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

                                    FORM 10-K
(Mark One)

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


                  For the fiscal year ended September 30, 2008

                                       OR

[_] TRANSITION REPORT PURSUANT TO 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
                           ---------------------------
             (Exact name of registrant 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)

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

Securities registered pursuant to Section 12(b) of the Act:  None.

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

                          Common Stock, $.001 par value
                                (Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. |_|

     Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. |_|

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

Yes  |X|    No  |_|

     Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|

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     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.

     Large accelerated filer    |_|     Accelerated filer  |_|

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

     Smaller reporting company  |_|


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

     The approximate aggregate market value of the shares of common stock held
by non-affiliates of the registrant, based on the closing price of our common
stock on March 31, 2008 of $0.10 per share of common stock, was approximately
$17,336,890.(1)

     As of December 1, 2008, the registrant had 392,787,597 shares of common
stock outstanding.

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

(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
registrant, and by others who, to the registrant's knowledge, own 5% or more of
the registrant'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.

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<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

Item Number and Caption                                                                                        Page
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<S>                                                                                                              <C>
PART I............................................................................................................4
------

   ITEM 1.       BUSINESS.........................................................................................4

   ITEM 1A.      RISK FACTORS.....................................................................................9

   ITEM 1B.      UNRESOLVED STAFF COMMENTS.......................................................................17

   ITEM 2.       PROPERTIES......................................................................................17

   ITEM 3.       LEGAL PROCEEDINGS...............................................................................17

   ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................18

PART II..........................................................................................................19

   ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
                 EQUITY SECURITIES...............................................................................19

   ITEM 6.       SELECTED FINANCIAL DATA.........................................................................20

   ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........21

   ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................30

   ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................................30

   ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............30

   ITEM 9A.      CONTROLS AND PROCEDURES.........................................................................31

   ITEM 9B.      OTHER INFORMATION...............................................................................31

PART III.........................................................................................................32

   ITEM 10.      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE..........................................32

   ITEM 11.      EXECUTIVE COMPENSATION..........................................................................36

   ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS..42

   ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................................................46

   ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES.........................................................46

SIGNATURES.......................................................................................................53

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                                     PART I

Item 1.           BUSINESS.

Overview

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

         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 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. Additionally, because the
Mobetron is self-shielded, it can provide a flexible solution for the use of
electrons in the treatment of skin cancer as an external beam machine outside of
a shielded vault environment.

         We have strong systems and device patents for Mobetron. We have also
received U.S. Food and Drug Administration 510k approval, CE Mark (Europe), JIS
approval (Japan), and SFDA approval (China). We distribute directly in the
United States 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.

         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 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 improved treatment
outcomes for advanced cancer patients over conventional radiotherapy alone.
Although IOERT is considered to have potential in the treatment of cancer, the
limitations of existing equipment and facilities have limited its use. Very few
hospitals have operating rooms that are specially shielded for radiation, a
"dedicated operating room". A dedicated operating room requires a fully fitted
operating room plus a conventional radiation machine and expensive, heavy
shielding. The construction and equipment cost for a single dedicated operating
room can exceed $4 to $5 million. The significant weight, about 100 tons
including the concrete shielding, and reduced usability of these rooms limit
their economic and practical feasibility.

                                       4
<PAGE>

         For this reason, most of the 200 hospitals that conduct IOERT do so by
performing the surgery in the operating room 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
operating room 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
operating room in the basement to reduce the transportation distance. But these
basement operating rooms 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 believe that 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 operating room 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 and Potential for Mobetron Expanded to Breast and Skin Cancer

         Traditionally, IOERT, which before the advent of the Mobetron was
difficult and costly to apply, has been restricted to advanced and recurrent
cancers where conventional therapeutic approaches have been largely ineffective.
Mobetron has not only made IOERT a simpler and less expensive treatment for
these traditional applications, it has also opened up the possibility of
applying IOERT to early stage cancers such as breast and skin cancer and other
prevalent cancers such as lung and prostate cancer.

         Furthermore, IOERT delivers some or all of the radiation treatment at
the time of surgery, thereby reducing the number of radiation treatments
required per patient and allowing for higher utilization or decreased need for
conventional equipment. 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.

         Recent studies, especially those conducted by a team led by
world-renowned breast cancer surgeon, Dr. Umberto Veronesi, a pioneer in the use
of breast conserving therapy, and presented at the June 2008 meeting of the
International Society of Introperative Radiation Therapy, have shown that IOERT
can be effective in the treatment of breast cancer. Preliminary results of Dr.
Veronesi's study show that for many women, the use of IOERT at the time of a
lumpectomy surgery can eliminate six weeks of post-operative conventional
radiation therapy traditionally given these patients. In fact, Dr. Veronesi's
preliminary results show no statistical difference in 7-year survival rates for
the IOERT patients compared to those treated with the traditional approach for
breast conserving therapy of removing the tumor, wait for the breast to heal,
and then irradiate the whole breast for five to six weeks, five times a week,
followed by an additional five to eight treatments called the "boost" that is
focused on the tumor bed. Dr. Veronesi stated in presenting his findings, "In my
opinion, the results are equivalent and IOERT will become routinely used in the
management of breast cancer." Even for women who are not candidates for
Veronesi's "single-dose" therapy, many more breast cancer patients can benefit
from an IOERT "boost" at the time of lumpectomy, which may result in shorter
post-surgical radiation regimens, better local tumor control, and greater long
term survival.

         In November 2008, we delivered our first Mobetron dedicated entirely to
the dermatology market. The well proven use of radiation for the treatment of
skin cancer and other maladies opens an entirely new potential market for us.
Most skin cancers are currently removed surgically in a procedure known as Mohs
surgery, the efficacy of which is well accepted. Mohs surgery has the advantage
of eliminating the cancer immediately. However, this procedure results in
scarring at the site of the cancer, making this a less desirable option for
cosmetically sensitive areas, such as the face. In addition, lesions removed
surgically from elderly patients often take a long time to heal. Electron beam
radiation therapy is a viable alternative for these patients, with equivalent
clinical results and enhanced cosmetic outcomes. In addition, this alternative
offers strong reimbursement from both Medicare and private payers, making this
an excellent complementary offering for dermatology practices. In addition to
treating cancers, electron beam radiation is widely used for cosmetic skin
treatments such as the removal of keloid scars and other cosmetic skin
anomalies.

         Our methodology for estimating the U.S. market is as follows: we
estimate 225 academic institutions, 800 large community centers and another 200
potential buyers for general cancer treatments. In addition we estimate 250
dermatology clinics that could be buyers for the dermatology treatment, for a
total of 1,475 machines in the United States. Internationally, we believe the
market could add another approximately 2,450 machines, with 800 of those in
Western Europe, 600 in Asia, and the rest spread throughout the world. Of this
total, 2,000 of these are government or public institutions.

                                       5
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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 $4 to $5 million per operating room. We believe 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 operating room 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. We believe additional advantages of
using Mobetron over traditional IOERT solutions include: safer application;
quicker delivery during surgery; shorter surgery times; and greater availability
for patients.

         Development work on the first Mobetron system began in November 1993.
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 and began patient treatments in December 1997. In July 1998, we
received 510(k) approval from the U.S. 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 installed base of twenty-five Mobetrons in hospitals
in the United States, Europe, Asia, and South America.

         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. We believe that
12 MeV energy beams have sufficient penetration to effectively treat more than
90% of IOERT patients.

         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. A Mobetron system
weighs less than 3,000 pounds, which allows the system to avoid structural
loading problems and to be positioned easily for patient treatment.

Patent Protection

         A basic U.S. systems patent for Mobetron was granted on June 14, 1994.
A second U.S. 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 U.S. patent protecting the electron
accelerator technology used in Mobetron was granted, and in 2000, a U.S. patent
on the unique alignment system used to orient Mobetron to the tumor prior to
irradiation was also granted. These U.S. patents expire at various dates
beginning in April 2013. The Company is exploring additional U.S. and
international filings that may result in new patent protection or extension of
existing patents. Mobetron also has international patent protection in Japan,
key European countries, and Russia. We also hold United States. trademarks for
"Mobetron" and "Intraop Medical

Marketing and Sales

         Currently about 200 health centers conduct IOERT treatments worldwide,
most of which use heroic transport. In the United States, we have targeted sales
and marketing education efforts on these centers as they have already
demonstrated a commitment to IOERT, and more recently on those centers that wish
to expand their breast cancer treatment programs to take advantage of IOERT's
single dose and boost benefits.

                                       6
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         To address the large U.S. market, we have significantly increased our
sales efforts over the last three fiscal years, growing our U.S. sales and
marketing employees and contract sales personnel to a team of 10 people as of
the date of this filing. We believe that 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 also expanded our efforts to better
the U.S. reimbursement for IOERT, a key sales driver in the United States, and
expect these efforts to increase demand for Mobetron within the next few years.

         We have recently engaged in a field verification trial with a
dermatology clinic in Ft. Myers, Florida to treat skin cancer with the Mobetron.
This arrangement allows the dermatologists in the clinic to refer patients to a
joint venture between the clinic and a local radiation oncology group that will
perform the radiation treatments. The Mobetron was installed in the dermatology
clinic's office in November 2008, making this a convenient alternative treatment
for patients with cancer in cosmetically sensitive areas. The dermatologists
involved in this joint venture feel that up to 20% of their patients receiving
surgery could be eligible for radiation as an alternative form of treatment to
Mohs surgery. With over one million patients per year receiving surgery for skin
cancer, the potential market for the dermatology application of the Mobetron is
very large. In addition, the U.S. reimbursement for this procedure is strong. We
expect treatments using the Mobetron to begin at the dermatology clinic in the
first calendar quarter of 2009..

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

         In Western Europe, the primary market driver for the Mobetron is the
use of IOERT for early stage breast cancer, and to a lesser extent, the
decreased utilization of conventional radiation equipment resulting from
application of a fraction of the total therapeutic dose though IOERT. In Europe,
our sales efforts are carried out by a combination of our 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 Asia, distributorships have been established in the major markets
for IOERT: Japan, China, Taiwan, India and Korea. The distributors have 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 Asia to provide service support similar to that in Europe.
We have sold two Mobetrons in China in the past 16 months. We believe the
potential market size in China is well over a hundred units.

         We believe China is a strong potential market for Mobetron sales for
several reasons. First, the current mastectomy rate in China is very high, as
many women live in rural areas and cannot afford the time and cost to travel to
radiation centers daily to receive a multiple fractionation treatment. In
addition, physicians in China are under significant pressure to treat and
release patients quickly. Also, the Chinese system is one of socialized health
care, and the reduction of multiple fraction treatments would save the system
money and resources. Further, lung cancer in China is a very serious disease,
and there is great interest in providing IOERT for lung cancer, as IOERT has
shown promise in reducing recurrence and increasing long-term survival rates for
patients with this disease. Lastly, China has over 80 large institutions that we
consider potential Mobetron customers.

Manufacturing and Production

         Historically, we have relied on contracted third-parties to manufacture
Mobetron, while we have concentrated our resources on engineering and testing,
research and development, marketing and service. CDS Engineering LLC, or CDS, of
Hayward, California was our primary contract manufacturer until we terminated
our manufacturing agreement with them in November 2008. Our accelerator guide,
another key Mobetron component, is manufactured by Accuray Incorporated, which
is headquartered in Sunnyvale, California.

         Our termination of the CDS agreement was an initial strategic step in
our effort to reduce manufacturing costs and eliminate the Company's dependence
on a single source supplier. The Company intends to reduce costs by completing
the final Mobetron assembly in-house from components competitively sourced from
various vendors and contract manufacturers. We believe that we have the
necessary skills and resources to build or assemble the Mobetron to meet current
demand.

          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 two-week period, and that testing 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 sufficiently shielded for beam testing, we believe
we are able to meet near-term anticipated demand. With modifications to another
of the cells, we believe we could support a production volume of up to fifty
units per year.

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Product Offerings

         We are developing additional products and services for the IOERT and
radiotherapy market to maximize the market opportunity provided by Mobetron. Our
entry into the dermatology market, as described above, illustrates the
flexibility of the Mobetron. We expect to continue to innovate on this product
as follows:

         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 that 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. This year, we added a motorized jack to increase the
unit's mobility and improved Mobetron per energy beam steering, which will
simplify beam symmetry control while reducing overall test time. By redesigning
the chiller/heat exchanger we were able to reduce cost and the overall weight of
the machine. We continue to focus our research and development efforts to look
for further enhancements to improve our profit margins while increasing the
functionality and reliability of the Mobetron.

         Service. Mobetron generally includes a one-year warranty of parts and
labor. After the warranty period, we offer parts and service to our 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 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 operating room 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.

         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, manufactured a system called the Liac in an attempt to
replace the Novac 7 in the market. Info & Tech delivered a small number of
pre-commercial units to its customers. 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 sales of Liac in Italy, where we view the
Novac 7 and the Liac as significant competition. Refer to the discussion in Item
3 (Legal Proceedings) below concerning the status of litigation with Info &
Tech. In October 2008, we were informed by the District Court in Dusseldorf,
Germany that Info & Tech had informed the Court that the company was bankrupt.
However, the Liac is still being manufactured in Italy by Sordina, an Italian
manufacturer of operating room tables and lamps.

                                       8

<PAGE>

         Except as set forth above, we do not believe we face significant direct
competition for the Mobetron. If significant direct competition does occur, we
believe at least initially it is likely to be through modifying conventional
S-band accelerators for electron only operation, as we are not aware that any 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.

         There are several competing technologies for both the breast and
dermatology market, none of which involve the delivery of electrons. For
dermatology, low voltage x-rays have been used to treat superficial skin lesions
only. This type of disease represents a low percentage of the overall market for
dermatology radiation, as many lesions extend deeper into the skin tissue and
require higher energies to reach.

         For treatment of breast cancer, there are many competing methods for
delivering radiation, including x-ray Brachytherapy. Mammosite, a Brachytherapy
system, has had significant market success, as it is a cheaper system compared
to other accelerated partial breast irradiation techniques (APBI) with strong
U.S. reimbursement for both radiation oncologists and surgeons, despite a lack
of strong clinical evidence of its efficacy. Additionally, the Zeiss Intrabeam
is a low voltage x-ray machine that has been used to deliver single dose IORT.
This system is less expensive than the Mobetron, but lacks the energy range for
treating other cancers, and is limited in its range of treating breast cancers.

Research and Development

         During the fiscal years ended September 30, 2008 and September 30,
2007, we incurred research and development expenses of $1,625,880 and $661,678,
respectively. These activities accounted for about 19% to 25% of staff time
during each of those periods, respectively. We further expect that research and
development expenses will increase over the foreseeable future as we continue
work on various cost reduction and production and assembly enhancement projects
for Mobetron and engage in additional sponsorship of clinical research.

Government Regulation and Environmental Matters

         All medical devices require certification from the U.S. Food and Drug
Administration, or the FDA, before entering distribution. The certification
process is intended to assure that the products are safe and effective.

         On July 24, 1998, we 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. In November 23,
2003, we received SFDA approval in China. Mobetron has been tested according to
international regulatory standards for radiotherapy accelerators, including the
Suggested State Regulations for the Control of Radiation and the International
Electrotechnical Committee 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 that result from production of our products.

Employees

         As of September 30, 2008, we had a total of 30 employees: 27 full-time
employees and 3 part-time employees. Of the total, 10 employees were engaged in
product research, development and manufacturing operations, 10 in sales and
marketing, 5 in service and technical support, and 5 in general and
administrative functions. All but three of these full-time 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 relationship with us, and they or
we may terminate their employment at any time.

Item 1A. RISK FACTORS.

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

                                       9
<PAGE>

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

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


                         RISKS RELATING TO OUR BUSINESS

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

         We are a medical device company that has experienced significant
operating losses, primarily due to the cost of substantial research and
development of our primary product, the Mobetron. Since inception, we have
generated about $29.9 million in revenue through September 30, 2008. However, we
expect to continue to incur operating losses as well as negative cash flow from
operations in future periods. Our ability to achieve profitability will depend
upon our ability to sell the Mobetron at higher unit volumes and at higher
margins. Further, if the Mobetron and any other of our products do not gain
commercial acceptance, we may never generate significant revenues or achieve or
maintain profitability. As a consequence of these uncertainties, our independent
public accountants have expressed a "going concern" qualification in their audit
reports.

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

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

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

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

         In October 2008, we repaid our then outstanding senior secured
debentures and raised additional working capital through the issuance of new 10%
senior secured debentures to three private lenders, which such senior debentures
are due at maturity on December 31, 2008. Among other terms, the 10% senior
secured debentures are secured by a lien on all of our assets not otherwise
pledged under our product financing arrangement.

         Currently, the Company does not have sufficient capital resources to
retire the 10% senior secured debentures when the notes mature on December 31,
2008. The Company will be in default unless it can raise additional capital by
December 31, 2008 or renegotiate the terms of the 10% senior secured debenture.
The Company is in active conversations with the note holders.

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

                                       10
<PAGE>

We have significant additional capital and operating needs.

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

Our primary  product is subject to uncertain market acceptance.

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

We are currently dependent on one key supplier.

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

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

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

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

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

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

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

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

         In a related matter, on June 21, 2007, Gio-marco S.p.A. filed a
proceeding for nullification of that same German subpart DE69428698 of our
European Patent 0700578 with the German Federal Patent Court. Our response to
this filing was made in January 2008. The Court hearing on this procedure is
scheduled for March 15, 2009.

                                       11

<PAGE>

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

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

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

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

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

We are substantially dependent on certain key employees.

         We believe that our success will depend to a significant extent upon
the efforts and abilities of a relatively small group of management personnel,
particularly Donald A. Goer, PhD, our Chief Scientist, and John Powers, our
President and Chief Executive Officer. The loss of the services of one or more
of these key people could have a material adverse effect on us. We have
employment agreements with Dr. Goer, 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 our obligations under the debentures.

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

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

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

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

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

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

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

                                       12
<PAGE>

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

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

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

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


                         RISKS RELATING TO OUR INDUSTRY

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

         The medical device industry is subject to rapid, unpredictable, and
significant technological change. Our business is also subject to competition in
the United States and abroad from a variety of sources, including universities,
research institutions, conventional medical linear accelerator manufacturers,
other medical device companies and pharmaceutical companies. Many of these
potential competitors have substantially greater technical, financial, and
regulatory resources than we do and are accordingly better equipped to develop,
manufacture, and market their products. If these companies develop and introduce
products and processes competitive with or superior to our products, we may not
be able to compete successfully against them.

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

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

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

                                       13
<PAGE>

We are subject to extensive government regulation.

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

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

We expect to be highly dependent on overseas sales.

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

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

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

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

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

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

                                       14
<PAGE>

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

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

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

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

                        RISKS RELATED TO OUR COMMON STOCK

The trading market for our common stock is limited.

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

Our stock price may be volatile.

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

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

                                       15
<PAGE>

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

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

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

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

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

Our stock may lose access to a viable trading market.

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

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

Item 1B. UNRESOLVED STAFF COMMENTS.

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

Item 2.  PROPERTIES.

         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 Company has
the option to renew for three (3) additional years at the then current market
rate. The property is in satisfactory condition for the purpose for which it is
used.

Item 3.  LEGAL PROCEEDINGS.

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

         In a related matter, on June 21, 2007, Gio-marco S.p.A. filed a
proceeding for nullification of that same German subpart DE69428698 of our
European Patent 0700578 with the German Federal Patent Court. Our response to
this filing was made in January 2008. The Court hearing on this procedure is
scheduled for March 15, 2009.

                                       17
<PAGE>

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


         On April 23, 2008, we held our 2008 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 the filing of an
amendment to our articles of incorporation to authorize a one-for-twenty reverse
stock split of the outstanding shares of our common stock and to reduce the
authorized number of shares of our common stock from 500 million to 100 million;
(iii) approved an amendment to our 2005 Equity Incentive Plan to increase by 20
million the number of shares of common stock authorized for issuance thereunder
on a pre-reverse stock split basis, and (iv) ratified PMB + Helin Donovan, LLP
as our auditors for the fiscal year ended September 30, 2008.

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

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

Results of the voting on the matters described above at our 2008 annual meeting
of stockholders were as follows:

         (i) Election of seven (7) members of the Board of Directors for terms
         expiring at the 2009 annual meeting of stockholders: each of Oliver
         Janssen, John Powers, Michael Friebe, Keith Jacobsen, Stephen L.
         Kessler, Greg Koonsman, and Rawleigh Ralls received 279,414,082 votes
         for, 534,417 votes against, and 1,155,060 abstentions.

         (ii) Amendment of our articles of incorporation to effect a
         one-for-twenty reverse stock split and reduce the authorized number of
         shares of our common stock from 500 million to 100 million: vote totals
         were 258,281,708 for, 22,580,583 against, 242,067 abstain, and 1 not
         voted.

         (iii) Amendment of our 2005 Equity Incentive Plan to authorize the
         issuance of an additional 20 million shares (prior to the reverse stock
         split) under the Plan: vote totals were 259,938,984 for, 1,946,559
         against, 6,153,390 abstain, and 13,065,426 not voted.

         (iv) Ratification of the selection of PMB + Helin Donovan, LLP as the
         auditors of our financial statements for the fiscal year ending
         September 30, 2008: vote totals were 279,753,888 for, 4,300 against,
         and 1,346,171 abstain.

                                       18
<PAGE>

                                     PART II


Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
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" and currently is quoted under the symbol
"IOPM.OB."

         On December 1, 2008, the closing bid quotation for our common stock was
$0.05. 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 rounded to the nearest whole cent. 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 2008                  $0.08             $0.03
        June 2008                       $0.11             $0.06
        March 2008                      $0.15             $0.09
        December 2007                   $0.19             $0.06
        September 2007                  $0.23             $0.06
        June 2007                       $0.27             $0.11
        March 2007                      $0.35             $0.19
        December 2006                   $0.40             $0.16

Number of Stockholders

         As of December 1, 2008, there were 393 holders of record of our common
stock, including those held in "street name."

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.

Recent Sales of Unregistered Securities

         On October 3, 2008, the Company entered into a debenture purchase
agreement with E.U. Capital Venture, Inc., Encyclopedia Equipment LLC and Lacuna
Venture Fund LLLP, pursuant to which the Company issued 10% senior secured
debentures in the aggregate principal amount of $2,000,000.

         The debentures pay interest at the rate of 10% per annum payable
monthly, in arrears. All outstanding principal and any accrued but unpaid
interest is payable in full on the earlier of (i) the date the Company has
closed the issuance, or series of issuances, of securities with gross proceeds
received by the Company of not less than $3 million and (ii) December 31, 2008.
Upon the occurrence of certain events of default, the full principal amount of
the debentures, together with interest and other amounts owing, becomes
immediately due and payable.

         In connection with the issuance of the debentures, the Company entered
into a security agreement with the holders of the debentures, granting them a
security interest in the Company's assets.

         The sale and issuance of the debentures was made in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended.

         The Company previously reported the sale of the debentures and the
execution of the agreements described above under Item 1.01 on a Form 8-K filed
with the SEC on October 8, 2008.

                                       19
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

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






                  (Remainder of page intentionally left blank)


                                       20

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward looking statements

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

Business Overview

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

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

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

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

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

                                       21
<PAGE>

Critical Accounting Policies

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

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

Share-based Compensation Expense

         Effective January 1, 2006, we adopted the modified prospective
transition method under Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, or SFAS 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors, including stock options issued under our
2005 Equity Incentive Plan. Upon adoption of SFAS 123(R), we elected to value
our share-based payment awards granted after January 1, 2006 using the
Black-Scholes option-pricing model, or the Black-Scholes model, which we
previously used for the pro forma information required under SFAS 123. For
additional information, see Note 8 to the audited Consolidated Financial
Statements.

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

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

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

                                       22
<PAGE>

Results of operations for the fiscal year ended September 30, 2008 compared to
the fiscal year ended September 30, 2007.

Revenue, Costs of Revenue and Gross Margins
<TABLE>
<S>                                              <C>               <C>                  <C>                    <C>
                                                        Year Ended September 30,
        Revenue                                          2008              2007              Change        Percent
        -----------------------------------------------------------------------------------------------------------
          Product sales                          $  6,947,582      $  3,529,233         $ 3,418,349            97%
          Service                                     398,363           418,424            (20,061)            -5%
        -----------------------------------------------------------------------------------------------------------
        Total Revenue                            $  7,345,945      $  3,947,657         $ 3,398,288            86%
        -----------------------------------------------------------------------------------------------------------

        Costs of Revenue
        -----------------------------------------------------------------------------------------------------------
          Product sales                          $  5,706,842      $  2,719,585         $ 2,987,257           110%
          Service                                     251,027           196,682              54,345            28%
        -----------------------------------------------------------------------------------------------------------
        Total Costs of Revenue                   $  5,957,869      $  2,916,267         $ 3,041,602           104%
        -----------------------------------------------------------------------------------------------------------

                                                        Year Ended September 30,
        Gross Margin                                     2008              2007              Change        Percent
        -----------------------------------------------------------------------------------------------------------
          Product sales                         $   1,240,740       $   809,648          $  431,092            53%
                                                          18%               23%

          Service                                     147,336           221,742            (74,406)           -34%
                                                          37%               53%
        -----------------------------------------------------------------------------------------------------------
        Total Gross Margin                      $   1,388,076      $  1,031,390          $  356,686            35%
                                                          19%               26%
        Gross Margin Adjustment
        Less:  Accessory Sales                        (2,665)            94,474              97,139           103%
               Prior Period Sales                       4,841           120,973             116,132            96%
        Add:   Share Based Compensation               370,032            12,093             357,939           [NM]
        -----------------------------------------------------------------------------------------------------------
        Adjusted Gross Margin                    $  1,755,932       $   828,036          $  927,896           112%
                                                        25.9%             25.8%
        ===========================================================================================================
</TABLE>

Product Sales

         Product sales revenue includes systems and accessories sold but
excludes parts sold under service contracts. During fiscal year 2008, we sold
six Mobetron systems compared to three Mobetron systems sold in fiscal year
2007, bringing our total installed Mobetron base worldwide to twenty-five (25)
systems. Of the six systems sold in the 2008 fiscal year, two were sold to U.S.
hospitals and the remaining four were sold to overseas customers including our
first systems in Germany and Colombia, second system in China and fourth system
in Italy. In fiscal year 2007, we sold our third system in Japan, our first in
China, and our eighth system in the United States. We are pleased to note that
subsequent to year end, we have received purchase orders for three more systems
worldwide, including for our first machine to treat skin cancer from a group of
dermatologists in the United States, plus two new purchase orders from overseas
customers in Italy and Germany.

         Total gross margin for fiscal year 2008 decreased from fiscal year 2007
by seven points to 19%, primarily due to the allocation of share-based
compensation to cost of goods sold. Adjusting for share based compensation as
well as accessory sales and revenue recognized in the current period but
relating to systems sold in the prior period (without a corresponding adjustment
to cost of good sold) shows a slight increase in our gross margin
year-over-year.

                                       23
<PAGE>

         An analysis of our system sales for the fiscal years ended September
30, 2008 and September 30, 2007 is as follows:

<TABLE>
<S>                                                     <C>               <C>           <C>       <C>
                                                        Year Ended September 30,
  Mobetron Systems Sales Analysis                      2008              2007        Change   Percent
-------------------------------------------------------------------------------------------------------
  Systems Sold                                            6                 3             3      100%

    Systems Revenue                             $ 6,789,242       $ 3,210,864
    Revenue per Mobetron System                   1,131,540         1,070,288        61,252        6%
    Materials cost per system sold                  773,272           733,853        39,419        5%


    Materials Margin Per System                     358,268           336,435        21,833        6%
                                                     31.66%            31.43%

    Labor, Overhead and Warranty                    911,045           415,105       495,940      119%
    Labor Overhead and Warranty Per System          151,841           138,368        13,473       10%

  Gross Margin per System                       $   206,427       $   198,067     $   8,360        4%
                                                        18%               19%
-------------------------------------------------------------------------------------------------------
  Gross Margin per System Adjustment
  Add:   Share Based Compensation                    61,672            4,031         57,641      [NM]
-------------------------------------------------------------------------------------------------------
  Adjusted Gross Margin per System               $  268,099       $  202,098      $  66,001       33%
                                                        24%              19%
=======================================================================================================
</TABLE>


         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) is comparatively higher in fiscal year 2008 primarily due to the
below-market sales price offered to place our first machine in China in the
fiscal year ending September 30, 2007. This had a profound impact on reducing
our average revenue per system in 2007 as the sale of even one Mobetron below
market can substantially alter the average sales price given the limited number
of units sold in 2007. Adjusting for the below market sale in China, our revenue
per machine was still slightly higher in 2008 with the inclusion of 4 surgical
tables compared to only 1 in 2007.

         Materials cost per system was also slightly higher in fiscal year 2008
than in fiscal year 2007, primarily due to the inclusion of the three additional
surgical tables in the systems sold in fiscal year 2008. Excluding the surgical
tables, same system materials increased $22,482 year-over-year due to higher
pricing from our former contract vendor, CDS Engineering LLC, or CDS, of
approximately $20k per machine and the addition of a motorized transport jack
that adds approximately $10k in costs per machine. The Company is committed to
reducing material costs per machine. Shortly after the end of our 2007 fiscal
year, we hired an outside consulting firm to help us define future cost
reduction opportunities and feature upgrades for the Mobetron. As a result of
this effort, the Company terminated its manufacturing agreement with CDS in
November 2008 as a first strategic step to lowering its manufacturing costs and
eliminating the Company's dependence on a single source supplier. The Company
has decided that it will assemble the Mobetron System in-house with existing
labor already skilled in the assembly and testing of the Mobetron. We are
optimistic that this change will enable us to increase our product margins over
the long term.

         Other costs of systems sales, which include labor, overhead, and
warranty, increased on a per system basis by $13,473 or 10%. Factory and
installation personnel related costs decreased by $52,421 or 35% as we amortize
these costs over a greater number of machines sold in 2008 compared to 2007.
However, these savings were completely offset by an increase in the share based
compensation allocated to each machine (explained further below under operating
expenses). Warranty related expenses on a per machine basis increased by $13,138
in fiscal year 2008 as management decided to increase its reserve based on
historical performance.

         Excluding the non-cash overhead allocation of share based compensation,
our gross margin per machine would have increased by 5 percentage points to 24%
in fiscal year 2008.


                                       24
<PAGE>

Service

         The majority of service revenue for the fiscal years ended September
30, 2008 and 2007 came from annual service contracts, with the balance of
service revenue coming from as-requested service calls and parts sales to
customers. In 2008 we had 5 service contracts compared to the same number in
2007. Of the five service contracts in fiscal year 2008, four were renewals from
2007. 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 obtain direct contracts with a few customers in Europe, which
revenue is included in the fiscal years ended September 30, 2008 and 2007.



Operating Expenses

         A comparison of our operating expenses for the fiscal years ended
September 30, 2008 and 2007 is as follows:


<TABLE>

<S>                                    <C>                <C>                <C>              <C>
                                             Year Ended September 30,
                                              2008             2007             Change      Percent
    ------------------------------------------------------------------------------------------------
     Research and Development          $   1,625,880     $    661,678      $    964,202        146%
     General & Administrative              2,810,830        2,239,365           571,465         26%
     Sales and Marketing                   4,445,968        1,808,445         2,637,523        146%
    ------------------------------------------------------------------------------------------------
     Total Operating Expenses          $   8,882,688     $  4,709,488      $  4,173,190         89%
    ================================================================================================
</TABLE>


         Share based compensation. Share-based compensation, particularly the
non-cash cost of issuing options to our employees and directors, was $1,889,266
higher in the fiscal year ended September 30, 2008, compared to the fiscal year
ended September 30, 2007, accounting for approximately 45% of the year-over-year
increase in operating costs. The increase in share based compensation was
primarily the result of new options grants and option exercise price reductions
granted in November 2007 to our employees and directors following the
significant dilution caused by equity sales and other transactions entered into
by us in August 2007 and completed in October 2007, and the addition of new
management as part of those transactions. These expenses played a large part in
increasing operating expenses in all of the categories shown below:

<TABLE>
<S>                                        <C>                  <C>                  <C>
    Share Based Compensation              Year ended September 30,
                                           2008                2007             Change
                                    -----------------   ------------------------------------
    Research and development            $    485,642         $  17,805         $    467,837
    General and administrative               484,609            22,848              461,761
    Sales and marketing                      992,359            32,691              959,668
   -----------------------------------------------------------------------------------------

    Total                               $  1,962,610         $  73,344         $  1,889,266
   =========================================================================================
</TABLE>


         Below is a comparison of our operating expenses for the fiscal years
ended September 30, 2008 and 2007 excluding the impact of share based
compensation:


<TABLE>
<S>                                    <C>               <C>               <C>              <C>

                                                 Year Ended September 30,
                                                  2008             2007            Change   Percent
    ------------------------------------------------------------------------------------------------
     Research and Development          $   1,140,238     $    643,873      $    496,365         77%
     General & Administrative              2,326,231        2,216,517           109,714          5%
     Sales and Marketing                   3,453,609        1,775,754         1,677,855         94%
    ------------------------------------------------------------------------------------------------
     Total Operating Expenses          $   6,920,078     $  4,636,144      $  2,283,934         49%
    ================================================================================================
</TABLE>

                                       25
<PAGE>


         Research and development. Research and development expenses increased
by approximately 77% or $496,365, excluding share based compensation, in the
fiscal year ended September 30, 2008 compared to fiscal year ended September 30,
2007. Non-recurring charges of $120,000 were paid to an outside consulting firm
to help us define future cost reduction opportunities and feature upgrades for
the Mobetron, which we believe should over the long term help us increase our
product margins. In fiscal year 2008, personnel and consulting costs increased
by $279,994 with the hiring of three additional employees plus an independent
contractor to help oversee operations. 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. General and administrative expenses
increased by $109,714 or approximately 5%, excluding share based compensation,
in the fiscal year ended September 30, 2008 versus the fiscal year ended
September 30, 2007. Included in this increase is a bad debt expense of $253,513
from one of our overseas customers. Although this amount has been written off,
the Company is still actively pursuing collections on this account. Also in
fiscal year 2008 we saw an increase of $85,240 in legal expenses compared to
2007 when we recovered $65,000 for prevailing in our patent lawsuit. Offsetting
these increases was a decrease in investor relations expenses and consulting
expenses of $174,327 and $97,557 respectively in fiscal year 2008. The decrease
in investor relations expenses resulted primarily from the termination of our
third-party investor relations contracts towards the end of fiscal year 2007.

         Sales and marketing. Sale and marketing expenses increased by
$1,677,855 or approximately 94%, excluding share based compensation, in fiscal
year 2008 compared to fiscal year 2007 primarily due to the Company's plan to
significantly invest in its sales and marketing efforts. During fiscal year
2008, the Company hired six full time employees (sales agents) and engaged seven
new consultants. Consequently, personnel related expenses increased by $644,555
and travel and entertainment expenses by $222,750 compared to fiscal year 2007.
The Company also increased its spending on marketing and advertising for
Mobetron by $715,964 during fiscal year 2008 versus fiscal year 2007. We expect
sales and marketing expenses to continue to increase as we expand our Mobetron
sales efforts in the United States and overseas.

         Interest Expense. Through certain transactions completed in August and
October 2007, we changed our capital structure significantly. As a part of those
transactions, we eliminated $6.4 million face value of convertible debentures
and related beneficial conversion features and debt discounts due to warrants,
$1,200,000 of short-term debentures, $500,000 of promissory notes sold in April
and May 2007, and an additional $350,000 of related party debt. Our senior
debentures, which bear interest at 10% per annum, and our revolving combined
inventory and factoring agreement, or 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, 2008.

<TABLE>
<CAPTION>
<S>                                                                <C>                      <C>

        Type of debt, net debt discounts                               Balance at     Interest Rate
                                                              September 30,  2008
        -------------------------------------------------------------------------------------------
        Notes payable, related parties                                $   119,002             9.00%
        Product financing arrangement, inventory                        3,283,770            12.00%
        Product financing arrangement, factoring                        1,219,520            24.00%
        Senior debentures                                               1,000,000            10.00%
        Other notes                                                       150,000             8.00%
        Other notes                                                        44,367             9.00%
        -------------------------------------------------------------------------------------------
        Total debt, net debt discounts                                $ 5,816,659
        Dollar weighted average borrowing rate                                               13.98%
        ===========================================================================================

</TABLE>

                                       26
<PAGE>



Liquidity and Capital Resources

We experienced net losses of $8,639,427 and $6,026,740 for fiscal years 2008 and
2007, respectively. In addition, we have incurred substantial monetary
liabilities in excess of monetary assets over the past several years and, as of
September 30, 2008, had an accumulated deficit of $42,681,085. Furthermore, we
have significant short-term and long-term capital and operating needs. Unless we
are able to raise additional capital in the near future, we will be unable to
satisfy our short-term and long-term liabilities. 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 actions include:

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

     o    Developing new markets overseas and expanding our sales efforts within
          the United States; and

     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, 2008, 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 2008 and 2007
were as follows:

<TABLE>
<CAPTION>
<S>                                                                                      <C>

                                                     Year Ended September 30,
        Cash Flows                              2008                  2007                 Change
        ------------------------------------------------------------------------------------------
        Provided by (Used in):

          Operating Activities        $     (5,571,929)   $       (4,665,681)     $      (906,248)

          Investing Activities                (157,879)              (24,648)            (133,231)

          Financing Activities               5,473,960             5,078,823              395,137
        ------------------------------------------------------------------------------------------

        Net Increase/(Decrease)       $       (255,848)   $          388,494      $      (644,342)
        ==========================================================================================

</TABLE>


Operating Activities

         Net cash used for operating activities increased by $906,248 in fiscal
year 2008 in comparison to the prior fiscal year. Partially offsetting our net
loss of $8,639,427 for fiscal year 2008 was $2,013,398 of non-cash charges for
share-based compensation for the issuances of common stock, warrants, and
options lieu of compensation. During fiscal year 2007, our net loss of
$6,026,740 was similarly partially offset by non-cash charges of $905,253.
Additionally, large combined differences in other asset and liability accounts
of approximately $2.25 million between fiscal years 2008 and 2007 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 the large per-system cost of Mobetron.

Investing Activities

         Investing activities were higher in fiscal year 2008 versus fiscal year
2007, primarily because of the acquisition of fixed assets related to the
addition of two offices to our existing leasehold premises at a cost of $31,713
and computer and equipments at a cost of $63,729. The Company also invested
$50,800 in the form of intangible assets for certain non-recurring engineering
expenses paid to third parties related to development by those third parties of
certain Mobetron subsystems.


                                       27
<PAGE>

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. In October 2007, we had a second close pursuant to our
August 2007 Agreements in which we issued 20,418,444 shares of our common stock
for consideration of $1,601,686 of which $1,150,071 was paid back to the
convertible debenture holders, resulting in net proceeds of $451,615 to the
Company. We also issued options to purchase 25,527,827 shares of our common
stock in November 2007 (see Note 14 to our financial statements).

         In fiscal year 2008, the Company also sold an additional 69,492,073
shares of its common stock for consideration of $4,719,273 to certain third
parties and related parties. Partially offsetting the proceeds from issuance of
such common stock, the Company had a net reduction in notes payable of $878,834
in 2008 (see Note 4 to our financial statements). The Company reduced notes
payable by paying EU Capital by $622,457, Senior Debenture holders (ABS &
Regenmacher) $333,333 and related and other parties $123,210. Partially
offsetting this reduction, the Company converted $150,000 in liabilities to
BTH-China into notes payable. As of December 1, 2008, the Company had
392,787,597 shares of common stock outstanding and 47,136,432 potentially
dilutive shares of common stock from the possible exercise of outstanding
options and warrants, compared to 379,402,984 outstanding shares of common stock
and 47,316,432 potentially dilutive shares of common stock from outstanding
options and warrants as reported on our Form 10-QSB for the quarter ended June
30, 2008.




                                       28
<PAGE>



Debt and Lease Obligations

         At December 1, 2008, we had notes payable and obligations for leased
equipment from various sources as shown below. Interest rates on such debt range
from 8% to 24%. We also lease office space and equipment under non-cancelable
operating and capital leases with various expiration dates through 2011.


<TABLE>
<CAPTION>
<S>                                                                                     <C>


                                                                                     December 1,
                                                                                        2008
                                                                                  ------------------

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

        Product financing arrangement                                                   $ 4,706,531
        Senior secured debentures                                                         2,000,000
        Other notes                                                                         194,367
                                                                                  ------------------
                                                                                        $ 6,900,898
        Less debt discounts due to warrants
                                                                                            (39,060)
                                                                                  ------------------
                                                                                          6,861,838

        Less current portion                                                             (6,861,838)
                                                                                  ------------------
          Notes payable, other, net debt discounts due to warrants
               and beneficial conversion features, net of current portion               $         -
                                                                                  ==================

        Capital lease for equipment                                                     $     5,158
        Less current portion
                                                                                             (2,447)
                                                                                  ------------------

        Capital lease obligations, net of current portion                               $     2,711
                                                                                  ==================

</TABLE>


                  (Remainder of page intentionally left blank)

                                       29
<PAGE>



         As of December 1, 2008, future minimum lease payments that come due in
the fiscal years ending September 30 are as follows:

<TABLE>
<CAPTION>
<S>                                                                    <C>                <C>

Period Ending September 30,                                        Capital Leases         Operating
                                                                                          Leases
---------------------------------------------------------------    ------------------------------------
2009                                                                     $ 2,579           $ 244,754

2010                                                                       2,579             233,838

2011                                                                         431                   -
                                                                   ----------------    ----------------

Total minimum lease payments                                               5,589            $478,592
                                                                                       ================
Less: Amount representing interest                                          (208)
                                                                   ----------------

Present value of minimum lease payments                                    5,381

Less: Current portion                                                     (2,435)
                                                                   ----------------

Obligations under capital lease, net of current portion                  $ 2,946
                                                                   ================
</TABLE>


Deferred Revenue Items

         Revenue under service agreements is deferred and recognized over the
term of the agreement, typically one year, on a straight line basis. As of
September 30, 2008 and September 30, 2007, deferred revenue was $162,811 and
$144,673 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, 2008 or September 30, 2007.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required by this Item are included in Item 15 of this
report and are presented beginning on page F-1.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

None


                                       30
<PAGE>


Item 9A. CONTROLS AND PROCEDURES.


(a)      Evaluation of Disclosure Controls and Procedures.

         Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer ("Certifying Officers"), has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal
period covered by this Annual Report on Form 10-K. Based upon such evaluation,
the Certifying Officers have concluded that, as of the end of such period,
September 30, 2008, the Company's disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is made known to management,
including our Certifying Officers, and that such information is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.

         In designing and evaluating our disclosure controls and procedures, our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.

         Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act). Our internal control system was designed to
provide reasonable assurance to the Company's management and board of directors
regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

         Our management,assessed the effectiveness of the Company's internal
control over financial reporting as of September 30, 2008. In making this
assessment, management used the criteria set forth by the SEC's new Interpretive
Guidance in Release No. 34-55929. Based on our assessment, management believes
that, as of September 30, 2008, the Company's internal control over financial
reporting is effective based on those criteria.

         This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.


     (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 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


Item 9B. OTHER INFORMATION.

         None.



                  (Remainder of page intentionally left blank)



                                       31
<PAGE>

                                    PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

         The following table sets forth information regarding our executive
officers and directors as of December 1, 2008.

<TABLE>
<CAPTION>
<S>                                                    <C>

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

Oliver Janssen                              45          Chairman of the Board

John Powers                                 47          President, Chief Executive Officer, and
                                                        Director

Michael Friebe, Ph.D.                       43          Director

Keith Jacobsen                              64          Director

Stephen L. Kessler                          65          Director

Greg Koonsman                               44          Director

Rawleigh Ralls                              46          Director

Richard Belford                             57          Vice President, Quality Assurance,
                                                        Regulatory Affairs

Donald A. Goer, Ph.D.                       65          Chief Scientist

Wink Jones                                  32          Vice President, Sales and Marketing

J.K. Hullett                                45          Chief Financial Officer, Secretary
</TABLE>


Family Relationship Among the Current Directors and Executive Officers

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

Biographical Information

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

         Oliver Janssen has served as Chairman of the Board 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

                                       32
<PAGE>

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
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 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. 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 M.B.A. degree from The University of
Dallas and a B.S. degree in Aerospace Engineering from Texas A&M University. 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 more
than 15 years, Mr. Ralls has been an active investor in both the private and
public markets. After receiving an M.B.A. degree 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, as a director 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-stage
enterprises in both the private and public markets. Mr. Ralls's received an
undergraduate degree in chemical engineering from the University of Arkansas,
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., predecessor to the Company,
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 the Company's Director of Quality Assurance and Regulatory
Affairs. In his current capacity, he has responsibility for overseeing all
aspects of the Company's quality programs and worldwide regulatory compliance.
He received his B.A. degree in electronics, with a minor in business
administration from University of California, San Francisco, and has had
extensive quality and regulatory assurance training as a member of the American
Society for Quality and the Regulatory Affairs Professional Society.

         Donald A. Goer, Ph.D., Chief Scientist. Dr. Goer is a co-founder of
Intraop Medical, Inc., the predecessor to the Company, where he served as Chief
Executive Officer, President and a director until Intraop Medical, Inc.'s merger
into the Company in February 2005. From February 2005 until August 2007, Dr.
Goer served as Chief Executive Officer, President and a director of the Company
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

                                       33
<PAGE>

study in metallurgical engineering, Dr. Goer joined Varian Associates, a
scientific device manufacturer. Dr. Goer has 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 also 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.

         Winfield (Wink) Jones, Vice President, Sales and Marketing, Mr. Jones
is currently the Vice President of Marketing for the Company. He joined the
Company as a consultant in October 2007. From October 2006 until September 2007,
Mr. Jones was the Chief Executive Officer of concept3D, Inc, a 3-dimensional
computer modeling services company he founded. In addition, Mr. Jones is a
founding and managing partner at Lacuna, LLC, a Boulder, Colorado based
financial management company founded in August 2006 that manages both a venture
capital fund and a hedge fund. Prior to his involvement with the Lacuna funds,
Mr. Jones was Chief Operating Officer of the internet services provider
NetIdentity from 2003 until its acquisition in June 2006.

         J.K. Hullett, Chief Financial Officer, Secretary. Mr. Hullett was hired
as the Company's Chief Financial Officer, in November 1, 2008. Prior to that,
Mr. Hullett served from 2000 to 2003 as Chief Executive Officer and Chief
Financial Officer of NetIdentity, a company that provides personalized email
addresses and web hosting services. From 2004 to 2006, Mr. Hullett served as
Chief Financial Officer of @Last Software, Inc., a 3d design software company
that Google, Inc. acquired in March 2006. From 2006 to present, Mr. Hullett has
served as limited partner and principal of Lacuna Venture Fund, LLLP and Lacuna
Hedge Fund LLLP and Chief Financial Officer of Mocapay, Inc., a company
specializing in mobile payment at the point of sale. Mr. Hullett holds an M.B.A.
degree from the University of Texas, Austin.

Officer Resignations

Scott Mestman resigned his position as Vice President, Sales and Marketing on
July 2, 2008. Richard Simon resigned his position as Vice President of Operation
on October 31, 2008. Howard Solovei resigned his positions as Chief Financial
Officer, and Secretary on October 31, 2008.

Audit Committee and Meetings


Audit Committee

         The Audit Committee was established on April 6, 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 Committee 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 are Keith Jacobsen, Steve
Kessler, and Rawleigh Ralls. All current members of the Audit Committee, except
for Rawleigh Ralls, are "independent," as defined by IntraOp policy and NASDAQ
listing standards. The Board has also determined that Keith Jacobsen and Steve
Kessler meet the criteria of financial experts as defined under SEC rules.. The
Audit Committee met four times during the fiscal year ended September 30, 2008.

Section 16(a) Beneficial Ownership Reporting Compliance

         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 SEC rules 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, 2008, 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, 2008.

Code of Ethics

                                       34
<PAGE>

         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 Form 10-K.




                  (Remainder of page intentionally left blank)


                                       35
<PAGE>


Item 11. EXECUTIVE COMPENSATION.

         The following table provides information concerning the compensation
received for services rendered to Intraop Medical Corporation in all capacities
during the fiscal years ended September 30, 2008 and September 30, 2007, by our
chief executive officer, our two other most highly compensated executive
officers or key employees whose compensation exceeded $100,000 for the fiscal
year ended September 30, 2008 and two other individuals who received significant
compensation during fiscal year 2008 but were not executive officers as of the
end of the fiscal year (the "named executive officers").

                          Summary Compensation Table .
<TABLE>
<CAPTION>
<S>                                                                    <C>          <C>             <C>          <C>

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

   Name and                                                             Nonequity   Nonqualified
  principal                                      Stock       Option     incentive       deferred
   position              Salary         Bonus   awards       awards          plan   compensation      All other
                 Year       ($)           ($)      ($)       ($)(6)  compensation       earnings   compensation  Total ($)
                                                                              ($)            ($)            ($)
---------------------------------------------------------------------------------------------------------------------------
John Powers,     2008   142,320        64,000        0    3,299,400             0              0              0  3,505,720
President and    ----------------------------------------------------------------------------------------------------------
Chief            2007         0                      0            0             0              0              0
Executive
Officer (1)


---------------------------------------------------------------------------------------------------------------------------
Donald A.        2008   186,134             0        0      380,514             0              0              0    566,648
Goer, Chief      ----------------------------------------------------------------------------------------------------------
Scientist (2)    2007   184,040             0        0            0             0              0              0    184,040




---------------------------------------------------------------------------------------------------------------------------
Scott J.         2008   236,474             0        0       77,656             0              0              0    236,474
Mestman,         ----------------------------------------------------------------------------------------------------------
Former Vice      2007   254,550             0        0            0             0              0              0    254,550
President,
Worldwide
Sales and
Marketing (3)


---------------------------------------------------------------------------------------------------------------------------
Howard           2008   166,126             0        0      291,906             0              0              0    458,032
Solovei,         ----------------------------------------------------------------------------------------------------------
Former   Chief   2007   166,126             0        0            0             0              0              0    166,126
Financial
Officer    and
Secretary (4)

---------------------------------------------------------------------------------------------------------------------------
Winfield G.      2008    87,250             0        0      225,000             0              0              0    312,250
Jones, Vice
President,
Sales and
Marketing (5)

---------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1) Mr. Powers received no compensation during 2007. 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 is an "at will" employee of IntraOp and
will received an initial base salary of $185,000 per year, annual 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 the lesser of 5% or the percent change in the consumer price index, or
CPI, a stock option grant for 18,330,000 shares of our common stock awarded on

                                    36
<PAGE>

November 23, 2007 with an exercise price of $0.18 per share, vesting 6.25% per
quarter over 48 months, ,six months severance for termination without cause,
four weeks annual paid vacation, other standard benefits offered to our
executive officers and a signing bonus of $64,000, which was paid in December
2007..

(2) Dr. Goer resigned his position as President and Chief Executive Officer of
the Company and assumed the role of Chief Scientist on August 22, 2007. In
November 2007, Dr. Goer received a stock option exercisable for 2,113,968 shares
of our common stock under our 2005 Equity Incentive Plan with an exercise price
of $0.18 per share, 75,500 shares of which vested upon issuance, 100,609 shares
of which vested on January 1, 2008, and the remainder of which will vest ratably
monthly over 33 months. In addition, in November 2007 stock options previously
granted to Dr. Goer with an exercise price of between $0.55 and $1.375 per share
were cancelled and re-issued with an exercise price of $0.18 per share to
reflect the significant dilution caused by the equity sale and other
transactions pursuant to the August 2007 Agreements.

(3) Mr. Mestman resigned his position as Vice President, Sales and Marketing on
July 2, 2008. On November 23, 2007, Mr. Mestman received a stock option
exercisable for 431,422 shares of our common stock under our 2005 Equity
Incentive Plan with an exercise price of $0.18 per share, one-twelve of which
vested on issuance and the remainder of which will vest ratably monthly over 33
months. In addition, in November 2007, stock options previously granted to Mr.
Mestman with an exercise price of $0.58 per share were cancelled and re-issued
with an exercise price of $0.18 per share to reflect the significant dilution
caused by the equity sale and other transactions pursuant to the August 2007
Agreements. The stock options held by Mr. Mestman, which were exercisable for an
aggregate of 531,422 shares of our common stock, were cancelled upon Mr.
Mestman's resignation. Mr. Mestman was paid three month severance and allowed to
retain his computer and other accessories with a net book value of $5,196

(4) Mr. Solovei resigned his position as Chief Financial Officer and Secretary
of the Company on October 31, 2008. On November 23, 2007, Mr. Solovei received a
stock option exercisable for 1,621,698 shares of our common stock under our 2005
Equity Incentive Plan with an exercise price of $0.18 per share, 878,420 shares
of which vested upon issue and the remainder of which will vest ratably monthly
over 33 months. In addition, in November 2007, stock options previously granted
to Mr. Solovei with an exercise price between $0.54 and $1.25 per share were
cancelled and re-issued with an exercise price of $0.18 per share to reflect the
significant dilution caused by the equity sale and other transactions pursuant
to the August 2007 Agreements. Mr. Solovei will receive 10 months severance to
be paid during the Company's customary payroll schedule commencing from November
1, 2008 to August 31, 2009 subject to reduction by the amount of any and all
cash compensation earned by Mr. Solovei during this period. The Company also
agreed to pay Mr. Solovei his COBRA premiums for 10 months. Mr. Solovei's
options will cease to vest and he will have 90 days from his separation date to
exercise his 1,318,608 vested shares. Mr. Solovei was also allowed to retain his
computer with a net book value of $0.

(5) Mr. Jones joined the services of the Company in October 2007 as a marketing
consultant, became an employee of the Company in May 2008 and was promoted to
Vice President, Sales and Marketing effective July 2, 2008. On June 2008, Mr.
Jones received a stock option exercisable for 2,500,000 shares of our common
stock under our 2005 Equity Incentive Plan with an exercise price of $0.09 per
share, one-twelve of which will vest each quarter over three years.

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

                                                          Year ended
                                                         September 30,
                                                             2008
                                                   --------------------------

        Expected term (in years)                           0.02 to 7

        Risk-free interest rate                         2.83% to 4.34%

        Expected volatility                              204% to 247%

        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 outstanding for each named executive officer as of the fiscal year ended
of September 30, 2008:

                                       37
<PAGE>


                Outstanding Equity Awards at 2008 Fiscal Year-End
<TABLE>
<CAPTION>
<S>                                                                               <C>       <C>         <C>           <C>


--------------------------------------------------------------------------------------------------------------------------------
                                        Option awards                                             Stock awards
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Equity       Equity
                                                                                                         incentive    incentive
                                                                                                              plan         plan
                                                                                             Market        awards:      awards:
                                                                                             value       Number of    Market or
                                                   Equity                                    of           unearned       payout
                                                incentive                         Number     shares        shares,     value of
                                                     plan                         of         of           units or     unearned
                                                  awards:                         shares     units           other      shares,
                 Number of       Number of      Number of                         or units   of             rights     units or
                securities      securities     securities                         of stock   stock       that have       others
                underlying      underlying     underlying                         that       that       not vested       rights
               unexercised     unexercised    unexercised  Option         Option  have not   have              (#)    that have
               options (#)     options (#)       unearned  exercise   expiration  vested     not                     not vested
Name           exercisable   unexercisable    options (#)  price ($)        date    (#)      vested ($)                    ($)
--------------------------------------------------------------------------------------------------------------------------------
John Powers      3,436,875      14,893,125              0      0.18   11/23/2017          0         0            0            0
--------------------------------------------------------------------------------------------------------------------------------
Donald    A.        50,000               0              0      0.18    6/22/2010          0         0            0            0
Goer
               -----------------------------------------------------------------------------------------------------------------
                    25,000               0              0      0.18      4/26/11          0         0            0            0
               -----------------------------------------------------------------------------------------------------------------
                    25,000               0              0      0.18    10/1/2011          0         0            0            0
               -----------------------------------------------------------------------------------------------------------------
                    20,000               0              0      0.18    10/1/2012          0         0            0            0
               -----------------------------------------------------------------------------------------------------------------
                    15,000               0              0      0.18    9/30/2013          0         0            0            0
               -----------------------------------------------------------------------------------------------------------------
                    15,000               0              0      0.18    9/30/2014          0         0            0            0
               -----------------------------------------------------------------------------------------------------------------
                    40,000               0              0      0.18    12/7/2015          0         0            0            0

--------------------------------------------------------------------------------------------------------------------------------
Winfield  G.       208,333       2,291,667              0      0.09    06/2/2018          0         0            0            0
Jones

--------------------------------------------------------------------------------------------------------------------------------
Scott     J.       131,823         299,599      (131,823)      0.18    12/7/2015          0         0            0            0
Mestman (1)

               -----------------------------------------------------------------------------------------------------------------
                   100,000               0      (100,000)      0.18    12/7/2015          0         0            0            0


--------------------------------------------------------------------------------------------------------------------------------
Howard             175,000               0              0      0.18     1/1/2013          0         0            0            0
Solovei

               -----------------------------------------------------------------------------------------------------------------
                     5,000               0              0      0.18    9/30/2013          0         0            0            0
               -----------------------------------------------------------------------------------------------------------------
                    10,000               0              0      0.18    9/30/2014          0         0            0            0
               -----------------------------------------------------------------------------------------------------------------
                    50,000               0              0      0.18    12/7/2015          0         0            0            0

               -----------------------------------------------------------------------------------------------------------------
                    20,000               0              0      0.18     2/6/2016          0         0            0            0
               -----------------------------------------------------------------------------------------------------------------
                 1,058,608         563,090              0      0.18   11/23/2017          0         0            0            0

--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Subsequent to fiscal year end, Mr. Mestman's stock options were cancelled in
the month of October 2008 due to non-exercise.


         Our directors who are employees of the Company 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 2008:

                                       38
<PAGE>

                   Director Compensation For 2008 Fiscal-Year

<TABLE>
<CAPTION>
<S>                                                                          <C>              <C>              <C>

-------------------------------------------------------------------------------------------------------------------------
                        Fees                                  Non-equity
                   earned or                              incentive plan      Nonqualified
                     paid in        Stock        Option     compensation          deferred        All other
                    cash ($)   awards ($)        awards              ($)      compensation     compensation    Total ($)
Name                                             ($)(7)                       earnings ($)              ($)
-------------------------------------------------------------------------------------------------------------------------
Oliver  Janssen       31,667            0        21,500                0                 0                0       53,167
(1)

-------------------------------------------------------------------------------------------------------------------------
Michael                8,750            0        85,566                0                 0                0       94,316
Friebe,   Ph.D.
(2)

-------------------------------------------------------------------------------------------------------------------------
Keith  Jacobsen        8,750            0        73,918                0                 0                0       82,668
(3)

-------------------------------------------------------------------------------------------------------------------------
Stephen      L.        8,750            0        62,269                0                 0                0       71,019
Kessler (4)

-------------------------------------------------------------------------------------------------------------------------
Greg   Koonsman        8,750            0        21,500                0                 0                0       30,250
(5)

-------------------------------------------------------------------------------------------------------------------------
Rawleigh Ralls         8,750            0        21,500                0                 0                0       30,250
(6)

-------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1) On April 2008, Mr. Janssen received a stock option exercisable for 100,000
shares of common stock under our 2005 Equity Incentive Plan with an exercise
price of $0.08 per share, four-eighteenth of which vested on issuance with the
remainder vesting ratably over 36 months. Also in June 2008, Mr. Janssen
received additional stock options exercisable for 150,000 shares of common stock
with an exercise price of $0.09 per share, one-eighteenth of which vested on
issuance with the remainder vesting ratably over 36 months. As of September 30,
2008, Mr. Janssen had outstanding options exercisable for 250,000 shares of our
common stock and no outstanding stock awards. In addition, Mr. Janssen received
a cash payment of $22,500 for consulting services from July 2008 to September
2008. No other board member received a cash payment in fiscal year 2008.

(2) On November 23, 2007, Mr. Friebe received a stock option exercisable for
355,923 shares of our common stock under our 2005 Equity Incentive Plan with an
exercise price of $0.18 per share, one-fourth ratably over four quarters. In
addition in November 2007, stock options previously granted to Mr Friebe with an
exercise price between $0.22 to $1.25 per share were cancelled and re-issued
with an exercise price of $0.18 per share to reflect the significant dilution
caused by the equity sale and other transactions pursuant to the August 2007
Agreements. On April 2008, Mr. Friebe received a stock option exercisable for
100,000 shares of common stock under our 2005 Equity Incentive Plan with an
exercise price of $0.08 per share, four-eighteenth of which vested on issuance
with the remainder vesting ratably over 36 months. Also in June 2008 Mr. Friebe
received an additional stock option exercisable for 150,000 shares of common
stock with an exercise price of $0.09 per share, one-eighteenth of which vested
on issuance with the remainder vesting ratably over 36 months. As of September
30, 2008, Dr. Friebe had outstanding options exercisable for 688,423 shares of
our common stock and no outstanding stock awards.

(3) On November 23, 2007, Mr. Jacobsen received a stock option exercisable for
291,210 shares of our common stock under our 2005 Equity Incentive Plan with an
exercise price of $0.18 per share, one-fourth ratably over four quarters. In
addition in November 2007, stock options previously granted to Mr Jacobsen with
an exercise price of $0.35 and $0.58 per share were cancelled and re-issued with
an exercise price of $0.18 per share to reflect the significant dilution caused
by the equity sale and other transactions pursuant to the August 2007
Agreements. In April 2008 Mr. Jacobsen received a stock option exercisable for
100,000 shares of common stock under our 2005 Equity Incentive Plan with an
exercise price of $0.08 per share, four-eighteenth of which vested on issuance
with the remainder vesting ratably over 36 months. Also in June 2008 he received
additional stock option exercisable for 150,000 shares of common stock with an
exercise price of $0.09 per share, one-eighteenth of which vested on issuance
with the remainder vesting ratably over 36 months. As of September 30, 2008, Mr.
Jacobsen had outstanding options exercisable for 608,710 shares of our common
stock and no outstanding stock awards.

(4) On November 23, 2007, Mr. Kessler received a stock option exercisable for
226,497 shares of our common stock under our 2005 Equity Incentive Plan with an
exercise price of $0.18 per share, one-fourth ratably over four quarters. In
addition in November 2007, stock options previously granted to Mr Kessler with
an exercise price of $0.35 and $0.58 per share were cancelled and re-issued with
an exercise price of $0.18 per share to reflect the significant dilution caused
by the equity sale and other transactions pursuant to the August 2007
Agreements. In April 2008 Mr. Kessler received a stock option exercisable for
100,000 shares of common stock under our 2005 Equity Incentive Plan with an

                                       39
<PAGE>

exercise price of $0.08 per share, four-eighteenth of which vested on issuance
with the remainder vesting ratably over 36 months. Also in June 2008 he received
additional stock option exercisable for 150,000 shares of common stock with an
exercise price of $0.09 per share, one-eighteenth of which vested on issuance
with the remainder vesting ratably over 36 months. As of September 30, 2008, Mr.
Kessler had outstanding options exercisable for 528,997 shares of our common
stock and no outstanding stock awards.

(5) On April 2008 Mr. Koonsman received a stock option exercisable for 100,000
shares of common stock under our 2005 Equity Incentive Plan with an exercise
price of $0.08 per share, four-eighteenth of which vested on issuance with the
remainder vesting ratably over 36 months. Also in June 2008 Mr. Koonsman
received additional stock option exercisable for 150,000 shares of common stock
with an exercise price of $0.09 per share, one-eighteenth of which vested on
issuance with the remainder vesting ratably over 36 months. As of September 30,
2008, Mr. Koonsman had outstanding options exercisable for 250,000 shares of our
common stock and no outstanding stock awards.

(6) On April 2008 Mr. Ralls received a stock option exercisable for 100,000
shares of common stock under our 2005 Equity Incentive Plan with an exercise
price of $0.08 per share, four-eighteenth of which vested on issuance with the
remainder vesting ratably over 36 months. Also in June 2008 he received
additional stock option exercisable for 150,000 shares of common stock with an
exercise price of $0.09 per share, one-eighteenth of which vested on issuance
with the remainder vesting ratably over 36 months. As of September 30, 2008, Mr.
Ralls had outstanding options exercisable for 250,000 shares of our common stock
and no stock awards.

 (7) See note 6 to the Summary Compensation Table above regarding assumptions
made in determining the fair value of options granted.


Description of the 2005 Equity Incentive Plan

         On December 7, 2005, the Board amended and restated our 1995 Stock
Option Plan, re-naming it the 2005 Equity Incentive Plan, pursuant to which,
45,359,664 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 non-statutory options.

         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 our 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 Agreements, Termination of Employment and Change-in-Control
Arrangements

         Mr. Powers, our President and Chief Executive Officer, has an
employment agreement with the Company that provides for an initial base salary
of $185,000 per year, annual 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 the lesser of 5% or the
percent change in the CPI, a stock option exercisable for 18,330,000 shares of
IntraOp common stock with an exercise price of $0.18 per share, which was
awarded on November 23, 2007 vesting 6.25% per quarter over 48 months, six
months severance for termination without cause, four weeks annual paid vacation,
other standard benefits offered to our executive officers and a signing bonus of
$64,000, which was paid in December, 2007.

         Dr.. Goer, our Chief Scientist, has an employment agreement with the
Company 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.

         On October 31, 2008, the Company entered into a separation agreement
with Howard Solovei in connection with his resignation as Chief Financial
Officer (the "Separation Agreement"). Pursuant to the terms of the Separation
Agreement, the Company will pay Mr. Solovei the equivalent of ten months of his
base salary in effect immediately prior to his termination, which is
approximately $138,438. Such severance payments will be made on the same basis
and at the same time as payments of Mr. Solovei's base salary were made prior to
the termination of his employment and shall be reduced by the amount of any and
all cash compensation paid or payable to Mr. Solovei for work performed (whether
as a self-employed person or as an employee or consultant of any person or

                                       40
<PAGE>

entity) during the ten-month period following the October 31, 2008 (the
"Separation Period"). In addition, the Company also agreed to pay the premiums
of group health insurance COBRA continuation coverage for Mr. Solovei and his
eligible dependents for up to the entire Separation Period, subject to certain
limitations. The vesting of any outstanding options issued by the Company to Mr.
Solovei ceased as of October 31, 2008 and any remaining unvested shares lapsed
and terminated on such date. Mr. Solovei agreed pursuant to the terms of the
Separation Agreement to not solicit any current employee, consultant or agent of
the Company for 12 months after October 31, 2008. As consideration for the
benefits of the Separation Agreement, Mr. Solovei executed a full general
release of claims against the Company and its affiliates.


                  (Remainder of page intentionally left blank)


                                       41
<PAGE>



Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER  MATTERS.

Principal Stockholders

     The following table sets forth certain information regarding the ownership
of IntraOp's common stock as of December 1, 2008 by: (i) each director; (ii)
each of the named executive officers; (iii) all executive officers and directors
of IntraOp as a group; and (iv) all those known by IntraOp to be beneficial
owners of more than five percent of its common stock. Unless otherwise
indicated, the address of each beneficial owner listed below is the address of
our principal offices, c/o Intraop Medical Corporation, 570 Del Rey Avenue,
Sunnyvale, CA 94085.

<TABLE>
<CAPTION>
<S>                                                                     <C>                      <C>

                                                                          Beneficial Ownership(1)
                                                                ---------------------------------------------
Beneficial Owner                                                    Number of Shares       Percent of Total
--------------------------------------------------------------  -------------------------  ------------------

VMG Holdings II, LLC(2)                                                   27,557,006               7.02%
   13155 Noel Road, Suite 2400
   Dallas, TX  75240
Lacuna, LLC(3)                                                           135,208,638              34.42%
   1100 Spruce Street, Suite 202
   Boulder, CO  80302
Ellerphund Capital(4)                                                     38,544,475               9.81%
   2616 Hibernia Street
   Dallas, TX  75204
Michael Friebe, Ph.D.(5)                                                   1,033,145                  *
Keith A. Jacobsen(6)                                                       1,166,032                  *
Oliver Janssen(7)                                                         12,877,599               3.20%
Stephen L. Kessler(8)                                                        488,719                  *
Gregory S. Koonsman(2)(9)                                                 27,641,728               7.04%
Rawleigh H. Ralls, IV(10)                                                     84,722                  *
Richard A. Belford(11)                                                       299,700                  *
Donald A. Goer, Ph.D.(12)                                                  9,676,413               2.45%
Winfield Jones(13)                                                           416,667                  *
John Powers(14)                                                            5,728,125               1.44%
Howard Solovei(15)                                                         1,831,108                  *%
Scott Mestman(16)                                                          3,880,535                  *%
All executive officers and directors as a group                           65,574,493              15.86%
(13 persons)(17)

-------------------------------------------------------------------------------------------------------------------
</TABLE>

      * Less than one percent.

(1)   This table is based upon information supplied by officers, directors and
      principal stockholders, information supplied by our transfer agent, and
      Schedules 13D and 13G filed with the Securities and Exchange Commission
      (the "SEC"). Unless otherwise indicated in the footnotes to this table and
      subject to community property laws where applicable, the Company believes
      that each of the stockholders named in this table has sole voting and
      investment power with respect to the shares indicated as beneficially
      owned. Applicable percentages are based on 392,787,597 shares outstanding
      on December 1, 2008, adjusted as required by rules promulgated by the SEC.

(2)   The principal business of VMG Holdings II, LLC ("VMG") is serving as a
      vehicle for investment in the Company. Gregory S. Koonsman acts as the
      Manager and President of VMG. Mr. Koonsman, by virtue of being the sole
      manager of VMG, may be deemed to have sole voting and dispositive control
      over the shares held by VMG.

(3)   Includes 78,851,763 shares held by Lacuna Venture Fund LLLP ("Lacuna
      Venture") and 56,356,875 shares held by Lacuna Hedge Fund LLLP ("Lacuna
      Hedge"). Lacuna LLC is the general partner of Lacuna Ventures GP LLLP
      ("Lacuna Ventures GP"), which is the general partner of Lacuna Venture.
      Lacuna LLC and Lacuna Ventures GP 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 Lacuna Venture but disclaim beneficial ownership except

                                       42
<PAGE>

      to their pecuniary interest therein. Lacuna LLC is also the general
      partner of Lacuna Hedge GP LLLP ("Lacuna Hedge GP"), which is the general
      partner of Lacuna Hedge. Lacuna LLC and Lacuna Hedge GP 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 Lacuna Hedge but disclaim
      beneficial ownership except to their pecuniary interest therein.

(4)   Includes 23,901,619 shares held by Ellerphund Ventures II, L.P.
      ("Ellerphund Ventures") and 14,642,856 shares held by Ellerphund IOPM,
      L.P. ("Ellerphund IOPM"). Ellerphund Capital II, LLC ("Ellerphund
      Capital") is the sole general partner of Ellerphund Ventures. Ellerphund
      Capital III, LLC ("Ellerphund III") is the sole general partners of
      Ellerphund IOPM. Marc Eller and Ryan Eller (each an "Eller Person" and,
      together, the "Eller Persons") are the sole managers of each of Ellerphund
      Capital and Ellerphund III. Ellerphund Capital and Ellerphund Ventures 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. Ellerphund Ventures disclaims beneficial ownership of the shares
      held by any Eller Person other than Ellerphund Ventures and Ellerphund
      Capital. Ellerphund IOPM and Ellerphund III 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 IOPM. Ellerphund IOPM
      disclaims beneficial ownership of the shares held by any Eller Person
      other than Ellerphund IOPM and Ellerphund III. The Eller Persons may be
      deemed to have shared power to vote or direct the vote or, and to dispose
      or direct the disposition of, the shares held by Ellerphund Ventures and
      Ellerphund IOPM. The Eller Persons disclaim beneficial ownership of the
      shares held by any Eller Person other than himself, except to the extent
      of his pecuniary interest therein.

(5)   Includes 500,000 shares held by Tomovation GmbH ("Tomovation"). Mr. Friebe
      may be deemed to have the shared power to vote or direct the vote of, and
      the shared power to dispose or direct the disposition of, the shares held
      by Tomovation and, therefore, Mr. Friebe may be deemed to be the
      beneficial owner of such shares. Mr. Friebe disclaims beneficial ownership
      of the shares held by Tomovation except to the extent of his pecuniary
      interest therein. Also includes 523,145 shares Mr. Friebe has the right to
      acquire within 60 days of December 1, 2008 through the exercise of vested
      options.

(6)   Includes 97,600 shares held by Keith A. Jacobsen and Susan P. Jacobsen,
      trustees for the Keith A. Jacobsen and Susan P. Jacobsen Trust. Also
      includes 443,432 shares Mr. Jacobsen has the right to acquire within 60
      days of December 1, 2008 through the exercise of vested options. Mr.
      Jacobsen's address is 7 Rustic Way, Orinda, CA 94563.

(7)   Includes 3,262,145 shares held by Oliver Janssen and Caitlin M. Long. Also
      includes 9,530,732 shares Hultquist Capital LLC ("Hultquist") has the
      right to acquire from us within 60 days of December 1, 2008 through the
      exercise of outstanding warrants. Mr. Janssen is a member and managing
      director of Hultquist and 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 Hultquist. Mr. Janssen disclaims beneficial ownership of
      the shares held by Hultquist except to the extent of his pecuniary
      interest therein. Also includes 84,722 shares Mr. Janssen has the right to
      acquire within 60 days of December 1, 2008 through the exercise of vested
      options. Mr. Janssen's address is One Embarcadero Center, Suite 1140, San
      Francisco, CA 94111.

(8)   Includes 363,719 shares Mr. Kessler has the right to acquire within 60
      days of December 1, 2008 through the exercise of vested options. Mr.
      Kessler's address is 115 E. 87th Street, Apartment 25F, New York, NY
      10128.

(9)   Includes 27,557,006 shares held by VMG Holdings II, LLC. Also includes
      84,722 shares Mr. Koonsman has the right to acquire within 60 days of
      December 1, 2008 through the exercise of vested options.

(10)  Includes 84,722 shares Mr. Ralls has the right to acquire within 60 days
      of December 1, 2008 through the exercise of vested options. Mr. Ralls's
      address is 1100 Spruce Street, Suite 202, Boulder, CO 80302.

(11)  Includes 199,700 shares Mr. Belford has the right to acquire within 60
      days of December 1, 2008 through the exercise of vested options.

(12)  Includes 7,768,166 shares held by Donald A. Goer and Henci L. Goer 1989
      Family Trust, of which Mr. Goer and Ms. Goer and trustees, and includes
      200,425 shares held by Sarah Goer and 205,000 shares held by Evan Goer.
      Also includes 1,370,820 shares Mr. Goer has the right to acquire within 60
      days of December 1, 2008 through the exercise of vested options.

(13)  Includes 416,667 shares Mr. Jones has the right to acquire within 60 days
      of December 1, 2008 through the exercise of vested options.

(14)  Includes 5,728,125 shares Mr. Powers has the right to acquire within 60
      days of December 1, 2008 through the exercise of vested options.

(15)  Includes 500,000 shares held by The Wilder Solovei Revocable Trust. Also
      includes 1,318,608 shares Mr. Solovei has the right to acquire within 60
      days of December 1, 2008 through the exercise of vested options, and
      12,500 shares Mr. Solovei has the right to acquire from IntraOp within 60
      days of December 1, 2008 pursuant to the exercise of outstanding warrants.

(16)  Includes 3,728,750 shares held by The Mestman Family Trust. Also includes
      151,785 shares that Mr. Mestman has the right to acquire from IntraOp
      within 60 days of December 1, 2008 pursuant to the exercise of outstanding
      warrants.

(17)  Includes shares, options and warrants described in the notes above, as
      applicable, and held by IntraOp's directors and executive officers.
      Includes an aggregate of 11,068,382 shares subject to vesting conditions
      of unexercised stock options held by IntraOp's directors and executive
      officers that vest on or prior to January 30, 2009.

                                       43
<PAGE>



                      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, 2008:

<TABLE>
<CAPTION>
<S>                                                                     <C>                    <C>

                                                                                                Number of securities
                                                                                                 remaining available
                                                    Number of                                    for future issuance
                                                 securities to be       Weighted-average            under equity
                                                   issued upon           exercise price          compensation plans
                                                   exercise of           of outstanding         (excluding securities
                                                   outstanding               options                reflected in
                                                     options                                         column (a))
                                                       (a)                     (b)                       (c)
                                                -------------------     ------------------     ------------------------
Equity compensation plans                           30,844,099                $0.17                  14,515,565
approved by security holders

Equity compensation plans not                           0                      $0                         0
approved by security holders
                                                -------------------     ------------------     ------------------------
Total:                                              30,844,099                $0.17                  14,515,565

</TABLE>


         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. Further, at the Company's annual meeting of stockholders on
April 23, 2008, stockholders approved an amendment to the Plan to increase the
number of shares of common stock reserved for issuance under the Plan by an
additional 20,000,000 shares for a total of 45,359,664 shares.



                  (Remainder of page intentionally left blank)


                                       44
<PAGE>



Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.

         During the two fiscal years ended September 30, 2007 and September 30,
2008 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):

         Between January and March 2007, Dr. Goer made loans to the Company in
the amount of $233,571. The notes that we issued evidencing such loans had an
interest rate of between 8% and 9% per annum and in connection therewith we also
issued to Dr. Goer warrants to purchase 192,682 shares of our common stock at an
exercise price of $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. The warrants to purchase all of those
6,669,932 shares of common stock were exercised in October 2007. During the two
fiscal years ended September 30, 2007 and September 30, 2008, we repaid $130,000
of principal and accrued interest on promissory notes held by Dr. Goer. In
December 2007, Dr. Goer also forgave $52,517 of principal and $1,483 of interest
in lieu of paying the cash exercise price of $0.18 per share on options to
purchase 300,000 shares of our common stock. As of September 30, 2008,
promissory notes in the principal amount of $119,002, plus accrued interest
thereon, remained outstanding and payable to Dr. Goer. Those notes bear interest
at 9% per annum.

         During January 2007 and April 2007, Scott Mestman, our former Vice
President, Worldwide Sales and Marketing, made unsecured loans to us in the
aggregate principal amount of $275,000. The notes that we issued evidencing such
loans had an interest rate of between 8% and 10% per annum and in connection
therewith we also issued to Mr. Mestman warrants to purchase 26,785 shares of
our common stock at an exercise price of $0.28 per share and warrants to
purchase 125,000 shares of our common stock at an exercise price of $0.40 per
share. In August 2007, the exercise price of the foregoing warrants was
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 the notes described above, plus $4,300 of payables
owed to him into warrants to purchase 3,491,250 shares of our common stock with
an exercise price of $0.00 per share. The warrants to purchase all of those
3,491,250 shares of common stock were exercised in October 2007.

         In January 2007, a firm controlled by Dr. Friebe, one of our directors,
made unsecured loans to us in the aggregate principal amount of $20,000. The
notes that we issued evidencing such loans had an interest rate of 8% and in
connection therewith we also issued to such firm warrants to purchase 21,428
shares of our common stock at an exercise price of $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 caused the conversion of 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 warrants to purchase
500,000 shares of our common stock with an exercise price of $0.00 per share.
The warrants to purchase all of those 500,000 shares of common stock were
exercised in October 2007. As of September 30, 2007, no amounts remained
outstanding under the notes issued to the firm controlled by Dr. Friebe. We also
paid $169,432 of fees to two overseas firms controlled by Dr. Friebe for sales
and marketing consulting in Europe. In December 2007, Dr. Friebe purchased
10,000 shares of our common stock at an exercise price of $0.09 per share.

         In August 2007, as part of the August 2007 Agreements, Oliver Janssen,
our Chairman, paid $151,094 to purchase 1,564,675 shares of our common stock and
warrants to purchase 4,957,777 shares of our common stock with an exercise price
of $0.00 per share. The warrants to purchase all of those 4,957,777 shares of
common stock were exercised in October 2007. In October 2007, also as part of
the August 2007 Agreements, Mr. Janssen purchased 611,331 shares of our common
stock for $48,906 . 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 warrants to purchase 9,530,732
shares of our common stock with an exercise price of $0.08 per share to
Hultquist and we reimbursed those new investors $75,547 of consulting fees owed
to them by Hultquist.

         In August 2007, as part of the August 2007 Agreements, entities
affiliated with Rawleigh Ralls, a director, and J.K. Hullett and Winfield Jones,
two of our executive officers, paid $2,704,574 for 28,007,674 shares of our
common stock and warrants to purchase 88,744,200 shares of our common stock with
an exercise price of $0.00 per share. All of these warrants were exercised in
October 2007. In October 2007, also as part of the August 2007 Agreements,
entities affiliated with Mr. Ralls, Mr. Hullett and Mr. Jones paid $875,426 for
10,942,818 shares of our common stock. In June 2008, entities affiliated with
Mr. Ralls, Mr. Hullett and Mr. Jones paid $500,000 for 6,666,667 shares of our
common stock. In September 2008, entities affiliated with Mr. Ralls, Mr. Hullett
and Mr. Jones were further issued 1,025,641 additional shares for $0.00 as part
of consideration for certain amendments to June 2008 sale agreements. Also in
September 2008, entities affiliated with Mr. Ralls, Mr. Hullett and Mr. Jones
guaranteed payment on $1 million in secured notes payable by the Company to ABS
SOS-Plus Partners Ltd and Regenmacher Holding Ltd., which notes matured
September 30, 2008 and the obligations thereunder paid in October 2008.

                                       45
<PAGE>

         Subsequent to closing our fiscal year as of September 30, 2008, the
Company entered into a 10% senior secured debenture agreement with entities
affiliated with Mr. Ralls, Mr. Hullett and Mr. Jones, an entity controlled by
Oliver Janssen and EU Capital to borrow up to $2 million. The proceeds from the
issued by the Company pursuant to the 10% senior secured debenture agreement
were used to the pay the notes payable to ABS SOS-Plus Partners Ltd and
Regenmacher Holding Ltd and for general working capital purposes. The note
issued by the Company pursuant to the 10% senior secured debenture agreement
matures December 31, 2008 and is collateralized by a portion of the assets of
the Company.

         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 warrants to purchase 13,881,775 shares of our common stock with an
exercise price of $0.00 per share. All of these warrants were exercised in
October 2007. In October 2007, as part of the August 2007 Agreements, firms
controlled by Mr. Koonsman paid $136,938 for 1,711,726 shares of our common
stock. In June 2008, entities controlled by Mr. Koonsman paid $400,000 for
5,333,333 shares of our common stock. In September 2008, entities controlled by
Mr. Koonsman were further issued 820,513 additional shares for $0.00 as part of
consideration for certain amendments to June 2008 sale agreements.

         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 and Rawleigh Ralls. Mr.
Powers is not considered independent because of his current employment as the
chief executive officer of the Company. Mr. Ralls is not considered independent
because of his affiliation with the Company's largest shareholder.

         Rawleigh Ralls, a member of our Audit Committee, is not independent for
purposes of his service on the audit committee.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

(1) Audit Fees. The aggregate fees billed to us for the years ended September
30, 2008 and September 30, 2007 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-QSB's were $55,000 and $55,000,
respectively.

(2) Audit-Related Fees. There were no fees billed to us for the years ended
September 30, 2008 and September 30, 2007 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,
2008 and September 30, 2007 for professional services rendered by our principal
accountant for tax compliance, tax advice, and tax planning were $21,270 and
$8,277, respectively.

(4) All Other Fees. There were no other fees billed to us for the years ended
September 30, 2008 and September 30, 2007 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, 2008 were
attributed to work performed by our principal accountant's full-time, permanent
employees.

Item 15.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES


         The following documents are filed as part of this report:

          1.    Financial Statements: Reference is made to the Intraop Medical
                Corporation Index to Consolidated Financial Statements appearing
                on page F-1 of this report.

          2.    Financial Statement Schedules have been omitted since they are
                either not required, not applicable, or the information is
                otherwise included.

          3.    Exhibits:

                                       46
<PAGE>

                   Number                                            Description
                   ------                                            -----------
<TABLE>
<CAPTION>
<S>     <C>                   <C>

                2.1            Agreement and Plan of Reorganization dated February 24, 2004, by and between the
                               Company 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 between the Company 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 Company 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 Company 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 Company 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)

                4.6            Registration Rights Agreement dated as of August 31, 2005, by and among the Company,
                               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 Company and
                               Dolphin Offshore Partners (10)

                4.11           Form of 7% Convertible Debenture (11)

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

                4.13           Form of 8% Debenture (22)
                4.14           Registration Rights Agreement dated as of January 10, 2007 by and between the Company

                               and the Purchasers named therein (25)

                4.15           Form of Common Stock Purchase Warrant (22)

                4.16           Form of Warrant to Purchase Common Stock (24)

                4.17           Warrant to Purchase Common Stock issued to Emerging Markets Consulting, LLC (24)
</TABLE>

                                       47
<PAGE>
<TABLE>
<CAPTION>
<S>                           <C>

                4.18           Warrant to Purchase Common Stock issued to Eckert & Ziegler Strahlen-und Medizintechnik
                               AG (25)

                4.19           Warrant to Purchase Common Stock issued to DLA Piper US LLP (25)

                4.20           Form of warrant issued to investors (27)

                4.21           Form of warrant issued to financial advisors (27)

                4.22           Form of 10% Senior Secured Debenture due December 31, 2008 (35)

                4.23           Reference is made to Exhibits 3.1 and 3.2

                10.1           Inventory/Factoring Agreement, dated as of August 16, 2005, by and among the Company,
                               E.U. Capital Venture, Inc., and E.U.C. Holding (12)

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

                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 Company, 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 Company and Stonegate
                               Securities, Inc. (9)

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

                10.9           Securities Purchase Agreement dated as of October 25, 2005 by and among the Company and
                               the purchasers identified on the signature pages thereto (11)

                10.12          Amendment to Registration Rights Agreement dated January 25, 2006 by and between the
                               Company and the parties named therein (13)

                10.13          Agreement dated as of January 25, 2006 by and among the Company, Regenmacher Holdings,
                               Ltd. and ABS SOS-Plus Partners, Ltd. (13)

                10.14          Agreement executed April 7, 2006 by and between the Company and Emerging Markets
                               Consulting, LLC (14)

                10.15          Amended and Restated Inventory and Receivables Purchase Agreement dated as of April 10,
                               2006 by and between the Company and E.U. Capital Venture, Inc. and E.U.C. Holding (15)

                10.16          Second Amendment to Registration Rights Agreement dated as of March 31, 2006 by and
                               among the Company and the other parties named therein (16)

                10.17          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. (17)
</TABLE>

                                       48
<PAGE>

<TABLE>
<CAPTION>
<S>                           <C>

                10.18          Promissory Note dated July 14, 2006 in the aggregate principal amount of $25,000 issued
                               by the Company to Bushido Capital Master Fund, L.P. (18)

                10.19          Promissory Note dated July 17, 2006 in the aggregate principal amount of $50,000 issued
                               by the Company to Donald A. Goer (18)

                10.20          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
                               Company, E.U. Capital Venture, Inc. and E.U.C. Holding (19)

                10.21          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 Company, E.U. Capital Venture, Inc. and E.U.C. Holding (20)

                10.22          Inventory Purchase Agreement dated October 3, 2006 by and between the Company and 4M,
                               Inc. (21)

                10.23          Securities Purchase Agreement dated as of January 10, 2007 by and among the Company and
                               the Purchasers named therein (22)

                10.24          First Amendment to Inventory Purchase Agreement dated as of March 14, 2007 by and
                               between the Company and 4M, Inc. (23)

                10.25          Unsecured Promissory Note dated March 15, 2007 by and between the Company and 4M, Inc.
                               (23)

                10.26          Form of Unsecured Promissory Note (24)

                10.27          Agreement dated as of April 1, 2007 by and between the Company and Emerging Markets
                               Consulting, LLC (24)

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

                10.29          Final Settlement Agreement and Mutual Release dated as of  July 2, 2007 by and between
                               the Company and DLA Piper Rudnick Gray Cary USLLP (25)

                10.30          Employment Agreement dated October 1, 1993 by and between the Company and Donald A.
                               Goer (26) (+)

                10.31          Common Stock and Warrant Purchase Agreement dated as of August 17, 2007 by and among
                               the Company and the other parties named therein (27)

                10.32          Officer and Director Warrant Purchase Agreement dated as of August 17, 2007 by and
                               among the Company and the other parties named therein (27) (+)

                10.33          Debenture Conversion and Purchase and Warrant Cancellation Agreement dated as of August
                               17, 2007 by and among the Company and the other parties named therein (27)

                10.34          January Bridge Note Conversion and Warrant Purchase Agreement dated as of August 17,
                               2007 by and among the Company and the other parties named therein (27)

                10.35          Company Warrant Repricing Agreement dated as of August 17, 2007 by and among the
                               Company and the other parties named therein (27)
</TABLE>

                                       50
<PAGE>
<TABLE>
<CAPTION>
<S>                           <C>

                10.36          Insider Indebtedness Conversion Agreement dated as of August 17, 2007 by and among the
                               Company and the other parties named therein (27)

                10.37          Amendment and Waiver Agreement dated as of August 17, 2007 by and among the Company and
                               the other parties named therein (27)

                10.38          Rights Agreement dated as of August 17, 2007 by and among the Company and the other
                               parties named therein (27)

                10.39          Form of Indemnification Agreement (27) (+)

                10.40          2005 Equity Incentive Plan, as amended  (*)(+)

                10.41          Amendment to Rights Agreement dated August 27, 2007 by and among the Company and the
                               other parties named therein (28)

                10.42          Employment Agreement dated November 19, 2007 between the Company and John Powers (29)
                               (+)

                10.43          Common Stock Purchase Agreement dated as of January 31, 2008 by and among the Company
                               and the investors named therein (30)

                10.44          Common Stock Purchase Agreement dated as of June 10, 2008 by and among the Company and
                               the investors named therein (31)

                10.45          Amendment to 10% Senior Secured  Debenture dated as of August 29, 2008 by and between
                               the Company and ABS-SOS Plus Partners Ltd. and Regenmacher Holdings, Ltd. (32)

                10.46          Guaranty dated August 29, 2008 executed by Lacuna  Hedge Fund LLLP (32)

                10.47          Debenture Purchase Agreement dated as of October 3, 2008 by and between the Company and
                               E.U. Capital Venture, Inc., Encyclopedia Equipment LLC and Lacuna Venture Fund LLLP (33)

                10.48          Security Agreement dated as of October 3, 2008 by and between the Company and E.U.
                               Capital Venture, Inc., Encyclopedia Equipment LLC and Lacuna Venture Fund LLLP (33)

                10.49          Separation Agreement dated as of October 31, 2008 by and between the Company and Howard
                               Solovei (*)(+)

                10.50          Settlement Agreement dated as of November 5, 2008 by and between the Company and C.D.S.
                               Engineering, LLC (*)

                10.51          Separation Agreement dated as of July 2, 2008 by and between the Company and Scott
                               Mestman (*)(+)

                14.1           Code of Ethics (*)

                23.1           Consent of Auditor (*)

                24.1           Power of Attorney (included on signature page hereto) (*)

                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 J.K. Hullett, Principal Financial Officer (*)

                32.1           Section 1350 Certification of John Powers, Principal Executive Officer (*)
</TABLE>

                                       50
<PAGE>
<TABLE>
<CAPTION>
<S>                           <C>

                32.2           Section 1350 Certification of J.K. Hullett, Principal Financial Officer (*)



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

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

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

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

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

                (6)            Previously filed as an exhibit to the Company'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
                               Company's definitive Information Statement filed on February 11, 2005.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                (26)           Previously filed as an exhibit to the Company's Form 10-QSB filed on August 17, 2007.
</TABLE>
                                       51
<PAGE>

<TABLE>
<CAPTION>
<S>                            <C>
                (27)           Previously filed as an exhibit to the Company's Form 8-K Report filed on August 23,
                               2007.

                (28)           Previously filed as an exhibit to the Company's Form 8-K Report filed on October 30,
                               2007.

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

                (30)           Previously filed as an exhibit to the Company's Form 8-K Report filed on February 20,
                               2008.

                (31)           Previously filed as an exhibit to the Company's Form 8-K Report filed on June 12, 2008.

                (32)           Previously filed as an exhibit to the Company's Form 8-K Report filed on September 8,
                               2008.

                (33)           Previously filed as an exhibit to the Company's Form 8-K Report filed on October 8,
                               2008.

                (*)            Filed herewith.

                (+)            Indicates management contract or compensatory
                               plan or arrangement required to be filed as an
                               exhibit pursuant to Item 15(b) of Form 10-K.
</TABLE>


                                       52
<PAGE>



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          Intraop Medical Corporation

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

              KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose
signature appears below constitutes and appoints John Powers and J.K. Hullett,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done therewith, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, and any of
them or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
<S>                                                   <C>                                         <C>

Signature                                              Title                                       Date

/s/ Oliver Janssen                                     Chairman                                    December 22, 2008
--------------------------------------------------
Oliver Janssen


/s/ John Powers
--------------------------------------------------
John Powers                                            President, Chief Executive Officer, and     December 22, 2008
                                                       Director (Principal Executive Officer)


/s/ J.K. Hullett                                       Chief Financial Officer and Secretary       December 22, 2008
--------------------------------------------------
J.K. Hullett                                           (Principal Financial Officer and
                                                       Principal Accounting Officer)


/s/ Keith Jacobsen                                     Director                                    December 22, 2008
--------------------------------------------------
Keith Jacobsen

/s/ Michael Friebe                                     Director                                    December 22, 2008
--------------------------------------------------
Michael Friebe

/s/ Stephen L. Kessler                                 Director                                    December 22, 2008
--------------------------------------------------
Stephen L. Kessler

/s/ Greg Koonsman                                      Director                                    December 22, 2008
--------------------------------------------------
Greg Koonsman

/s/ Rawleigh Ralls                                     Director                                    December 22, 2008
--------------------------------------------------
Rawleigh Ralls
</TABLE>

                                       53


                          Intraop Medical Corporation
                   Index to Consolidated Financial Statements
                      For the Year Ended September 30, 2008

<TABLE>
<CAPTION>
<S>                                                                                                     <C>
Report of Independent Registered Public Accounting Firm for Year Ended September 30, 2008                F-2
Consolidated Balance Sheet as of September 30, 2008                                                      F-3
Consolidated Statements of Operations for the Years Ended September 30, 2008 and September
30, 2007                                                                                                 F-4
Consolidated Statement of Stockholder's Deficit for the Years Ended September 30, 2008 and
September 30, 2007                                                                                       F-6
Consolidated Statements of Cash Flows for the Years Ended September 30, 2008 and September
30, 2007                                                                                                 F-8
Notes to Consolidated Financial Statements                                                               F-10
</TABLE>

                                      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, 2008, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for the fiscal years ending September 30, 2008 and 2007. 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, 2008, and the consolidated results of
its operations and its cash flows for the fiscal years ending September 30, 2008
and 2007 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, 2008, had an
accumulated deficit of $42,681,085. 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 19, 2008

                                      F-2
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                                   <C>
Intraop Medical Corporation
Consolidated Balance Sheet
----------------------------------------------------------------------------------------------------------------------------
                                                                                                            September 30,
                                                                                                                2008
                                                                                                       ---------------------
ASSETS
Current assets:
  Cash and cash equivalents                                                                               $         282,516
  Accounts receivable                                                                                               245,819
  Inventories, net                                                                                                1,018,257
  Inventories, under product financing arrangement                                                                3,849,339
  Prepaid expenses and other current assets                                                                          14,473
                                                                                                       ---------------------

         Total current assets                                                                                     5,410,404

Property and equipment, net                                                                                         190,070
Intangible assets, net                                                                                              257,167
Deposits                                                                                                             93,084
                                                                                                       ---------------------
                                                                                                          $       5,950,725
        Total Assets
                                                                                                       =====================

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

         Total current liabilities
                                                                                                                  8,198,725

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

         Total liabilities
                                                                                                                  8,201,671
                                                                                                       ---------------------

Commitments and contingencies (see note 11)

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

          Total stockholders' deficit                                                                            (2,250,946)
                                                                                                       ---------------------

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

The accompanying notes form an integral part of these consolidated financialstatements.
</TABLE>
                                      F-3
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                               <C>                     <C>
Intraop Medical Corporation
Consolidated Statements of Operations
----------------------------------------------------------------------------------------------------------------------------
                                                                                          Year ended September 30,

                                                                                  ------------------------------------------
                                                                                        2008                    2007
                                                                                  -----------------       ------------------

Revenues:
  Product sales                                                                      $   6,947,582            $   3,529,233
  Service                                                                                  398,363                  418,424
                                                                                  -----------------       ------------------

  Total revenues                                                                         7,345,945                3,947,657
                                                                                  -----------------       ------------------

Cost of revenues:
  Product sales                                                                          5,706,842                2,719,585
  Service                                                                                  251,027                  196,682
                                                                                  -----------------       ------------------

  Total cost of revenues                                                                 5,957,869                2,916,267
                                                                                  -----------------       ------------------

Gross margin                                                                             1,388,076                1,031,390
                                                                                  -----------------       ------------------

Operating expenses:
  Research and development                                                               1,625,880                  661,678
  General and administrative                                                             2,810,840                2,239,365
  Sales and marketing                                                                    4,445,968                1,808,445
                                                                                  -----------------       ------------------

          Total operating expenses                                                       8,882,688                4,709,488
                                                                                  -----------------       ------------------

Loss from operations                                                                    (7,494,612)              (3,678,098)

Other income / (expense)                                                                    364,620                (187,096)
Gain on extinguishment of debt                                                              28,000                5,637,355
Interest income                                                                                 20                       29
Interest expense                                                                        (1,505,679)              (7,798,930)
                                                                                  -----------------       ------------------

Loss before taxes                                                                       (8,607,651)              (6,026,740)

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

Net loss                                                                             $  (8,639,427)           $  (6,026,740)
                                                                                  =================       ==================

Basic and diluted net loss per share
   available to common stockholders                                                  $       (0.03)           $       (0.18)
                                                                                  =================       ==================
Weighted average number of shares in calculating net loss per share:
  Basic and diluted                                                                    342,421,673               34,234,044
                                                                                  =================       ==================
The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>

<TABLE>
<CAPTION>
<S>                                   <C>        <C>       <C>         <C>      <C>          <C>           <C>             <C>
                                                           Additional            Obligation
                                         Common Stock       Paid-In    Treasury   to issue      Stock      Accumulated
                                       Shares     Amount    Capital     Stock      Stock     Subscription    Deficit       Total
                                     -----------------------------------------------------------------------------------------------

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)
Stock based compensation                       -        -   2,383,888         -           -            -             -    2,383,888
Conversion of notes and debt into
 common stock                            310,000      310      54,590         -           -            -             -       54,900
Conversion of obligations into
 common stock                        212,653,059  212,653   5,027,115         -  (5,239,768)           -             -            -
Sale of common stock                  89,910,517   89,911   5,087,314         -           -    1,150,071             -    6,327,296
Other                                          -        -          99         -           -            -             -           99
Warrants issued for consulting
 services                                      -        -       9,424         -           -            -             -        9,424
Net loss                                       -        -           -         -           -            -    (8,639,427)  (8,639,427)
                                     -----------------------------------------------------------------------------------------------

Balance at September 30, 2008        392,787,597  392,788  40,187,351  (150,000)          -            -   (42,681,085)  (2,250,946


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

                                      F-5
<PAGE>

Intraop Medical Corporation
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
                                                      Year ended September 30,
                                                     ---------------------------
                                                         2008          2007
                                                     ------------- -------------
Cash flows from operating activities:
  Net loss                                           $ (8,639,427) $ (6,026,740)
  Adjustments to reconcile net loss to net cash
    used for operating activities:
   Depreciation of property and equipment                  34,344        78,614
   Loss on disposal of fixed assets                        64,682             -
   Amortization of intangible assets                       76,611        73,380
   Amortization of beneficial conversion rights                 -     2,539,226
   Amortization of debt discount                          237,034     2,604,161
   Amortization of debt issuance costs                    212,888       763,542
   Non-cash compensation for options issued             2,383,888        95,053
   Non-cash compensation for warrants issued              (15,976)      340,632
   Non-cash compensation for common stock issued                -        48,000
   Non-cash gain on extinguishment of debt                (28,000)   (5,637,355)
  Changes in assets and liabilities:
     Accounts receivable                                  158,252     3,198,821
     Inventories                                        1,742,400    (3,374,384)
     Prepaid expenses and other current assets             62,446        56,467
     Other assets                                         155,301       122,485
     Accounts payable                                  (1,773,196)      828,872
     Accrued liabilities                                 (265,472)       76,637
     Foreign exchange translation                          22,296        (4,215)
                                                     ------------- -------------

     Net cash used for operating activities            (5,571,929)   (4,216,804)
                                                     ------------- -------------

Cash flows used for investing activities:
  Acquisition of fixed assets                            (107,079)      (24,648)
  Acquisition of intangible assets                        (50,800)            -
                                                     ------------- -------------

     Net cash used for investing activities              (157,879)      (24,648)
                                                     ------------- ------------

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

                                      F-6
<PAGE>




Intraop Medical Corporation
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
<S>                                                                               <C>                     <C>
------------------------------------------------------------------------------------------------------------------------------
                                                                                           Year ended September 30,
                                                                                  --------------------------------------------
                                                                                         2008                     2007
                                                                                  ------------------        ------------------
Cash flows provided by financing activities:
     Proceeds from note payable, related party                                                    -                   653,571
     Proceeds from note payable, other                                                    5,747,915                12,168,214
     Payments on note payable, related party                                                (37,828)                  (58,610)
       Payments on note payable, other                                                   (6,588,921)              (12,609,680)
       Debt issuance costs                                                                        -                   (85,000)
       Proceeds from sale of warrants & common stock, net of fees                         1,150,071                 4,561,450
       Proceeds from issuance of common stock                                             5,202,723                         -
                                                                                  ------------------        ------------------

         Net cash provided by financing activities                                        5,473,960                 4,629,945
                                                                                  ------------------        ------------------

     Net increase (decrease) in cash and cash equivalents                                  (255,848)                  388,493
     Cash and cash equivalents, at beginning of period                                      538,364                   149,871
                                                                                  ------------------        ------------------

     Cash and cash equivalents, at end of period                                         $  282,516               $   538,364
                                                                                  ==================        ==================

Supplemental disclosure of cash flow information:
     Cash paid for interest                                                              $  989,014               $ 1,427,734
                                                                                  ==================        ==================
     Income taxes paid                                                                   $   31,776                   $ 2,100
                                                                                  ==================        ==================

Supplemental disclosure of non-cash investing
   and financing activities:
       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                                                  $   54,900               $ 5,740,550
                                                                                  ==================        ==================
     Accrued liabilities converted to notes payable                                      $  150,000                         -
                                                                                  ==================        ==================
</TABLE>

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

                                      F-7
<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. The Company's business is the development,
manufacturing, marketing, and service of mobile electron beam treatment systems
designed for Intraoperative electron-beam radiotherapy ("IOERT"). IOERT is the
application of radiation directly to a cancerous tumor and/or tumor bed during
surgery.


Basis of Consolidation:

For the years ended September 30, 2008 and 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 $8,639,427 and $6,026,740 for the years
ended September 30, 2008 and 2007, respectively. In addition, the Company has
incurred substantial monetary liabilities in excess of monetary assets over the
past several years and, as of September 30, 2008, has an accumulated deficit of
$42,681,085. 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.

     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, 2008, the Company obtained capital through the sale of
common stock of approximately $6,352,794. During 2008, the Company was able to
convert $85,789 of debt into equity and to extinguish $28,000 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.

                                      F-8
<PAGE>

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

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, 2008, the Company maintains its cash and cash equivalents
with a major bank.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivables 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.

Inventories:

Inventories are stated at the lower of cost or market value. Cost is determined
by the first-in, first-out basis and market being determined as the lower of
replacement cost or 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.

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


                                      F-9
<PAGE>

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

Concentration of Credit Risk:

The Company maintains its cash in bank accounts, which at times may exceed
federally insured limits. The Company has not experienced any losses on such
accounts.

Credit risk with respect to account receivables is concentrated due to the
limited number of transactions recorded in any particular period. Two customers
represent 34.5% and 6.0% of accounts receivable at September 30, 2008. The
Company reviews the credit quality of its customers but does not require
collateral or other security to support customer receivables. Six customers
accounted for 15.2%, 12.3%, 13.2%, 9.5%, 17.5% and 14.7% of net revenue for the
year ended September 30, 2008. Three customers accounted for 35.8%, 24.8%, and
21.8%, of net revenue for the year ended September 30, 2007.

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.

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.

                                      F-10
<PAGE>

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

Revenue Recognition:

Revenue is recognized when earned in accordance with applicable accounting
standards, including Staff Accounting Bulletins 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 five customers during the year ended September 30,
2008 and six customers during the year ended September 30, 2007. Under these
agreements, customers agree to a one-year service contract for which they
receive warranty-level labor and either full coverage or a credit for a certain
contracted dollar amount for service-related parts. On contracts with credit for
service-related parts, the Company recorded a liability for parts equal to the
amount of the parts credit contracted for by the customer with the remainder of
the contract price recorded as labor related service contract liability. On full
coverage contract, the Company recorded the contract price as service contract
liability.

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, 2008 and
2007 were $1,625,880 and $661,678, respectively.

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.

                                      F-11
<PAGE>

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

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, 2008 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.


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 carryforwards. 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 carryforwards. A valuation allowance is established to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized. The Company has recorded a full valuation allowance
against its deferred tax assets.

                                      F-12
<PAGE>

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


Advertising Costs:

Advertising and sales promotion costs are expensed as incurred. Advertising
expense totaled $715,964 for and $326,422, respectively, for the years September
30, 2008 and 2007.

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,
2007, 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:
<TABLE>
<CAPTION>
<S>                                                                    <C>                 <C>
                                                                            Year ended September 30,
                                                                       ------------------------------------
                                                                             2008                2007
                                                                       -----------------    ---------------

        Numerator                                                       $    (8,639,427)      $ (6,026,740)
        Net loss available to common stockholders

        Denominator                                                         342,421,673         34,234,044
        Weighted average common shares outstanding
                                                                       -----------------    ---------------

        Total shares, basic and diluted                                     342,421,673         34,234,044
                                                                       =================    ===============
        Net loss per common share:
          Basic and diluted                                             $         (0.03)     $       (0.18)
                                                                       =================    ===============
</TABLE>

The potential dilutive shares, which are excluded from the determination of
basic and diluted net loss per share as their effect is anti-dilutive, are as
follows:
<TABLE>
<CAPTION>
<S>                                                                   <C>                <C>
                                                                            Year ended September 30,
                                                                            2008               2007
                                                                      ---------------    ----------------

       Obligation to issue common stock                                            -             623,278
       Options to purchase common stock                                   30,844,099           1,840,500
       Warrants to purchase common stock                                  16,292,333         228,376,214
                                                                      ---------------    ----------------

       Potential equivalent shares excluded                               47,136,432         230,839,992
                                                                      ===============    ================
</TABLE>

                                      F-13
<PAGE>

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

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:

The Company follows 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 and SAB 110 in its
adoption of SFAS 123(R). See Note 8 for a detailed discussion of SFAS 123(R).

Accounting for Convertible Debt and Senior Securities:

During the years ended September 30, 2005 and 2007 the Company had 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.

As a result of the August 2007 Agreements (see note 6), 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.

                                      F-14
<PAGE>

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

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, 2008 and 2007, comprehensive
loss is equivalent to the Company's reported net loss. Accordingly, a statement
of comprehensive loss is not presented.

Segment:

The Company operates in a single business segment that includes the design,
development, and manufacture of the Mobetron. The Company does 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, 2007 to conform to the presentation
of the consolidated financial statements for the year ended September 30, 2008.
There was no effect on previously reported net loss.

Recent Accounting Pronouncements:

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

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

                                      F-15
<PAGE>

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

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

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


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

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



NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Two customers represent 34.5% and 6.0% of accounts receivable at September 30,
2008. Six customers accounted for 15.2%, 12.3%, 13.2%, 19.5%, 17.5% and 14.7% of
net revenue for the year ended September 30, 2008. Three customers accounted for
35.8%, 24.8%, 21.8%, of net revenue for the year ended September 30, 2007.

Three suppliers represented 35.2%, 5.1% and 5.1% of accounts payable at
September 30, 2008. Purchases from these suppliers during the year ended
September 30, 2008 totaled approximately zero, $428,911 and $78,758
respectively. Purchases from these same suppliers during the year ended
September 30, 2007 totaled approximately zero, $346,229 and $81,317.

                                      F-16
<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:
<TABLE>
<CAPTION>
<S>                                                                               <C>
                                                                                       September 30,
                                                                                           2008
                                                                                   -------------------

       Finished goods                                                                  $           -
       Work-in-progress                                                                       515,821
       Purchased parts and raw material, net of reserves of                                   502,436
       $25,833
                                                                                   -------------------

                                                                                       $    1,018,257
                                                                                   ===================

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:

                                                                                       September 30,
                                                                                           2008
                                                                                    ------------------

        Finished goods                                                                 $      649,584
        Work-in-progress                                                                    3,148,780
        Purchased parts and raw material                                                       50,975
                                                                                    ------------------

                                                                                       $     3,849,339
                                                                                    ==================
</TABLE>

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:
<TABLE>
<CAPTION>
<S>                                                                                 <C>
                                                                                       September 30,
                                                                                           2008
                                                                                    ------------------

         Property & equipment                                                              $  278,184
         Computer equipment                                                                   133,365
         Furniture & fixtures                                                                  67,808
         Leasehold improvements                                                                37,420
                                                                                    ------------------
                                                                                              516,777
         Less: accumulated depreciation                                                      (326,707)
                                                                                    ------------------
                                                                                           $  190,070
                                                                                    ==================
</TABLE>

                                      F-17
<PAGE>

NOTE 3 BALANCE SHEET COMPONENTS (CONTINUED)

Included in property and equipment is an asset acquired under capital lease
obligations with an original cost of $11,742 as of September 30, 2008. Related
accumulated depreciation and amortization of this asset was $7,241 as of
September 30, 2008. Depreciation and amortization expense was $2,348 and $2,348
for the years ended September 30, 2008 and 2007.


Intangible Assets:

Intangible Assets consist of the following:
<TABLE>
<CAPTION>
<S>                                                                               <C>
                                                                                      September 30,
                                                                                           2008
                                                                                  --------------------

         Mobetron related manufacturing and design rights and non-
           recurring vendor engineering charges                                         $     393,300

         Less accumulated amortization                                                       (166,133)
                                                                                  --------------------
         Mobetron related manufacturing and design rights and non-                            227,167
           recurring vendor engineering charges, net
         Medical device approval license not subject to amortization                           30,000
                                                                                  --------------------
         Intangible assets, net                                                         $     257,167
                                                                                  ====================
</TABLE>

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.

Amortization expense for intangible assets totaled approximately $76,611 and
$73,380 for the years ended September 30, 2008 and 2007, respectively.
Amortization expense for the next five fiscal years is estimated as follows:

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

                                         2009                   $    78,290
                                         2010                        78,290
                                         2011                        56,457
                                         2012                         9,790
                                         2013                         4,340
                                                            ----------------
                                                                $   227,167
                                                            ================

                                      F-18
<PAGE>



NOTE 3 BALANCE SHEET COMPONENTS (CONTINUED)

Accrued Liabilities:

A summary is as follows:

                                                        September 30,
                                                             2008
                                                     -------------------
Accrued liabilities:
Contract advances                                          $     84,000
Accrued interest payable                                        108,372
Accrued warranty                                                161,947
Deferred revenue                                                162,811
Accrued wages and benefits payable                              184,827
Accrued sales tax payable                                        14,525
                                                     -------------------

                                                          $     716,482
                                                     ===================


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 sheet, at September 30, 2008.

Warranty accrual at September 30, 2007                     $     111,515

Accrual for warranties during the year                           240,000
Actual product warranty expenditures                            (189,568)
                                                        -----------------

Warranty accrual at September 30, 2008                     $     161,947
                                                        =================




                  (Remainder of page intentionally left blank)

                                      F-19
<PAGE>

NOTE 4 - BORROWINGS

Outstanding notes payable were as follows:

<TABLE>
<CAPTION>
<S>                                                                               <C>
                                                                                     September 30,
                                                                                         2008
                                                                                  -------------------

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

        Product financing arrangement                                                 $    4,503,290
        Senior secured debentures                                                          1,000,000
        Other notes                                                                          194,367
                                                                                  -------------------
                                                                                           5,697,657

        Less: debt discounts due to warrants                                                 (47,740)
                                                                                  -------------------
        Notes payable, net of debt discounts                                               5,649,917

        Less: current portion                                                             (5,649,917)
                                                                                  -------------------
        Notes payable, other, net of current portion and unamortized
               debt discounts                                                         $            -
                                                                                  ===================
</TABLE>

Notes payable, related parties:

Notes payable to related parties of $119,002 at September 30, 2008, 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, 2008, the Company repaid $37,828 of
principal under this note. The note holder also converted $52,517 of principal
and $1,483 of interest in lieu of paying the cash exercise price of $0.18 per
share on 300,000 stock options exercised during the year.

Inventory and receivables financing arrangements:

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

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

                                      F-20
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)


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

At September 30, 2008 the outstanding principal balance under the Product
Financing Arrangement was $4,503,290.

Senior secured debentures

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

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

The relative fair value of the warrants was determined using the Black-Scholes
option-pricing model and the fair value of $638,734 attributable to the warrant
was recorded as a note discount and was amortized to interest over a period of
three years. At September 30, 2008 the outstanding principal balance under the
senior secured debentures was $1,000,000 which was due for payment in August
2008. It was mutually agreed to be paid off with the same terms and conditions
in October 2008.

Other notes:

The Company has a note payable to a former director with an outstanding
principal balance of $44,367 at September 30, 2008. This note is due on demand
and bears interest at 9% per annum. During the year ended September 30, 2008,
the Company repaid $32,865 of principal under this note.

Other notes also include a promissory note to the Company's Chinese distributor
with an outstanding principal balance of $150,000 at September 30, 2008. This
note is due on May 1, 2009 and bears interest at 8% per annum.

                                      F-21
<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,
                                                                 2008
                                                          -------------------

Capital lease for equipment                                  $       5,381
Less current portion                                                (2,435)
                                                          -------------------

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


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-22
<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-23
<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-24
<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-25
<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,
                                                                     2008
                                                             -------------------

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

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

At the Company's annual meeting of stockholders on October 15, 2007,
stockholders approved an amendment to the Company's 2005 Equity Incentive Plan
(the "Plan") to increase by 22,062,664 shares the number of shares of common
stock reserved for issuance under the Plan. Further, at the Company's annual
meeting of stockholders on April 23, 2008, stockholders approved an amendment to
the Plan to increase the number of shares of common stock reserved for issuance
under the Plan by an additional 20,000,000 shares.

Treasury Stock:

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

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

In August 2007, the Company entered into a series of agreements more fully
described in Note 6 to the September 30, 2007 financial statements (the "August
2007 Agreements"). In October 2007, parties to the August 2007 Agreements: i)
invested an additional $1,601,687 in cash and forgave $31,789 of Company
accounts payable as consideration for the purchase of an aggregate of 20,418,444
shares of common stock, ii) exercised warrants to purchase 212,029,781 shares of
common stock with an exercise price of $0.00 per share, and iii) exercised
rights to the issuance of an additional 623,278 shares of common stock. As a
direct result of these October 2007 transactions, the Company recorded and
increase to common stock of $233,072, an increase to additional paid-in-capital
of $5,474,026, a reduction of the obligation to issue common stock of $5,239,768
and a reduction in stock subscription of $1,150,071.

Sale of common stock:

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

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

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

In June and September 2008, the Company sold an aggregate of 13,846,154 shares
of its restricted common stock at fair value for $900,000, to certain related
parties.

                                      F-26
<PAGE>

NOTE 7 - COMMON STOCK (CONTINUED)

In August 2008, the Company sold an aggregate of 3,846,153 shares of its
restricted common stock at fair value for $250,000, to certain related parties.

In September 2008, the Company sold an aggregate of 7,692,306 shares of its
restricted common stock at fair value for $500,000, to certain related parties.

Issuance of common stock upon exercise of warrants and options:

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


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, 2008 and 2007
reflect the effect of SFAS 123(R). In accordance with the modified prospective
transition method, the Company's financial statements for prior periods have not
been restated to reflect, and do not include, the impact of SFAS 123(R).
Share-based compensation expense recognized is based on the value of the portion
of share-based payment awards that is ultimately expected to vest. Share-based
compensation expense recognized in the Company's Consolidated Statements of
Operations during the year ended September 30, 2008 included compensation
expense for share-based payment awards granted prior to, but not yet vested, as
of December 31, 2005 based on the grant date fair value estimated in accordance
with the pro forma provisions of SFAS 123 and compensation expense for the
share-based payment awards granted subsequent to December 31, 2005 based on the
grant date fair value estimated in accordance with the provisions of SFAS
123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to
attribute the value of share-based compensation to expense using the
straight-line attribution.

                                      F-27
<PAGE>

NOTE 8 - STOCK OPTIONS (CONTINUED)

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

                                                        Year ended
                                                      September 30,
                                                  2008               2007
                                             ---------------     -------------

   Cost of revenues - Service                 $      50,788        $    2,364
   Research and development                         485,642            17,805
   General and administrative                       484,609            22,848
   Sales and marketing                              992,359            32,691
                                             ---------------     -------------

   Total                                      $   2,013,398        $   75,708
                                             ===============     =============

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


During the years ended September 30, 2008 and 2007, total share-based
compensation expense recognized in earnings before taxes was $2,013,398 and
$75,708 respectively and the total related recognized tax benefit was zero.
Additionally, total share-based compensation expense capitalized as part of
inventories for the years ended September 30, 2008 and 2007 was $335,386 and
$10,946 respectively, and total share-based compensation expense applied to
warranty reserve for the years ended September 30, 2008 and 2007 was $34,646 and
$1,147 respectively.

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

The fair value of options granted under the Plan and the New Plan were estimated
at the date of grant using the Black-Scholes model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
<S>                                                                              <C>
                                                          Year ended              Year ended
                                                         September 30,           September 30,

                                                             2008                    2007
                                                   ---------------------------------------------

Expected term (in years)                                   0.02 to 7              5.4 to 10
Risk-free interest rate                                 2.83% to 4.34%          4.53% to 4.66%
Expected volatility                                      204% to 247%            173% to 178%
Expected dividend yield                                       0%                      0%
Weighted average fair value at grant date                    $0.15                  $0.23
</TABLE>


                                      F-28
<PAGE>

NOTE 8 - STOCK OPTIONS (CONTINUED)

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, 2008 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.


                  (Remainder of page intentionally left blank)

                                      F-29
<PAGE>

NOTE 8 - STOCK OPTIONS (CONTINUED)

Activity under the Plan is presented below:
<TABLE>
<CAPTION>
<S>                                                                       <C>           <C>             <C>
                                                                                          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         1,740,500   $      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    $           -
Granted                                  (31,210,327)       31,210,327          0.17              -
Authorized                                42,062,664                 -             -              -
Cancelled or expired                       1,906,728       (1,906,728)         (0.66)             -
Exercised                                          -         (300,000)          0.18              -
                                     ----------------  ----------------  ------------  ---------------  --------------
Balance at September 30, 2008             14,515,565        30,844,099   $      0.17             9.08   $           -
                                     ----------------  ----------------  ------------  ---------------  --------------
Exercisable at                                               8,335,830   $      0.18             8.66   $           -
  September 30, 2008
                                     ================  ================  ============  ===============  ==============
</TABLE>


 (1) The aggregate intrinsic value represents the total pre-tax intrinsic value,
based on the Company's closing stock price of $0.04 as of September 30, 2008,
which would have been received by the option holders had all option holders
exercised their options as of that date.

As of September 30, 2008 there was approximately $1,618,176 of total
unrecognized compensation expense related to outstanding stock options. This
unrecognized compensation expense is expected to be recognized over a weighted
average period of 2.58 years.

                                      F-30
<PAGE>

NOTE 8 - STOCK OPTIONS (CONTINUED)

Total options under the Plan at September 30, 2008, were as follows:
<TABLE>
<CAPTION>
<S>                                                                <C>
                         Options                  Weighted               Options
                       Outstanding                Average              Exercisable
    Option                as of                  Remaining                as of
   Exercise           September 30,             Contractual           September 30,
    Price                 2008                  Life (Years)               2008
---------------    --------------------       -----------------    --------------------
    $0.080                     648,000              9.48                       248,250
    0.090                    3,520,000              9.68                       343,333
    0.180                   26,645,599              8.99                     7,713,747
    0.800                        8,000              3.47                         8,000
    1.250                       22,500              6.08                        22,500
                   --------------------                            --------------------

    Total                   30,844,099              9.08                     8,335,830
                   ====================                            ====================
</TABLE>

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



NOTE 9 - WARRANTS

The following warrants are each exercisable into one share of common stock:
<TABLE>
<CAPTION>
<S>                                                                  <C>                   <C>
                                                                         Weighted
                                                   Number of              Average              Aggregate
                                                    Shares                 Price                 Price
                                             -------------------     -----------------     ----------------
 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            2,361,127
 Warrants granted                                     1,350,000                  0.07               87,750
 Warrants exercised                                (212,039,781)                    -                (900)
 Warrants cancelled                                  (1,350,000)                (0.08)           (108,000)
 Warrants expired                                       (44,100)                (1.25)            (55,125)
                                             -------------------     -----------------     ----------------
 Balance at September 30, 2008                       16,292,333                  0.14            2,284,852
                                             ===================     =================     ================
</TABLE>

                                      F-31
<PAGE>



NOTE 9 - WARRANTS (CONTINUED)

The common stock warrants for the years ended September 30, 2008 and 2007 are
comprised of the following:



                               Warrants                Weighted
                             Outstanding               Average
                                as of                 Remaining
  Exercise Price            September 30,         Contractual Life
                                 2007                  (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
                         =====================


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

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

    Fiscal Year
      Ending
   September 30,               Number
---------------------     ----------------
        2009                      169,091
        2010                    2,045,830
        2011                      887,500
        2012                   13,189,912
        2013                            -
                          ----------------
                               16,292,333
                          ================


                                      F-32
<PAGE>

NOTE 9 - WARRANTS (CONTINUED)

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.

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.

                                      F-33
<PAGE>

NOTE 9 - WARRANTS (CONTINUED)

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 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.

                                      F-34
<PAGE>

NOTE 9 - WARRANTS (CONTINUED)

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.

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

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

                                      Year ended              Year ended
                                     September 30,           September 30,
                                         2008                    2007
                                  ------------------   ------------------------
Expected life (in years)                4.14                   0.21 to 5
Risk-free interest rate                 3.26%                4.11 to 4.71%
Expected volatility                    251.27%            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,
2008.

                                      F-35
<PAGE>

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, 2008 and 2007 was $234,876 and $248,115 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:
<TABLE>
<CAPTION>
<S>                                                              <C>                    <C>
                  Year Ended September 30,                            Capital                Operating
                                                                       Leases                  Leases
-------------------------------------------------------------    -------------------    ---------------------
                            2009                                              2,579                  244,754
                            2010                                              2,579                  233,838
                            2011                                                431                        -
                            2012                                                  -                        -
                            2013                                                  -                        -
                                                                 -------------------    ---------------------

Total minimum lease payments                                                  5,589                 $478,592
                                                                                        =====================

Less: amount representing interest                                             (208)
                                                                 -------------------

Present value of minimum lease payments                                       5,381
Less: current portion                                                        (2,435)
                                                                 -------------------

Obligations under capital lease, net of current portion                     $ 2,946
                                                                 ===================
</TABLE>



NOTE 12 - INCOME TAX

The Company has no taxable income and no provision for federal and state income
taxes is required for 2008 and 2007 except certain minimum state taxes.

A reconciliation of the statutory federal rate and the Company's effective tax
rate for the year ended September 30, 2008 and 2007 is as follows:


                                             Year Ended September 30,
                                      ---------------------------------------
                                               2008                2007
                                      ---------------------------------------
U.S. federal taxes (benefit)
At statutory rate                                34.0%                 34.0%
State                                             0.0%                 -0.1%
Permanent Differences                           -11.4%                -40.1%
Other                                             0.1%                  0.7%
Valuation allowance                             -23.0%                  5.5%
                                      ---------------------------------------
Total                                             0.3%                  0.0%


                                      F-36
<PAGE>

NOTE 12 - INCOME TAX (CONTINUED)

Significant components of the Company's deferred tax assets and liabilities as
of September 30, 2008 and 2007 are as follows:

<TABLE>
<CAPTION>
<S>                                                                              <C>
                                                                    Year Ended September 30,
                                                                --------------------------------
                                                                    2008                 2007
                                                                --------------    --------------
Deferred tax assets:
   - Net Operation Losses and Credits Carryover                 $ 10,095,189      $   7,659,516
   - Depreciation/Amortization                                         5,180             22,322

     Accruals                                                        195,776           284,905
     Other                                                           232,549           358,781
                                                                --------------    --------------
Deferred tax assets                                               10,528,694         8,325,524

Less:  valuation allowance                                       (10,528,694)       (8,325,524)
                                                                --------------    --------------
Total deferred tax assets                                                  -                 -

Net deferred tax assets                                         $          -      $          -
                                                                ==============    ==============
</TABLE>

Net operating loss carryforwards of approximately $24,990,000 and $18,716,000
are available as of September 30, 2008 and 2007, to be applied against future
federal taxable income. The net operating loss carryforwards expire in tax years
2011 through 2026 for federal purposes. State net operating loss carryforwards
of approximately $17,541,000 and $11,195,000 are available as of September 30,
2008 and 2007, to be applied against future state taxable income. The state net
operating loss carryforwards expire in tax years 2011 through 2016.

The Company also has federal and state research and development tax credits
carryover of $371,000 and $254,000, respective as of September 30, 2008. 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, 2008 and 2007, respectively. Therefore, we
have a full valuation allowance on our deferred tax assets.

In August 2007, 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 being subject to a substantial annual
limitation. The annual limitation may result in the expiration of net operating
losses and credits before utilization.


                                      F-37
<PAGE>

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

Europe                       $    2,188,761      $      357,341
Asia                              1,170,232           1,836,883
United States                     3,086,952           1,753,433
South America                       900,000                   -
                           -----------------    ----------------

Total Revenue                $    7,345,945      $    3,947,657
                           =================    ================

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, 2008.

United States                        $ 440,474
Europe                                   3,045
Asia                                     3,718
                            -------------------

Total                                $ 447,237
                            ===================


NOTE 14 - SUBSEQUENT EVENTS

The following subsequent events occurred between October 1, 2008 and December
19, 2008.

In October 2008 the Company issued $2,000,000 10% senior secured debentures with
a due date of December 31, 2008. Of the $2,000,000, one of the related parties
invested $1,375,000 and the remainder was invested by two other parties.

The Company repaid $1,000,000 of principal due under its notes payable due to
senior debenture holders and $1,867,518 to revolving inventory financing.
Similarly the Company received $1,716,800 of loan proceeds under International
Factoring Arrangement and $579,110 under lease finance arrangement of a
Mobetron.

                                      F-38