensive acceptance testing, Mobetron was delivered to the University of
California - San Francisco, or UCSF, and began patient treatments in December
1997. In July 1998, Intraop Medical, Inc. received 510(k) approval from the Food
and Drug Administration to market Mobetron in the United States. Delivery of the
first commercial Mobetron system was to University Hospitals of Cleveland, where
patient treatments began in July 1999, and to date we have delivered nineteen
Mobetrons to hospitals in the United States, Europe, and Japan.

     Mobetron was featured in September 1998 in Spain at the inaugural meeting
of the International Society of IOERT. The paper by UCSF on the use of Mobetron
was awarded the Society's "Best Technical Paper", signifying the most important
technical contribution to the field of IOERT. Mobetron also received the
prestigious "1999 Excellence in Design Award" from Design Magazine.

     Mobetron Technology. Mobetron uses proprietary 9000 megahertz X-band
technology to generate electron-beams of energy to 12 MeV (million electron
volts), while conventional technology uses lower frequency 3000 megahertz S-band
technology, requiring larger and heavier accelerator components. Twelve MeV
energy beams have sufficient penetration to effectively treat more than 90% of
IOERT patients.

     The feasibility of using a miniature accelerator to achieve a dedicated
IOERT system was originally explored under a Phase I Small Business Innovative
Research "SBIR" grant from the National Cancer Institute. The study concluded
that a lightweight accelerator, providing energy levels up to 12 MeV and
operable without added room shielding was feasible. Later, a $500,000 Phase II
SBIR grant was awarded and used to confirm these results with measurements on a
working laboratory prototype system.

     In Mobetron, electron-beams are produced by a linear accelerator weighing
less than 700 pounds. This low weight accelerator is mounted to a C-arm system
with a beamstopper mounted opposite the accelerator to intercept the radiation
produced in the forward direction.

     Mobetron's X-band technology is based on a miniature electron accelerator
that has proven itself in industrial applications for more than 20 years. The
design of the accelerator and its treatment applicators, in combination with the
lead beamstopper below the surgical table, allow Mobetron to operate without
additional shielding in the operating room. Mobetron system weighs less than
3,000 pounds, avoiding structural loading problems and allowing Mobetron to be
positioned easily for patient treatment.

Patent Protection

     A basic systems patent for Mobetron was granted on June 14, 1994. A second
systems patent which extended the claims of the first patent to the technology
used in conventional accelerators was granted on May 23, 1995. These two patents
protect the use of a linear accelerator in a mobile, self-shielded application.
In 1997 a patent protecting the electron accelerator technology used in Mobetron
was granted, and in 2000, a patent on the unique alignment system used to orient
Mobetron to the tumor prior to irradiation was also granted. These domestic
patents expire at various dates beginning in April 2013. Mobetron also has
international patent protection in Japan, key European countries, and Russia. We
also hold trademarks for "Mobetron" and "Intraop Medical".

                                       7
<PAGE>

Marketing and Sales

     Currently about 200 health centers conduct IOERT treatments worldwide, most
of which use heroic transport. In the U.S., we have targeted sales and marketing
education efforts initially on these centers as they have already demonstrated a
commitment to IOERT. We plan to then expand this initial target market to the
1,300 U.S. hospital centers which currently have radiation oncology departments
and could purchase Mobetron within the next five years.

     To address the large U.S. market, we have significantly increased our sales
efforts over the last fiscal year. In October 2005, we as added a new Vice
President of Worldwide Sales and Marketing to our management team, who in turn,
has grown our U.S. sales and marketing employees and contract sales personnel to
a team of 10 people as of the date of this filing. These additions to personnel,
in addition to upgrades to our marketing materials, branding strategy, and our
efforts to better publicize the increasing body of clinical studies on the use
and effectiveness of IOERT for breast and lung cancer will help us increase U.S.
sales over the coming years.

     We have established agreements with distributors in key markets such as
Europe, Japan, Eastern Europe, China, India, Taiwan, and Korea. Our strategy is
to address key customer sites in the U.S., European and Far East markets
together, rather than sequentially and more deeply penetrate each geographic
market. Accordingly, we continue to expand our team of international
distributors to sell and service Mobetron internationally. We sell directly in
the U.S. using our own sales force.

     In Western Europe, the market driver is the use of IOERT for early stage
breast cancer, and to a lesser extent, the decreased utilization of conventional
radiation equipment as a fraction of the total therapeutic dose is applied
though IOERT. In Europe, our sales efforts are carried out by a combination of
IntraOp's own personnel, third party, commissioned sales agents, and
distributors. Distributors work on "best-efforts" basis and have responsibility
for sales, promotion and service, including the purchase of spare parts to
service their customer base. We have also hired our own European service
specialist to provide service support to the European distributors' service
organizations on a timely basis.

     In the Far East, distributorships have so far been established in the major
markets for IOERT: Japan, China, Taiwan, India and Korea. The distributor has
full service responsibility, including the purchase of spare parts, while we
have the responsibility for training the service organizations. We have had a
dedicated salesperson in China since 2003, and in fiscal year 2006, we hired our
own serviceperson in the Far East to provide service support similar to that in
Europe. In the fiscal year ended September 30, 2007, we sold our first Mobetron
in China.

Manufacturing and Production

     We have chosen to manufacture Mobetron through the use of contract
manufacturing, while concentrating our resources on engineering and test, R&D,
marketing and service. CDS Engineering LLC, or CDS, of Hayward, California is
our primary contract manufacturer. CDS is a privately held, specialty contract
manufacturer serving customers in the semiconductor, aerospace, medical and
analytical equipment industries. Our waveguide, another key Mobetron component,
is manufactured by Accuray Incorporated (NASD: ARAY), which is headquartered in
Sunnyvale, California..

     Contract manufacturing significantly reduces the capital required to
operate the business. It also provides us the flexibility to quickly relocate
manufacturing operations or out-source components of the system since we have
little fixed manufacturing assets or personnel to consider in any change.

                                       8
<PAGE>

     Mobetron is self-shielded for clinical use because the treatment lasts only
1 - 2 minutes. However, pre-shipment testing requires hours of beam on-time over
approximately a four to six week period, and that requires shielded test cells.
We test our machines at our leased, combined office, manufacturing and test
facilities in Sunnyvale, California. The facility includes four test cells.
Using the two cells that are shielded enough for beam testing, we believe we are
able to meet near term anticipated demand. With modifications to another of the
cells, we could support a production volume of up to fifty units per year.

Product Offerings

     We are developing additional products and services for the IOERT and
radiotherapy market to maximize the market opportunity provided by Mobetron.

     Mobetron Enhancements. We have continued to increase the functionality,
ease-of-use, reliability, and cost effectiveness of Mobetron with various
enhancements. As an example, over this last fiscal year we completed the
prototype of a new modulator cabinet for Mobetron which we shipped as a
commercial release in the fiscal year ended September 30, 2007. The new
modulator which replaces many of the hard wired connections found in the
existing modulator with a printed circuit board backplane design, offers
significant cost reduction and greater reliability. In October 2007, we
introduced a new set of large, rectangular Mobetron applicators designed
specifically for sarcomas. We recently contracted with an outside engineering
firm to conduct further studies towards cost reduction and improvement of
Mobetron

     Service. Mobetron generally includes a one year warranty of parts and
labor. After the warranty period, IntraOp offers parts and service to its
customers either through annual service contracts or on a per occurrence service
call basis. Because radiation therapy equipment generally enjoys a 7 - 10 year
useful life, we expect that service will become an increasing revenue component
as Mobetron sales increase.

     Conventional Electron-beam Treatments. Mobetron may be used as a
conventional electron radiotherapy system in the radiation therapy department
when not in use for IOERT. This dual use could add existing conventional
electron-beam radiotherapy patient volume to IOERT patient volume for hospitals,
while enabling us to participate in the well-established $500 million per year
conventional radiotherapy linear accelerator market.

     Accessories and Disposables. Each IOERT procedure requires the use of
sterilized caps to protect the tip of Mobetron's linear accelerator, sterile
drapes, standard and custom applicators to guide the beam to the treatment area,
and other devices and disposables. We manufacture or out-source the manufacture
of these devices and disposables, and supply them directly to hospitals.

Competition

     To our knowledge, no other company produces a self-shielded, mobile linear
accelerator for cancer radiation therapy.

     In the mid 1980's, Siemens offered a conventional design, electron-only
linear accelerator for IOERT procedures. This system was a conventional
radiotherapy accelerator modified to treat only in the electron mode, but still
requiring a shielded room. Despite a total cost of more than $3.5 million,
including reconstruction of the O.R. to install concrete shielding, Siemens sold
seven systems.

     Other linear accelerator manufacturers have sold one or two similarly
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.

                                       9
<PAGE>

     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. Refer to the discussion in Item 3 (Legal Proceedings) below
concerning the status of litigation with Info & Tech.

     If significant direct competition does occur, at least initially it is
likely to be through modifying conventional S-band accelerators for electron
only operation, as none of the major linac manufacturers have extensive X-band
technology expertise. It is also possible that an alternative technology will be
developed that directly competes with our products.

Research and Development

     During the fiscal years ended September 30, 2007 and September 30, 2006, we
incurred research and development expenses of $661,678 and $624,284,
respectively. These activities accounted for about 20% to 25% of staff time
during each of those periods. We further expect that research and development
expenses will increase over the coming months as we continue work on various
cost reduction and enhancement projects for Mobetron and engage in additional
sponsorship of clinical research.

Government Regulation and Environmental Matters

     All medical devices require certification from the United States Food and
Drug Administration before entering distribution. The certification process
assures that the products are safe and effective.

     On July 24, 1998, IntraOp received clearance from the FDA under the 510(k)
process, allowing commercial marketing and sales of Mobetron in the United
States. The 510(k) process is reserved for medical devices that are deemed to
have established clinical efficacy, thereby avoiding lengthy clinical trials.
Hospitals in the United States are already using and billing for IOERT.

     Europe and Japan have separate certification processes. Mobetron received
clearance for sales in Japan in May 2000, and received marketing approval for
the European Union "CE Mark" in September 2001. Mobetron has been tested
according to the regulatory standards for radiotherapy accelerators, including
the Suggested State Regulations for the Control of Radiation "SSRCR" and the
International Electrotechnical Committee "IEC" requirements for radiotherapy
equipment. Mobetron has also been registered for sale in China, and we are
working to obtain registration in Canada, India, Taiwan, and Korea.

     We are subject to various federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices, and the use and disposal of hazardous or potentially
hazardous substances. We do not operate facilities that require practices for
controlling and disposing of the limited amount of waste and potentially
hazardous materials.

                                       10
<PAGE>

Employees

     As of September 30, 2007, we had 24 full time equivalent employees. Of the
total, 7 employees were engaged in product research, development and
manufacturing operations, 6 in sales and marketing, 5 in service and technical
support, and 6 in general and administrative functions. All but three of these
full time equivalent employees were located in the United States. We are not a
party to any collective bargaining agreements with our employees, and we have
not experienced any work stoppages. We believe we have good relations with our
employees. We are located in Silicon Valley and face intense competition for
highly skilled technical employees. Our employees generally have an at-will
employment relationships with us, and they or we may terminate their employment
at any time

Item 2.       DESCRIPTION OF PROPERTY

     Our principal offices, housing our administrative, research and
development, marketing and sales, manufacturing operations, and test facility
are in one building located in Sunnyvale, California. This approximate 14,419
square feet facility is leased to us through September 5, 2010. The property is
in satisfactory condition for the purpose for which it is used.

Item 3.       LEGAL PROCEEDINGS

     In June 2006, the we brought suit at the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactures an
IOERT system marketed as the Liac, Info & Tech's German distributor, Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold for infringement of the
German subpart DE69428698 of our European Patent 700578, seeking damages and an
injunction against further infringement. Oral proceedings took place on October
31, 2006, and a hearing took place before the court on July 31, 2007. A ruling
on the case was made on August 23, 2007 in which we prevailed in enjoining the
above named parties from selling or distributing their product in Germany. This
matter is subject to appeal.

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



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                                       11
<PAGE>

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

     On October 15, 2007, IntraOp held its annual meeting of stockholders. At
the annual meeting, the stockholders: (i) elected the following directors:
Oliver Janssen, Michael Friebe Ph.D., Keith Jacobsen, Stephen L. Kessler, Greg
Koonsman, John Powers, and Rawleigh Ralls, (ii) approved an amendment to our
articles of incorporation to increase our authorized shares of common stock from
100 million to 500 million, (iii) approved an amendment to our 2005 Equity
Incentive Plan to increase by 22,062,664 the number of shares of common stock
authorized for issuance thereunder, (iv) ratified PMB Helin Donovan, LLP as our
auditors for the fiscal year ended September 30, 2007, and (v) ratified
indemnification agreements entered into between us and our directors.

     Results of the voting were as follows:

                                                                          Broker
                                                                          ------
                                          For     Against    Abstain    Non-Vote
                                          ---     -------    -------    --------
     1. Election of Directors

        Oliver Janssen             59,068,233   2,226,834    238,306           1

        Michael Friebe Ph.D.       59,068,233   2,226,834    238,306           1

        Keith Jacobsen             60,963,400     331,667    238,306           1

        Stephen L. Kessler         60,963,400     331,667    238,306           1

        Greg Koonsman              60,963,400     331,667    238,306           1

        John Powers                59,068,233   2,226,834    238,306           1

        Rawleigh Ralls             60,963,400     331,667    238,306           1

                                                                          Broker
                                                                          ------
                                          For     Against    Abstain    Non-Vote
                                          ---     -------    -------    --------
     2.  An amendment to our       58,814,900   2,688,655     29,817           2
     articles of incorporation
     to increase the number of
     authorized shares from 100
     million to 500 million.

     3.  An amendment to our       58,614,900   2,223,599     10,000   8,684,404
     2005 Equity Incentive Plan
     to increase by 22,062,664
     the number of shares of
     common stock authorized
     for issuance thereunder.

     4.  Ratification of PMB       61,523,374           0          0           0
     Helin Donovan, LLP, as our
     auditors for the fiscal
     year ended September 30,
     2007.

     5.  Ratification of           60,655,200     860,832     17,291           1
     indemnification agreements
     between IntraOp and our
     directors.


                                       12
<PAGE>


                                     PART II


Item 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
              SECURITIES.

Market Information

     Our common stock began trading on The OTC Bulletin Board on February 27,
2004 under the symbol "IOPM." Set forth below are the high and low bid prices
for our common stock each quarter within the last two fiscal years.

     On November 30, 2007, the closing bid quotation for our common stock was
$0.15. The following table sets forth, for the periods indicated, the high and
low closing bid quotations of our common stock, as reported on The OTC Bulletin
Board. All prices listed herein reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.

     Quarter Ended                High                 Low
     -------------                ----                 ---
     September 2007              $0.23               $0.06

     June 2007                   $0.27               $0.11

     March 2007                  $0.35               $0.19

     December 2006               $0.40               $0.16

     September 2006              $0.55               $0.31

     June 2006                   $0.70               $0.46

     March 2006                  $0.80               $0.42

     December 2005               $0.75               $0.40

Number of Stockholders

     As of November 30, 2007, there were 405 holders of record of our common
stock.

Dividend Policy

     Historically, we have not paid any dividends to the holders of our common
stock and we do not expect to pay any such dividends in the foreseeable future
as we expect to retain our future earnings for use in the operation and
expansion of our business.



                  (Remainder of page intentionally left blank)




                                       13
<PAGE>


ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward looking statements

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

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

Risk Factors

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


                         RISKS RELATING TO OUR BUSINESS

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

     IntraOp is a medical device company that has experienced significant
operating losses in each year since the incorporation on March 9, 1993 of its
merger partner, Intraop Medical Inc., primarily due to the cost of substantial
research and development of its sole product, Mobetron. Since inception, we have
generated about $22.6 million in revenue through September 30, 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.
Further, if Mobetron and any other of our products do not gain commercial
acceptance, we may never generate significant revenues or achieve or maintain
profitability. As a consequence of these uncertainties, our independent public
accountants have expressed a "going concern" qualification in their audit
reports.

                                       14
<PAGE>

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

     In August 2005, we entered into a revolving, $3,000,000, combined inventory
and factoring agreement, or product financing arrangement, under which we
pledged as collateral certain of our inventory and receivables. Pursuant to
further amendments to the product financing arrangement, as of September 30,
2007, maximum availability under the line was $6,000,000.

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

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

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 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.

     CDS Engineering LLC, or CDS, manufactures the majority each of Mobetron.
Other key Mobetron components include our accelerator guide which is
manufactured by Accuray Incorporated of Sunnyvale, California, and parts of our
modulator which is manufactured by TPI Systems of Sunnyvale, California. One of
the founders of Accuray Incorporated, Donald A. Goer, is our Chief Scientist.

                                       15
<PAGE>

     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. Further, to the extent that we are unable to negotiate
favorable contract terms or to find alternate suppliers for key parts
manufactured by these suppliers, we may be subject to significant price
increases for the goods purchased from these suppliers resulting in a decrease
in product margins and profitability.

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

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

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

     In June 2006, the we brought suit at the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactures an
IOERT system marketed as the Liac, Info & Tech's German distributor, Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold for infringement of the
German subpart DE69428698 of our European Patent 700578, seeking damages and an
injunction against further infringement. Oral proceedings took place on October
31, 2006, and a hearing took place before the court on July 31, 2007. A ruling
on the case was made on August 23, 2007 in which we prevailed in enjoining the
above named parties from selling or distributing their product in Germany. This
matter is subject to appeal.

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

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

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

                                       16
<PAGE>

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

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

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

We are substantially dependent on certain key employees.

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

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

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

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

                                       17
<PAGE>

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

     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 September
30, 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 or 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. However, as part of the August 2007 Agreements, all of
the convertible debentures were extinguished, the registration rights agreement
containing the liquidated damages clauses was terminated, and the warrants
related to the debentures were either cancelled or exercised, making mute any
reset provisions of those warrants. As such, we do not currently have any
transactions which require derivative liability treatment.

     We evaluated various valuation methodologies to assess the value of stock
and warrants issued as part of the August 2007 Agreements. Income approaches
such as the discounted net cash flow method and the excess earnings method
attempt to capture the value of the company's earnings or cash flows, with the
assumption that they will either be paid out as dividends or valued upon
liquidation. These approaches are most applicable to ongoing businesses
generating steady or predictable cash flows. As we have yet to reach
profitability or produce meaningful or consistent operating cash flow, and
because of the great uncertainty regarding any forecast that could be made about
our earnings or cash flows, we determined that these measures were inappropriate
for valuing the securities issued in the August 2007 Agreements.

     Further, as our liabilities exceed our assets and because of the
uncertainty in valuing goodwill, the intellectual capital portfolio, and other
intangibles, neither the net book value method nor the liquidation method were
deemed appropriate to value the securities issued per the August 2007
Agreements. Consequently, we used the transaction method to value the
investments made by the Lacuna Investors in Note 6 to 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

                                       18
<PAGE>

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.

     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 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

                                       19
<PAGE>

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.

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 Electro technical 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.

                                       20
<PAGE>

     Additionally, we have limited experience in many of the foreign markets in
which we plan to sell our goods and services. To succeed, we will have to
overcome cultural and language issues and expand our presence overseas. No
assurance can be given that we can meet these goals. We may be subject to
taxation in foreign jurisdictions, and transactions between any of our foreign
subsidiaries and us may be subject to U.S. and foreign withholding or other
taxes. We also may 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, we may not
be able to achieve sustained profitability or profitability at all.

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

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

                                       21
<PAGE>

third party payors could also be subject to substantial delays and other
problems related to receipt of payment. The health care industry, and
particularly the operation of reimbursement procedures, has been characterized
by a great deal of uncertainty, and accordingly no assurance can be given that
third party payors will not become a significant source of payment for our
products, or that such a change in payment policies will not occur. Any of these
factors could have a material adverse effect on our business and financial
condition. We cannot assure that such legislation will not restrict hospitals'
ability to purchase equipment such as 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.


                        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.

                                       22
<PAGE>

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

     Our common stock is currently listed for trading on the OTC Bulletin Board
which is generally considered to be a less efficient market than markets such as
NASDAQ or other national exchanges, and which may cause difficulty in conducting
trades and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15(g) of the
Securities Exchange Act of 1934, as amended, or 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.

     Pursuant to the terms August 2007 Agreements, including the second close
thereunder which occurred in October 2007, we issued 296,508,532 shares of
common stock and warrants to purchase 10,780,732 of common stock. None of these
shares have been registered with the SEC and may not be sold except pursuant to
a registration statement filed with the SEC or an exemption from registration.
Pursuant to the August 2007 Agreements, we have agreed to register the new
shares upon the demand of the majority of the holders of those shares. The
holders have not yet demanded registration of their shares.

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.

                                       23
<PAGE>

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 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
and design instructions in connection with Mobetron, Intraop Medical, Inc.'s
product, and a certain medical device approval license).

     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.

     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 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

                                       24
<PAGE>

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 we failed to meet certain requirements for filing, making
effective, and maintaining effectiveness of the registration statements required
under the registration rights agreements. 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.

                                       25
<PAGE>

     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. 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.
Although initially unable to meet deadlines for meeting the various deadlines to
file and have the registration statement declared effective, we entered into a
series of waivers to the registration rights agreement to reset these deadlines
and avoid paying liquidated damages. 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 agreement.

     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 September 30, 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.

     As part of the August 2007 Agreements, all of the convertible debentures
were extinguished, the registration rights agreement containing the liquidated
damages clauses was terminated, and the warrants related to the debentures were
either cancelled or exercised, making mute any reset provisions of those
warrants.

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 for the year ended September 30, 2007
and for the year ended September 30, 2006 reflect the effect of SFAS 123(R). In

                                       26
<PAGE>

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 during the three and twelve
months ended September 30, 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 $75,153 and $147,684 before
taxes on earnings, respectively, for the years ended September 30, 2007 and
September 30, 2006, respectively. During the years ended September 30, 2006 and
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.

     As share-based compensation expense recognized in the Unaudited
Consolidated Statements of Operations for years ended September 30, 2007 and
September 30, 2006, 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.

                                       27
<PAGE>

     As of September 30, 2007, there was $4,533 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 0.96 years.

Results of operations for the fiscal year ended September 30, 2007 compared to
the fiscal year ended September 30, 2006.

Revenue, Costs of Revenue and Gross Margins

                                         Year Ended September 30,
      Revenue                    2007           2006         Change      Percent
     ---------------------------------------------------------------------------
       Product sales     $  3,529,233   $  5,521,661   $ (1,992,428)        -36%

       Leasing                      -        134,127       (134,127)       -100%

       Service                418,424        327,166         91,258          28%
     ---------------------------------------------------------------------------
      Total Revenue      $  3,947,657   $  5,982,954   $ (2,035,297)        -34%
     ---------------------------------------------------------------------------

      Costs of Revenue
     ---------------------------------------------------------------------------
       Product sales     $  2,719,585   $  4,303,210   $ (1,583,625)        -37%

       Leasing                      -         38,323        (38,323)       -100%

       Service                196,682        231,142        (34,460)        -15%
     ---------------------------------------------------------------------------
      Total Costs of
       Revenue           $  2,916,267   $  4,572,675   $ (1,656,408)        -36%
     ---------------------------------------------------------------------------

                                         Year Ended September 30,
      Gross Margin               2007           2006         Change      Percent
     ---------------------------------------------------------------------------
      Product sales      $    809,648   $  1,218,451   $   (408,803)        -34%
                                  23%            22%

      Leasing                       -         95,804        (95,804)       -100%
                                   -%            71%

      Service                 221,742         96,024        125,718         131%
                                  53%            29%
     ---------------------------------------------------------------------------
      Total Gross
       Margin            $  1,031,390   $  1,410,279   $   (378,889)        -27%
                                  26%            24%
     ===========================================================================



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                                       28
<PAGE>

Product Sales

     During fiscal year 2006, we sold five Mobetron systems consisting of four
new systems and a resale of a system returned to us at the end of its lease
term, bringing the total installed Mobetron base worldwide to seventeen systems.
In comparison, we sold three Mobetron systems in fiscal year 2007. All of the
systems sold in the 2006 fiscal year were to overseas customers and included our
second system in Poland, our third in Italy, our second placement in Holland,
our first system in Belgium and our second system in Japan. In fiscal year 2007,
we sold our third system in Japan, our first in China, and our eighth system in
the United States. Although we were unable to best the prior year's sales
figure, we are pleased to note that subsequent to year end, we delivered two
more systems to U.S. hospitals and received our first order in Germany.

                                        Year Ended September 30,
Mobetron Systems Sales Analysis        2007          2006       Change   Percent
--------------------------------------------------------------------------------
Systems Sold                              3             5           (2)

  Systems Revenue               $ 3,210,864   $ 5,518,443

  Revenue per Mobetron System     1,070,288     1,103,689      (33,401)      -3%

  Materials cost per system sold    733,853       759,608      (25,755)      -3%

  Materials Margin Per System       336,435       344,081       (7,645)      -2%
                                     31.43%        31.18%

  Labor, Overhead and Warranty      415,105       517,005

  Labor Overhead and Warranty
   Per System                       138,368       103,401       34,967       34%

Gross Margin per System         $   198,067   $   240,680  $   (42,613)     -18%
                                        19%           22%
================================================================================


     Per system sales revenue (product sales less sales of accessories and less
revenue recognized in the current period but relating to systems sold in prior
period) was slightly lower in fiscal year 2007 in comparison to revenue in
fiscal year 2006, primarily due to the below-market sales price offered to place
our first machine in China. Materials cost per system however were lower in
fiscal year 2007 than in fiscal year 2006, due to cost reduction efforts, but
made even more impressive because fiscal year 2006 sales included a used
Mobetron with a lower carrying cost in inventory. Shortly after the end of our
2007 fiscal year we hired an outside engineering firm to help us define future
cost reduction opportunities and feature upgrades for Mobetron. Although the
majority of these efforts will not likely be reflected in cost of materials in
the short term, over the long term we are optimistic about increasing product
margins.

     Other costs of systems sales which includes labor, overhead, warranty and
sales commissions paid to third parties, however, increased on a per system
basis. Although we paid commissions to sales agents for two overseas sales in
fiscal year 2006 versus no commissions in fiscal year 2007, these costs were
more than offset by an increase in factory and installation personnel related
costs, while warranty related expenses on a per machine basis decreased by about
approximately 8% in fiscal year 2007.

                                       29
<PAGE>

Leasing

     Leasing revenue in fiscal year 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 fiscal year 2007.

Service

     The majority of service revenue for the fiscal year ended September 30,
2007 came from annual service contracts which increased from two such contracts
at the beginning of fiscal year 2006 to five such contracts at the end of fiscal
year 2007, with the balance of service revenue coming from as-requested service
calls and parts sales to customers. In addition, an expensive, one-time repair
under one of those contracts added over $100,000 of service revenue and a
corresponding amount of expense during fiscal year 2006. We expect service
revenue to grow in relative proportion to U.S. based sales and to a lesser
extent overseas sales. Overseas distributors are generally responsible for
servicing their own customers with parts supplied by us, though we also recently
obtained direct contracts with a few of their customers in Europe, which revenue
is included in the fiscal year September 30, 2007.

Operating Expenses

     A comparison of our operating expenses for the fiscal years ended September
30, 2007 and 2006 are as follows:


                                        Year Ended September 30,
                                       2007          2006       Change   Percent
--------------------------------------------------------------------------------
  Research and Development      $   661,678   $   624,284  $    37,394        6%

  General & Administrative        2,239,365     2,414,219     (174,848)      -7%

  Sales and Marketing             1,808,445       800,842    1,007,603      126%
--------------------------------------------------------------------------------
  Total Operating Expenses      $ 4,709,488   $ 3,839,345  $   870,149       23%
================================================================================


     Research and development included the production cut-in of our newly
redesigned modulator which will decrease build cost and increase reliability of
this Mobetron component, and the addition of a motorized transport 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. Amortization of these capitalized contract engineering services
however, was primarily responsible for an increase in research and development
expenses of approximately 6% in fiscal year 2007 in comparison to fiscal year
2006. We believe that our research and development expenses will increase
further over time as we develop new products and applications and continue our
efforts to cut Mobetron production costs.

     General and administrative expenses decreased by approximately 7% in the
fiscal year ended September 30, 2007 versus the fiscal year ended September 30,
2006. If not however for a decrease in investor relations expenses of $285,256
in fiscal year 2007 as compared to fiscal year 2006, we would have posted an
increase in general and administrative expenses of $110,405 in fiscal year 2007
over fiscal year 2006. The decrease in investor relations expenses resulted
primarily from the termination of our two third party investor relations

                                       30
<PAGE>

contracts in fiscal year 2007. Offsetting the decrease in investor relations
expenses however, we experienced an increase in consulting expenses, mainly
related to our efforts to raise additional capital, of approximately $101,660
and increase of $68,821 in payroll related expenses from additional personnel in
fiscal year 2007 versus fiscal year 2006. Also in fiscal year 2007 we saw an
increase in rental and office expense of $77,443 over the previous fiscal year,
in part because we now occupy our entire headquarters building, while in early
fiscal year 2006 we were still subleasing space to others, offsetting our rental
expense. Meanwhile, we saw a decrease of $79,282 in legal expenses in fiscal
year 2007 versus fiscal year 2006 in which we filed four expensive registration
statements and other filings related in large part to the convertible and senior
debentures which we put in place in August through November 2005.

     Sales and marketing expenses increased by approximately 126% in fiscal year
2007 in comparison to the fiscal year 2006, mainly due to increased personnel
expenses and related travel and entertainment expenses of $765,072, as we added
sales people late in fiscal year 2006. We also increased our spending on
marketing and advertising for Mobetron by $234,999 during fiscal year 2007
versus fiscal year 2006. We expect sales and marketing expenses to continue to
increase as we expand our Mobetron sales efforts.

     Interest Expense. In August 2007, per our August 2007 Agreements (see Note
6 to our financial statements) our capital structure changed significantly. As a
part of those agreements, we eliminated $6.4 million face value of our
convertible debentures and related beneficial conversion features and debt
discounts due to warrants, $1,200,000 of short-term debentures, $500,000 of
promissory notes sold in April and May 2007, and an additional $350,000 of
related party debt. The elimination of these and other payables and accrued
liabilities created a gain on extinguishment of debt of $5,416,726 and the write
off $2,614,224 beneficial conversion features and debt discounts due to
warrants. Our senior debentures which bears interest at 10% per annum and our
Product Financing Arrangement now represent the majority of our debt and drive
interest expense accordingly. Our Product Financing Arrangement has two classes
of borrowings: borrowings related to financed inventory prior to sale to a
customer bear interest at 12% per annum while borrowings related to financed
purchase orders and receivables, or factoring, bear interest at 24% per annum.

     An estimate of our new dollar weighted average borrowing rate is found
below based on the interest rates and outstanding balances of our various types
of debt at September 30, 2007.

                                              Balance at
                                           September 30,
      Type of debt, net debt discounts             2007    Interest Rate
      -------------------------------------------------------------------
      Notes payable, related parties       $    209,347            9.00%
      Product Financing Arrangement,
       inventory                              1,962,050           12.00%
      Product Financing Arrangement,
       factoring                              3,163,696           24.00%
      Senior debentures                       1,333,333           10.00%
      Other notes                                77,232            9.00%
      -------------------------------------------------------------------
      Total debt, net debt discounts       $  6,745,658
      Dollar weighted average borrowing
       rate                                                       17.11%
      ===================================================================



                                       31
<PAGE>

Liquidity and Capital Resources

     We experienced net losses of $6,026,740 and $7,160,101 for fiscal years
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
September 30, 2007, had an accumulated deficit of $34,041,658. These matters,
among others, raise substantial doubt about our ability to continue as a going
concern. In view of the matters described above, recoverability of a major
portion of the recorded asset amounts shown on our consolidated balance sheet is
dependent upon our ability to generate sufficient sales volume to cover our
operating expenses and/or to raise sufficient capital to meet our payment
obligations. Management is taking action to address these matters, which
include:

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

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

     o    Evaluating funding strategies in the public and private markets.

Historically, management has been able to raise additional capital. During the
year ended September 30, 2007, we obtained capital through the issuance of notes
and the sale of common stock, the proceeds of which were used for working
capital and the repayment of liabilities. The successful outcome of future
activities cannot be determined at this time and there is no assurance that if
achieved, we will have sufficient funds to execute our intended business plan or
generate positive operating results.

Our primary cash inflows and outflows in fiscal years 2007 and 2006 were as
follows:

                             Year Ended September 30,
     Cash Flows                        2007            2006          Change
     -------------------------------------------------------------------------
     Provided by (Used in):
       Operating Activities   $  (4,216,804)  $  (5,763,368)  $   1,546,564

       Investing Activities         (24,648)       (226,193)        201,545

       Financing Activities       4,629,945       6,095,991      (1,466,046)
     -------------------------------------------------------------------------
     Net Increase/(Decrease)  $     388,493   $     106,430   $     282,059
     =========================================================================


Operating Activities

     Net cash used for operating activities decreased by $1,546,564 in fiscal
year 2007 in comparison to the same period in the prior fiscal year. Offsetting
our net loss of $6,026,740 for fiscal year 2007 were $905,253 of non-cash
charges, primarily for gain on extinguishment of debt, amortization of debt
discounts, beneficial conversion features and issuance costs related to our new
senior and convertible debentures, including write-offs of beneficial conversion
features and debt discounts related to the extinguishment of convertible
debentures and other notes payable, but also for issuances of common stock,
warrants, and options issued in lieu of compensation. During fiscal year 2006,
our net loss of $7,160,101 was similarly offset by non-cash charges of
$3,840,617. Additionally, large combined differences in other asset and
liability accounts of approximately $3.35 million between fiscal years 2007 and
2006 significantly affected operating cash flow during those two years. These
accounts, which include inventories, accounts receivable, accounts payable,
customer deposits, and deposits with vendors, are currently highly subject to
short term fluctuations and will continue to be volatile because of our low
volume and timing of Mobetron sales and large per system cost of Mobetron.

                                       32
<PAGE>

Investing Activities

     Investing activities were substantially higher in fiscal year 2006 versus
fiscal year 2007, primarily because 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

     In August 2007, per our August 2007 Agreements (see Note 6 to our financial
statements) our capital structure changed significantly. As a part of those
agreements, we eliminated $6.4 million face value of our convertible debentures
and related beneficial conversion features and debt discounts due to warrants,
$1,200,000 of short-term debentures, $500,000 of promissory notes sold in April
and May 2007, and an additional $350,000 of related party debt. These
transactions, although creating a more equity-based, stable financial structure,
were highly dilutive. Following the second close under the August 2007
Agreements which happened in October 2007 and including the issuance of
25,527,827 new options in November 2007 (see Note 14 to our financial
statements), we now have 323,285,524 basic shares outstanding and 62,456,097
potentially dilutive shares from options and warrants, compared to 26,477,472
basic shares and 40,130,831 potentially dilutive shares from options, warrants
and convertible debentures as reported on our Form 10-QSB for the quarter ended
June 30, 2007.



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                                       33
<PAGE>

Debt and Lease Obligations

     At November 30, 2007, we had notes payable and obligations for leased
equipment from various sources as shown below. Interest rates on such debt range
from 9% to 24%. We also lease office space and equipment under non-cancelable
operating and capital leases with various expiration dates through 2011.



                                                          November 30,
                                                             2007
                                                         -------------

      Notes payable, related parties                     $     209,347
                                                         =============

      Product financing arrangement                      $   5,125,747
      Senior secured debentures                              1,333,333
      Other notes                                               77,232
                                                         -------------
                                                             6,536,312
                                                         -------------
      Less debt discounts due to warrants                     (284,774)
                                                         -------------
                                                             6,251,538

      Less current portion                                  (6,251,538)
                                                         -------------
        Notes payable, other, net debt discounts
         due to warrants and beneficial conversion
         features, net of current portion                $           -
                                                         =============

      Capital lease for equipment                        $       7,732

      Less current portion                                      (2,353)
                                                         -------------

      Capital lease obligations, net of current
       portion                                           $       5,379
                                                         =============



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                                       34
<PAGE>

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

 Period Ending September 30,                       Capital     Operating
                                                   Leases        Leases
--------------------------------------------  ----------------------------
 2008                                               2,579        237,625
 2009                                               2,579        244,754
 2010                                               2,579        233,838
 2011                                                 431              -
                                              -------------  -------------

 Total minimum lease payments                       8,168    $   716,217
                                                             =============
 Less: Amount representing interest                  (436)
                                              -------------

 Present value of minimum lease payments            7,732

 Less: Current portion                             (2,353)
                                              -------------

 Obligations under capital lease, net of
  current portion                             $     5,379
                                              =============



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 September
30, 2007 and September 30, 2006 deferred revenue was $144,673 and $127,213
respectively, which is included under accrued liabilities.

Off-Balance Sheet Arrangements

     We had no off-balance sheet arrangements to report for the fiscal year
ended September 30, 2007 or September 30, 2006.

Item 7.       FINANCIAL STATEMENTS.

The financial statements listed on the index to financial statements on page F-1
are filed as part of this Form 10-KSB.

Item 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE.

None

                                       35
<PAGE>

Item 8A.      CONTROLS AND PROCEDURES.

 (a) Evaluation of Disclosure Controls and Procedures.

     Management, with the participation of the Chief Executive Officer and Chief
Financial Officer, has performed an evaluation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934). This evaluation included consideration of the controls,
processes and procedures that are designed to ensure that information required
to be disclosed by us in the reports we file under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to our management, including or
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2007, our disclosure controls and procedures were effective.

 (b) Changes in Internal Control over Financial Reporting.

     There were no changes in our internal control over financial reporting
during the fourth quarter of fiscal 2007, which were identified in connection
with our evaluation that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

Item 8B.      OTHER INFORMATION.

     On December 3, 2007, our board of directors approved an amendment to our
2005 Equity Incentive Plan to increase the number of shares reserved for
issuance thereunder by 20 million. This amendment to the 2005 Equity Incentive
Plan will be submitted to our stockholders for approval at the next annual
meeting of stockholders.



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                                       36
<PAGE>


                                    PART III

Item 9.       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
              PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A)
              OF THE EXCHANGE ACT.



     The following table sets forth information regarding our executive officers
and directors as of November 30, 2007.


     Name                        Age     Position
     ----                        ---     --------

     Oliver Janssen              44      Chairman of the Board

     John Powers                 46      President, Chief Executive Officer, and
                                         Director

     Michael Friebe, Ph.D.       42      Director

     Keith Jacobsen              63      Director

     Stephen L. Kessler          64      Director

     Greg Koonsman               43      Director

     Rawleigh Ralls              45      Director

     Richard Belford             56      Vice President, Quality Assurance,
                                         Regulatory Affairs

     Donald A. Goer, Ph.D.       64      Chief Scientist

     Scott Mestman               48      Vice President, Sales and Marketing

     Richard Simon               60      Vice President of Operations

     Howard Solovei              45      Chief Financial Officer, Secretary


     All officers and key employees are subject to termination at will. The
board of directors is elected annually by stockholders, and members of the board
serve until the next annual meeting of stockholders, unless they resign prior to
the meeting.

Officer and Director Resignations

     Mary Louise Meurk resigned her positions as secretary and director of
IntraOp on August 8, 2006. Director Paul J. Crowe resigned his position on
September 5, 2006. Corporate Controller and Chief Accounting Officer Regis
Bescond resigned his position on October 30, 2006. Director Allan C. Martin
resigned his position on November 10, 2006. Dr. Theodore Phillips resigned his
positions as secretary and director on August 17, 2007. Mr. John Matheu resigned
his position as director on August 17, 2007. Donald A. Goer resigned his
positions as director, chairman, chief executive officer and president on August
17, 2007.

Family Relationship Among the Current Directors and Executive Officers

     No family relationships exist among our current directors or executive
officers.

                                       37
<PAGE>

Biographical Information

     The business experience of each director, executive officer, and key
employee of IntraOp is summarized below.

     Oliver Janssen has served as Chairman and a director since August 2007. Mr.
Janssen has been a Managing Director of Hultquist Capital LLC, a San Francisco
strategic and financial advisory services company, since its founding in 1995.
Prior to 1995, he was a Vice President with Bridgemere Capital, Inc., a San
Francisco financial advisory services firm. He has advised numerous technology
and growth companies on strategic alternatives for financing growth. In
addition, Mr. Janssen was on the Board of Directors of Noah Precision Holdings,
Inc., a maker of thermoelectric temperature control systems, during its
acquisition by Advanced Energy Industries, Inc. Mr. Janssen received a Master's
Degree in International Management from the Thunderbird School of Global
Management in Phoenix, Arizona and a B.A. degree in English from Kenyon College.

     John P. Powers has served as President, Chief Executive Officer, and a
director since August 2007. Prior to joining IntraOp, from February 2007 to
August 2007, Mr. Powers served as President of John P. Powers & Associates, a
professional services company focused on product placement and positioning,
contract negotiations, consultation, and training for sales and program
management. As the former Chief Executive Officer of VelociTel, Inc., from March
2002 to August 2005, and most recently Vice President and General Manager of
metroPCS, Los Angeles from August 2005 to February 2007, Mr. Powers has led
wireless expansion for the past 22 years. He began his career in wireless at
Motorola in May 1994, as the cellular technology began its breakthrough and
where he held the position of Senior Director of Operations and Worldwide
Ancillary Service before joining Crown Castle International in January 1999, as
Vice President of Business Development and Marketing. Mr. Powers has a B.S.
degree in marketing from the University of Illinois in Champaign-Urbana.

     Michael Friebe has served as a director since March 2004. Dr. Friebe has
been Chief Executive Officer and President of Tomovation GmbH since February
2003. Tomovation is a German company that owns and operates imaging centers in
Germany and makes investments in early stage European medical technology
companies. Prior to forming Tomovation, Dr. Friebe was the President of
UMS-Neuromed beginning in April 2001 and a founder of Neuromed AG in November
1993. These companies operated mobile MRI, CT and PET imaging systems in a
number of European Countries. Dr. Friebe received B.S. and M.S.E.E. degrees in
electrical engineering from the University of Stuttgart in Germany, and a Ph.D.
degree in medical engineering from the University of Witten in Germany. He also
holds a masters degree in management from Golden Gate University, San Francisco.
He is a member of several professional engineering and medical societies.

     Keith Jacobsen has served as a director since June 2005. Prior to his
retirement in 1999, Mr. Jacobsen accumulated over 30 years senior executive
experience in the transportation industry, including: CEO and CFO of Nedlloyd
Holdings USA, CFO of Nedlloyd Lines USA, CFO of Associated Freight Lines, and
executive positions at American President Companies. He has served as Treasurer
of the City of Orinda and was a highly decorated First Lieutenant in the U.S.
Army. He holds B.S. and M.B.A. degrees from the University of California,
Berkeley.

     Stephen L. Kessler has served as a director since December 2005. Mr.
Kessler served most recently as Chief Financial Officer for the Metropolitan
Transportation Authority, or MTA, of New York, the largest regional transit
provider in the Western Hemisphere, from April 2004 through July 2005. At the
MTA, Mr. Kessler led the development of a three year balanced budget, instituted
new financial planning models to address projected structural deficits, and
initiated a shared services program to reduce duplicative administrative
expenses. Prior to the MTA, Mr. Kessler served as a management consultant
through the Financial Executives Consulting Group, LLC, in Connecticut, from

                                       38
<PAGE>

November 2001 through March 2004. Previously, Mr. Kessler served as CFO for
Versaware Inc. and EverAd Inc., two high growth start-up companies that
introduced electronic publishing and digital content technologies to the
Internet, from July 1999 through August 2001. Prior to these assignments, Mr.
Kessler served as Senior Vice President, Finance and Administration for the
McGraw-Hill Companies' Construction Information Group, from February 1995
through July 1999. Before McGraw-Hill, Mr. Kessler held Chief Financial Officer
and other senior management positions at Prodigy Services Company (a joint
venture of IBM and Sears), Georgia Pacific Corporation, PepsiCo, and
Westinghouse Electric Corporation, from 1967 through 1995. Mr. Kessler received
an M.B.A. degree in finance from the University of Chicago Graduate School of
Business in 1967 and a B.S. degree in industrial management from Carnegie
Mellon.

     Greg Koonsman has served as a director since August 2007. Mr. Koonsman is
co-founder and senior partner in VMG Health. VMG Health is a valuation and
financial advisory firm that specializes exclusively in the healthcare services
sector. VMG was founded in 1995 and has offices in Dallas, Texas and Nashville,
Tennessee. From August 1995 to September 2006, Mr. Koonsman was also co-founder
and director in Practice Performance, Inc., a business outsourcing provider to
surgical specialists. Practice Performance, Inc was merged with MedSynergies,
Inc. in September of 2006. Prior to founding VMG Health, Mr. Koonsman began his
health care financial advisory career with Ernst & Young. Mr. Koonsman worked
for Bell Helicopter/Textron from 1987 to 1990 as an engineer on the V-22 Tilt
Rotor program. Mr. Koonsman received an MBA from The University of Dallas in
1990 and a B.S. in Aerospace Engineering from Texas A&M University in 1986. Mr.
Koonsman is a Chartered Financial Analyst, a member of the American Society of
Appraisers, and the Federated Ambulatory Surgery Association. He speaks
frequently on the subject of healthcare business valuation and was a co-author
of "Financial Valuation, Applications and Models" published by Wiley.

     Rawleigh Ralls has served as a director since August 2007. For the past 15+
years, Mr. Ralls has been an active investor in both the private and public
markets. After receiving an MBA from Southern Methodist University, he spent
eight years with Goldman Sachs' Private Client Services group in Dallas. Mr.
Ralls then co-founded Precept Capital Management in 1998 with two partners.
Precept grew quickly to over $300 million in managed assets by the time he sold
his stake in September 2000. Since that time, Mr. Ralls has held several board
positions including: Netidentity.com, an email and web hosting firm where he
served as Chairman from 1999 until June 2006; @Last Software, as a director from
1999 until March 2006; Knowledge Factor Inc., as a director from June 2006 until
present; Savoya, LLC, as a director from November 2003 to present; and Concept3d
from October 2006 until present. In October 2006, Mr. Ralls co-founded a new
Boulder-based investment management company with several partners, and serves as
a managing director. This firm, Lacuna LLC, invests in and assists the
development of promising early-stageenterprises in both the private and public
markets. Mr. Ralls's received an undergraduate degree in chemical engineering
from the University of Arkansas in 1984, and his early work experience included
jobs with AT&T, Exxon and GE.

     Richard A. Belford, Vice President, Quality Assurance, Regulatory Affairs.
Mr. Belford joined Intraop Medical, Inc. in August 1998, and has over 30 years
of quality assurance and regulatory affairs experience within the medical device
industry. For the past eight years, he had served as IntraOp's Director of
Quality Assurance and Regulatory Affairs. In his current capacity, he has
increased responsibility for overseeing all aspects of IntraOp's quality
programs and worldwide regulatory compliance. IntraOp is certified to the ISO
13485:2003 standard for medical device manufacturing and maintains 510(k) FDA
approval for Mobetron in the U.S., CE Mark in Europe, JIS in Japan, and SDA in
China. He has successfully implemented an ISO 9001/EN 46001 certified program at
IntraOp which enabled IntraOp to originally obtain its Certificate for CE
Marking for international exports. Mr. Belford is also program manager for Japan
licensing and JIS testing, and for all other foreign country registrations. He
received his B.A. degree in electronics, with a minor in business administration
from University of California, San Francisco in 1973, and has had extensive
quality and regulatory assurance training, as a member of the American Society
for Quality and the Regulatory Affairs Professional Society.

                                       39
<PAGE>

     Donald A. Goer, Ph.D., Chief Scientist. Dr. Goer is a co-founder of Intraop
Medical, Inc., the predecessor company to Intraop Medical Corporation, in 1993,
where he served as Chief Executive Officer, President and a director until its
merger into IntraOp in February 2005. From February 2005 until August 2007, Dr.
Goer served as Chief Executive Officer, President and a director of IntraOp
before assuming his current role as Chief Scientist. He is a recognized expert
on linear accelerator technology and is the author of a number of articles on
the subject, including the chapter on radiation therapy linear accelerators for
the Encyclopedia of Medical Devices and Instrumentation. After post-doctoral
study in metallurgical engineering, Dr. Goer joined Varian Associates. Dr. Goer
more than thirty years experience in the sales, marketing and product
development of linear accelerators. From 1977 through 1985, Dr. Goer was
responsible for the product development of Varian's cancer therapy equipment.
Five new cancer treatment units were successfully introduced to the market
during this period, resulting in the sale of more than 700 treatment systems.
Between 1985 and 1990, Dr. Goer was responsible for market development and
strategic planning at Varian. Dr. Goer's last position at Varian was Manager of
Sales Operations with principal responsibilities in the international market. In
1991, Dr. Goer joined Schonberg Research Corporation as President. In 1991, Dr.
Goer assisted in founding Accuray Incorporated, a medical company providing
dedicated accelerators for radiosurgery. The accelerator guide, a key component
of Mobetron, is manufactured by Accuray Incorporated. Dr. Goer received his
Ph.D. in physics from The Ohio State University in 1973.

     Scott Mestman, Vice President, Sales and Marketing. Mr. Mestman was hired
as IntraOp's Vice President - Sales and Marketing, in September, 2005. Mr.
Mestman has over 24 years of experience in radiation therapy. Prior to joining
IntraOp, he most recently served as Vice President, Corporate Development for
Vantage Oncology, a venture capital funded developer, owner and operator of
freestanding radiation therapy centers, a position he held from January 2004 to
August 2005. From March, 2002 to December, 2003, Mr. Mestman was Vice President,
Sales Strategy and Development at Siemens Medical Solutions where he acted as a
key advisor to executive management for business strategy and direction. He
began his 20 year career at Varian Medical Systems as a human factors and design
engineer, where he was employed from 1981 to February, 2002. While at Varian, he
held positions in engineering, marketing, sales, sales management, national
accounts, business development and mergers and acquisitions. He also spearheaded
the development of the $100 million "See and Treat" Cancer Care business in
partnership with General Electric Medical Systems. Mr. Mestman has a B.S. degree
in biomedical engineering from the University of Rochester and has completed
graduate course work at Stanford University and the University of Santa Clara.

     Richard Simon, Vice President of Operations. Mr. Simon was hired as
IntraOp's Vice President of Operations in November 1997. Mr. Simon has had an
extensive career in the engineering, service and manufacturing of medical
equipment, including twenty years in engineering positions with the medical
division of Varian Associates. For ten years, Mr. Simon served as the engineer
and project manager for the C Series linacs for Varian, developing and shipping
more than 450 linear accelerators during this period. He was the project manager
for the VARiS oncology information system from Varian, with more than 100
systems shipped. Mr. Simon received professional training in electrical
engineering, project management and attended Youngstown State University.

     Howard Solovei, Chief Financial Officer, Secretary. Mr. Solovei joined
IntraOp in August 2002 as a consultant, and was appointed our Chief Financial
Officer in January 2003. Prior to that, Mr. Solovei served as the Chief
Financial Officer of Phoenix Leasing Inc., where he gained 14 years experience
in leasing and equipment finance from June 1984 to April 2000. At Phoenix, Mr.
Solovei was responsible for the management of nearly $1 billion of leased
assets, $600 million of bank agreements for the company's 30+ partnerships and
corporate entities as well as securitized debt offerings of $280 million. Mr.
Solovei was also responsible for projections and strategic and tactical planning
for the company and its public limited partnerships. Mr. Solovei holds a B.S.
degree in business administration from the University of California, Berkeley.

                                       40
<PAGE>

Board Committees And Meetings
Board of Directors

     During the fiscal year ending September 30, 2007, there were seven meetings
of the board of directors. Each board member attended all of the meetings of the
board of directors and meetings of all of the committees of the board of
directors on which he served other than Mr. Phillips and Mr. Matheu who each
missed one board of directors meeting, and Mr. Jacobsen who missed one Audit
Committee meeting.

Audit Committee

     The Audit Committee was established on April 6, 2005, and its members were
appointed on August 8, 2005. The Audit Committee is composed of three members
and operates under a written charter adopted by the Board of Directors. A copy
of the Audit Compensation charter was attached to the Proxy Statement for our
2006 Annual Meeting of Stockholders. The responsibilities of the Audit Committee
are contained in the Audit Committee charter. The current members of the Audit
Committee as of August 17, 2007 are Keith Jacobsen, Steve Kessler, and Rawleigh
Ralls. The members of the Audit Committee during fiscal 2007 and until August
17, 2007 were Keith Jacobsen and Stephen L. Kessler. All current members of the
Audit Committee are "independent," as defined by IntraOp policy and the National
Association of Securities Dealers, Inc. listing standards. The Board has also
determined that there is no Audit Committee financial expert serving on the
Audit Committee. Although the current members of the audit committee do not meet
all of the criteria of a financial expert under SEC rules, the Board of
Directors believes that the current members of the Audit Committee possess
sufficient financial knowledge and experience relative to the financial
complexity of IntraOp's financial statements to adequately carry out their
duties under the Audit Committee charter. The Audit Committee met four times
during the fiscal year ended September 30, 2007.

Compensation Committee

     The Compensation Committee was established on April 6, 2005. The current
members of the Compensation Committee as of August 17, 2007 are Michael Friebe,
Oliver Janssen, and Raleigh Ralls, none of whom is an employee of IntraOp. The
members of the Compensation Committee during fiscal 2007 and until August 17,
2007 were John P. Matheu and Theodore L. Phillips. The Compensation Committee
makes recommendations with respect to compensation of executive officers and
granting of stock options and stock awards. A copy of the Compensation Committee
charter was attached to the Proxy Statement for our 2006 Annual Meeting of
Stockholders. The Compensation Committee did not meet during the fiscal year
ended September 30, 2007.

Nominating and Corporate Governance Committee

     The Nominating and Governance Committee was established on April 6, 2005.
The Nominating and Governance Committee is composed of three members and
operates under a written charter adopted by the Board of Directors. The current
members of the Nominating and Governance Committee as of August 17, 2007 are
Oliver Janssen, John Powers and Michael Friebe. The members of the Nominating
and Governance Committee during fiscal 2007 and until August 2007 were Donald A.
Goer, Michael Friebe and John P. Matheu. All current members of the Nominating
and Governance Committee are "independent," as defined by IntraOp policy and the
National Association of Securities Dealers, Inc. listing standards. A copy of
the Nominating and Governance Committee charter was attached to the Proxy

                                       41
<PAGE>

Statement for our 2006 Annual Meeting of Stockholders. The Nominating and
Governance Committee makes recommendations to the Board regarding the size and
composition of the Board and recommends corporate governance principles, codes
of conduct and compliance mechanisms applicable to IntraOp. The Nominating and
Governance Committee is responsible for reviewing with the Board from time to
time the appropriate skills and characteristics required of Board members in the
context of the current size and make-up of the Board. This assessment includes
numerous factors such as understanding of and achievements in manufacturing,
technology, finance and marketing. These factors, and any other qualifications
considered useful by the Committee, are reviewed in the context of an assessment
of the perceived needs of the Board at a particular point in time. The
Nominating and Governance Committee has not established any specific minimum
criteria or qualifications that a nominee must possess. The Nominating and
Governance Committee establishes procedures for the nomination process,
recommends candidates for election to the Board and also nominates officers for
election by the Board. The Nominating and Governance Committee did not meet
during the fiscal year ended September 30, 2007.

Compliance With Section 16(A) Of The Exchange Act

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of common stock and other
equity securities of IntraOp. Officers, directors and greater than 10%
stockholders are required by the SEC regulation to furnish us with copies of all
Section 16(a) forms they file.

     To our knowledge, and based solely on a review of the copies of such
reports and amendments thereto furnished to us and written representations from
the reporting persons that no other reports were required during the fiscal year
ended September 30, 2007, we believe that all Section 16(a) filing requirements
applicable to the officers, directors and greater than 10% beneficial owners of
IntraOp were complied with during the fiscal year ended September 30, 2007.

Code of Ethics

     We have adopted a code of personal and business conduct and ethics that
applies to our principal executive officer, principal financial officer, and
principal accounting officer or controller, or persons performing similar
functions. The code of personal and business conduct and ethics is filed as an
exhibit to this Annual Report on Form 10-KSB.



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                                       42
<PAGE>


Item 10.      EXECUTIVE COMPENSATION.

     The following table provides information concerning the compensation
received for services rendered to Intraop Medical Corporation in all capacities
during the year ended September 30, 2007, by our chief executive officer and the
two other most highly compensated executive officers or key employees whose
compensation exceeded $100,000 for the fiscal year ended September 30, 2007.

                             Summary Compensation Table

<TABLE>
<CAPTION>
 Name and                                         Nonequity Nonqualified
 principal                        Stock Option    incentive     deferred
  position         Salary  Bonus awards awards         plan compensation   All other
             Year     ($)    ($)    ($) ($)(5) compensation     earnings compensation  Total
                                                        ($)          ($)          ($)     ($)
---------------------------------------------------------------------------------------------
<S>          <C>        <C>    <C>    <C>    <C>          <C>          <C>          <C>     <C>
John
 Powers,
 President
 and Chief
 Executive
 Officer
 (1)         2007       0      0      0      0            0            0            0       0
---------------------------------------------------------------------------------------------
Donald A.
 Goer,
 Chief
 Scientist
 (2)         2007 184,040      0      0      0            0            0            0 184,040
---------------------------------------------------------------------------------------------
Donald A.
 Goer,
 President
 and Chief
 Executive
 Officer
 (2)         2006 184,112      0      0 21,027            0            0            0 205,139
---------------------------------------------------------------------------------------------
Scott J.
 Mestman,
 Vice
 President,
 Worldwide
 Sales and
 Marketing
 (3)         2007 254,550      0      0      0            0            0            0 254,550
---------------------------------------------------------------------------------------------
Scott J.
 Mestman,
 Vice
 President,
 Worldwide
 Sales and
 Marketing
 (3)         2006 135,519      0      0 52,568            0            0            0 188,087
---------------------------------------------------------------------------------------------
Howard
 Solovei,
 Chief
 Financial
 Officer
 and
 Secretary
 (4)         2007 166,126      0      0      0            0            0            0 166,126
---------------------------------------------------------------------------------------------
Howard
 Solovei,
 Chief
 Financial
 Officer
 and
 Secretary
 (4)         2006 163,823      0      0 35,210            0            0            0 199,033
---------------------------------------------------------------------------------------------
</TABLE>

                                       43
<PAGE>

(1)  Mr. Powers received no compensation during the periods shown. Although
appointed as our President and Chief Executive Officer on August 22, 2007, we
did not enter into a compensation agreement with Mr. Powers until November 19,
2007. Pursuant to the employment agreement, Mr. Powers will be an "at will"
employee of IntraOp and will receive a base salary of $185,000 per year,
incentive bonus compensation of up to 100% of base salary upon attainment of
goals agreed to by Mr. Powers and our Board of Directors, an annual salary
increase of not less than 5% or the percent change in the CPI, a stock option
exercisable for 18,330,000 shares of IntraOp common stock, which was awarded on
November 23, 2007, six months severance for termination without cause, four
weeks paid vacation, other standard benefits offered to our executive officers
and a signing bonus of $64,000.

(2)  Dr. Goer resigned his position as President and Chief Executive Officer and
assumed the role of Chief Scientist on August 22, 2007. In December 2005, Dr.
Goer received options for 40,000 shares of our common stock under our 2005
Equity Incentive Plan with an exercise price of $0.58 per share and vesting
3/36th upon issuance and then ratably monthly over 33 months.

(3)  Mr. Mestman joined IntraOp in May 2005. In December 2005, Mr. Mestman
received options for 100,000 shares of our common stock under our 2005 Equity
Incentive Plan with an exercise price of $0.58 per share and vesting 3/36th upon
issue and then ratably monthly over 33 months.

(4)  In December 2005, Mr. Solovei received options for 50,000 shares of our
common stock under our 2005 Equity Incentive Plan with an exercise price of
$0.58 per share and vesting 3/36th upon issue and then ratably monthly over 33
months. In May 2006, Mr. Solovei received options for 20,000 shares of our
common stock under our 2005 Equity Incentive Plan with an exercise price of
$0.58 per share and which vested 100% on July 31, 2006.



                  (Remainder of page intentionally left blank)




                                       44
<PAGE>

(5)  The fair value of options granted were estimated at the date of grant using
the Black-Scholes model with the following weighted average assumptions:

                                                Year ended
                                              September 30,
                                                   2006
                                            -------------------

         Expected term (in years)                4 to 5.1
         Risk-free interest rate              4.41% to 4.99%
         Expected volatility                103.37% to 131.35%
         Expected dividend yield                    0%

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.

The following table sets forth information concerning unexercised options, stock
that has not yet vested and equity incentive awards for each named executive
officer outstanding as of the fiscal year ended of September 30, 2007:


                             Outstanding Equity Awards at Fiscal Year-End

<TABLE>
<CAPTION>
                               Option awards                                  Stock awards
------------------------------------------------------------------------------------------------------
                                                                                     Equity    Equity
                                                                                   incentive incentive
                                                                           Market      plan      plan
                                                                            value   awards:   awards:
                                        Equity                                 of  Number of Market or
                                     incentive                      Number  shares unearned    payout
                                          plan                          of     of   shares,  value of
                                       awards:                      shares  units  units or  unearned
           Number of     Number of   Number of                          or     of     other   shares,
          securities    securities  securities                       units  stock    rights  units or
          underlying    underlying  underlying                          of   that  that have   others
          unexercised  unexercised  unexercised  Option     Option   stock   have       not    rights
          options (#)  options (#)    unearned  exercise expiration   that    not    vested  that have
Name      exercisable unexercisable options (#)   price        date   have  vested       (#)      not
                                                     ($)               not     ($)             vested
                                                                    vested                         ($)
                                                                        (#)
------------------------------------------------------------------------------------------------------
<S>                 <C>           <C>         <C>     <C>       <C>       <C>    <C>       <C>       <C>
John
 Powers             0             0           0       --        n/a       0      0         0         0
------------------------------------------------------------------------------------------------------
Donald A.
 Goer         300,000             0           0     0.55 12/11/2007       0      0         0         0
------------------------------------------------------------------------------------------------------
Donald A.
 Goer          50,000             0           0     0.88  6/22/2010       0      0         0         0
------------------------------------------------------------------------------------------------------
Donald A.
 Goer          25,000             0           0     0.88    4/26/11       0      0         0         0
------------------------------------------------------------------------------------------------------
</TABLE>

                                       45
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
<S>            <C>                <C>         <C>   <C>   <C>             <C>    <C>       <C>       <C>
Donald A.
 Goer          25,000             0           0     0.88  10/1/2011       0      0         0         0
------------------------------------------------------------------------------------------------------
Donald A.
 Goer          20,000             0           0     0.88  10/1/2012       0      0         0         0
------------------------------------------------------------------------------------------------------
Donald A.
 Goer          15,000             0           0    1.375  9/30/2013       0      0         0         0
------------------------------------------------------------------------------------------------------
Donald A.
 Goer          15,000             0           0    1.375  9/30/2014       0      0         0         0
------------------------------------------------------------------------------------------------------
Donald A.                    13,333
 Goer          26,667           (1)           0     0.58  12/7/2015       0      0         0         0
------------------------------------------------------------------------------------------------------
Scott J.                     33,333
 Mestman,      66,667           (1)           0     0.58  12/7/2015       0      0         0         0
------------------------------------------------------------------------------------------------------
Howard
 Solovei      175,000             0           0     0.80   1/1/2013       0      0         0         0
------------------------------------------------------------------------------------------------------
Howard
 Solovei        5,000             0           0     1.25  9/30/2013       0      0         0         0
------------------------------------------------------------------------------------------------------
Howard
 Solovei       10,000             0           0     1.25  9/30/2014       0      0         0         0
------------------------------------------------------------------------------------------------------
Howard                       16,667
 Solovei       33,333           (1)           0     0.58  12/7/2015       0      0         0         0
------------------------------------------------------------------------------------------------------
Howard
 Solovei       20,000             0           0     0.54   2/6/2016       0      0         0         0
------------------------------------------------------------------------------------------------------
</TABLE>

(1)  These options vest ratably monthly until fully vested on November 7, 2008.

     Our directors who are employees of IntraOp do not receive any additional
consideration for serving on our Board of Directors. The following table sets
forth information concerning compensation paid to our non-employee directors
during fiscal year 2007:

                                       46
<PAGE>

                              Director Compensation
<TABLE>
<CAPTION>
              Fees                    Non-equity
            earned                     incentive  Nonqualified
            or paid  Stock  Option          plan      deferred     All other
Name        in cash awards  awards  compensation  compensation  compensation   Total
                ($)     ($)     ($)           ($)  earnings ($)           ($)     ($)
-------------------------------------------------------------------------------------
<S>           <C>         <C>     <C>           <C>           <C>           <C> <C>
Oliver
 Janssen
 (1)          5,000       0       0             0             0             0   5,000
-------------------------------------------------------------------------------------
Michael
 Friebe,
 Ph.D. (2)    7,000       0  10,801             0             0             0  17,801
-------------------------------------------------------------------------------------
Keith
 Jacobsen
 (3)         11,000       0   8,909             0             0             0  19,909
-------------------------------------------------------------------------------------
Stephen L.
 Kessler
 (4)         11,000       0   8,909             0             0             0  19,909
-------------------------------------------------------------------------------------
Greg
 Koonsman
 (5)          3,000       0       0             0             0             0   3,000
-------------------------------------------------------------------------------------
Rawleigh
 Ralls
(6)           5,000       0       0             0             0             0   5,000
-------------------------------------------------------------------------------------
John Matheu
(7)           5,500       0   8,909             0             0             0  13,909
-------------------------------------------------------------------------------------
Theodore
 Phillips,
 M.D (8)      8,000       0   8,909             0             0             0  16,909
-------------------------------------------------------------------------------------
Allan C.
 Martin (9)       0       0       0             0             0             0       0
-------------------------------------------------------------------------------------
</TABLE>

(1)  Mr. Janssen was appointed as a director on August 22, 2007. As of September
30, 2007, he had no outstanding option or stock awards.

(2)  As of September 30, 2007, Dr. Friebe had 82,500 outstanding options and no
outstanding stock awards.

(3)  As of September 30, 2007, Mr. Jacobsen had 67,500 outstanding options and
no outstanding stock awards.

(4)  As of September 30, 2007, Mr. Kessler had 52,500 outstanding options and no
outstanding stock awards.

(5)  Mr. Koonsman was appointed as a director on August 22, 2007. As of
September 30, 2007, he had no outstanding option or stock awards.

(6)  Mr. Ralls was appointed as a director on August 22, 2007. As of September
30, 2007, he had no outstanding option or stock awards.

(7)  As of September 30, 2007, Mr. Matheu had 92,500 outstanding options and no
outstanding stock awards. Mr. Matheu resigned as a director on August 17, 2007.

(8)  As of September 30, 2007, Dr. Phillips had 92,500 outstanding options and
no outstanding stock awards. Dr. Phillips resigned as a director on August 17,
2007.

(9)  Mr. Martin resigned as a director on November 10, 2006. As of September 30,
2007, he had no outstanding option or stock awards.

                                       47
<PAGE>

Description of the 2005 Equity Incentive Plan

     On December 7, 2005, the Board amended and restated the 1995 Stock Option
Plan, re-naming it the 2005 Equity Incentive Plan, pursuant to which, 26,062,664
shares of common stock have been reserved for issuance to officers, directors,
employees and consultants of IntraOp upon exercise of options granted under the
plan. The primary purpose of the plan is to attract and retain capable
executives, employees, directors, advisory board members and other consultants
by offering such individuals a greater personal interest in our business by
encouraging stock ownership. Options granted under the plan may be designated as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 or nonstatutory options. The plan is administered by a
compensation committee of the Board of Directors consisting of outside members
of the board of directors which will determine, among other things, the persons
to be granted options, the number of shares subject to each option and the
option price.

     The exercise price of any incentive stock option granted under the plan
must be equal to the fair market value of the shares on the date of grant, and
with respect to persons owning more than 10% of the outstanding common stock,
the exercise price may not be less than 110% of the fair market value of the
shares underlying such option on the date of grant. The exercise price of
nonstatutory stock options may not be less than the fair market value of the
shares underlying such options, and the term of such nonqualified options may
not extend beyond ten years. No incentive stock option may be exercisable more
than ten years after the date of grant, except for optionees who own more than
10% of the our common stock, in which case the option may not have a term
greater than five years. The compensation committee has the power to impose
additional limitations, conditions and restrictions in connection with the grant
of any option.

     Employment Contract and Termination of Employment and Change-in-Control
Arrangements

     Mr. Powers has an employment agreement with IntraOp that provides for a
base salary of $185,000 per year, incentive bonus compensation of up to 100% of
base salary upon attainment of goals agreed to by Mr. Powers and our Board of
Directors, an annual salary increase of not less than 5% or the percent change
in the CPI, a stock option exercisable for 18,330,000 shares of IntraOp common
stock which was awarded on November 23, 2007, six months severance for
termination without cause, four weeks paid vacation, other standard benefits
offered to our executive officers and a signing bonus of $64,000.

     Donald A. Goer, our Chief Scientist, has an employment agreement with
IntraOp that currently provides for an annual salary of $184,000. In addition,
Dr. Goer will receive a severance payment equal to one year's salary in the
event IntraOp terminates his employment without cause. The agreement
automatically renews for successive one-year periods unless either party gives
prior written notice of termination at least 60 days prior to the end of the
then current one-year term.

     Howard Solovei, our Chief Financial Officer, has an employment agreement
with IntraOp that currently provides for an annual salary of $166,125. In
addition, Mr. Solovei will receive a severance payment equal to (i) two weeks
salary times the number of months Mr. Solovei has been employed by IntraOp, up
to a maximum of twelve months' salary, if he is terminated by IntraOp without
cause or (ii) in the event that Mr. Solovei is terminated without cause and
there is a change of control of IntraOp prior to Mr. Solovei's termination or
within four months following such a termination, twelve months' salary. The
agreement automatically renews for successive one-year periods unless either
party gives prior written notice of termination at least 60 days prior to the
end of the then current one-year term.

                                       48
<PAGE>

Item 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Principal Stockholders

     The following table contains information regarding the actual beneficial
ownership of our outstanding common stock as of November 30, 2007, for:

     o    each person or group that we know beneficially owns more than 5% of
          our common stock;

     o    each of our directors;

     o    our chief executive officer;

     o    the other executive officers whose compensation exceeded $100,000 in
          fiscal 2007; and

     o    all of our directors and executive officers as a group.

     Percentage of beneficial ownership is based on shares of common stock
outstanding as of November 30, 2007, together with warrants, options, and
convertible securities that are exercisable within 60 days of November 30, 2007
for each stockholder. Beneficial ownership includes shares over which the
indicated beneficial owner exercises voting and/or investment power. Shares of
common stock subject to options that are currently exercisable or will become
exercisable within 60 days are deemed outstanding for computing the percentage
ownership of the person holding the option, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes below, we believe that the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to applicable community property laws.
Unless otherwise indicated, the address of each beneficial owner listed below is
the address of our principal offices.


                                         Amount and Nature   Percentage of
                                           of Beneficial       Shares of
                                         Ownership as of      Common Stock
                                         November 30, 2007    Outstanding
     --------------------------------------------------------------------
      Richard A. Belford (1)(2)                 91,140             0.03%

      Michael Friebe (1)(2)                    748,909             0.23%

      Donald A. Goer (1)(2)                  8,612,946             2.66%

      Keith A. Jacobsen (1)(2)                 862,903             0.27%

      Oliver Janssen (2)(3)                 16,664,515             5.01%

      Stephen J. Kessler (1)(2)                241,624             0.07%

      Greg Koonsman (2)(4)                  19,974,589             6.18%

      Scott J. Mestman (1)(2)                3,912,765             1.21%

      John P. Powers (1)(2)                  1,145,625             0.35%

      Rawleigh H. Ralls IV (5)                       -             0.00%

      Richard A. Simon (1)(2)                  224,467             0.07%

      Howard Solovei (1)(2)                  1,435,785             0.44%
     --------------------------------------------------------------------
      Officers and directors as a group     53,915,268            16.52%


                                       49
<PAGE>


      Others
     --------------------------------------------------------------------
      VMG Holdings II, LLC (4)              19,974,589             6.18%

      Lacuna Venture Fund LLLP (5)          71,275,317            22.07%

      Lacuna Hedge Fund LLLP (5)            56,356,875            17.45%

      Lacuna Ventures GP LLLP (5)           71,275,317            22.07%

      Lacuna Hedge GP LLLP (5)              56,356,875            17.45%

      Lacuna LLC (5)                       127,632,192            39.52%

      Ellerphund Ventures II, LP (6)        24,968,236             7.73%

      Ellerphund Capital II, LLC (6)        24,968,236             7.73%

      Sandor Advisors, LLC (7)              17,834,454             5.52%

      John Lemak (7)                        17,834,454             5.52%

      Precept Capital Management, L.P. (8)  17,834,454             5.52%

      Precept Management LLC (8)            17,834,454             5.52%

      D. Blair Baker (8)                    17,834,454             5.52%
     --------------------------------------------------------------------


(1) Address: c/o Intraop Medical Corporation, 570 Del Rey Avenue, Sunnyvale, CA
94085.

(2) Number of shares of common stock beneficially owned as of November 30,
2007 includes the following option and warrant grants that are exercisable
within 60 days of November 30, 2007


                                       Warrants       Options
            --------------------------------------------------
             Richard A. Belford               -        91,140

             Michael Friebe              31,428       171,481

             Donald A. Goer             196,682       657,275

             Keith A. Jacobsen                -       140,303

             Oliver Janssen           9,530,732             -

             Stephen J. Kessler               -       109,124

             Scott J. Mestman           151,785       113,730

             John P. Powers                   -     1,145,625

             Richard A. Simon                 -       211,967

             Howard Solovei              12,500     1,104,785


(3) Represents 7,133,783 shares directly held by Oliver Janssen and 9,530,732
shares directly held by Hultquist Capital, LLC ("Hultquist"). Oliver Janssen is
a member and managing director of Hultquist and may be deemed to have shared
voting power to vote, or direct the vote of, and to dispose or direct the
disposition of, the securities held by Hultquist. Mr. Janssen disclaims
beneficial ownership of the share directly held by Hultquist, except to the
extent of his pecuniary interest therein.

(4) Represents shares directly held by VMG Holdings II, LLC ("VMG Holdings").
Gregory Koonsman is the sole manager of VMG Holdings and may be deemed to have
voting power to vote, or direct the vote of, and to dispose or direct the
disposition of, the securities held by VMG Holdings. Mr. Koonsman disclaims
beneficial ownership of the shares directly held by VMG Holdings, except to the
extent of his pecuniary interest therein. The address for VMG Holdings is 13155
Noel Road, Suite 2400, Dallas, Texas 75240.

(5) Represents shares directly held by Lacuna Venture Fund LLLP and Lacuna
Hedge Fund LLLP. Lacuna Ventures GP LLLP is the general partner of Lacuna
Venture Fund LLLP, Lacuna Hedge GP LLLP is the general partner of Lacuna Hedge
LLLP and Lacuna, LLC is the general partner of Lacuna Ventures GP LLLP and
Lacuna Hedge GP LLLP (together, the "Lacuna Entities"). Rawleigh Rawls is a
member and managing director of Lacuna, LLC. Lacuna Ventures Gp LLP, Lacuna
Hedge GP LLP and Lacuna, LLC own no shares directly, but may be deemed to have
shared power to vote or direct the vote of, and to dispose or direct the
disposition of, the shares. Mr. Rawls does not own any of the shares
directly and disclaims beneficial ownership of the shares directly held by the
Lacuna Entities. The
address for the Lacuna Entities is 1100 Spruce Street, Suite 202, Boulder,
Colorado 80302.

                                       50
<PAGE>

(6) Ellerphund Capital II, LLC serves as the sole general partner of Ellerphund
Ventures II, L.P. (together, the "Ellerphund Entities"). Ellerphund Capital II,
LLC does not directly own any securities of IntraOp. Ellerphund Capital II, LLC
and Ellerphund Ventures II, L.P. may be deemed to have shared power to vote or
direct the vote of, and to dispose or direct the disposition of, the shares
held by Ellerphund Ventures II, L.P. but disclaim beneficial ownership except to
the extent of their pecuniary interest therein. The address for the Ellerphund
Entities is 2612 Hibernia Street, Dallas, Texas 75201.

(7) John Lemak is a principal of Sandor Advisors, LLC ("Sandor Advisors") .
Mr. Lamak and Sandor Advisors hold the shares for the account of Sandor
Capital, L.P., Sandor Capital (QP), L.P. and Sandor Master Fund, L.P.
(together, the "Sandor Entities") Sandor Capital Management, L.P. is the
general partner of the Sandor Entities (the "General Partner"). Sandor
Advisors controls the General Partner. Sandor Advisors, through its control of
the General Partner, has the sole power to vote and dispose of the shares held
by the Sandor Entities. Mr. Lemak, as the principal of Sandor Advisors, may
direct the vote of, and to dispose or direct the disposition of, the
securities held by the Sandor Entities. Mr. Lemak disclaims beneficial
ownership of the share directly held by the Sandor Entities, except to the
extent of his pecuniary interest therein. The address for Mr. Lemak, Sandor
Advisors and the Sandor Entities is 2828 Routh Street, Suite 500, Dallas,
Texas 75201.

(8) Precept Management, LLC ("Precept Management") is the general partner of
Precept Capital Management, L.P. ("Precept Capital"). Precept Management may be
deemed to beneficially own securities owned and/or held by and/or for the
account and/or benefit of Precept Capital. D. Blair Baker is the managing member
of Precept Management and may be deemed to beneficially own securities owned
and/or held by and/or for the account of Precept Capital. Mr. Baker may direct
the vote of, and to dispose or direct the disposition of, the securities held by
the Precept Capital. Mr. Baker disclaims beneficial ownership of the shares
directly held by Precept Capital, except to the extent of his pecuniary interest
therein. The address for Mr. Baker, Precept Management and Precept Capital is
200 Crescent Court, Suite 1450, Dallas, Texas 75201.


                      EQUITY COMPENSATION PLAN INFORMATION

     The following table summarizes compensation plans (including individual
compensation arrangements) under which our equity securities are authorized for
issuance as of September 30, 2007:

                                                                  Number of
                                                                  securities
                                                                  remaining
                                                                available for
                                                                future issuance
                               Number of                         under equity
                           securities to be    Weighted-      compensation plans
                              issued upon       average           (excluding
                              exercise of    exercise price       securities
                              outstanding    of oustanding       reflected in
                                options         options           column (a))
                                   (a)             (b)                (c)
                            ---------------  ---------------  ------------------
Equity compensation plans
approved by security
holders                         1,840,500         $0.68            1,756,500

Equity compensation plans
not approved by security
holders                             0               $0                 0
                            ---------------  ---------------  ------------------
Total:                          1,740,000         $0.71            1,857,000


     On October 15, 2007 stockholder approval was obtained to authorize the
issuance of up to an additional 22,064,662 shares under our 2005 Equity
Incentive Plan.

                                       51
<PAGE>

Item 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
              INDEPENDENCE.

     During the two fiscal years ended September 30, 2006 and September 30, 2007
we entered into the following transactions with our directors, executive
officers and/or beneficial owners of 5% or more of our common stock (or the
members of the immediate family of such persons):

     In December 2005, Donald A. Goer, our Chief Scientist, converted a total
of $260,000 of outstanding principal, plus accrued interest, of promissory
notes into 431,034 shares our common stock. Between January and March 2007,
Dr. Goer made additional loans in the amount of $233,571. The notes had an
interest rate of between 8% and 9% per annum and included warrants to purchase
196,682 shares of our common stock at $0.28 per share. In August 2007, the
exercise price of these warrants was subsequently reduced to $0.08 per share
as part of the August 2007 Agreements. Also in August 2007, as part of the
August 2007 Agreements, Dr. Goer converted a total of $533,571 of outstanding
principal, plus accrued interest, under those notes into warrants to purchase
6,669,632 shares of common stock with an exercise price of $0.00 per share.
All 6,669,632 of these warrants were exercised in October 2007. During the two
fiscal years ended September 30, 2006 and September 30, 2007, we repaid
$148,000 of principal and accrued interest on promissory notes held by Dr.
Goer. The remaining notes have an interest rate of 9% per annum. As of
September 30, 2007, promissory notes in the principal amount of $209,346, plus
accrued interest thereon, remained outstanding and payable to Dr. Goer. These
notes bear interest at 9% per annum.

During January 2007 and April 2007, Scott Mestman, our Vice President,
Worldwide Sales and Marketing, made unsecured loans to us in the aggregate
principal amount of $275,000. The notes had an interest rate of between 8% and
10% per annum and included 26,785 warrants to purchase our common stock at
$0.28 per share and 125,000 warrants to purchase our common stock at $0.40 per
share. In August 2007, the exercise price of these warrants were subsequently
reduced to $0.08 per share as part of the August 2007 Agreements. Also as part
of the August 2007 Agreements, Mr. Mestman converted all principal and accrued
interest under those notes, plus $4,300 of payables owed to him into warrants
to purchase 3,491,250 shares of common stock with an exercise price of $0.00
per share. All 3,491,250 of these warrants were exercised in October 2007.

     In January 2007, a firm controlled by Dr. Friebe, one of our directors, had
made unsecured loans to us in the aggregate principal amount of $20,000. The
notes had an interest rate of 8% and included 21,428 warrants to purchase our
common stock at $0.28 per share. In August 2007, the exercise price of these
warrants were subsequently reduced to $0.08 per share as part of the August 2007
Agreements. Also as part of the August 2007 agreements, Dr. Friebe converted a
total of $20,000 of outstanding principal, plus accrued interest, under those
notes, plus $20,000 of payables owed to companies controlled by Dr. Friebe into
500,000 warrants for common stock with an exercise price of $0.00 per share. All
500,000 of these warrants were exercised in October 2007. The notes had an
interest rate of 8% per annum, and as of September 30, 2007, no amounts remained
outstanding. We also paid $169,432 of fees to two overseas firms controlled by
Dr. Friebe for sales and marketing consulting in Europe.

     In August 2007, as part of the August 2007 Agreements, Oliver Janssen, our
Chairman, made a contribution of $151,094 to purchase 1,564,675 shares of our
common stock and 4,957,777 warrants for common stock with an exercise price of
$0.00 per share. All of these warrants were exercised in October 2007. Also as
part of the August 2007 Agreements, and per an agreement between Hultquist
Capital, LLC, or Hultquist, a firm controlled by Mr. Janssen, and some of the
new investors, we issued 9,530,732 warrants with an exercise price of $0.08 per
share to Hultquist and reimbursed to those new investors, $75,547 of consulting
fees charged to them by Hultquist.

     In August 2007, as part of the August 2007 Agreements, entities controlled
by Rawleigh Ralls, a director, paid $2,704,574 for 28,007,674 shares of our
common stock and 88,744,200 warrants for common stock with an exercise price of
$0.00 per share. All of these warrants were exercised in October 2007.

                                       52
<PAGE>

     In August 2007, as part of the August 2007 Agreements, firms controlled by
Greg Koonsman, a director, paid $423,062 for 4,381,088 shares of our common
stock and 13,881,775 warrants for common stock with an exercise price of $0.00
per share. All of these warrants were exercised in October 2007.

     We reviewed the independence of the Board of Directors and considered any
transaction between each director or any member of his or her family and us. As
a result of this review, the Board of Directors has determined that each of the
members of the Board of Directors is independent under the Nasdaq Rule 4200
definition of "independence," except for John Powers. Mr. Powers, is not
considered independent because of his current employment as the chief executive
officer of IntraOp.

Item 13.      EXHIBITS

              d)    Exhibits

              Number                           Description
              ------                           -----------

              2.1     Agreement and Plan of Reorganization dated February 24,
                      2004, by and among the Registrant and Intraop Medical,
                      Inc. (1)

              2.2     Amendment to Agreement and Plan of Reorganization made and
                      entered into as of June 29, 2004, by and among the
                      Registrant and Intraop Medical, Inc. (2)

              2.3     Second Amendment to Agreement and Plan of Reorganization
                      made and entered into as of July 30, 2004, by and between
                      the Registrant and Intraop Medical, Inc. (3)

              2.4     Third Amendment to Agreement and Plan of Reorganization
                      made and entered into as of November 15, 2004, by and
                      between the Registrant and Intraop Medical, Inc. (4)

              2.5     Fourth Amendment to Agreement and Plan of Reorganization
                      made and entered into as of December 20, 2004, by and
                      between the Registrant and Intraop Medical, Inc. (5)

              3.1     Amended and Restated Articles of Incorporation (6)

              3.2     By-Laws (7)

              4.1     Agreement for the Purchase of Common Stock dated October
                      3, 2003 (8)

              4.2     Form of 7% Convertible Debenture due August 31, 2008 (9)

              4.3     Form of Common Stock Purchase Warrant (9)

              4.4     Form of Short Term Common Stock Purchase Warrant (9)

              4.5     Form of Representative's Warrant issued to Stonegate
                      Securities, Inc. (9)

                                       53
<PAGE>

              4.6     Registration Rights Agreement dated as of August 31, 2005,
                      by and among the Registrant, Bushido Capital Master Fund,
                      L.P., Samir Financial, L.L.C., Gamma Opportunity Capital
                      Partners, L.P., Regenmacher Holdings Ltd. and ABS SOS-Plus
                      Partners Ltd. (9)

              4.7     Form of 7% Convertible Debenture due October __, 2008 (10)

              4.8     Form of Common Stock Purchase Warrant (10)

              4.9     Form of Short Term Common Stock Purchase Warrant (10)

              4.10    Registration Rights Agreement dated as of October 25, 2005
                      by and among the Registrant and Dolphin Offshore Partners
                      (10)

              4.11    Form of 7% Convertible Debenture (12)

              4.12    Registration Rights dated as of October 25, 2005 by and
                      among the Registrant and the purchasers signatory thereto
                      (12)

              4.13    Form of 8% Debenture (24)

              4.14    Registration Rights Agreement dated as of January 10, 2007
                      by and between the Registrant and the Purchasers named
                      therein (24)

              4.15    Form of Common Stock Purchase Warrant (24)

              4.16    Form of Warrant to Purchase Common Stock (26)

              4.17    Warrant to Purchase Common Stock issued to Emerging
                      Markets Consulting, LLC (26)

              4.18    Warrant to Purchase Common Stock issued to Eckert &
                      Ziegler Strahlen-und Medizintechnik AG (27)

              4.19    Warrant to Purchase Common Stock issued to DLA Piper US
                      LLP (27)

              4.20    Form of warrant issued to investors (29)

              4.21    Form of warrant issued to financial advisors (29)

              10.1    Inventory/Factoring Agreement, dated as of August 16,
                      2005, by and among the Registrant, E.U. Capital Venture,
                      Inc., and E.U.C. Holding (13)

              10.2    Securities Purchase Agreement, dated as of August 31,
                      2005, by and among the Registrant, Bushido Capital Master
                      Fund, L.P., Samir Financial, L.L.C., and Gamma Opportunity
                      Capital Partners, L.P. (9)

              10.3    Securities Purchase Agreement dated as of August 31, 2005,
                      by and among the Registrant, Regenmacher Holdings Ltd. and
                      ABS SOS-Plus Partners Ltd. (9)

                                       54
<PAGE>

              10.4    Form of 10% senior secured Debenture due August 31, 2008
                      (9)

              10.5    Security Agreement, dated as of August 31, 2005, by and
                      among the Registrant, Regenmacher Holdings Ltd. and ABS
                      SOS-Plus Partners Ltd. (9)

              10.6    Subsidiary Guaranty dated as of August 31, 2005 executed
                      by Intraop Medical Services, Inc. (9)

              10.7    Placement Agency Agreement dated May 17, 2005 by and
                      between the Registrant and Stonegate Securities, Inc. (9)

              10.8    Disclosure Schedules (9)

              10.9    Securities Purchase Agreement dated as of October 25, 2005
                      by and among the Registrant and Dolphin Offshore Partners,
                      L.P. (10)

              10.10   Disclosure Schedules (10)

              10.11   Disclosure Schedules (11)

              10.12   Securities Purchase Agreement dated as of October 25, 2005
                      by and among the Registrant and the purchasers identified
                      on the signature pages thereto (12)

              10.13   Disclosure Schedules (12)

              10.14   2005 Equity Incentive Plan (14)

              10.15   Amendment to Registration Rights Agreement dated January
                      25, 2006 by and between the Registrant and the parties
                      named therein (15)

              10.16   Agreement dated as of January 25, 2006 by and among the
                      Registrant, Regenmacher Holdings, Ltd. and ABS SOS-Plus
                      Partners, Ltd. (15)

              10.17   Agreement executed April 7, 2006 by and between the
                      Registrant and Emerging Markets Consulting, LLC (16)

              10.18   Amended and Restated Inventory and Receivables Purchase
                      Agreement dated as of April 10, 2006 by and between the
                      Registrant and E.U. Capital Venture, Inc. and E.U.C.
                      Holding (17)

              10.19   Second Amendment to Registration Rights Agreement dated as
                      of March 31, 2006 by and between the Registrant and the
                      other parties named therein (18)

              10.20   First Amendment to Amended and Restated Inventory and
                      Receivables Purchase Agreement entered into as of May 24,
                      2006, by and among the Registrant, E.U. Capital Venture,
                      Inc. and E.U.C. Holding (19)

              10.21   Promissory Note dated July 14, 2006 in the aggregate
                      principal amount of $25,000 issued by the Registrant to
                      Bushido Capital Master Fund, L.P. (20)

                                       55
<PAGE>

              10.22   Promissory Note dated July 17, 2006 in the aggregate
                      principal amount of $50,000 issued by the Registrant to
                      Donald A. Goer (20)

              10.23   Second Amendment to Amended and Restated Inventory and
                      Receivables Purchase Agreement entered into as of May 24,
                      2006, as further amended on June 1, 2006, by and among the
                      Registrant, E.U. Capital Venture, Inc. and E.U.C. Holding
                      (21)

              10.24   Third Amendment to Amended and Restated Inventory and
                      Receivables Purchase Agreement entered into as of May 24,
                      2006, as further amended on June 1, 2006 and August 14,
                      2006, by and among the Registrant, E.U. Capital Venture,
                      Inc. and E.U.C. Holding (22)

              10.25   Inventory Purchase Agreement dated October __, 2006 by and
                      between the Registrant and 4M, Inc. (23)

              10.26   Securities Purchase Agreement dated as of January 10, 2007
                      by and between the Registrant and the Purchasers named
                      therein (24)

              10.27   First Amendment to Inventory Purchase Agreement dated as
                      of March 14, 2007 by and between the Registrant and 4M,
                      Inc. (25)

              10.28   Unsecured Promissory Note dated March 15, 2007 by and
                      between the Registrant and 4M, Inc. (25)

              10.29   Form of Unsecured Promissory Note (26)

              10.30   Agreement dated as of April 1, 2007 by and between the
                      Registrant and Emerging Markets Consulting, LLC (26)

              10.31   Promissory Noted dated July 25, 2007 issued to Eckert &
                      Ziegler Strahlen-und Medizintechnik AG (27)

              10.32   Final Settlement Agreement and Mutual Release dated as of
                      July 2, 2007 by and between the Registrant and DLA Piper
                      Rudnick Gray Cary US LLP (27)

              10.33   Employment Agreement dated October 1, 1993 by and between
                      the Registrant and Donald A. Goer (28)

              10.34   Employment Agreement dated as of December 15, 2002 by and
                      between the Registrant and Howard Solovei (28)

              10.35   Common Stock and Warrant Purchase Agreement dated as of
                      August 17, 2007 by and among the Registrant and the other
                      parties named therein (29)

              10.36   Officer and Director Warrant Purchase Agreement dated as
                      of August 17, 2007 by and among the Registrant and the
                      other parties named therein (29)

                                       56
<PAGE>

              10.37   Debenture Conversion and Purchase and Warrant Cancellation
                      Agreement dated as of August 17, 2007 by and among the
                      Registrant and the other parties named therein (29)

              10.38   January Bridge Note Conversion and Warrant Purchase
                      Agreement dated as of August 17, 2007 by and among the
                      Registrant and the other parties named therein (29)

              10.39   Company Warrant Repricing Agreement dated as of August 17,
                      2007 by and among the Registrant and the other parties
                      named therein (29)

              10.40   Insider Indebtedness Conversion Agreement dated as of
                      August 17, 2007 by and among the Registrant and the other
                      parties named therein (29)

              10.41   Amendment and Waiver Agreement dated as of August 17, 2007
                      by and among the Registrant and the other parties named
                      therein (29)

              10.42   Rights Agreement dated as of August 17, 2007 by and among
                      the Registrant and the other parties named therein (29)

              10.43   Form of Indemnification Agreement (29)

              10.44   2005 Equity Incentive Plan, as amended  (30)

              14.1    Code of Ethics (*)

              31.1    Rule 13a-14(a)/15d-14(a) Certification of John Powers,
                      Principal Executive Officer (*)

              31.2    Rule 13a-14(a)/15d-14(a) Certification of Howard Solovei,
                      Principal Financial Officer (*)

              32.1    Section 1350 Certification of John Powers, Principal
                      Executive Officer (*)

              32.2    Section 1350 Certification of Howard Solovei, Principal
                      Financial Officer (*)

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

              (1)     Previously filed as an exhibit to the Registrant's 8-K
                      Report filed on February 25, 2004.

              (2)     Previously filed as an exhibit to the Registrant's 8-K
                      Report filed on June 30, 2004.

              (3)     Previously filed as an exhibit to the Registrant's Form
                      10-QSB filed on August 16, 2004.

                                       57
<PAGE>

              (4)     Previously filed as an exhibit to the Registrant's Form
                      10-QSB filed on November 18, 2004.

              (5)     Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on December 23, 2004.

              (6)     Previously filed as an exhibit to the Registrant's 8-K
                      Report filed on March 15, 2005.

              (7)     Previously filed as Exhibit C to the Merger Agreement
                      filed as Exhibit A to the Registrant's definitive
                      Information Statement filed on February 11, 2005.

              (8)     Previously filed as an exhibit to the Registrant's Form
                      10-QSB/A filed on February 25, 2004.

              (9)     Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on September 1, 2005.

              (10)    Previously filed as an exhibit to the Registrant's Form
                      8-K filed on October 31, 2005.

              (11)    Previously filed an exhibit to the Registrant's 8-K Report
                      filed on November 1, 2005.

              (12)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on November 8, 2005.

              (13)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on August 19, 2005.

              (14)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on December 7, 2005.

              (15)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on March 16, 2006.

              (16)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on April 7, 2006.

              (17)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on April 12, 2006.

              (18)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on April 18, 2006.

              (19)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on June 2, 2006.

              (20)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on July 19, 2006.

              (21)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on August 15, 2006.

                                       58
<PAGE>

              (22)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on September 20, 2006.

              (23)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on October 6, 2006.

              (24)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on January 10, 2007.

              (25)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on March 20, 2007.

              (26)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on April 13, 2007.

              (27)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on July 30, 2007.

              (28)    Previously filed as an exhibit to the Registrant's Form
                      10-QSB filed on August 17, 2007.

              (29)    Previously filed as an exhibit to the Registrant's Form
                      8-K Report filed on August 23, 2007.

              (30)    Previously filed as Appendix B to Registrant's Schedule
                      14A filed on September 24, 2007.

              (*)     Filed herewith.



                  (Remainder of page intentionally left blank)




                                       59
<PAGE>

Item 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

(1)  Audit Fees. The aggregate fees billed to us for the years ended September
30, 2007 and September 30, 2006 for professional services rendered by our
principal accountant for the audit of our annual financial statements and review
of financial statements included in our Form 10-KSB were $55,000 and $76,000,
respectively.

(2)  Audit-Related Fees. There were no fees billed to us for the years ended
September 30, 2007 and September 30, 2006 for assurance and related services by
our principal accountant that are reasonably related to the performance of the
audit or review of our financial statements and are not reported under Item (1)
above.

(3) Tax Fees. The aggregate fees billed to us for the years ended September
30, 2007 and September 30, 2006 for professional services rendered by our
principal accountant for tax compliance, tax advice, and tax planning were
$8,277 and $16,813, respectively.

(4)  All Other Fees. There were no other fees billed to us for the years
ended September 30, 2007 and September 30, 2006 for products and services
provided by our principal accountant, other than the services reported in Items
(1) through (3) above.

(5)  Our audit committee pre-approves all auditing and tax services to be
provided by our principal accountant on an annual basis prior to entering into
an engagement with our principal accountant for such services. All other
non-audit services, if any, must be pre-approved by our audit committee on a
case by case basis. All services described in Items (1) through (4) above were
pre-approved by our audit committee.

(6)  All of the hours expended on our principal accountant's engagement to audit
our financial statements for the fiscal year ended September 30, 2007 were
attributed to work performed by our principal accountant's full time, permanent
employees.


                                       60
<PAGE>


                                   SIGNATURES

     In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on this 14th day of December, 2007.

                                     Intraop Medical Corporation

                                     By: /s/ John Powers
                                         ---------------------------------------
                                         John Powers,
                                         President and Chief Executive Officer

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature                       Title                          Date
---------                       -----                          ----

/s/ Oliver Janssen              Chairman                       December 14, 2007
-----------------------------
Oliver Janssen


/s/ John Powers                 President, Chief Executive     December 14, 2007
-----------------------------   Officer, and Director
John Powers                     (Principal Executive Officer)


/s/ Howard Solovei              Chief Financial Officer and    December 14, 2007
-----------------------------   Secretary (Principal
Howard Solovei                  Financial Officer and
                                Principal Accounting Officer)


/s/ Keith Jacobsen              Director                       December 14, 2007
-----------------------------
Keith Jacobsen


/s/ Michael Friebe              Director                       December 14, 2007
-----------------------------
Michael Friebe


/s/ Stephen L. Kessler          Director                       December 14, 2007
-----------------------------
Stephen L. Kessler


/s/ Greg Koonsman               Director                       December 14, 2007
-----------------------------
Greg Koonsman


/s/ Rawleigh Ralls              Director                       December 14, 2007
-----------------------------
Rawleigh Ralls

                                       61


<PAGE>

                           Intraop Medical Corporation
                   Index to Consolidated Financial Statements
                      For the Year Ended September 30, 2007


Report of Independent Registered Public Accounting Firm for Year Ended
September 30, 2007                                                           F-2

Consolidated Balance Sheet as of September 30, 2007                          F-3

Consolidated Statements of Operations for the Years Ended September
30, 2007 and September 30, 2006                                              F-4

Consolidated Statement of Stockholder's Deficit for the Years Ended
September 30, 2007 and September 30, 2006                                    F-6

Consolidated Statements of Cash Flows for the Years Ended September
30, 2007 and September 30, 2006                                              F-8

Notes to Consolidated Financial Statements                                  F-10


                                      F-1
<PAGE>

        Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders of Intraop Medical Corporation:

We have audited the accompanying  consolidated  balance sheet of Intraop Medical
Corporation, a Nevada corporation, (the "Company") as of September 30, 2007, and
the related  consolidated  statements of operations,  stockholders'  deficit and
cash  flows for the fiscal  years  ending  September  30,  2007 and 2006.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit includes  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for  expressing  an  opinion on the
effectiveness  of the  Company's  internal  control  over  financial  reporting.
Accordingly,  we express no such opinion. An audit also includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Intraop
Medical  Corporation as of September 30, 2007, and the  consolidated  results of
its operations and its cash flows for the fiscal years ending September 30, 2007
and 2006 in conformity  with  accounting  principles  generally  accepted in the
United States.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated  financial  statements,  the Company has incurred  substantial  net
losses and  incurred  substantial  monetary  liabilities  in excess of  monetary
assets  over the  past  several  years  and as of  September  30,  2007,  had an
accumulated  deficit  of  $34,041,656.   These  matters,   among  others,  raise
substantial doubt about its ability to continue as a going concern. Management's
plans  concerning  these  matters are  described  in Note 1. These  consolidated
financial   statements   do  not  include  any   adjustments   relating  to  the
recoverability  and  classification  of  recorded  assets,  or the  amounts  and
classification  of liabilities  that might be necessary in the event the Company
cannot continue in existence.


/s/ PMB Helin Donovan, LLP
PMB Helin Donovan, LLP
San Francisco, California
December 14, 2007


                                      F-2
<PAGE>

<TABLE>
<CAPTION>

Intraop Medical Corporation
Consolidated Balance Sheet
------------------------------------------------------------------------------------------
                                                                             September 30,
                                                                                 2007
                                                                             -------------
ASSETS
Current assets:
<S>                                                                          <C>
  Cash and cash equivalents                                                  $     538,364
  Accounts receivable                                                              404,071
  Inventories, net                                                               2,990,220
  Inventories, under product financing arrangement                               3,619,776
  Prepaid expenses and other current assets                                         76,919
                                                                             -------------

         Total current assets                                                    7,629,350

Property and equipment, net                                                        182,016
Intangible assets, net                                                             282,980
Deferred financing cost                                                            212,886
Deposits                                                                           248,385

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

         Total Assets                                                        $   8,555,617
                                                                             =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable                                                           $   3,490,691
  Accrued liabilities                                                              983,435
  Capital lease obligations, current portion                                         2,353
  Notes payable, related parties, current portion                                  209,347
  Notes payable, other, current portion, net of unamortized debt discounts       6,251,538
                                                                             -------------

         Total current liabilities                                              10,937,364

  Capital lease obligations, net of current portion                                  5,379
  Notes payable, other, net of current portion, unamortized debt discounts
     and beneficial conversion features                                                 --
                                                                             -------------

         Total liabilities                                                      10,942,743
                                                                             -------------

Commitments and contingencies (see note 9)

Stockholders' deficit:
  Common stock, $0.001 par value: 100,000,000 shares authorized;
     89,914,021 shares issued and outstanding                                       89,914
  Additional paid-in capital                                                    27,624,921
  Stock subscription                                                            (1,150,071)
  Obligation to issue stock                                                      5,239,768
  Treasury stock, at cost, 600,000 shares at $.25 per share
                                                                                  (150,000)
  Accumulated deficit                                                          (34,041,658)
                                                                             -------------

         Total stockholders' deficit                                            (2,387,126)
                                                                             -------------

             Total liabilities and stockholders' deficit                     $   8,555,617
                                                                             =============


The  accompanying  notes form an integral part of these  consolidated  financial statements.
</TABLE>



                                      F-3
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Operations
--------------------------------------------------------------------------------
                                                    Year ended September 30,
                                                 ------------------------------
                                                     2007              2006
                                                 -------------    -------------

Revenues:
  Product sales                                  $   3,529,233    $   5,521,661
  Leasing                                                   --          134,127
  Service                                              418,424          327,166
                                                 -------------    -------------

  Total revenues                                     3,947,657        5,982,954
                                                 -------------    -------------

Cost of revenues:
  Product sales (1)                                  2,719,585        4,303,210
  Leasing                                                   --           38,323
  Service (1)                                          196,682          231,142
                                                 -------------    -------------

  Total cost of revenues                             2,916,267        4,572,675
                                                 -------------    -------------

Gross margin                                         1,031,390        1,410,279
                                                 -------------    -------------

Operating expenses:
  Research and development (1)                         661,678          624,284
  General and administrative (1)                     2,239,365        2,414,219
  Sales and marketing (1)                            1,808,445          800,842
                                                 -------------    -------------

          Total operating expenses                   4,709,488        3,839,345
                                                 -------------    -------------

Loss from operations                                (3,678,098)      (2,429,066)

Other income                                          (187,096)         (76,877)
Gain on extinguishment of debt                       5,637,355           33,358
Interest income                                             29            7,205
Interest expense                                    (7,798,930)      (4,694,721)
                                                 -------------    -------------

Loss before taxes                                   (6,026,740)      (7,160,101)

Provision for income taxes                                  --               --
                                                 -------------    -------------

Net loss                                         $  (6,026,740)   $  (7,160,101)
                                                 =============    =============

Basic and diluted net loss per share
  available to common stockholders               $       (0.18)   $       (0.33)
                                                 =============    =============
Weighted average number of shares in
  calculating net loss per share:
  Basic and diluted                                 34,234,044       21,799,599
                                                 =============    =============


The  accompanying  notes form an integral part of these  consolidated  financial
statements.


                                      F-4
<PAGE>

<TABLE>
<CAPTION>

Intraop Medical Corporation
Consolidated Statements of Operations (Continued)
-------------------------------------------------------------------------------------------

                                                                Year ended September 30,
                                                                2007                2006
                                                             ------------------------------
(1)   Includes the following amounts related to
        share-based compensation expense of stock options:

<S>                                                                 <C>              <C>
Cost of revenues - Product sales                                       360               --
Cost of revenues - Service                                           2,374            5,154
Research and development                                            18,561           44,881
General and administrative                                          23,372           54,302
Sales and marketing                                                 30,486           43,347
                                                             -------------    -------------

Total                                                        $      75,153    $     147,684
                                                             =============    =============


The  accompanying  notes form an integral part of these  consolidated  financial statements.

</TABLE>




                  (Remainder of page intentionally left blank)


                                      F-5
<PAGE>

<TABLE>
<CAPTION>

Intraop Medical Corporation
Consolidated Statements of Stockholders' Deficit
----------------------------------------------------------------------------------------------------------------------------------


                                                Common Stock           Additional
                                        ---------------------------      Paid-In      Treasury       Accumulated
                                           Shares         Amount         Capital        Stock          Deficit           Total
                                        ------------   ------------   ------------   ------------    ------------    ------------

<S>                                       <C>          <C>            <C>            <C>             <C>             <C>
Balance at September 30, 2005             20,033,767   $     20,034   $ 16,721,934   $   (150,000)   $(20,854,817)   $ (4,262,849)
Stock based compensation                     200,000            200        306,940             --              --         307,140
Conversion of notes into common stock      1,817,185          1,817        782,149             --              --         783,966
Conversion of notes interest payable         150,500            150         80,544             --              --          80,694
  into common stock
Issuance of warrants in connection                --             --      2,076,580             --              --       2,076,580
  with debt financing
Issuance of common stock in                  135,000            135         80,866             --              --          81,001
  connection with debt financing
Issuance of common stock upon                 30,000             30          2,970             --              --           3,000
  exercise of stock options
Issuance of common stock upon              3,910,720          3,911      1,241,805             --              --       1,245,716
  exercise of warrants
Reevaluation of warrants in                       --             --         45,945             --              --          45,945
  connection with extension of life
Reevaluation of warrants in                       --             --        119,113             --              --         119,113
  connection with repricing
Warrants issued for consulting services           --             --         56,864             --              --          56,864
convertible debt beneficial                       --             --      2,486,064             --              --       2,486,064
  Conversion feature
Net loss                                          --             --             --             --      (7,160,101)     (7,160,101)
                                        ------------   ------------   ------------   ------------    ------------    ------------

Balance at September 30, 2006             26,277,172   $     26,277   $ 24,001,774   $   (150,000)   $(28,014,918)   $ (4,136,867)
                                        ============   ============   ============   ============    ============    ============

The  accompanying  notes form an integral part of these  consolidated  financial statements.

</TABLE>


                                      F-6
<PAGE>

<TABLE>
<CAPTION>
Intraop Medical Corporation
Consolidated Statements of Stockholders' Deficit (Continued)
-----------------------------------------------------------------------------------------------------------------------------------


                                                      Additional               Obligation
                                   Common Stock        Paid-In      Treasury    to issue     Stock      Accumulated
                              ----------------------
                                Shares      Amount     Capital       Stock       Stock    Subscription    Deficit        Total
                              ----------- ---------- ------------ ------------ ------------------------------------- -------------

<S>                            <C>        <C>        <C>          <C>           <C>       <C>          <C>           <C>
Balance at September 30, 2006  26,277,172 $   26,277 $ 24,001,774 $  (150,000)          -           -  $(28,014,918) $ (4,136,867)
Stock based compensation          200,000        200      142,855           -           -           -             -       143,055
Conversion of debentures into
 common stock                  19,555,293     19,555      528,689           -           -           -             -       548,244
Sale of common stock, net of
 direct fees incurred of
 $448,664                      42,081,556     42,082    1,825,603           -           -           -             -     1,867,685
Cashless exercise of warrants   1,800,000      1,800       48,664           -           -           -             -        50,464
Warrants issued or modified
 for debt financing                     -          -      611,996           -           -           -             -       611,996
Warrants issued for
 consulting services                    -          -      326,054           -           -           -             -       326,054
Conversion feature                      -          -      139,286           -           -           -             -       139,286
Warrants with $0.00 exercise
 price                                  -          -            -           -   5,239,768           -             -     5,239,768
Stock subscription                      -          -            -           -           -  (1,150,071)            -    (1,150,071)
Net loss                                -          -            -           -           -           -    (6,026,740)   (6,026,740)
                              ----------- ---------- ------------ ------------ ---------- ------------ ------------- -------------

Balance at September 30, 2007  89,914,021     89,914   27,624,921    (150,000)  5,239,768  (1,150,071)  (34,041,658) $ (2,387,126)
                              =========== ========== ============ ============ ========== ============ ============= =============


The accompanying notes form an integral part of these consolidated financial statements
</TABLE>

                                      F-7
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S>                                                   <C>            <C>
----------------------------------------------------------------------------------
                                                       Year ended September 30,
                                                    ------------------------------
                                                           2007           2006
                                                    ---------------  -------------

Cash flows from operating activities:
  Net loss                                             $(6,026,740)   $(7,160,101)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
   Depreciation of property and equipment                   78,614         64,011
   Amortization of intangible assets                        73,380         27,197
   Amortization of beneficial conversion rights          2,539,226      1,465,571
   Amortization of debt discount                         2,604,161      1,306,936
   Amortization of debt issuance costs                     763,542        243,155
   Non-cash compensation for options issued                 95,053        142,359
   Non-cash compensation for warrants issued               340,632        404,374
   Non-cash compensation for common stock issued            48,000        216,001
   Non-cash revenue received on leased equipment                 -        (62,168)
   Non-cash gain on extinguishment of debt              (5,637,355)        (5,143)
   Non-cash interest expense                                     -         38,324
  Changes in assets and liabilities:
     Accounts receivable                                 3,198,821     (2,673,589)
     Inventories                                        (3,374,384)      (306,655)
     Prepaid expenses and other current assets              56,467        (26,000)
     Other assets                                          122,485       (182,759)
     Accounts payable                                      828,872        499,143
     Accrued liabilities                                    76,637        182,555
     Foreign exchange translation                           (4,215)        63,421
                                                    ---------------  -------------

     Net cash used for operating activities             (4,216,804)    (5,763,368)
                                                    ---------------  -------------

Cash flows used for investing activities:
  Acquisition of fixed assets                              (24,648)      (196,193)
  Acquisition of intangible assets                               -        (30,000)
                                                    ---------------  -------------

     Net cash used for investing activities                (24,648)      (226,193)
                                                    ---------------  -------------

The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>

                                      F-8
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Cash Flows (Continued)
-----------------------------------------------------------------------
                                              Year ended September 30,
                                             --------------------------
                                                  2007         2006
                                             ------------- ------------
Cash flows provided by financing activities:
    Proceeds from note payable, related party      653,571     100,000
    Proceeds from note payable, other           12,168,214   9,184,775
    Payments on note payable, related party        (58,610)   (393,330)
    Payments on note payable, other            (12,609,680) (3,704,602)
    Debt issuance costs                            (85,000)   (339,568)
    Proceeds from sale of warrants & common
     stock, net of fees                          4,561,450           -
    Proceeds from issuance of common stock               -   1,248,716
                                             ------------- -----------

         Net cash provided by financing
          activities                             4,629,945   6,095,991
                                             ------------- -----------

Net increase (decrease) in cash and cash
 equivalents                                       388,493     106,430
Cash and cash equivalents, at beginning of
 period                                            149,871      43,441
                                             ------------- -----------

Cash and cash equivalents, at end of period       $538,364    $149,871
                                             ============= ===========


Supplemental disclosure of cash flow
 information:
  Cash paid for interest                         $1,427,734 $1,018,255
  Income taxes paid                                   2,100          -

Supplemental disclosure of non-cash investing
  and financing activities:
  Leased equipment reclassified to inventory     $        -   $631,114
  Property and equipment, at book value,
   converted to inventory                                 -     10,906
  Purchase of intangible under vendor payment
   agreement                                              -    312,500
  Accounts payable, interest payable and royalty
   payable converted
      to common stock and warrants                  340,311          -
  Conversion of promissory notes and interest
   payable
     to common stock and warrants                 5,740,550    864,660

The accompanying notes form an integral part of these consolidated financial
statements.

                                      F-9
<PAGE>

                    INTRAOP MEDICAL CORPORATION NOTES TO THE
                        CONSOLIDATED FINANCIAL STATEMENTS

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

Formation and Business of the Company:

Intraop Medical Corporation (the "Company") was organized under the laws of
the State of Nevada on November 5, 1999 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.

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.

Basis of Consolidation:

For the year ended September 30, 2006, the consolidated financial statements
include the accounts of Intraop Medical Corporation and its wholly owned
subsidiaries, 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.    In
April 2007 the Company formed Intraop Medical Europe Ltd., a United Kingdom
registered corporation in which Intraop Medical Corporation is the majority
shareholder.  Consequently, for the year ended September 30, 2007, the
consolidated financial statements include the accounts of Intraop Medical
Corporation, Intraop Medical Services, Inc., and Intraop Medical Europe
Ltd.   All significant inter-company balances and transactions have been
eliminated in preparation of the consolidated financial statements.

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 $6,026,740 and $7,160,101
for the years ended September 30, 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 September 30, 2007,
has an accumulated deficit of $34,041,658. 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. In the year
          ended September 30, 2007, the Company hired a new Chief Executive
          Officer.

                                      F-10
<PAGE>

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

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

     o    Evaluating funding strategies in the public and private markets.

Historically, management has been able to raise additional capital. During
the year ended September 30, 2007, the Company obtained capital through the
issuance of notes and the sale of common stock and warrants of approximately
$5,710,384. During 2007, the Company was able to convert $646,455 of debt
into equity and Company was able to extinguish $5,637,355 of debt.  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.

Cash and Cash Equivalents:

The Company considers all highly liquid investments purchased with an
original maturity of three months or less at the time of purchase to be cash
equivalents. As of September 30, 2007, the Company maintains its cash and
cash equivalents with a major bank.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are stated at the amount the Company expects to
collect. The Company recognizes allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. Management considers the following factors when
determining the collectibility of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. If the
financial condition of the Company's customers were to deteriorate, adversely
affecting their ability to make payments, an allowance would be required.
Based on management's assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings and a credit to a
valuation allowance. Balances that remain outstanding after the Company has
used reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to accounts receivable.  At September 30,
2007, the Company has not recorded an allowance.

Inventories:

Inventories are stated at the lower of cost or market value.  Cost is
determined by the first-in, first-out method and market represents the
estimated net realizable value. The Company records inventory write-downs for
estimated obsolescence of unmarketable inventory based upon assumptions about
future demand and market conditions.

Property and Equipment:

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Equipment held under capital leases
is classified as capital assets and amortized using the straight line method
over the term of the lease or the estimated useful life, whichever is
shorter. Minor replacements, maintenance, and repairs that do not increase
the useful life of the assets are expensed as incurred.

                                      F-11
<PAGE>

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

The depreciation and amortization periods for property and equipment
categories are as follows:

          Description                         Useful Life
          -----------                         -----------

      Equipment                                 5 years
      Computer equipment                        3 years
      Furniture and fixtures                    5 years

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 represent 92.1%, 4.1% and 3.7% of accounts receivable at September
30, 2007. The Company reviews the credit quality of its customers but does
not require collateral or other security to support customer receivables.
Three customers accounted for 35.8%, 24.8%, 21.8%, of net revenue for the
year ended September 30, 2007. Five customers accounted for 22.4%, 19.6%,
17.2%, 16.9% and 14.7% of net revenue for the year ended September 30, 2006.

Long-Lived Assets:

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets,
long-lived assets to be held and used are analyzed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. SFAS No. 144 relates to assets that can be
amortized and the life can be determinable. The Company reviews property and
equipment and other long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.  Recoverability is measured by comparison of the asset's
carrying amount to future undiscounted net cash flows the assets are expected
to generate.  Cash flow forecasts are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic
conditions.  If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the projected discounted future cash flows arising from the
assets or their fair values, whichever is more determinable.

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.

                                      F-12
<PAGE>

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

Fair Value of Financial Instruments:

The  carrying  amount  of  cash  equivalents,  accounts  receivable,  accounts
payable,  notes  payable and  obligations  under capital  leases  approximates
their fair value either due to the short  duration to maturity or a comparison
to market interest rates for similar instruments.

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 customers during the year ended
September 30, 2007 and five customers during the year ended September 30,
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.


 Lease Revenue and Leasing Transactions:

Leasing revenue in the year ended September 30, 2006 was comprised of revenue
recognized on a Mobetron system leased to an overseas customer.  The lease
ended on January 1, 2006, at which time the residual value of the leased
asset in the amount of $631,114 was reclassified to inventory.
Correspondingly, the Company adjusted and reclassified as accounts payable
$1,013,022 of lease obligation related to repurchase obligations the Company
had under the lease, and recognized a gain on extinguishment of those lease
obligations in the amount of $28,214.  During the year ended September 30,
2007, the Company did not have any lease related revenue.

Research and Development Costs:

Costs incurred for research and development, which include direct expenses
and an allocation of research related overhead expenses, are generally
expensed as incurred.  The Company has however chosen to capitalize as
intangible assets, certain non-recurring engineering expenses paid to certain
of its vendors related to development by those vendors of certain Mobetron
subsystems to be subsequently supplied by those same vendors.  The Company
has not incurred significant costs for software development related to its
Mobetron product.

Research and development costs for the fiscal years ended September 30, 2007
and 2006 were $661,678 and $624,284, respectively.

                                      F-13
<PAGE>

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

Deferred Rent:

The Company has entered into operating lease agreements for its corporate
office and warehouse, some of which contain provisions for future rent
increases, or periods in which rent payments are abated.  In accordance with
generally accepted accounting principles, the Company records monthly rent
expense equal to the total of the payments due over the lease term, divided
by the number of months of the lease term. The difference between rent
expense recorded and the amount paid is credited or charged to "Deferred
rent."

Warranty Claims:

The Company's financial statements include accruals for warranty claims based
on the Company's claims experience. Such costs are accrued at the time
revenue is recognized and are included in "Accrued liabilities" in the
accompanying balance sheet.

Deferred Financing Costs:

Costs relating to obtaining debt financing are capitalized and amortized over
the term of the related debt using the effective interest method. When a loan
is paid in full, any unamortized financing costs are removed from the related
accounts and charged to interest expense.

Intangible Assets:

Intangible assets consist primarily of amounts paid for manufacturing and
design rights related to the Mobetron, certain non-recurring engineering
expenses paid to third parties related to development by those third parties
of certain Mobetron subsystems, and a medical device approval license. These
manufacturing and design rights and non-recurring engineering expenses
related to the Mobetron are amortized on a straight-line basis over their
estimated useful lives of five years. The medical device approval license has
an indefinite life and therefore is not subject to amortization.

The Company evaluates the carrying value of its intangible assets during the
fourth 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 intangible assets completed during the year ended
September 30, 2007 resulted in no impairment losses.

Contingencies:

From time to time, the Company is subject to various claims and legal
proceedings covering a wide range of matters that arise in the ordinary
course of its business activities. Management believes that any liability
that may ultimately result from the resolution of these matters will not have
a material adverse effect on the financial condition or results of operations
of the Company.

                                      F-14
<PAGE>

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


Income Taxes:

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

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

Advertising Costs:

Advertising and sales promotion costs are expensed as incurred. Advertising
expense totaled $326,422 for and $91,393, respectively, for the years
September 30, 2007 and 2006.

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. Basic net loss per share for the year ended September
30, 2006, includes shares redeemable by stockholders in accordance with
certain dissenter's rights provisions, as these shares were repurchased on
December 13, 2005. 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.

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

                                                      Year ended September 30,
                                                    --------------------------
                                                        2007          2006
                                                    ------------  ------------

      Numerator                                     $(6,026,740)  $(7,160,101)
      Net loss available to common stockholders

      Denominator                                    34,234,044    21,799,599
      Weighted average common shares outstanding
                                                    ------------  ------------

      Total shares, basic                            34,234,044    21,799,599
                                                    ============  ============
      Net loss per common share:
        Basic and diluted                           $     (0.18)  $     (0.33)
                                                    ============  ============

                                      F-15
<PAGE>

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

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

                                                  Year ended September 30,
                                                --------------------------
                                                     2007          2006
                                                -------------  -----------

     Debentures convertible to common stock                -   16,000,000
     Obligation to issue common stock                623,278            -
     Options to purchase common stock              1,840,500     1,740,000
     Warrants to purchase common stock           228,376,214    17,371,428
                                                -------------  -----------
     Potential equivalent shares excluded        230,839,992    35,111,428
                                              ===============  ===========


Warrants to purchase common stock at September 30, 2007, includes 212,029,781
warrants issued as part of a series of definitive binding agreements entered
into on August 17, 2007 (the "August 2007 Agreements," as further described
in Note 6), which warrants could not be exercised until the Company received
stockholder approval to amend its articles of incorporation to increase its
authorized common stock from 100 million shares to 500 million shares. That
approval was obtained at the annual meeting of stockholders on October 15,
2007.

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) superseded 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 8 for a detailed discussion of SFAS 123(R).

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).

                                      F-16
<PAGE>

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

Accounting for Convertible Debt and Senior Securities:

During the years ended September 30, 2005 and 2006 the Company issued
convertible debt securities with non-detachable conversion features.  The
Company accounted for such securities in accordance with Statement of
Financial Accounting Standards No. 133 and 150 and Emerging Issues Task Force
Issue Nos. 98-5, 00-19, 00-27, 05-02, 05-08 and 05-04 View C. For the
imbedded conversion option, the Company records the intrinsic value, which is
measured using the commitment date fair value of the underlying stock.

In conjunction with the issuance of the Company's senior and convertible
debentures and the related warrants and registration rights for fiscal year
2006, the Company 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 the underlying securities of the
Company, as well as on the volatility of the Company's stock price during the
term used for observation and the term remaining for the underlying financial
instruments.

As a result of the August 2007 Agreements, all of the convertible debentures
were extinguished, the registration rights agreement containing the
liquidated damages clauses was terminated, and the warrants related to the
debentures were either cancelled or exercised, making mute any reset
provisions of those warrants.

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 years ended September 30, 2007 and 2006,
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 year ended September 30, 2006 to conform to the
presentation of the consolidated financial statements for the year ended
September 30, 2007. There was no effect on previously reported net loss.

                                      F-17
<PAGE>

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

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 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 adopted SAB 108 and it did not have a material
impact on its consolidated financial position, results of operations or cash
flows.

In July 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109"
("FIN48").  FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an entity's financial statements in accordance with SFAS No.
109, "Accounting for Income Taxes", and prescribes a recognition threshold
and measurement attribute for financial statement disclosure of tax
provisions taken or expected to be taken on a tax return.  Additionally, FIN
48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.  FIN 48
is effective for fiscal years beginning after December 15, 2006, with early
adoption permitted.  The Company does not anticipate this statement will have
any impact on its consolidated financial position, results of operations or
cash flows.



NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three customers represent 92.1%, 4.1% and 3.7% of accounts receivable at
September 30, 2007. Three customers accounted for 35.8%, 24.8%, 21.8%, of net
revenue for the year ended September 30, 2007. Five customers accounted for
22.4%, 19.6%, 17.2%, 16.9% and 14.7% of net revenue for the year ended
September 30, 2006.

Three suppliers represented 54.8%, 30.8% and 4.2% of accounts payable at
September 30, 2007. Purchases from these same suppliers during the year ended
September 30, 2007 totaled approximately $4,567,618, zero & zero. Purchases
from these suppliers during the year ended September 30, 2006 totaled
approximately $2,563,328, $1,013,022, and zero respectively.

                                      F-18
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:

                                                          September 30,
                                                              2007
                                                         --------------

     Finished goods                                       $          -
     Work-in-progress                                        2,564,764
     Purchased parts and raw material, net of reserves         425,456
     of $25,833
                                                         --------------
                                                          $  2,990,220
                                                         ==============

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:

                                                          September 30,
                                                              2007
                                                         --------------

      Finished                                            $  1,990,715
      goods
      Work-in-progress                                       1,323,211
      Purchased parts and raw material                         305,850
                                                         --------------

                                                          $  3,619,776
                                                         ==============

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

Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:

                                                          September 30,
                                                              2007
                                                         --------------
      Equipment                                           $   270,990
      Computer equipment                                      133,376
      Furniture & fixtures                                     64,306
      Leasehold improvements                                    5,707
                                                         --------------
                                                              474,379
      Less: accumulated depreciation                         (292,363)
                                                         --------------
                                                          $   182,016
                                                         ==============

Included in property and equipment is an asset acquired under capital lease
obligations with an original cost of $11,742 as of September 30, 2007.
Related accumulated depreciation and amortization of this asset was $4,893 as
of September 30, 2007.

                                      F-19
<PAGE>

NOTE 3 BALANCE SHEET COMPONENTS (CONTINUED)

Intangible Assets:

Intangible Assets consist of the following:

                                                              September 30,
                                                                  2007
                                                             ---------------

      Mobetron related manufacturing and design               $     551,728
      rights and non-recurring vendor engineering charges

      Less accumulated amortization                                (298,748)
                                                             ---------------
      Mobetron related manufacturing and design                     252,980
      rights and non-recurring vendor engineering
      charges, net
      Medical device approval license not subject to                 30,000
      amortization
                                                             ---------------
      Intangible assets, net                                  $     282,980
                                                             ===============

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

Deferred financing cost:

                                                              September 30,
                                                                  2007
                                                             ---------------

      Debt issuance cost                                      $  1,422,370
      Less: accumulated amortization
                                                                (1,209,484)

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

      Deferred financing cost, net                            $    212,886
                                                             ===============

Amortization expense for intangible assets and deferred financing costs
totaled approximately $836,922 and $452,802 for the years ended September 30,
2007 and 2006, respectively.  Amortization expense for the next five fiscal
years is estimated as follows:

                        Year Ending
                       September 30,        Amount
                       ---------------  --------------

                            2008            $ 212,886
                            2009               69,313
                            2010               68,500
                            2011               68,500
                            2012               46,667
                                        --------------
                                           $  465,866
                                        ==============

                                      F-20
<PAGE>

NOTE 3 BALANCE SHEET COMPONENTS (CONTINUED)

Accrued Liabilities:

A summary is as follows:

                                                September 30,
                                                    2007
                                               --------------
         Accrued liabilities:
         Contract advances                       $   451,300
         Accrued interest payable                     68,573
         Accrued warranty                            111,515
         Deferred revenue                            144,673
         Accrued wages and benefits payable          201,164

         Accrued sales tax payable                     6,210
                                               --------------

                                                 $   983,435
                                               ==============

Warranty:

The warranty periods for the Company's products are generally one year 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 on the Company's
consolidated balance sheets, at September 30, 2007.

         Warranty accrual at September           $   157,558
         30, 2006

         Accrual for warranties during               100,894
         the year
         Actual product warranty
         expenditures                               (146,937)
                                               --------------

         Warranty accrual at September           $
         30, 2007                                    111,515
                                               ==============



           (Remainder of page intentionally left blank)

                                      F-21
<PAGE>

NOTE 4 - BORROWINGS

Outstanding notes payable were as follows:

                                                        September 30,
                                                             2007
                                                       --------------

      Notes payable, related parties, current            $   209,347
                                                       ==============

      Product financing arrangement                     $  5,125,747
      Senior secured debentures                            1,333,333
      Other notes                                             77,232
                                                        -------------
                                                           6,536,312

      Less: debt discounts due to warrants                  (284,774)
                                                        -------------
      Notes payable, net of debt discounts                 6,251,538

      Less: current portion
                                                          (6,251,538)
                                                        -------------
      Notes payable, other, net of current portion and
      unamortized
             debt discounts                                $       -
                                                        =============

Notes payable, related parties:

Notes payable to related parties of $209,347 at September 30, 2007, is
related to a note issued to an officer of the Company.  The note is due on
demand and bears interest at 9% per annum.

During the year ended September 30, 2007, the Company borrowed $628,571 from
related parties, repaid $33,661 of principal, and, as part of the August 2007
Agreements, agreed to convert $928,571 of principal and $23,065 of interest
into warrants to purchase 11,607,132 shares of common stock with an exercise
price of $0 per share.  All of these warrants were exercised in October 2007.

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 "Product
Financing Arrangement") with a financial institution. Under the terms of the
agreement, the Company agreed to pay interest at the rate of 12% per annum on
inventory 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 for 576,923 shares of common stock
at an exercise price of $0.52 per share.   The warrant had an original term
of two years. The fair value attributable to the warrant of $123,209 was
recorded as a note discount and was amortized to interest over a one year
period from issuance.

In April 2006, the Company entered into an amendment to the Product Financing
Arrangement to clarify and amend certain terms and conditions pursuant to
which the Company can obtain financing under the agreement. Pursuant to the
amendment, ownership of the inventory financed is transferred to the lender.
From time to time, the Company may repurchase financed inventory from the
lender at a price equal to the original transfer price plus interest.

                                      F-22
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

In June 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 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, 2008, the expiration date of a warrant to
purchase 576,923 shares of common stock 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 was 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 was
amortized into interest over a period of the notes payable.

In April 2007, the Company entered into an amendment to the Product Financing
Arrangement to increase the ratio of borrowing relative to the amount of
financed collateral.   Under the terms of the amendment, the Company granted
to the lender warrants to purchase 100,000 shares of common stock at an
exercise price of $0.40 per share with expiration three years from the date
of issuance.  The fair value of $15,004 attributable to the warrant was
recorded as a note discount and was amortized to interest.

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

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

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

At September 30, 2007 the outstanding principal balance under the Product
Financing Arrangement was $5,125,747.

                                      F-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,
other than those pledged to others under the Product Financing Arrangement.
In addition, the Company issued 1,600,000 shares of  common stock to the
holders of the debentures as security for the debentures, which the Company
estimated had a fair market value of $0.55 per share. As a further
inducement, the Company granted the holders of the debentures warrants to
purchase 2.5 million shares of common stock at an exercise price of $0.40 per
share with an expiration date of August 31, 2010.  The warrants associated
with the senior debentures included 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 lender exercised those
warrants for 100,000 shares of common stock in June 2006.

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. At inception, the registration rights agreement required the
Company to pay monthly liquidated damages if the Company failed to meet
certain requirements for filing, making effective, and maintaining
effectiveness of the registration statements required under the registration
rights agreements.

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

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.

                                      F-24
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

     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.

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. Although
initially unable to meet deadlines for meeting the various deadlines to file
and have the registration statement declared effective, the Company entered
into a series of waivers to the registration rights agreement to reset these
deadlines and avoid paying liquidated damages.  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 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 September
30, 2007 the outstanding principal balance under the senior secured
debentures was $1,333,333 and the unamortized note discount related to the
original warrant issuance was $150,405.

Pursuant to the August 2007 Agreements, the Company agreed to (i) pay to
holders of the senior debentures a restructuring fee in the aggregate amount
of $85,000, (ii) reduce the exercise price of the remaining warrants to
purchase 2,400,000 shares of common stock from $0.40 to $0.05, and (iii)
allow cashless exercise of the warrants.  The holders of the senior
debentures, in turn, agreed to certain amendments and waivers which included,
among other things, the elimination of the liquidated damages related to the
registration of the warrants or common stock resulting from their exercise.
The fair value of $50,464 attributable to the price reduction of the warrant
and the $85,000 restructuring fee were recorded as a debt issuance cost and
are being amortized into interest expense over the remaining life of the
loan.  The senior debenture holders opted for cashless exercise of their
remaining 2,400,000 warrants immediately after executing the August 2007
Agreements, thus making mute the price reset provisions of those warrants.

Other notes:

The Company has a note payable to a former director with an outstanding
principal balance of $77,232 at September 30, 2007.  This note is due on
demand and bears interest at 9% per annum. During the year ended September
31, 2007, the Company repaid $37,438 of principal under this note, and as
part of the August 2007 Agreements, the holder agreed to convert $50,000 of
principal into 625,000 warrants to purchase  common stock with an exercise
price of $0 per share.  All of these warrants were exercised in October 2007.

                                      F-25
<PAGE>

NOTE 5 - CAPITAL LEASE

Capital lease

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

                                                                  September
                                                                  30, 2007
                                                               --------------
      Capital lease for equipment                               $      7,732
      Less current portion                                            (2,353)
                                                               --------------
      Capital lease obligations, net of current portion         $      5,379
                                                               ==============


NOTE 6 - AUGUST 2007 AGREEMENTS

In August 2007 the Company entered into a series of definitive binding
agreements (the "August 2007 Agreements"), whereby:

      a)  An investor group led by Lacuna Hedge Fund LLP (the "Lacuna
      Investors") paid $3,668,313 in cash and forgave $98,211 of Company
      accounts payable to purchase an aggregate of 42,081,556 shares of the
      Company's common stock and warrants to purchase 165,589,736 shares of
      common stock, which have an exercise price of zero and which will be
      exercised at a subsequent closing (the "Second Closing") to occur after
      such time as, among other things, the Company obtains stockholder
      approval to amend the Company's articles of incorporation to increase
      the authorized number of shares of common stock to 500,000,000.  The
      Lacuna Investors further agreed, subject to certain terms and
      conditions including, but not limited to, stockholder approval to amend
      the Company's articles of incorporation to increase the authorized
      number of shares of common stock to 500,000,000, to invest an
      additional $1,633,476 to purchase an aggregate of 20,418,444 shares of
      the Company's common stock at the Second Closing.  Stockholder approval
      of the increase in the number of authorized shares was obtained on
      October 15, 2007, and the Second Closing occurred on October 24, 2007,
      at which time the additional investment of $1,633,476 was made by the
      Lacuna Investors.

      b) In exchange for: (i) the extinguishment in full of their Company
      convertible debentures; (ii) the cancellation of 8,750,000 warrants
      related to those debentures; (iii) the termination of the registration
      rights and price reset agreements related to the debentures and
      warrants; and (iv) an additional equity investment in the Company of
      $1,280,000 by the Lacuna Investors; holders of the convertible
      debentures and related warrants: (i) converted their outstanding
      principal of $6,400,000 into 19,555,293 shares of the Company's common
      stock; (ii) sold 10,178,571 of those converted shares to the Lacuna
      Investors for $1,280,000, which purchase price was paid on behalf of
      the Lacuna Investors by the Company; (iii) received warrants to
      purchase an aggregate of 21,656,663 shares of common stock, which have
      an exercise price of zero and which were exercised at the Second
      Closing; (iv) waived all rights to $174,840 accrued and unpaid interest
      related to their debentures; and (v) retained a right have issued to
      them an additional 623,278 shares on or before the Second Closing,
      which right was exercised in October 2007.

                                      F-26
<PAGE>

NOTE 6 - AUGUST 2007 AGREEMENTS (CONTINUED)

      The Company evaluated various valuation methodologies assess the value
      of stock and warrants issued as part of the August 2007 Agreements.
      Income approaches such as the discounted net cash flow method and the
      excess earnings method attempt to capture the value of the Company's
      earnings or cash flows, with the assumption that they will either be
      paid out as dividends or valued upon liquidation.  These approaches are
      most applicable to ongoing businesses generating steady or predictable
      cash flows.   As the Company has yet reach profitability or produce
      meaningful or consistent operating cash flow, and because of the great
      uncertainty regarding any forecast that could be made about these
      earnings or cash flows, the Company determined that these measures were
      inappropriate for valuing the securities issued in the August 2007
      Agreements.

      Further, as the Company's liabilities exceed its assets and because of
      the uncertainty in valuing goodwill, the Company's intellectual capital
      portfolio, and other intangibles, neither the net book value method nor
      the liquidation method were deemed appropriate to value the securities
      issued per the August 2007 Agreements.

      Consequently, the Company used the transaction method to value the
      investments made by the Lacuna Investors in subsections a) and b)
      above, and in turn used this valuation to calculate the value of
      certain of shares and warrants issued in the subsections a) through h)
      of this footnote, all as further described below.

      In applying the transaction method, the Company concluded that pursuant
      to subsections a) and b) above, the Lacuna Investors, following the
      Second Closing which occurred as described above on October 24, 2007,
      had purchased 238,268,307 shares of the Company's common stock for
      which they had made equity investments in the Company of $6.68 million,
      or an average share price of approximately $0.028 per share.

      As such, as a result of the transactions described in subsection a)
      above, the Company recorded: a cash receipt for the investment of
      $3,668,313 and a reduction in accounts payable of $98,211, an increase
      in common stock and additional paid in capital of $42,082 and $954,195,
      respectively, to record the sale of 42,081,556 shares of the Company's
      common stock, accrued $3,920,319 of obligations to issue common stock
      upon exercise of 165,589,736 warrants and $1,150,071 as an advance
      towards stock subscription, an offset to stockholders' equity.

      As a result of the transactions described in subsection b) above, the
      Company recorded a $1,280,000 cash contribution and related offset to
      additional paid related to the $1,280,000 additional investment by the
      Lacuna Investors.  With regard to the conversion of convertible
      debentures into 19,555,293 shares of common stock, the Company recorded
      a par value of $19,555 as common stock, $528,689 as additional paid in
      capital, and $17,474 as an obligation to issue common stock with regard
      to the rights to issuance of an additional 623,278 shares of common
      stock, each based on an approximate rate of $0.028 as described above.
      Further as a result of the extinguishment in full of all $6,400,000 of
      convertible debentures, the Company recorded interest expense of
      $2,614,224 related to the write off of debt discounts and beneficial
      conversion features related to those debentures, a reduction in
      interest payable of $174,840 related to the waiver of interest by the
      debenture holders, and a gain on extinguishment of debt of $4,121,964
      as the carrying value of the notes exceeded the combined value of the
      cash and securities paid to the debenture holders.  The Company
      recorded the issuance of 21,656,663 warrants as an obligation to issue
      common stock in the amount of $607,157, at an approximate rate of
      $0.028 per share.

                                      F-27
<PAGE>

NOTE 6 - AUGUST 2007 AGREEMENTS (CONTINUED)

      c) In exchange for: (i) the extinguishment in full of Company
      short-term debentures in principal amount of $771,430; (ii)
      cancellation of warrants to purchase an aggregate of 826,528 shares of
      the Company's common stock related to those debentures; and (iii) the
      termination of the registration rights and price reset agreements
      related to the debentures and warrants; holders of the short-term
      debentures and related warrants who were also convertible debenture
      holders: (i) received an aggregate cash payment of $400,000, warrants
      to purchase an aggregate of 5,000,0000 shares of common stock, which
      have an exercise price of zero and were exercised at the Second
      Closing; and (ii) waived all rights to $39,033 of accrued and unpaid
      interest related to their debentures.

      Accordingly, the Company recorded: an extinguishment of $771,430 of
      principal of short-term debentures, a reduction in interest payable
      $39,033 due to the waiver of accrued interest, a cash payment to the
      note holders of $400,000, an obligation to issue common stock in the
      amount of $140,178, based on the 5,000,000 new warrants issued and a
      rate of $0.028 per share, and a gain on extinguishment of debt of
      $270,285, as the carrying value of the notes exceeded the combined
      value of the cash and securities paid to the debenture holders.

      d) In exchange for (i) a fee of $85,000; and (ii) a reduction of the
      exercise price from $0.40 per share to $.05 per share for warrants to
      purchase 2,400,000 shares of common stock and the ability to net
      exercise those warrants; the holders of the Company's senior debentures
      (i) agreed to certain changes to the terms of the senior debentures;
      and (ii) net exercised their warrant in full in exchange for 1,800,000
      shares of common stock.

      Accordingly, the Company recorded the fee and the $85,000 and the
      issuance of shares, at the rate of $0.028 per share, in the amount of
      $50,464 as a deferred financing cost with a corresponding offset to
      common stock an additional paid in capital in the amount of $1,800 and
      $133,664, respectively.  The deferred financing costs will be amortized
      into interest expense using the effective interest method over the
      remaining life of the senior debentures.

      e) In exchange for: (i) the extinguishment certain Company payables,
      including notes, accounts payable, and accrued liabilities in the
      amount of $498,300; (ii) the re-pricing of warrants to purchase an
      aggregate of 1,158,515 shares of common stock related to the
      extinguished notes down to $0.08 per share; and (iii) the termination
      of certain registration rights and price reset agreements related to
      the notes and existing warrants; holders of these payables and
      warrants: (i) converted their payables into new warrants to purchase an
      aggregate of 6,228,750 shares of common stock, which have an exercise
      price of zero and which were exercised at the Second Closing; and (ii)
      waived all rights to $13,613 of accrued and unpaid interest related to
      their debentures.

      Accordingly, to record the re-pricing of the warrants, the Company
      recorded a warrant expense of $2,583 and a corresponding offset to
      additional paid in capital based on the difference between the fair
      value the warrants immediately before and after the transaction.  The
      Company further recorded an extinguishment of $498,300 of payables, a
      reduction in interest payable of $13,613 due to the waiver of accrued
      interest, an obligation to issue common stock in the amount of
      $174,627, based on the 1,158,515 new warrants issued and a rate of
      $0.028 per share, and a gain on extinguishment of debt of $337,326, as
      the carrying value of the payables exceeded the combined value of the
      securities paid to the holders.

                                      F-28
<PAGE>

NOTE 6 - AUGUST 2007 AGREEMENTS (CONTINUED)

      f) In exchange for: (i) the extinguishment certain Company payables,
      including notes, accounts payable, and accrued liabilities in the
      amount of $1,022,371; (ii) the repricing of warrants to purchase an
      aggregate of 419,895 shares of common stock related to the extinguished
      debentures down to $0.08 per share; and (iii) the termination of
      certain registration rights and price reset agreements related to the
      notes and existing warrants; holders of these payables and warrants,
      who are also related parties: (i) converted their payables into new
      warrants to purchase an aggregate of 12,779,632 shares of common stock,
      which have an exercise price of zero and which were exercised at the
      Second Closing; and (ii) waived all rights to $23,065 of accrued and
      unpaid interest related to their debentures.

      Accordingly, to record the re-pricing of the warrants, the Company
      recorded a warrant expense of $892 and a corresponding offset to
      additional paid in capital based on the difference between the fair
      value the warrants immediately before and after the transaction.  The
      Company further recorded an extinguishment of $1,022,371 of payables, a
      reduction in interest payable of $23,065 due to the waiver of accrued
      interest, an obligation to issue common stock in the amount of
      $358,285, based on the 12,779,632 new warrants issued and a rate of
      $0.028 per share, and a gain on extinguishment of debt of $687,150, as
      the carrying value of the payables exceeded the combined value of the
      securities paid to the holders.

      g) Certain related parties paid $62,000 in exchange for warrants to
      purchase an aggregate of 775,000 shares of common stock, which bore an
      exercise price of zero and were exercised at the Second Closing.
      Accordingly, the Company recorded an obligation to issue common stock
      in the amount of $21,728, based on the 775,000 new warrants issued and
      a rate of $0.028 per share, and $40,272 of additional paid in capital.

      h) The Company paid fees of $448,864 and issued warrants to certain
      financial advisors to purchase an aggregate of 10,780,732 shares of
      common stock, which have an exercise price of $0.08 per share and were
      determined to have a fair value of $282,133.  The fees and warrants
      were recorded as a direct cost of raising capital and were offset
      against additional paid in capital.

      i) The Company entered into a rights agreement with the parties listed
      above whereby, upon the request of a majority-in-interest of the
      Investors (the "Request"), within 45 days of such Request, the Company
      shall file a registration statement with the Securities and Exchange
      Commission registering the shares and warrants held by the Investors,
      to the extent such shares are not already registered. The Company
      agreed to use its commercially reasonable efforts to cause such
      registration statement to become effective as promptly as practicable
      subsequent to filing.  The Company also agreed not file any
      registration statement (other than a registration statement on Form
      S-8) prior to the effectiveness of the registration statement described
      above. The agreement does not provide for damages should the Company
      fail to meet its obligations under the agreement, and as of the date of
      this filing, the Company has not received a Request.

                                      F-29
<PAGE>

NOTE 7 - COMMON STOCK

Shares Reserved for Future Issuance:

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

                                                  September 30,
                                                      2007
                                                 --------------

         2005 Equity Incentive Plan                   3,597,000
         Common stock warrants                       16,346,433
                                                 --------------

         Total                                       19,943,433
                                                 ==============

Pursuant to the August 2007 Agreements, the Company issued  warrants to
purchase 212,029,781shares of common stock with an exercise price of $0 per
share.  These warrants were not exercisable until such time as the Company's
stockholders approved an amendment to the Company's articles of incorporation
to increase the authorized shares from 100 million to 500 million, at which
time the Company was required to reserve 212,029,781 shares for issuance of
these warrants.  Approval of the amendment to the articles of incorporation
was received at the annual meeting of stockholders on October 15, 2007 and
such warrants were exercised for an aggregate of 212,029,781 shares of common
stock shortly thereafter.

Treasury Stock:

In November  1998, the Company  repurchased  600,000 shares of common stock at
$0.25 per share.

Issuance of common stock to the Lacuna Investors

Pursuant to the August 2007 Agreements (see Note 6), the Lacuna Investors
purchased 42,081,556 shares of the Company's common stock.

Conversion of convertible debentures into common stock:

Pursuant to the August 2007 Agreements (see Note 6), as part of the
extinguishment in full of the Company's convertible debentures, the Company
issued 19,555,293 shares of common stock to the holders of its convertible
holders.

Issuance of common stock upon exercise of warrants:

Pursuant to the August 2007 Agreements (see Note 6), upon net exercise of
2,400,000 warrants held by holders of the  Company's senior debentures, the
Company issued 1,800,000 shares of common stock to such holders.

                                      F-30
<PAGE>

NOTE 7 - COMMON STOCK (CONTINUED)

Issuance of Common Stock as consideration for services:

On April 7, 2006, the Company entered into an investor relations agreement
with Emerging Markets Consulting, LLC ("EMC").  Pursuant to the agreement the
Company issued 100,000 shares of common stock to EMC having a market value of
$70,000, which was recorded as a component of general and administrative
expense. Further pursuant to the agreement, the Company issued to EMC an
additional 100,000 shares of common stock upon renewal of the agreement in
December 2006.  These shares had a market value of $30,000 and were recorded
as a component of general and administrative expense.   On April 9, 2007, the
Company entered into a new investor relations agreement with EMC pursuant to
which it issued to EMC an additional 100,000 shares of common stock to EMC
having a market value of $18,000, which expense was recorded as a component
of general and administrative expense.   As of September 30, 2007, the
investor relations agreement with EMC had been terminated.  Also pursuant to
these agreements with EMC, the Company issued warrants to purchase 100,000
shares common stock in each of April 2006, November 2006, and April 2007 with
an exercise price of $1.15, $1.00, and $0.40 per share, respectively.  Each
of the warrants had a term of five years from the date of issuance.


NOTE 8 - 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 as of the years ended September 30, 2007
and 2006 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 year ended
September 30, 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

                                      F-31
<PAGE>

NOTE 8 - STOCK OPTIONS (CONTINUED)

attribute the value of share-based compensation to expense using the
straight-line attribution. Share-based compensation expense related to stock
options was $75,153 and $147,684 for the years ended September 30, 2007 and
September 30, 2006 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.

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:

                                                           Year ended
                                                         September 30,
                                                              2007
                                                      -------------------

        Expected term (in years)                           5.4 to 10
        Risk-free interest rate                          4.53% to 4.66%
        Expected volatility                            172.65% to 178.26%
        Expected dividend yield                                0%
        Weighted average fair value at grant date            $0.23


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 year ended September 30, 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.

                                      F-32
<PAGE>



NOTE 8 - STOCK OPTIONS (CONTINUED)

The effect of recording share-based compensation expense for the year ended
September 30, 2007 is as follows:

<TABLE>
<CAPTION>
<S>                                                            <C>
                                                                      Year Ended
                                                                    September 30,
                                                                         2007
                                                               -----------------------
Stock-based compensation expense related to employee stock
 options and employee stock purchases                           $               75,153
Tax benefit                                                                          -
                                                               -----------------------
Net decrease in net earnings                                    $               75,153
                                                               =======================

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>

For the year ended September 30, 2007, total share-based compensation expense
recognized in earnings before taxes was $75,153 and the total related
recognized tax benefit was zero. Total share-based compensation expense
capitalized as part of inventories for the year ended September 30, 2007 was
$11,431. Total share-based compensation expense applied to warranty reserve
for the year ended September 30, 2007 was $1,121.

Activity under the New Plan is presented below:

                                                          Weighted
                                                           Average
                                              Weighted    Remaining   Aggregate
                        Shares                 Average    Contractual  Intrinsic
                       Available   Number of   Exercise     Term        Value
                      for Grant     Shares      Price    (in years)      (1)
                      ----------  ----------  ---------  -----------  ---------
Balance at September
 30, 2006              1,857,000   1,740,000      $0.71         6.13
Granted                 (183,500)     183,500       0.34            -
Authorized                     -           -          -            -
Cancelled or expired      83,000    (83,000)     (0.56)            -
Exercised                      -           -          -            -
                      ----------  ----------  ---------  -----------  ---------
Balance at September
 30, 2007              1,756,500   1,840,500      $0.68         5.44         $-
                      ----------  ----------  ---------  -----------  ---------
Exercisable at
September 30, 2007                 1,476,846      $0.72         5.61         $-
                      ==========  ==========  =========  ===========  ==========

                                      F-33
<PAGE>

NOTE 8 - STOCK OPTIONS (CONTINUED)

(1) The aggregate intrinsic value represents the total pre-tax intrinsic
value, based on the Company's closing stock price of $0.06 as of September
30, 2007, which would have been received by the option holders had all option
holders exercised their options as of that date.

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

                                   Weighted         Options
                 Options            Average       Exercisable
  Option       Outstanding         Remaining         as of
 Exercise         as of           Contractual    September 30,
  Price     September 30, 2006    Life (Years)        2006
----------  ------------------  --------------  ---------------
 $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           136,000
  1.3750          30,000             7.51            25,000
            ------------------                  ---------------
  Total         1,740,000                          1,476,846
            ==================                  ===============


Total options under the New Plan at September 30, 2007, comprised the
following:

                 Options            Weighted          Options
  Option       Outstanding           Average        Exercisable
 Exercise         as of             Remaining          as of
  Price       September 30,        Contractual      September 30,
                  2007             Life (Years)         2007
----------  -----------------    ---------------  ----------------
 $0.220          13,500               9.51             10,681
  0.350         170,000               9.27            118,611
  0.500          89,500               1.01             89,500
  0.540          20,000               8.36             20,000
  0.550         300,000               0.20            300,000
  0.580         557,000               8.19            460,861
  0.700           3,500               8.36              1,944
  0.800         377,000               4.55            377,000
  0.880         120,000               3.55            120,000
  1.250         160,000               6.64            159,833
  1.375          30,000               6.51             30,000
            -----------------                     ----------------
  Total         1,840,500                            1,688,430
            =================                     ================

                                      F-34
<PAGE>

NOTE 8 - STOCK OPTIONS (CONTINUED)
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.

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:

                                                            Year ended
                                                          September 30,
                                                      2007             2006
                                                 --------------  ---------------

Net loss available to common stockholders, as
 reported                                         $ (6,026,740)   $  (7,160,101)
Compensation recognized under APB 25                         -                -
Compensation recognized under SFAS 123                       -         (347,029)
                                                 --------------  ---------------

Pro-forma net loss available to common
 stockholders                                     $ (6,026,740)   $  (7,507,130)

                                                 ==============  ===============
Net loss per share:
  Basic and diluted - as reported                 $      (0.18)   $       (0.33)
                                                 ==============  ===============
  Basic and diluted - pro-forma                   $      (0.18)   $       (0.34)
                                                 ==============  ===============

As of September 30, 2007, there was $4,533 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted
under the New Plan. This unrecognized compensation expense is expected to be
recognized over a weighted-average period of 0.96 years.





                 (Remainder of page intentionally left blank)

                                      F-35
<PAGE>

NOTE 9 - WARRANTS

The following warrants are each exercisable into one share of common stock:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                  Number of Shares   Weighted Average   Aggregate Price
                                                          Price
                                 -----------------  -----------------  ----------------
 Balance at September 30, 2005         10,985,674           $   0.48         5,272,195
 Warrants granted                      12,906,730               0.41         5,315,000
 Warrants exercised                    (3,910,720)             (0.40)       (1,564,288)
 Warrants cancelled                      (576,923)             (0.52)         (300,000)
 Warrants expired                      (2,033,333)             (0.55)       (1,108,333)
                                 -----------------  -----------------  ----------------
 Balance at September 30, 2006         17,371,428           $   0.44      $  7,614,574
 Warrants granted                     238,217,182               0.02         4,318,399
 Warrants exercised                    (1,800,000)              0.05           (90,000)
 Warrants cancelled                   (22,037,489)             (0.36)       (7,903,267)
 Warrants expired                      (3,374,907)             (0.47)       (1,578,579)
                                 -----------------  -----------------  ----------------
 Balance at September 30, 2007        228,376,214               0.01         2,361,126
                                 =================  =================  ================
</TABLE>

The common stock warrants are comprised of the following:


                               Warrants
                             Outstanding               Weighted
                                as of                   Average
       Exercise              September 30,       Remaining Contractual
        Price                    2006                Life (Years)
----------------------  ----------------------  ----------------------
        $0.400                      15,830,947           3.25
        0.520                          769,230           1.82
        0.700                          119,100           3.92
        1.000                          100,000           4.52
        1.250                          483,060           1.14
        1.375                           69,091           0.42
                        ----------------------
        Total                       17,371,428
                        ======================


                               Warrants                Weighted
                             Outstanding                Average
                                as of                  Remaining
       Exercise              September 30,            Contractual
        Price                    2007                 Life (Years)
----------------------  ----------------------  ----------------------
        0.000                      212,029,781           0.11
        0.080                       13,809,142           4.68
        0.090                           10,000           4.95
        0.280                          400,000           4.76
        0.400                        1,675,000           3.10
        0.700                          119,100           2.92
        1.000                          100,000           3.52
        1.150                          100,000           4.13
        1.250                           64,100           1.04
        1.375                           69,091           1.25
                        ----------------------
        Total                      228,376,214
                        ======================

                                      F-36
<PAGE>

NOTE 9 - WARRANTS (CONTINUED)

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

             Fiscal Year
               Ending
            September 30,     Number
            --------------  ------------
                2008        212,073,881
                2009            169,091
                2010          2,045,830
                2011            887,500
                2012         13,199,912
                            ------------
                            228,376,214
                            ============

During the year ended September 30, 2006, the Company issued to the holders
of its convertible debentures certain short-term warrants to purchase 5.625
million shares of common stock, with expiration dates between November 25,
2006 and December 4, 2006 and warrants to purchase 5.625 million shares of
common stock, with expiration dates between October 25, 2010 and November 4,
2010. Both sets of warrants are exercisable at $0.40 per share. The Company
determined that the relative fair value of the warrants was $1,744,230. The
relative fair value of the warrants was recorded as a note discount and
amortized to interest over the life of the convertible debentures.

During year ended September 30, 2006, the Company issued five year warrants
to purchase 787,500 shares of common stock at an exercise price of $0.40 per
share for services rendered by a financial advisor in connection with sales
of its convertible debentures. The fair value of these warrants of $255,085
was capitalized as a debt issuance cost and amortized over the term of the
debentures.

From July to August 2006, the Company temporarily reduced the exercise price
of certain warrants to purchase 6 million shares of common stock issued to
holders of the Company convertible debentures from $0.40 to $0.30 per share
for a 15 day period. The relative fair value attributable to the short term
warrants re-pricing was determined to be $119,113 and was recorded as a note
discount and will be amortized to interest over the life of the debentures.

In January 2007 the Company sold $971,429 of short-term debentures to certain
existing convertible debenture holders and $228,570 of those same short-term
debentures to related parties.  As a further inducement to purchase the short
term debentures, the Company granted 1,040,813 warrants to the third party
purchasers and 244,895 warrants to the related parties purchasers, each
exercisable for shares of the Company's common stock at an exercise price of
$0.28 per share and expiring in January 2012.  The combined relative fair
value of the warrants of $274,602 was recorded as a debt discount and
amortized into income over the life of the notes.  Additionally, the Company
also agreed 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 recorded the fair value of the
reduction of the exercise price of the warrants as an additional note
discount of $26,693, to be amortized over the remaining life of the
convertible debentures.

The convertible debentures and short term debentures were extinguished as
part of the August 2007 Agreements and the remaining related note discounts
due to warrants were accordingly recognized as interest expense.

                                      F-37
<PAGE>

NOTE 9 - WARRANTS (CONTINUED)

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 an
exercise price of $1.15 per share. On April 9, 2007, the Company entered into
a new investor relations agreement with EMC pursuant to which the Company
issued an additional warrant to purchase 100,000 shares of stock at an
exercise price of $0.40 per share.  The fair value of the warrants issued on
November 14, 2006 and April 9, 2007 amounted to $27,002 and $16,918,
respectively, were recorded as marketing expense, a component of general and
administrative expense, in the year ended September 30, 2007.  Similarly the
fair value of warrants issued on April 7, 2006, $56,865, was recorded as
marketing expense in the year ended September 30, 2006.   As of September 30,
2007, the agreement with Emerging Markets Consultants LLC had been terminated.

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 a warrant to purchase 192,307 shares of common stock at
an exercise price of $0.52 per share with an expiration date of May 31, 2008
and a fair value of $66,708 to the financial institution. Additionally, the
Company agreed to extend by one year to August 15, 2008, the expiration date
of a warrant to purchase 576,923 shares of common stock previously issued to
the financial institution representing a fair value of $45,945. The fair
value attributable to the warrants and to the expiration date extension was
recorded as a note discount and amortized to interest over a one year period.
In January 2007, the Company agreed to reduce the exercise price of the
previously issued warrant from $0.52 per share to $0.28 per share.  The
Company also agreed to extend the expiration date of the warrant from May 31,
2008 to August 31, 2010.  The fair value of the price reduction and extension
of expiration period of $58,927 was recorded as a note discount and was
amortized into interest over a period of the notes payable.

In April 2007, the Company entered into an amendment to the Product Financing
Arrangement to increase the ratio of borrowing relative to the amount of
financed collateral.   Under the terms of the amendment, the Company granted
to the lender a warrant to purchase 100,000 shares of common stock at an
exercise price of $0.40 per share with an expiration date three years from
the date of issuance.  The fair value of $15,004 attributable to the warrant
was recorded as a note discount and was amortized to interest.

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

In February 2007, the Company extended the expiration date of warrants to
purchase 62,091 shares of common stock previously issued to a financial
advisor for an additional 22 months and expensed the $9,296 fair value of the
extension.

In April and May 2007,  the Company issued  promissory  notes in the aggregate
principal  amount of $350,000 to related  parties and promissory  notes in the
aggregate  principal  amount of $150,000 to third  parties.  These  promissory
notes  bear  interest  at 10% per annum and were  extinguished  as part of the
August  2007  Agreements.   As  a  further  inducement  to  enter  into  these
promissory notes, the Company

                                      F-38
<PAGE>

NOTE 9 - WARRANTS (CONTINUED)

granted to the lenders warrants to purchase 250,000 shares of common stock
with an exercise price of at $0.40 per share and expiring three years from
date of issuance.  The relative fair value of the warrants of $34,076 was
recorded as a debt discount and amortized to interest over the term of the
notes.

In July 2007, the Company entered into a short-term promissory note financing
with Eckert & Ziegler Strahlen-und Medizintechnik, ("E&Z"), in the amount of
Euro 250,000. The promissory note issued to E&Z bears interest at a rate of
7.5% per annum and was repaid prior to September 30, 2007. In connection with
the issuance of the promissory note, the Company issued to E&Z a two-year
warrant to purchase 100,000 shares of common stock at an exercise price of
$0.45 per share.  The relative fair value of the warrant of $14,703 was
recorded as a debt discount and amortized to interest over the term of the
agreement.  Shortly after entering into the August 2007 Agreements (see Note
6), the Company agreed to reduce the price of E&Z's warrant to $0.08 per
share.  The fair value of the reduction of in the amount of $854 was expensed.

Pursuant to the August 2007 Agreements (see Note 6), the Company issued
warrants to purchase 212,029,781 shares of common stock with an exercise
price of $0.00. On October 24, 2007, all of these warrants were exercised for
common stock.  Further pursuant to the August 2007 Agreements, the Company
issued warrants to purchase 10,780,732 shares of common stock to certain
financial advisors.  The warrants have a term of five years and an exercise
price of $0.08 per share.  Additionally, as part of those same agreements,
the Company cancelled warrants to purchase 9,576,528 shares of common stock
and repriced outstanding warrants to purchase 1,578,410 shares of common
stock with exercise prices ranging from $0.40 to $0.28 per share down to
$0.08 per share and issued 1,800,000 of common stock upon the net issuance of
2,400,000 warrants by its senior debenture holders . The warrant repricing is
shown in the tables to this footnote as a cancellation of the existing shares
and an issuance of a like amount of new shares, while the net exercise is
shown as an exercise of warrants to purchase 1,800,000 shares of common stock
and a cancellation of warrants to purchase 600,000 shares of common stock.
The Company's accounting for these transactions is discussed in Note 6.

In September 2007, the Company issued a warrant to purchase 10,000 shares
with an exercise price of $0.09 to one of its directors for providing an
overseas performance bond for the Company.  The $881 fair value of the
warrant was expensed.

During the year ended September 30, 2007, the Company entered into a Final
Settlement Agreement and Mutual Release, (the "Settlement Agreement"),  with
DLA Piper US LLP ("DLA Piper"), with respect to the settlement of a dispute
between the two parties concerning the amount of attorneys' fees billed by
DLA Piper to and the Company.  Pursuant to the Settlement Agreement, the
Company agreed to pay DLA Piper the total sum of $228,000 in six equal
monthly payments of $38,000 each.  In addition, the Company issued to DLA
Piper a five-year warrant to purchase 400,000 shares of common stock at an
exercise price of $0.45 per share and to cancel an existing warrant for
150,000 shares.    Subsequent to the August 2007 Agreements, the Company
agreed to reduce the price of DLA Piper's warrant to $0.28 per share.  The
fair value of these warrants, including the price reduction, of $69,422 was
capitalized as debt issuance cost and amortized over the term of the
remainder repayment obligation.

                                      F-39
<PAGE>

NOTE 9 - WARRANTS (CONTINUED)

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

                                                 Year ended
                                                September 30,
                                                    2007
                                            -------------------
       Expected life (in years)                  0.21 to 5
       Risk-free interest rate                 4.11% to 4.71%
       Expected volatility                   168.80% to 204.16%
       Expected dividend yield                       -

NOTE 10 - EMPLOYEE BENEFIT PLAN

The  Company  maintains  a  401(k)  defined   contribution  plan  that  covers
substantially  all of its  employees.  Participants  may  elect to  contribute
their  annual  compensation  up to the  maximum  limit  imposed by federal tax
law. The Company,  at its discretion,  may make annual matching  contributions
to the  plan.  The  Company  has made no  matching  contributions  to the plan
through September 30, 2007.


NOTE 11 - COMMITMENTS AND CONTINGENCIES

The Company leases offices and equipment under non-cancelable operating and
capital leases with various expiration dates through 2011. Rent expense for
the years ended September 30, 2007 and 2006 was $ 248,115 and $220,713
respectively. The terms of the facility lease provide for rental payments on
a graduated scale. The Company recognizes rent expense on a straight-line
basis over the lease period, and has accrued for rent expense incurred but
not paid.

Future minimum lease payments under non-cancelable operating and capital
leases are as follows:

                                                    Capital     Operating
                  Year Ended September 30,           Leases       Leases
            -------------------------------------  ----------  -----------
                            2008                      2,579      237,625
                            2009                      2,579      244,754
                            2010                      2,579      233,838
                            2011                                      -
                                                        431
                            2012                          -            -
                                                   ----------  -----------

            Total minimum lease payments              8,168     $716,217
                                                               ===========

            Less: amount representing interest         (436)
                                                   ----------

            Present value of minimum lease
            payments                                  7,732
            Less: current portion                    (2,353)
                                                   ----------

            Obligations under capital lease,        $ 5,379
            net of current portion
                                                   ==========

                                      F-40
<PAGE>

NOTE 12 - INCOME TAX

The Company has no taxable income and no provision for federal and state
income taxes is required for 2007 and 2006.

A reconciliation of the statutory federal rate and the Company's effective
tax rate for the year ended September 30, 2007 and 2006 is as follows:


                                           Year Ended September 30,
                                          ---------------------------
                                             2007          2006
                                          ---------------------------
U.S. federal taxes (benefit)
At statutory
rate                                            34.0%          34.0%
State                                           -0.1%           0.0%
Permanent Differences                          -40.1%          -1.0%
Other                                            0.7%           0.0%
Valuation allowance                              5.5%         -33.0%
                                          ---------------------------
Total                                            0.0%           0.0%

Significant components of the Company's deferred tax assets and liabilities
as of September 30, 2007 and 2006 are as follows:


                                                    September 30,
                                            ------------------------------
                                                  2007           2006
                                            ------------------------------
Deferred tax assets:
     Net Operation Losses and Credits
     Carryover                                   $ 7,659,516  $ 9,368,741
-

     Depreciation/Amortization                        22,322    (157,960)
-

     Accruals                                        284,905       347,331
     Other                                           358,781             -
                                            ------------------------------
Deferred tax assets                                8,325,524   9,558,382

Less:  valuation allowance                        (8,325,524) (9,558,382)
                                            ------------------------------
Total deferred tax assets                   $              -             -

Net deferred tax assets                      $             -             -
                                            ==============================

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 stock-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 employee stock-based compensation and to
determine the subsequent impact on the APIC Pool and Consolidated Statements
of Cash Flows of the tax effects of employee stock-based compensation awards
that are outstanding upon adoption of SFAS 123(R).


                                      F-41
<PAGE>

NOTE 12 - INCOME TAX (CONTINUED)

Net operating loss carryforwards of approximately $18,716,000 and $20,549,000
are available as of September 30, 2007 and 2006, to be applied against future
federal taxable income.  The net operating loss carryforwards expire in tax
years 2008 through 2026 for federal purposes.  Net operating loss
carryforwards of approximately $11,195,000 and $12,770,000 are available as
of September 30, 2007 and 2006, to be applied against future state taxable
income.  The state net operating loss carryforwards expire in tax years 2007
through 2016.

The Company also has federal and state research and development tax credits
carryover of $437,000 and $262,000, respective as of September 30, 2007.  The
federal tax credits begin to expire in tax year 2018, and the state tax
credit carryovers do not expire.

Due to the history of losses the Company has generated in the past, the
Company believes that it is not more-likely-than-not that all of the deferred
tax assets can be realized as of September 30, 2007 and 2006, respectively.
Therefore, we have a full valuation allowance on our deferred tax assets.

In August 2007, upon consummation of the transactions described in Note 6,
the Company experienced a change of control as defined in Internal Revenue
Code Section 382.  Accordingly, utilization of the net operating loss
carryforwards and credits are be subject to a substantial annual limitation.
The annual limitation may result in the expiration of net operating losses
and credits before utilization.


NOTE 13 - OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Net revenues by geographic area are presented based upon the country of
destination. No other foreign country represented 10% or more of net revenues
for any of the fiscal years presented. Net revenues by geographic area were
as follows:

                                Year ended
                               September 30,
                        --------------------------
                            2007          2006
                        ------------  ------------

      Europe             $  357,341    $ 4,595,802
      Asia                1,836,883      1,013,607
      United States       1,753,434        373,545
                        ------------  ------------

      Total Revenue      $ 3,947,658   $ 5,982,954
                        ============  ============


Long lived assets includes property and equipment, intangible assets, and
leased equipment each net of applicable depreciation or amortization residing
in the following countries during the year ended September 30, 2007.

      United States        $ 456,511
      Europe                   5,609
      Asia                     2,876
                        -------------

      Total                $ 464,996
                        =============

                                      F-42
<PAGE>

NOTE 14 - SUBSEQUENT EVENTS

The following subsequent events occurred  between October 1, 2007 and
December 14, 2007.

On October 15, 2007 at the Company held its annual meeting of stockholders. At
that meeting, among other things, the stockholders approved an amendment to
the articles of incorporation to increase the number of authorized shares from
100 million to 500 million and an amendment of the 2005 Equity Incentive Plan
to authorize the issuance of an additional 22,062,664 shares of common stock
under the Plan.

On October 16, 2007, holders of rights to the issuance of 623,278 shares of
the Company's common stock, received as part of the August 2007 Agreements,
exercised those rights.  The Company recorded a reduction in obligations to
issue common stock of $17,474 and a corresponding increase in additional paid
in capital and common stock.

On October 24 2007, a Second Closing under the August 2007 Agreements (see
Note 6) occurred, at which time, an additional equity investment of
$1,633,476 to purchase an aggregate of 20,418,444 shares of the Company's
common stock was made by the Lacuna Investors.  Further, the holders of
212,029,781 warrants issued as part of the August 2007 Agreements and having
an exercise price of $0.00 exercised those warrants and the Company issued a
like number of shares of common stock.  The Company recorded a reduction of
$5,239,768 in obligations to issue common stock, a reduction of $1,150,071 of
advances towards issuance of common stock and a resulting increase in common
stock and additional paid in capital.

Effective November 23, 2007, the Company granted new options to purchase an
aggregate of 25,527,827 shares of common stock to its officers, directors and
employees under the 2005 Equity Incentive Plan, each having an exercise price
of $0.18 per share, and re-priced existing options to purchase an aggregate of
1,552,500 shares of common stock, reducing the exercise price of those options
from between $1.375 and $0.22 per share down to $0.18 per share.

On November 19, 2007, the Company entered into an employment agreement with
John Powers, its Chief Executive Officer.  Pursuant to the employment
agreement, Mr. Power will be an "at will" employee of the Company and will
receive a base salary of $185,000 per year, incentive bonus compensation of
up to 100% of base salary upon attainment of goals agreed to by Mr. Powers
and the Company's Board of Directors, an annual salary increase of not less
than 5% or the percent change in the CPI,  a stock option exercisable for
18,330,000 shares of common stock, six months severance for termination
without cause, four  weeks paid vacation, other standard benefits offered to
the Company's executive officers and  a signing bonus of $64,000.

On December 3, 2007,  the Board of Directors of the Company approved an
amendment to the 2005 Equity Incentive Plan, increasing the number of
shares reserved for issuance upon exercise of options granted under the Plan
from 25,659,664 to 45,659,664.  The amendment to the Plan will be submitted
to the Company's stockholders for approval at the next annual meeting of
stockholders.

The Company repaid $1,105,253 of principal due under its notes payable due to
third parties and received $1,870,028 of loan proceeds under the Product
Financing Arrangement. The Company also repaid $37,827 of principal due under
its notes payable to a related party, and a related party forgave $54,000 of
principal of notes payable as consideration for the exercise of options to
purchase 300,000 shares of common stock.

                                      F-43