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

                                   FORM 10-KSB
(Mark One)

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

                  For the fiscal year ended September 30, 2006

                                       OR

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

        For the transition period from _______________ to _______________

                        Commission file number 000-49735

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

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


570 Del Rey Avenue Sunnyvale, California                                94086
(Address of principal executive offices)                              (Zip Code)
--------------------------------------------------------------------------------
Issuer's Telephone Number:                                        (408) 636-1020
--------------------------------------------------------------------------------

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

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

                                                Name of each exchange
    Title of each class                          on which registered
    -------------------                   --------------------------------------
Common Stock, $.001 par value                    OTC Bulletin Board

                                       1
<PAGE>

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

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

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

         Issuer's revenues for its most recent fiscal year were $5,982,954.

         As of November 30, 2006, the Issuer had 26,377,172 shares of common
stock outstanding. The approximate aggregate market value of the shares of
common stock held by non-affiliates of Issuer, based on the average of the
closing price on November 30, 2006 of $0.38 per share of common stock, was
approximately $9,258,212.(1)

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

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

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

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

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<TABLE>
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<S>     <C>                                                                                                      <C>
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                                                TABLE OF CONTENTS
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Item Number and Caption                                                                                        Page

PART I............................................................................................................4

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

PART II..........................................................................................................13

   ITEM 5.        MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................13
   ITEM 6.        MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......................................14
   ITEM 7.        FINANCIAL STATEMENTS...........................................................................37
   ITEM 8.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........38
   ITEM 8A.       CONTROLS AND PROCEDURES........................................................................38
   ITEM 8B.       OTHER INFORMATION..............................................................................38

PART III.........................................................................................................39

   ITEM 9.        DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                  SECTION 16(A) OF THE EXCHANGE ACT..............................................................39
   ITEM 10.       EXECUTIVE COMPENSATION.........................................................................44
   ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS............................................................................46
   ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................48
   ITEM 13.       EXHIBITS.......................................................................................50
   ITEM 14.       PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................................................54

SIGNATURES.......................................................................................................55


INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
</TABLE>

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<PAGE>

                                     PART I

Item 1.         DESCRIPTION OF BUSINESS

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

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

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

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

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

Intraoperative Electron-beam Radiation Therapy (IOERT)
         Each year, more than 1.3 million people in the United States are
diagnosed with cancer and more than 550,000 patients die of the disease. Of the
patients diagnosed with cancer, approximately 60% receive external beam
radiotherapy treatments, either with or without surgery. Despite the best
conventional radiation, surgical and chemotherapy techniques, about 1/3 of all
cancer patients will have a recurrence of cancer at the tumor site. If cancer
recurs at or near the site of the original tumor, the chances of survival are
significantly reduced.

                                       4
<PAGE>

         IOERT, a well-known and widely used treatment, involves the application
of radiation directly to the tumor or the tumor bed during surgery, as opposed
to radiation treatment applied either before surgery or after patient recovery
from surgery. In IOERT procedures, the majority of the tumor is removed through
conventional surgical techniques. Radiation is then directly applied to the area
immediately surrounding the tumor while it is still exposed and the surrounding
normal tissue can be retracted out of the radiation beam. This direct
application of radiation to the tumor site during surgery increases the
effective dose to the tumor substantially. This technique has shown to
dramatically increase the survival rates for colorectal, gastric, head and neck,
gynecological and other types of cancer.

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

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

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

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

Market Size for Mobetron Applied IOERT

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

         In the United States, there are approximately 1.3 million new cancer
cases per year. Approximately 60%, or 780,000 patients, will receive radiation
at some point in their treatment. Of the cancer patients treated with radiation
each year, 29% are treated with the aim of palliation (i.e. pain relief) and

                                       5
<PAGE>

71%, or 554,000 patients, are treated with a curative attempt. Of the radiation
patients treated with curative intent, 44%, or 244,000 patients fail, either
locally or regionally, implying that improved radiation treatment is still
needed. It is this quarter of a million patients that fail from curative
radiation therapy treatment that is the initial target population suitable for
the intensified radiation therapy that can be delivered by Mobetron at the time
of surgery. If we assume that 1/3 of these patients have cancers that are
amenable to IOERT, and that a single-site based Mobetron utilized at 60% will
treat 150 patients per year, the number of Mobetrons needed in the U.S. for the
target population is 550 units. Geographical and age distribution of the cancer
patients in the U.S. will increase this number by about 20%, or a total of 660
units. Since the U.S. is approximately half the world's market for health care
items, the total world Mobetron market for advanced disease is approximately
1,320 units.

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

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

Mobetron IOERT

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

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

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

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

         Development work on the first Mobetron system began in November 1993 by
Intraop Medical, Inc. Major features of the accelerator system were demonstrated
in August 1994, and by April 1995, a full working laboratory prototype of
Mobetron was completed. In September 1996, Mobetron system was introduced at the
Sixth International Intraoperative Radiotherapy Symposium in San Francisco.

                                       6
<PAGE>

After extensive acceptance testing, Mobetron was delivered to UC San Francisco,
or UCSF, and began patient treatments in December 1997. In July 1998, Intraop
Medical, Inc. received 510(k) approval from the Food and Drug Administration to
market Mobetron in the United States. Delivery of the first commercial Mobetron
system was to University Hospitals of Cleveland, where patient treatments began
in July 1999, and to date we have delivered seventeen Mobetrons to hospitals in
the United States, Europe, and Japan.

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

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

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

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

         Mobetron's X-band technology is based on a miniature electron
accelerator that has proven itself in industrial applications for more than 10
years. The design of the accelerator and its treatment applicators, in
combination with the lead beamstopper below the surgical table, allow Mobetron
to operate without additional shielding in the operating room. Mobetron system
weighs less than 3,000 pounds, avoiding structural loading problems and allowing
Mobetron to be positioned easily for patient treatment.

Patent Protection

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

Marketing and Sales

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

                                       7
<PAGE>

         To address the large U.S. market, we have significantly increased our
sales efforts over the last fiscal year. In October 2005, we hired industry
veteran Scott Mestman to our management team as Vice President of Worldwide
Sales and Marketing. Mr. Mestman in turn, recently completed the hiring of our
base U.S. sales team - three radiation therapy professionals targeted at the
East Coast, Midwest and West Coast sales territories. These additions to
personnel, in addition to upgrades to our marketing materials, branding
strategy, and our efforts to better publicize the increasing body of clinical
studies on the use and effectiveness of IOERT for breast and lung cancer will
help us increase U.S. sales over the coming years.

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

         In Western Europe, the market driver is the use of IOERT for early
stage breast cancer, and to a lesser extent, the decreased utilization of
conventional radiation equipment as a fraction of the total therapeutic dose is
applied though IOERT. In Europe, our sales efforts are carried out by a
combination of IntraOp's own employees, 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. In September 2006 we hired our first
direct European sales person, who serves as our Director of Northern European
Sales and is based in Cologne, Germany. We expect to hire additional direct
sales people in Europe to address this critical market. We have also hired our
own European service specialist to provide service support to the European
distributors' service organizations on a timely basis.

         In the Far East, distributorships have so far been established in the
major markets for IOERT: Japan, China and Taiwan. The distributor has full
service responsibility, including the purchase of spare parts, while we have the
responsibility for training the service organizations. In fiscal year 2006, we
hired our own serviceperson in the Far East to provide service support similar
to that in Europe.

Manufacturing and Production

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

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

                                       8
<PAGE>

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

Product Offerings

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

         Mobetron Enhancements. We have continued to increase the functionality,
ease-of-use, reliability, and cost effectiveness of Mobetron with various
enhancements. As an example, over this last fiscal year we completed the
prototype of a new modulator cabinet for Mobetron which we expect to ship as a
commercial release in Spring 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.

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

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

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

Competition

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

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

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

                                       9
<PAGE>

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

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

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

Research and Development

         During the fiscal years ended September 30, 2006 and September 30,
2005, we incurred research and development expenses of $624,284 and $491,123,
respectively. These activities accounted for between 20% to 25% of staff time
during each of those periods. Although much of the documentation and design work
on Mobetron has become relatively routine following the transition to our new
contract manufacturer in our fiscal year ended September 2003, CDS Engineering
LLC, we still experienced wage growth in this area. We further expect that
research and development expenses will increase over the coming months as we
continue work on various cost reduction and enhancement projects for Mobetron
and engage in additional sponsorship of clinical research.

Government Regulation and Environmental Matters

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

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

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

                                       10
<PAGE>

         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.

Employees

         As of September 30, 2006, we had 21 full time equivalent employees. Of
the total, 6 employees were engaged in product research, development and
manufacturing operations, 6 in sales and marketing, 5 in service and technical
support, and 4 in general and administrative functions. All but three of these
full time equivalent employees were located in the United States. We are not a
party to any collective bargaining agreements with our employees, and we have
not experienced any work stoppages. We believe we have good relations with our
employees. We are located in Silicon Valley and face intense competition for
highly skilled technical employees. Our employees generally have an at-will
employment relationship with us, and they or we may terminate their employment
at any time

Item 2.         DESCRIPTION OF PROPERTY

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

Item 3.         LEGAL PROCEEDINGS

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

         In June 2006, we brought suit at the District Court of Dusseldorf,
Germany against Info & Tech S.p.A., an Italian company which manufactures an
IOERT system marketed as the Liac, Info & Tech's German distributor, Conmedica
GmbH, and Conmedica's manager, Mr. Seigfried Kaufhold for infringement of our
German Patent 700578, seeking damages and an injunction against further
infringement. Oral proceedings took place on October 31, 2006, at which time the
schedule for further proceedings to take place was set for July 31, 2007.

                  (Remainder of page intentionally left blank)

                                       11
<PAGE>

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

         On  August 8, 2006, IntraOp held its annual meeting of stockholders. At
the annual meeting: (i)  the following directors were elected:  Paul J. Crowe,
Michael Friebe Ph.D., Donald A. Goer Ph.D., Keith Jacobsen, Stephen L. Kessler,
Allan C. Martin, John P. Matheu, Theodore L. Phillips, M.D., (ii) an amendment
to Intraop's 2005 Equity Incentive Plan to increase by 1,600,000 the number of
shares of common stock authorized for issuance thereunder was approved and (iii)
Pohl, McNabola, Berg & Company, LLP were ratified as IntraOp's auditors for the
fiscal year ended September 30, 2006.

        Results of the voting were as follows:
<TABLE>
<CAPTION>
<S>     <C>
                                                                   For          Against          Abstain
                                                                   ---          -------          -------
        1.  Election of Directors
            Paul J. Crowe                                   12,214,817                0           61,300
            Michael Friebe Ph.D.                            11,329,817          885,000           61,300
            Donald A. Goer Ph.D.                            11,329,817          885,000           61,300
            Keith Jacobsen                                  12,214,817                0           61,300
            Stephen L. Kessler                              12,214,817                0           61,300
            Allan C. Martin                                 12,214,817                0           61,300
            John P. Matheu                                  12,214,817                0           61,300
            Theodore L. Phillips M.D.                       11,329,817          885,000           61,300

                                                                                                                Broker
                                                                   For          Against          Abstain       Non-Vote
                                                                   ---          -------          -------       --------
        2.  An amendment to Intraop's 2005 Equity            9,897,789        1,477,457           27,624        873,247
        Incentive Plan to increase by 1,600,000
        the number of shares of common stock
        authorized for issuance thereunder

        3. Ratification of Pohl, McNabola, Berg &           12,193,059           61,300           21,758             --
        Company, LLP as IntraOp's auditors for the
        fiscal year ended September 30, 2006
</TABLE>

                  (Remainder of page intentionally left blank)

                                       12
<PAGE>

                                     PART II

Item 5.         MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

         Our common stock began trading on The OTC Bulletin Board on February
27, 2004 under the symbol "IOPM." Set forth below are the high and low bid
prices for our common stock since inception of trading for our common stock.

         On November 30, 2006, the closing bid quotation for our common stock
was $0.38. The following table sets forth, for the periods indicated, the high
and low closing bid quotations of our common stock, as reported on The OTC
Bulletin Board. All prices listed herein reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.

Quarter Ended                                High                          Low
-------------                                ----                          ---
September 2006                              $0.55                         $0.31
June 2006                                   $0.70                         $0.46
March 2006                                  $0.80                         $0.42


Quarter Ended                                High                          Low
-------------                                ----                          ---
December 2005                               $0.75                         $0.40
September 2005                              $0.80                         $0.43
June 2005                                   $1.40                         $0.55
March 2005                                  $1.755                        $1.10


Number of Stockholders

         As of November 30, 2006, there were 378 holders of record of our common
stock.

Dividend Policy

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

                                       13
<PAGE>

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

Forward looking statements

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

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

Risk Factors

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

                         RISKS RELATING TO OUR BUSINESS

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

         IntraOp is a medical device company that has experienced significant
operating losses in each year since the incorporation on March 9, 1993 of its
merger partner, Intraop Medical Inc., primarily due to the cost of substantial
research and development of its sole product, Mobetron. Since inception, we have
generated about $18.6 million in revenues through September 30, 2006, however we
expect to continue to incur operating losses as well as negative cash flows from
operations in future periods. Our ability to achieve profitability will depend
upon our successful commercial marketing of Mobetron and effectively making the
transition to a manufacturing and marketing company. It is possible that
Mobetron and any other products of IntraOp will never gain full commercial
acceptance, and as a result we may never generate significant revenues or
achieve or maintain profitability. As a consequence of these uncertainties, our
independent public accountants have expressed a "going concern" qualification in
their audit reports.

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

         In August 2005, we entered into a revolving, $3,000,000, combined
inventory and international factoring agreement, or Revolving Line, under which
we pledged as collateral certain of our inventory and receivables. On June 1,
2006 we entered into an amendment to the Revolving Line to increase the line to
$4,000,000. On August 14, 2006 and September 14, 2006, we further amended the

                                       14
<PAGE>

Revolving Line to increase the line to $4,500,000 through November 14, 2006
after which time the amount available under the line reverts to $4,000,000. In
October 2006, we entered into $700,000 inventory financing agreement, or
Inventory Agreement under which we pledged as collateral certain of our
inventory. Also in August 2005, we borrowed $2,000,000 pursuant to 10% senior
secured debentures issued to two private lenders which are due at maturity in
August 2008. Among other terms, the loan is secured by a lien on all of our
assets not otherwise pledged under our Revolving Line. In addition we issued
1,600,000 shares of our common stock to the holders of the 10% senior secured
debentures as collateral for the loan. So long as an event of default under the
secured debentures has not occurred, we retain voting rights over the shares
pledged as collateral and the lenders are not permitted to sell such shares.

         Should a default occur under the Revolving Line, Inventory Agreement,
or the secured debentures, the lenders under those agreements would be entitled
to exercise their rights as secured creditors under the Uniform Commercial Code,
including the right to take possession of the pledged collateral, which in the
case of the 10% senior secured debentures would include all of our assets, and
to sell those assets at a public or private sale and also to sell the shares
pledged as collateral. In the event the lenders exercise those rights, we would
have a very short period of time in which to obtain adequate capital to satisfy
the amount of the obligations to the lenders to prevent the sale of our assets.
For us to obtain such capital in such a short period would result in very
significant dilution to the stockholders and if we are unable to obtain those
funds, we could be unable thereafter to operate, possibly resulting in a total
loss of the investment made by our stockholders.

We have significant additional capital and operating needs.

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

Our single product is subject to uncertain market acceptance.

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

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

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

                                       15
<PAGE>

         Though members of management have extensive experience in
manufacturing, to date we have not manufactured Mobetron system ourselves. We do
not have experience manufacturing our products in the volumes that will be
necessary for us to achieve significant commercial sales. Any significant
interruption in our relationship with Accuray, CDS, TPI Systems or any other key
suppliers, including subcontractors, would have a material adverse effect on our
ability to manufacture Mobetron and, therefore, on our business, financial
condition, and results of operation.

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

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

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

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

         NRT, an Italian company, is offering a modified, non-shielded IOERT
unit called the Novac 7. This linear accelerator system was developed, in part,
with funding from the Italian government. The Novac 7 cannot achieve the higher
treatment energies offered by Mobetron and requires mobile shielding to be
positioned around the surgical table prior to treatment. A spin-off of NRT,
called Info & Tech, which manufactures a system called the Liac, is attempting
to replace NRT in the market. Info & Tech has delivered a small number of
pre-commercial units to its customers. The features and technology of the Liac
system are very similar to that of the NRT system.

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

We may unknowingly infringe the intellectual property rights of third parties
and thereby be exposed to lawsuit(s).

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

                                       16
<PAGE>

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

We could be subject to product liability claims for which we have no insurance
coverage.

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

We are substantially dependent on certain key employees.

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

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

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

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

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

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

                                       17
<PAGE>

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

         In June 2005, the Financial Accounting Standards Board Emerging Issues
Task Force issued EITF 05-04, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Under EITF 05-04, liquidated damages clauses may qualify
as freestanding financial instruments for treatment as a derivative liability.
Furthermore, EITF 05-04 addresses the question of whether a registration rights
agreement should be combined as a unit with the underlying financial instruments
and be evaluated as a single instrument. EITF 05-04 does not reach a consensus
on this question and allows for treatment as a combined unit (Views A and B) as
well as separate freestanding financial instruments (View C). On September 15,
2005, the FASB staff postponed further discussion of EITF 05-04. As of September
30, 2006, the FASB has still not rescheduled EITF 05-04 for discussion.

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

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

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

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

                                       18
<PAGE>

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

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

                         RISKS RELATING TO OUR INDUSTRY

We are subject to intense competition.

         Conventional medical linear accelerator manufacturers have more
substantial histories, backgrounds, experience, and records of successful
operations; possess greater financial, technical, marketing, and other
resources; and have more employees and more extensive facilities than we now
have, or will have in the foreseeable future. These companies have sold one or
two 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 has lower energy cannot
achieve the higher treatment energies offered by Mobetron and requires mobile
shielding to be positioned around the surgical table prior to treatment. A
spin-off of NRT, called Info & Tech, which manufactures a system called the
Liac, is attempting to replace NRT in the market. Info & Tech has delivered a
small number of pre-commercial units to its customers. The features and
technology of the Liac system are very similar to that of the NRT system. Both
of these competitors have had some sales success, mainly in Italy, where we view
them as significant competition.

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

                                       19
<PAGE>

Our industry is subject to rapid, unpredictable, and significant technological
change.

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

We are subject to extensive government regulation.

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

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

We expect to be highly dependent on overseas sales.

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

         Additionally, we have limited experience in many of the foreign markets
in which we plan to sell our goods and services. To succeed, we will have to
overcome cultural and language issues and expand our presence overseas by hiring
and managing additional staff and opening overseas offices to meet our sales,
manufacturing, and customer support goals. No assurance can be given that we can
meet these goals. We may also be subject to taxation in foreign jurisdictions,
and transactions between any of our foreign subsidiaries and us may be subject
to U.S. and foreign withholding or other taxes. We also may encounter

                                       20
<PAGE>

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

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

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

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

         Hospitals in the U.S. pay increasing attention to treatment costs,
return on assets, and time to investment recovery when making capital purchase
decisions. While IOERT is generally reimbursable, its rate of return on capital
invested compared to the return for external beam and other radiotherapy
delivery systems may not be as favorable. While the Company intends to make an
effort to increase the rate of reimbursement to improve the rate of return on
the capital investment in Mobetron for hospitals in the U.S., there is no
assurance that such an effort will be ultimately successful. Therefore,
regardless of positive clinical outcomes, the current U.S. reimbursement
environment may slow the widespread acceptance of IOERT and Mobetron in the U.S.
market.

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

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

                                       21
<PAGE>

                        RISKS RELATED TO OUR COMMON STOCK

The trading market for our common stock is limited.

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

Our stock price may be volatile.

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

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

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

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

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

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

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

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

                                       22
<PAGE>

less than $4.00 per share or which have tangible net worth of less than
$5,000,000 ($2,000,000 if the company has been operating for three or more
years). Such rules require, among other things, that brokers who trade "penny
stock" to persons other than "established customers" complete certain
documentation, make suitability inquiries of investors and provide investors
with certain information concerning trading in the security, including a risk
disclosure document and quote information under certain circumstances. Many
brokers have decided not to trade "penny stock" because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. If we remain subject to the
"penny stock rules" for any significant period, the market, if any, for our
securities may suffer. Because our securities are subject to the "penny stock
rules," investors will find it more difficult to dispose of our securities.
Further, for companies whose securities are traded in The OTC Bulletin Board, it
is more difficult to: (i) obtain accurate quotations, (ii) obtain coverage for
significant news events because major wire services, such as the Dow Jones News
Service, generally do not publish press releases about such companies, and (iii)
obtain needed capital.

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

         If our stockholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding options
or warrants, the market price of our common stock could fall. These sales also
may make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem reasonable or appropriate. We
recently completed four registration statements resulting in a total of
68,378,224 shares of our common stock being registered, including shares
resulting from the conversion of convertible securities and the exercise of
warrants and options, and we expect, within the next twelve months, to register
a minimum of up to an additional 3,597,000 shares of our common stock resulting
from the exercise of options, which upon registration with the SEC will also be
freely tradable.

Business Overview

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

         In connection with the consummation of the merger and pursuant to the
merger agreement, each of the issued and outstanding shares of Intraop Medical,
Inc.'s preferred stock and common stock were cancelled and extinguished and
automatically converted into the right to receive one (1) corresponding share of
our common stock. As a result of the merger, 14,175,028 shares of our common
stock were issued to stockholders of Intraop Medical, Inc. in exchange for their
shares of preferred stock and common stock. Additionally, as of March 9, 2005 we

                                       23
<PAGE>

assumed (i) 1,023,611 options reserved under Intraop Medical, Inc.'s stock
option plan which were exercisable within 60 days of the closing date for the
merger; (ii) warrants exercisable for 926,291 shares of our common stock; and
(iii) convertible promissory notes convertible into 1,540,795 shares of our
common stock. Additionally, we sold 795,000 shares of our common stock to
certain consultants in consideration for services provided in connection with
the consummation of the Merger. All of these securities were issued in reliance
upon the exemption from securities registration afforded by the provisions of
Regulation D, as promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

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

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

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

         Cost of revenues consists primarily of amounts paid to contact
manufacturers and, salary and benefit costs for employees performing customer
support and installation, lease related interest expense and depreciation
related to leased assets. General and administrative expenses include the
salaries and benefits of executive and administrative personnel, communications,
facilities, insurance, professional services and other administrative expenses.
Sales and marketing costs include salaries, benefits and the related expenses of
the sales staff including travel expenses, promotion materials, conferences and
seminars. Research and development expenses consist primarily of compensation
and related direct costs for employees and an allocation of research and
development-related overhead expenses. Since inception, we have invested
approximately $7.2 million in research and development. These amounts have been
primarily invested in development of Mobetron and have been expensed as they
have been incurred.

         As Mobetron, our primary product, sells for in excess of $1,200,000
depending on configuration, and because we are just beginning to move into full
commercial sale and production of this product, our historical results may vary
significantly from period to period. For example, sale of only one Mobetron in
any given quarter may substantially alter the sales and cost numbers for that
quarter, and the timing of such a sale often cannot be predicted with any
accuracy. While we expect that our financial results may ultimately become more
predictable as sales increase and costs stabilize, our financial results for the
foreseeable future are likely to continue to vary widely from period to period.

                                       24
<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 of
America. The preparation of these financial statements requires our management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. These estimates and assumptions are based on
historical experience and on various other factors that they believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. These estimates and assumptions also
require the application of certain accounting policies, many of which require
estimates and assumptions about future events and their effect on amounts
reported in the financial statements and related notes. We periodically review
our accounting policies and estimates and make adjustments when facts and
circumstances dictate. Actual results may differ from these estimates under
different assumptions or conditions. Any differences may have a material impact
on our financial condition and results of operations.

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

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

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

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

     o    prior to its  effectiveness  date,  we failed to file a  pre-effective
          amendment  and  otherwise  respond in writing to comments  made by the
          Commission  in  respect  of  such  registration  statement  within  10
          calendar  days after the  receipt of  comments  by or notice  from the
          Commission   that  such  amendment  is  required  for  a  registration
          statement to be declared effective, or

     o    a registration  statement  filed or required to be filed hereunder was
          not  declared  effective  by the  Commission  by December 29, 2005 and
          February 22, 2006, respectively, or

     o    after  December  29,  2005 and  February  22,  2006,  respectively,  a
          registration  statement  ceases for any reason to remain  continuously
          effective as to all registrable securities for which it is required to
          be  effective,  or the  investors  are not  permitted  to utilize  the
          prospectus  therein  to  resell  such  registrable  securities  for 10
          consecutive calendar days but no more than an aggregate of 15 calendar
          days during any 12-month period.

                                       25
<PAGE>

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

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

     o    Although entered into contemporaneously,  the debentures, warrants and
          registration   rights  agreements  are  nevertheless   separate  legal
          agreements.

     o    Payment of the liquidated  damages  penalties  under the  registration
          rights  agreements  does not alter the investors'  rights under either
          the warrant or debenture agreements.  The debentures and warrants have
          values which are based on their interest rate and the relation between
          their  conversion  price or exercise price and the value of our common
          stock. This value is independent of any payment for liquidated damages
          under the registration  rights agreements,  which is based on how long
          the shares remain unregistered.

     o    The  various  agreements  do not  relate  to the same  risk.  The risk
          inherent  in the  debentures  relates to our  ability  to repay  these
          instruments as and when they come due or to the extent  converted into
          common stock, to the price of our common stock. The warrants similarly
          bear risk  related to the value of our common  stock.  The  liquidated
          damages penalty under the registration  rights  agreements  relates to
          the risk of  IntraOp  filing a  registration  statement  and having it
          declared effective.

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

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

     The estimated fair value of the registration rights agreements was
determined using the discounted value of the expected future cash flows. At
September 30, 2005 and November 24, 2005, we were not able to file a
registration statement with the SEC or have it declared effective as required by
the dates specified in the registration rights agreements. However, in January
2006, we obtained an amendment to the registration rights agreements to extend
the required filing date of our initial registration statement to January 27,
2006, a deadline that we met, and to extend the required effectiveness date of
that same initial registration statement to March 31, 2006, a deadline we did
not meet, and to waive all amounts potentially due under the liquidated damages
clause which would have been due but for the waiver. On April 18, 2006 we
obtained a further amendment to the registration rights agreements to further
extend the required effectiveness date of our initial registration statement to
May 15, 2006 for investors subject to the August 31, 2005 registration rights
agreements and extend to May 30, 2006 the date on which we must have an

                                       26
<PAGE>

effective registration statement for 50% of the registrable shares for investors
who were signatory to the October 25, 2005 registration rights agreements, both
deadlines we met. On June 19, 2006, we met the requirements to have an effective
registration statement for all shares required to be registered pursuant to the
registrations right agreements. We believe that, in the future, we will be able
to meet the registration requirements of the registration rights agreements and
that in the event we cannot, and assuming we are making reasonable efforts to
file and have a registration statement declared effective, the holders of the
debentures will waive the liquidated damages required under the registration
rights agreements. As a result, at September 30, 2005 and September 30, 2006, we
assigned no value to the potential liquidated damages under the registration
rights agreements.

         EITF 05-04 offers multiple views on the question of whether a
registration rights agreement should be combined as a unit with the underlying
financial instruments and be evaluated as a single instrument. EITF 05-04 does
not reach a consensus on this question and allows for treatment as a combined
unit (Views A and B) as well as separate freestanding financial instruments
(View C). On September 15, 2005, the FASB staff postponed further discussion of
EITF 05-04. As of September 30, 2006, the FASB has still not rescheduled EITF
05-04 for discussion.

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

Share-based Compensation Expense

         Effective January 1, 2006, we adopted the modified prospective
transition method under Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, or SFAS 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors, including stock options issued under our
2005 Equity Incentive Plan. Our financial statements as of September 30, 2006
and for the year ended September 30, 2006 reflect the effect of SFAS 123(R). In
accordance with the modified prospective transition method, our financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R). Share-based compensation expense recognized
is based on the value of the portion of share-based payment awards that is
ultimately expected to vest. Share-based compensation expense recognized in our
Audited Condensed Consolidated Statements of Operations during the year ended
September 30, 2006, included compensation expense for share-based payment awards
granted prior to, but not yet vested as of, December 31, 2005 based on the grant
date fair value estimated in accordance with the pro forma provisions of SFAS
123 and compensation expense for the share-based payment awards granted
subsequent to January 1, 2006 based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). In conjunction with the adoption
of SFAS 123(R), we elected to attribute the value of share-based compensation to
expense using the straight-line attribution method. Share-based compensation

                                       27
<PAGE>

expense related to stock options was $147,684, before taxes on earnings for the
year ended September 30, 2006. During the year ended September 30, 2006, there
was no share-based compensation expense related to stock options recognized
under the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25. See Note 7
to the Condensed Consolidated Financial Statements for additional information.

         Upon adoption of SFAS 123(R), we elected to value our share-based
payment awards granted after January 1, 2006 using the Black-Scholes
option-pricing model, or the Black-Scholes model, which we previously used for
the pro forma information required under SFAS 123. For additional information,
see Notes 1 and 7 to the Audited Condensed Consolidated Financial Statements.

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

         The expected term of stock options represents the weighted-average
period the stock options are expected to remain outstanding. The expected term
is based on the observed and expected time to post-vesting exercise and
forfeitures of option by our employees. Upon the adoption of SFAS 123(R), we
determined the expected term of stock options using the simplified method as
allowed under SAB107. Prior to January 1, 2006, we determined the expected term
of stock options based on the option vesting period. Upon adoption of SFAS
123(R), we used historical volatility measured over a period equal to the option
expected terms in deriving its expected volatility assumption as allowed under
SFAS 123(R) and SAB 107. Prior to January 1, 2006, we had also used our
historical stock price volatility in accordance with SFAS 123 for purposes of
our pro forma information. The risk-free interest rate assumption is based upon
observed interest rates appropriate for the term of our stock options. The
dividend yield assumption is based on our history and expectation of dividend
payouts.

         As share-based compensation expense recognized in the Audited
Consolidated Statements of Operations for the year ended September 30, 2006, is
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on our historical
experience. In our pro-forma information required under SFAS 123 for the periods
prior to January 1, 2006, we accounted for forfeitures as they occurred. If
factors change and we employ different assumptions in the application of SFAS
123(R) in future periods, the compensation expense that we record under SFAS
123(R) may differ significantly from what we have recorded in the current
period.

         As of September 30, 2006, there was $61,026 of total unrecognized
compensation expense related to stock options granted under our 2005 Equity
Incentive Plan. This unrecognized compensation expense is expected to be
recognized over a weighted average period of 1.87 years.

                                       28
<PAGE>

Results of Operation for the fiscal year ended September 30, 2006 compared to
the fiscal year ended September 30, 2005.

Revenue, Costs of Revenue and Gross Margins
<TABLE>
<CAPTION>
<S>                                                   <C>             <C>              <C>                <C>
                                                                    Year Ended September 30,
Revenue                                                    2006            2005           Change         Percent
-----------------------------------------------------------------------------------------------------------------
  Product sales (systems and accessories)             5,521,661       3,460,920        2,060,741          59.54%
  Leasing                                               134,127         248,671        (114,544)         -46.06%
  Service                                               327,166         125,284          201,882         161.14%
-----------------------------------------------------------------------------------------------------------------
Total Revenue                                         5,982,954       3,834,875        2,148,079          56.01%
-----------------------------------------------------------------------------------------------------------------

Costs of Revenue
-----------------------------------------------------------------------------------------------------------------
  Product sales  (systems and accessories)            4,303,210       2,976,511        1,326,699          44.57%
  Leasing                                                38,323         371,506        (333,183)         -89.68%
  Service                                               231,142         168,000           63,142          37.58%
-----------------------------------------------------------------------------------------------------------------
Total Costs of Revenue                                4,572,675       3,516,017        1,056,658          30.05%
-----------------------------------------------------------------------------------------------------------------

                                                                    Year Ended September 30,
Gross Margin                                               2006            2005           Change         Percent
-----------------------------------------------------------------------------------------------------------------
  Product sales                                       1,218,451         484,409          734,042         151.53%
                                                         22.07%          14.00%

  Leasing                                                95,804       (122,835)          218,639              --
                                                         71.43%         -49.40%

  Service                                                96,024        (42,716)          138,740              --
                                                         29.35%         -34.10%
-----------------------------------------------------------------------------------------------------------------
Total Gross Margin                                    1,410,279         318,858        1,091,421         342.29%
                                                         23.57%           8.31%
=================================================================================================================
</TABLE>

                  (Remainder of page intentionally left blank)

                                       29
<PAGE>

Product Sales

         Product sales revenue, which includes systems and accessories sales but
excludes parts sold as part of our service business, increased by59.54% in
fiscal year 2006. During fiscal year 2006, we sold five Mobetron systems
consisting of four new systems and a resale of a system returned to us at the
end of its lease term, bringing the total installed Mobetron base worldwide to
seventeen systems. In comparison, we sold three Mobetron systems in fiscal year
2005. All of the systems sold in the 2006 fiscal year were to overseas customers
and included our second system in Poland, our third in Italy, our second
placement in Holland, our first system in Belgium and our second system in
Japan. We expect however that U.S. sales will begin to balance overseas sales in
fiscal 2007 as our sales force was expanded in the latter half of fiscal year
2006 to include three new U.S. sales people.
<TABLE>
<CAPTION>
<S>                                                     <C>               <C>               <C>              <C>
                                                              Year Ended September 30,
Mobetron Systems Sales Analysis                              2006              2005         Change        Percent
-----------------------------------------------------------------------------------------------------------------
Systems Sold                                                    5                 3              2         166.67%

  Revenue per Mobetron System                           1,103,689         1,076,934         26,755           2.48%
  Materials cost per system sold                          759,608           797,405       (37,798)          -4.74%

  Materials Margin Per System                             344,081           279,528         64,553          23.09%
                                                           31.18%            25.96%

  Other Costs of Sales                                    517,005           393,392
 Other Costs of Sales Per System                          103,401           131,131       (27,730)         -21.15%

Gross Margin per System                                   240,680           148,398         92,282          62.19%
                                                           21.81%            13.78%
=================================================================================================================
</TABLE>

         Per systems sales revenues (product sales less sales of accessories)
were higher in fiscal year 2006 in comparison to fiscal year 2005, an impressive
accomplishment as fiscal year 2006 sales included the remarket of a used
Mobetron to our new Belgian customer as further discussed below. Materials cost
per system were lower in fiscal year 2006 than in fiscal year 2005, in part due
to cost reduction efforts but also because fiscal year 2006 sales included a
used Mobetron with a lower carrying cost in inventory. Other costs of systems
sales which includes labor, overhead, warranty and sales commissions paid to
third parties, also fell on a per system basis. Although we paid commissions to
sales agents for two overseas sales in fiscal year 2006 versus no commissions in
fiscal year 2005, these costs were more than offset by a reduction in warranty
expense in fiscal year 2006. In fiscal year 2005 we incurred additional warranty
expense due mainly to lengthy extensions of warranties on two systems while in
fiscal year 2006 our total warranty expense closely matched our original
warranty accrual at sale. We will continue our cost reduction efforts over the
coming year in an effort to increase margins.

                                       30
<PAGE>

Leasing

         Leasing revenue in fiscal years 2006 and 2005 is comprised of revenue
recognized on a Mobetron system delivered to our customer in Eindhoven, Holland
in November 2003 and which lease ended on January 1, 2006. At inception, as an
equipment supplier, we received proceeds in the amount of $1,230,685 as sale
price of the equipment from a third party leasing company, who in turn leased
the equipment to the hospital pursuant to a seventy month lease. We had no
material obligations under the lease and the lease remained an unconditional
obligation of the hospital as the lessee to make payments to the leasing company
as lessor for the leasing company's own account.

         However, as an inducement to the hospital to enter into the lease, we
agreed in a contract with the hospital that, should the hospital decide, upon
sixty days prior notice to us, that at end of month eighteen of its lease on May
31, 2005 that the hospital wishes to prepay the lease with the leasing company
(a one-time option), that we would reimburse the hospital for the cost of the
hospital's exercise of the prepayment option to the leasing company. Following
the reimbursement by us to the hospital for the prepayment amount, title to the
equipment would revert to us.

         Because of the potential reimbursement to the hospital at the end of
month eighteen of the lease, we retained substantial risk of ownership in the
leased property, and the transaction has therefore been accounted for in
accordance with SFAS 13, "Accounting for Leases", specifically paragraphs 19,
21, and 22. Accordingly, we recorded the entire $1,230,685 of proceeds received
from the leasing company as an obligation for leased equipment, a liability on
our balance sheet and accounted for the lease as a borrowing. In accordance
with APB Opinion 21, Interest on Receivables and Payables, paragraphs 13 and 14,
we determined an interest rate for the obligation of 14.5% based on other debt
arrangements entered into by us at dates closest to the inception of the
obligation for leased equipment.

         During fiscal year 2005, we recognized $248,671 of leasing revenue from
this transaction. Further, prior to the lease expiration on January 1, 2006, a
portion of each month's rental revenue was recorded as interest expense and
included in cost of revenue with the remainder recorded as a reduction in
obligation for leased equipment. As the lease terminated on January 1, 2006, in
fiscal year 2006, in addition to monthly rental earned during final three months
of the lease, we realized as leasing revenue a final, one-time payment from the
third party leasing company due to the early termination of the lease by the
hospital in the amount of $71,959.

         Further, at inception of the lease, we recorded $1,016,238, the amount
that would otherwise have been our cost of revenue for the transaction, as
leased equipment, an asset on our balance sheet. The asset was depreciated on a
straight line basis over the period of our reimbursement obligation to the
hospital down to a value equal to the estimated residual value of the equipment
at the end of the obligation of approximately $631,114. The depreciation expense
was included in cost of revenue.

         Prior to May 31, 2005 the hospital notified us that it intended to
exercise its prepayment option, however not until January 1, 2006. We agreed to
extend our reimbursement option from May 31, 2005 until January 1, 2006, and
agreed to a new reimbursement amount. Although satisfied with the performance of
the Mobetron, the hospital completed the build out of certain shielded
facilities and found the Mobetron surplus to its use. As a result, at lease
termination, we reclassified our remaining obligation for leased equipment in
the amount of $1,013,022 to accounts payable and further reclassified the leased
asset to inventory.

                                       31
<PAGE>

         In fiscal year 2005 we incurred interest and depreciation on the leased
Mobetron in Eindhoven, Holland of $371,506, exceeding the revenue recognized on
this transaction during that same period. Beginning October 1, 2005, we stopped
depreciating this asset as we believed that the residual value of the equipment
at lease termination January 1, 2006 would exceed the assets book value. In
September 2006 we successfully remarketed this unit for well in excess of its
book value. Further, as no interest expense was recognized with respect to the
early termination payment we received from the third party leasing company,
leasing revenue exceeded leasing cost of revenue for fiscal year 2006.

Service

         The majority of service revenue for fiscal year 2006 came from service
contracts with three U.S. hospitals and two foreign customers, with the balance
from as-requested service calls and parts sales to customers. In fiscal year
2005, only two customers had annual service contracts with us. The remaining
difference in service revenue and service cost of revenue between fiscal year
2006 and fiscal year 2005 resulted from a single, large, non-recurring repair
order in fiscal year 2006. We expect service revenue to grow in relative
proportion to U.S. based sales. Overseas distributors are generally responsible
for servicing their own customers with parts supplied by us, though we also
recently obtained direct contracts with a few of its customers in Europe which
revenue is included in fiscal year 2006.

Operating Expenses

         A comparison of our operating expenses for the year ended September 30,
2006 and 2005 are as follows:
<TABLE>
<CAPTION>
<S>                                                     <C>               <C>              <C>            <C>
                                                          Year Ended September 30,
                                                           2006              2005           Change       Percent
-----------------------------------------------------------------------------------------------------------------
Research and Development                                624,284           491,123          133,161        27.11%
General & Administrative                              2,414,219         3,135,032        (720,813)       -22.99%
Sales and Marketing                                     800,842           619,910          180,932        29.19%
-----------------------------------------------------------------------------------------------------------------
Total Operating Expenses                              3,839,345         4,246,065        (406,720)        -9.58%
=================================================================================================================
</TABLE>

         Research and development expenses, primarily personnel related,
increased by approximately 27% in fiscal year 2006 in comparison to fiscal year
2005 as we added staff and continue work on various cost reduction and
enhancement projects for the Mobetron.

         General and administrative expenses decreased by $720,813 in fiscal
year 2006 in comparison to fiscal year 2005. Of this difference, $1,711,639 were
costs related to our merger completed in March 2005, including $1,591,470 of
non-cash charges for stock issued to service providers and preferred
stockholders under anti-dilutive agreements upon their conversion to common
stock. Without the merger related charges, general and administrative expenses
in fiscal year 2006 would have shown an increase of $990,826 over fiscal year
2005. The largest components of this change were increased investor relations
activities, increased legal expenses in part related to our issuance and
registration of our convertible and senior debt instruments, and increases in
compensation and related charges paid to employees and directors as we added
staff in this area and began to provide cash compensation to our outside
directors and recognized share-based compensation expense related to our
adoption of FAS 123R. We also incurred higher rental and office expenses due to
our move to new, larger facilities in October 2005.

                                       32
<PAGE>

         Sales and marketing expenses rose by $180,932 in fiscal year 2006 in
comparison to fiscal year 2005 due to an expansion of our sales force, including
the recognition of share-based compensation expense related to our adoption of
FAS 123R, and increased expenditures for marketing and promotion. In the latter
half of fiscal 2006 we added new three new U.S. salespeople and a Director of
Northern European Sales. We expect expenses in this area to continue to rise as
we further our Mobetron sales, marketing, and advertising efforts.

         Interest Expense. We completed post-merger restructuring of our debt in
August through November 2005 through the sale of our senior and convertible
debentures, the addition of our Revolving Line (see Note 4 to our financial
statements included in this filing) and the repayment of certain pre-merger
borrowings. That restructuring resulted in an increase in the amounts borrowed,
a shift from shorter term to longer term maturities and a decrease in our
overall borrowing cost. As a result, although our interest expense increased by
$2,773,015 in fiscal year 2006 in comparison to fiscal year 2005, after
subtracting amortization of debt issuance costs, debt discounts due to warrants
and beneficial conversions features (all non-cash components of interest),
adjusted interest expense increased by only $1,550 while the amount of interest
bearing obligations at September 30, 2006 was $3,741,021 greater than at
September 30, 2005.
<TABLE>
<CAPTION>
<S>                                                          <C>              <C>              <C>
                                                                Year Ended September 30,
        Interest Expense                                          2006             2005           Change
        -------------------------------------------------------------------------------------------------
        Interest Expense                                     4,694,721        1,921,706        2,773,015
        Amortization of debt issuance costs, debt
           discounts due to warrants and beneficial
           conversion features                               3,444,171          672,706        2,771,465
        -------------------------------------------------------------------------------------------------
        Adjusted interest expense                            1,250,550        1,249,000            1,550
        Interest bearing obligations                        13,415,314        9,674,293        3,741,021
        Ratio of adjusted interest expense to
           interest bearing obligations                           9.32%           12.91%           -3.59%
        =================================================================================================
</TABLE>

Liquidity and Capital Resources

         We experienced net losses of $7,160,101 and $5,720,802 for fiscal years
2006 and 2005, respectively. In addition, we have incurred substantial monetary
liabilities in excess of monetary assets over the past several years and, as of
September 30, 2006, had an accumulated deficit of $28,014,918. These matters,
among others, raise substantial doubt about our ability to continue as a going
concern. In view of the matters described above, recoverability of a major
portion of the recorded asset amounts shown on our consolidated balance sheet is
dependent upon our ability to generate sufficient sales volume to cover our
operating expenses and/or to raise sufficient capital to meet our payment
obligations. Management is taking action to address these matters, which
include:

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

     o    Developing  new markets  (primarily  Europe) and  expanding  our sales
          efforts.

     o    Evaluating funding strategies in the public and private markets.

                                       33
<PAGE>

         Historically, management has been able to raise additional capital.
During the fiscal year 2006, we obtained an additional $4.5 million through the
sale of convertible debentures and $1,245,716 through the exercise of warrants
related to these debentures. The proceeds will be used for working capital. The
successful outcome of future activities cannot be determined at this time and
there is no assurance that if achieved, we will have sufficient funds to execute
our business plan or generate positive operating results.

Our primary cash inflows and outflows in fiscal years 2006 and 2005 were as
follows:
<TABLE>
<CAPTION>
<S>                                                        <C>              <C>             <C>
                                                                Year Ended September 30,
        Cash Flows                                                2006             2005          Change
        -----------------------------------------------------------------------------------------------
        Provided by (Used in):
          Operating Activities                             (5,763,368)      (1,933,984)     (3,829,384)
          Investing Activities                               (226,193)        (105,584)       (120,609)
          Financing Activities                               6,095,991        1,963,534       4,132,457
        -----------------------------------------------------------------------------------------------
        Net Increase/(Decrease)                                106,430         (76,034)         182,464
        ===============================================================================================
</TABLE>

Operating Activities

         Net cash used for operating activities increased by $3,829,384 in
fiscal year 2006 in comparison to the same period in the prior fiscal year.
Significantly offsetting our net loss of $7,160,101 for fiscal year 2006 were
$3,840,617 of non-cash charges, primarily for amortization of debt discounts,
beneficial conversion features and issuance costs related to our new senior and
convertible debentures, but also for common stock, warrants, and options issued
in lieu of compensation. During fiscal year 2005, our net loss of $5,720,802 was
similarly offset by non-cash charges of $2,764,595 of which $1,591,470 were
merger related non-cash charges for stock issued to service providers and
preferred stockholders under anti-dilutive agreements upon their conversion to
common stock. Additionally, large combined differences in other asset and
liability accounts of approximately $3.5 million between fiscal years 2006 and
2005 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 of Mobetron sales and large per system cost of the Mobetron.

Investing Activities

         The increased investing activities in fiscal year 2006 consisted
primarily of the acquisition of fixed assets related to our move and expansion
into our new headquarters, manufacturing, and test facilities in October 2005.

                                       34
<PAGE>

Financing Activities

         From October 2005 through November 2005, we raised $4.5 million of
convertible debentures, which along with $2.5 million of similar convertible
debentures and $2 million in senior debentures raised at the end of fiscal year
2005, completed a significant change and improvement to our capital structure.
However, because no scheduled principal amortization is required on the
convertible debentures until their maturity three years from date of issuance,
and because only $333,333 of scheduled principal amortization per annum is
required on the senior debentures, our capital structure is much more stable.
Additionally, we made use of borrowings under our Revolving Line and Product
Financing Arrangement, as further described in Note 4 to our financial
statements hereto, to finance inventory and receivables..

         During fiscal year 2006 we repaid $393,330 of outstanding notes to
related parties and $3,704,602 of other notes payable, the majority of which
were repayments under our Revolving Line and Product Financing Arrangement.
Additionally, during fiscal year 2006, the following amounts were converted to
shares of our common stock: $183,967 of principal and $66,033 of interest by a
related party and $600,000 of principal and $14,660 of interest by holders of
our convertible debentures.

                  (Remainder of page intentionally left blank)

                                       35
<PAGE>

Debt and Lease Obligations

         At November 30, 2006, we had notes payable, obligations for leased
equipment from various sources as shown below Interest rates on such debt range
from 7% on our convertible debentures to 24% on our factored receivables
financing. We also lease office space and equipment under non-cancelable
operating and capital leases with various expiration dates through 2011.

                                                      Period ended
                                                    November 30, 2006
                                                    ------------------

        Notes payable, related parties                       $542,957
                                                    ==================

        Other Notes                                           337,426
        Revolving line                                      1,903,274
        Senior secured debentures                           1,611,111
        Convertible debentures                              6,400,000
                                                    ------------------

        Less debt discounts due to warrants               (2,291,516)
        Less beneficial conversion features               (2,399,941)
                                                    ------------------

                                                            5,560,354

        Less current portion                                3,276,619
                                                    ------------------

         Notes payable, other, net debt discounts
          due to warrants and beneficial conversion
          features, net of current portion                 $2,284,035
                                                    ==================

        Capital lease for equipment
        Less current portion                                    9,632
                                                    ------------------

        Capital lease obligations, net of current
          portion                                             (2,151)
                                                    ==================
                                                               $7,481

                  (Remainder of page intentionally left blank)

                                       36
<PAGE>

         As of November 30, 2006, 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,                                                          Operating
                                                                   Capital Leases     Leases
-------------------------------------------------------            --------------- ---------------
2007                                                                     $2,151        $192,179
2008                                                                      2,579         237,625
2009                                                                      2,579         244,754
2010                                                                      2,579         233,838
2011                                                                        429               -

Total minimum lease payments                                             10,317        $908,396
                                                                                   ===============

Less: Amount representing interest                                        (685)
                                                                   ---------------

Present value of minimum lease payments                                   9,632
Less: Current portion                                                   (2,151)
                                                                   ---------------

Obligations under capital lease, net of current portion                  $7,481
                                                                   ===============
</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, 2006 and September 30, 2005 deferred revenue was $127,213 and
$60,980 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, 2006 or September 30, 2005.


Item 7.         FINANCIAL STATEMENTS.

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

                                       37
<PAGE>

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

None

Item 8A.        CONTROLS AND PROCEDURES.

     (a) Evaluation of Disclosure Controls and Procedures.

        Management, with the participation of the Chief Executive Officer and
Chief Financial Officer, has performed an evaluation of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934). This evaluation included consideration of the controls,
processes and procedures that are designed to ensure that information required
to be disclosed by us in the reports we file under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to our management, including or
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2006, our disclosure controls and procedures were effective.

     (b) Changes in Internal Control over Financial Reporting.

        During the period covered by this Annual Report on Form 10-KSB, there
were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

Item 8B.        OTHER INFORMATION.

None.

                  (Remainder of page intentionally left blank)

                                       38
<PAGE>

                                    PART III

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

        Pursuant to the merger agreement, effective as of March 9, 2005, the
pre-merger officers and directors of IntraOp resigned their positions and the
officers and directors of Intraop Medical, Inc., respectively, became the
officers and directors of IntraOp until their successors are duly appointed,
elected and qualified. Specifically, on March 9, 2005, David Shamy resigned as
President, Chief Executive Officer, Chief Financial Officer, Secretary and
director of IntraOp. Phil Ray also resigned as Vice-President, Treasurer and
director of IntraOp on March 7, 2005. The resignations of David Shamy and Phil
Ray from their positions as directors and officers of IntraOp were conditions
precedent to the closing of the merger with Intraop Medical, Inc.

        The following table sets forth information regarding our executive
officers and directors as of November 30, 2006.

Name                         Age         Position
----                         ---         --------
Donald A. Goer Ph.D.         63          Chief Executive Officer, President, and
                                         Director

Michael Friebe Ph.D.         41          Director

Keith Jacobsen               62          Director

Stephen L. Kessler           63          Director

John P. Matheu               84          Director

Theodore L. Phillips, M.D.   73          Secretary and Director

Scott Mestman                47          Vice President, Sales and Marketing

Richard Simon                59          Vice President of Operations

Howard Solovei               44          Chief Financial Officer

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

Officer and Director Resignations

Mary Louise Meurk resigned her positions as secretary and director of IntraOp on
August 8, 2006. Director Paul J. Crowe resigned his position on September 5,
2006.  Corporate Controller and Chief Accounting Officer Regis Bescond resigned
his position on October 30, 2006.  Director Allan C. Martin resigned his
position on November 10, 2006.

                                       39
<PAGE>

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, executive officer, and key
employee of IntraOp is summarized below.  All directors, executive officers, and
key employees, except Mr. Jacobsen, Mr. Kessler, and Mr. Mestman have held their
present positions with IntraOp since the closing of the merger with Intraop
Medical, Inc. on March 9, 2005.  Prior to the merger, unless otherwise stated,
they were directors, officers or key employees of Intraop Medical, Inc. for at
least five years.

Donald A. Goer, Ph.D., President/CEO and Director

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

Dr. Michael Friebe Ph.D., Director

        Dr. Friebe joined our Board in March, 2004. Dr. Friebe has been Chief
Executive Officer and President of Tomovation GmbH since February 2003.
Tomovation is a German company that owns and operates imaging centers in Germany
and makes investments in early stage European medical technology companies.
Prior to forming Tomovation, Dr. Friebe was the President of UMS-Neuromed
beginning in April 2001 and a founder of Neuromed AG in November 1993. These
companies operated mobile MRI, CT and PET imaging systems in a number of
European Countries. Since April 2004 he has also been the CEO of BIOPHAN Europe
GmbH, a developer of MRI related products and, since March 2005, a director of
BIOPHAN, Inc. (OTC:BIPH.OB). Dr. Friebe received BSc and MSEE in Electrical
Engineering from the University of Stuttgart in Germany, and a PhD 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, Director

         Mr. Jacobsen joined our Board in 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 BS and
MBA degrees from the University of California, Berkeley.

                                       40
<PAGE>

Stephen L. Kessler, Director

        Mr. Kessler joined our Board in 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 MBA in Finance from the University of Chicago
Graduate School of Business in 1967 and a B.S. in Industrial Management from
Carnegie Mellon.

John P. Matheu, Director

        As a principal of Matheu Associates since 1996, Mr. Matheu provides
consulting and management advice to the pharmaceutical, biotechnology and
medical device industry. Mr. Matheu also serves as a director of Mediscience
Technology Corp., a publicly traded company. Until his retirement in 1984, Mr.
Matheu served 34 years with Pfizer Pharmaceuticals, Inc., where among other
accomplishments, as Vice President he established and directed Pfizer's generic
drug division. Prior to that assignment, Mr. Matheu directed Pfizer's 1,100
person sales force, its hospital marketing group and its training department.

Theodore L. Phillips, M.D., Secretary and Director

        Dr. Phillips is the principal or contributing author on more than 300
articles on cancer treatment in the medical literature and is one of the most
distinguished radiation oncologists in the world. Under his guidance as
Professor and Chairman of Radiation Oncology at the University of California -
San Francisco, or UCSF, from 1978 to 1998 and Associate Director, UCSF Cancer
Center from 1996 to 1999, the University became recognized as one of the top
cancer treatment centers in the world. He has received numerous awards and
honors for his many contributions to cancer treatment. While Dr. Phillips was
Chairman of Radiation Oncology at UCSF, the hospital purchased the first
Mobetron system. He currently serves as Chairman of our Technical Advisory
Board, and since 1998, holds the prestigious Wun-Kon Fu Endowed Chair in
Radiation Oncology at UCSF.

Scott Mestman, Vice President, Sales and Marketing

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

                                       41
<PAGE>

Richard Simon, Vice President of Operations

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

Howard Solovei, Chief Financial Officer

        Mr. Solovei joined IntraOp in August 2002 as a consultant, and was
appointed our Chief Financial Officer in January 2003. Prior to that, Mr.
Solovei served as the CFO of Phoenix Leasing Inc., where he gained 14 years
experience in leasing and equipment finance from June 1984 to April 2000. At
Phoenix, Mr. Solovei was responsible for the management of nearly $1 billion of
leased assets, $600 million of bank agreements for the company's 30+
partnerships and corporate entities as well as securitized debt offerings of $85
million. Mr. Solovei was also responsible for projections and strategic and
tactical planning for the company and its public limited partnerships. Mr.
Solovei holds a B.S. in Business Administration from the University of
California, Berkeley.

Board Committees And Meetings

Board of Directors

        During the fiscal year ending September 30, 2006, there were four
meetings of the board of directors. Each board member attended all of the
meetings of the board of directors and meetings of all of the committees of the
board of directors on which he served other than Mr. Crowe who attended 50% of
such meetings, Dr. Goer who attended 88% of such meetings and Mr. Martin who
attended 67% of such meetings.

Audit Committee

        IntraOp maintains a separately-designated standing audit committee. The
responsibilities of the audit committee are contained in the audit committee
charter. The audit committee at the beginning of the year ended September 30,
2006 consisted of Donald A. Goer, Paul J. Crowe and Keith Jacobsen. The board
originally determined to appoint one director to the audit committee who is not
"independent" as defined by IntraOp policy and the applicable listing standards.
Dr. Goer serves as the Chief Executive Officer of IntraOp and, therefore, is not
independent. The board of directors determined to appoint Dr. Goer as an audit
committee member because of his specific business experience relative to
IntraOp's business. The board further determined that Dr. Goer's position with
IntraOp would not interfere with his providing impartial advice to the audit
committee and that Dr. Goer's service on the audit committee was in the best
interests of IntraOp and its stockholders. On May 12, 2006, the board of
directors accepted the resignation of Dr. Goer from the committee and appointed
Mr. Stephen Kessler to the committee. Paul J. Crowe resigned his position on
September 5, 2006. Messrs. Crowe, Jacobsen, and Kessler were "independent," as
defined by IntraOp policy and the National Association of Securities Dealers,
Inc. listing standards. The board has also determined that no audit committee
financial expert serves on the audit committee. Although the current members of
the audit committee do not meet all of the criteria of a financial expert under
SEC rules, the board of directors believes that the current members of the audit
committee possess sufficient financial knowledge and experience relative to the
financial complexity of IntraOp's financial statements to adequately carry out
their duties under the audit committee charter.

                                       42
<PAGE>

Compensation Committee

        The compensation committee members are currently John P. Matheu and
Theodore L. Phillips. Paul J. Crowe served as member of the committee prior to
his resignation from the board of directors. None of the current or former
members of the committee are employees of IntraOp. The compensation committee
makes recommendations with respect to compensation of executive officers and
granting of stock options and stock awards.

Disclosure Committee

        The primary purpose of the disclosure committee is to assist the Chief
Executive Officer ("CEO") and the Chief Financial Officer in fulfilling their
responsibilities to ensure timely and accurate reporting of material
information. The board as a whole serves as members of the disclosure committee.
The committee did not meet in the fiscal year ended September 30, 2006.

Nominating and Corporate Governance Committee

        The primary responsibilities of the nominating and corporate governance
committee are to identify and recommend individuals qualified to become Board
members and committee members and recommend corporate governance principles,
codes of conduct and compliance mechanisms applicable to IntraOp. The members of
the committee are John P. Matheu, Donald A. Goer and Michael Friebe.

Compliance With Section 16(A) Of The Exchange Act

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

        To our knowledge, and based solely on a review of the copies of such
reports and amendments thereto furnished to us and written representations from
the reporting persons that no other reports were required during the fiscal year
ended September 30, 2006, 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, 2006.

Code of Ethics

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

                                       43
<PAGE>

Item 10.        EXECUTIVE COMPENSATION.

        The following table provides information concerning the compensation
received for services rendered to Intraop Medical Corporation in all capacities
during the year ended September 30, 2006, by our chief executive officer and
each of the other most highly compensated executive officers or key employees
whose compensation exceeded $100,000 for the fiscal year ended September 30,
2006.

                           Summary Compensation Table
<TABLE>
<CAPTION>
<S>                                <C>             <C>                                            <C>             <C>
                                                                                                Long-Term
                                                            Annual Compensation                Compensation
                                                  ---------------------------------------------------------
                                                                                                Securities         All Other
                                                                           Other Annual         Underlying        Compensation
Name and principal position                       Salary      Bonus    Compensation ($)(1)      Options (#)         ($)(2)
------------------------------------------------------------------------------------------------------------------------------
Donald A. Goer                     2006            $184,112     -               -                 490,000                  -
  President and Chief              2005            $176,551     -               -                 450,000                  -
    Executive Officer              2004            $165,000     -               -                 435,000             $2,462

Scott J. Mestman                   2006            $135,519     -               -                 100,000                  -
  Vice President, Worldwide        2005                   -     -               -                       -                  -
    Sales and Marketing            2004                   -     -               -                       -                  -

Richard Simon                      2006            $148,040     -               -                 160,000                  -
   Vice President,                 2005            $128,528     -               -                 135,000                  -
   Operations                      2004            $120,120     -               -                 125,000                  -

Howard Solovei                     2006            $163,823     -               -                 260,000                  -
   Chief Financial Officer         2005            $144,451     -               -                 190,000                  -
                                   2004            $135,000     -               -                 180,000                  -
</TABLE>

     (1)  For the years ended September 30, 2006, 2005 and 2004, there were no:

          a.   perquisites  over the  lesser of  $50,000  or 10% of the total of
               annual  salary  and bonus  reported  for any of the  above  named
               executive officers;
          b.   above-market  or  preferential   earnings  on  restricted  stock,
               options,  stock appreciation rights or deferred compensation paid
               during the fiscal year or payable during that period but deferred
               at the election of the named executive officer;
          c.   earnings on long-term incentive plan compensation paid during the
               fiscal year or payable  during  that  period but  deferred at the
               election of the named executive officer;
          d.   amounts  reimbursed  during  the fiscal  year for the  payment of
               taxes; or
          e.   preferential discounts on stock.

     (2)  Dr. Goer received  reimbursement  of premiums of a term life insurance
          policy of which he was the beneficiary.

                                       44
<PAGE>

                        Option Grants in Last Fiscal Year

         IntraOp made the following options grants to its chief executive
officer and each of the other most highly compensated executive officers or key
employees whose compensation exceeded $100,000 for the fiscal year ended
September 30, 2006:
<TABLE>
<CAPTION>
<S>                                                          <C>              <C>         <C>  <C>            <C>
                                                                           Exercise
                                                            Options       Price Per      Expiration       Percentage
Name and Principal Position                                 Granted           Share            Date              (1)
Donald A. Goer, President and Chief Executive                40,000           $0.58       12/7/2015           10.36%
Officer
Scott J. Mestman, Vice President, Worldwide Sales           100,000           $0.58       12/7/2015           25.91%
and Marketing
Richard Simon, Vice President, Operations                    10,000          $1.250       12/7/2015            6.48%
Howard Solovei, Chief Financial Officer                      50,000           $0.58       12/7/2015           12.95%
                                                             20,000           $0.54       2/16/2016            5.18%
</TABLE>


     (1)  Percentage  of total option grants to all employees in the fiscal year
          ended September 30, 2006.

Aggregate Option Exercises FY-End Option Values

        During the fiscal year ended September 30, 2006, neither the chief
executive officer nor any of the other most highly compensated executive
officers or key employees whose compensation exceeded $100,000 for the fiscal
year ended September 30, 2006 exercised any options.

Compensation of Non-Employee Directors

        Each member of the board of directors who is not an employee of IntraOp
is compensated for his services as director as follows: $2,500 for each board
meeting attended in person, and $500 for each board meeting attended by
telephone. In addition, each non-employee member of the board of directors is
annually granted a nonstatutory stock option to purchase 30,000 shares of common
stock under the 2005 Equity Incentive Plan as described below.

Description of the 2005 Equity Incentive Plan

        On December 7, 2005, the Board amended and restated the 1995 Stock
Option Plan, re-naming it the 2005 Equity Incentive Plan, pursuant to which,
4,000,000 shares of common stock have been reserved for issuance to officers,
directors, employees and consultants of IntraOp upon exercise of options granted
under the plan. The primary purpose of the plan is to attract and retain capable
executives, employees, directors, advisory board members and other consultants
by offering such individuals a greater personal interest in our business by
encouraging stock ownership. Options granted under the plan may be designated as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 or nonstatutory options. The plan is administered by a
compensation committee of the Board of Directors consisting of outside members
of the board of directors which will determine, among other things, the persons
to be granted options, the number of shares subject to each option and the
option price.

        The exercise price of any incentive stock option granted under the plan
must be equal to the fair market value of the shares on the date of grant, and
with respect to persons owning more than 10% of the outstanding common stock,
the exercise price may not be less than 110% of the fair market value of the
shares underlying such option on the date of grant. The exercise price of
nonstatutory stock options may not be less than the fair market value of the
shares underlying such options, and the term of such nonqualified options may

                                       45
<PAGE>

not extend beyond ten years. No incentive stock option may be exercisable more
than ten years after the date of grant, except for optionees who own more than
10% of the our common stock, in which case the option may not have a term
greater than five years. The compensation committee has the power to impose
additional limitations, conditions and restrictions in connection with the grant
of any option.

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

        Donald A. Goer, our Chief Executive Officer, has an employment
agreement with IntraOp that provides for an annual salary of $184,800. In
addition, Dr. Goer will receive a severance payment equal to one year's salary
in the event IntraOp terminates his employment without cause. The agreement
automatically renews for successive one-year periods unless either party gives
prior written notice of termination at least 60 days prior to the end of the
then current one-year term.

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

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

Principal Stockholders

        The following table contains information regarding the actual
beneficial ownership of our outstanding common stock as of November 30, 2006,
for:

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

     o    each of our directors;

     o    our chief executive officer;

     o    the other executive officers whose  compensation  exceeded $100,000 in
          fiscal 2005; and

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

         Percentage of beneficial ownership is based on shares of common stock
outstanding as of November 30, 2006, together with warrants, options, and
convertible securities that are exercisable within 60 days of November 30, 2006
for each stockholder. Beneficial ownership includes shares over which the
indicated beneficial owner exercises voting and/or investment power. Shares of
common stock subject to options that are currently exercisable or will become
exercisable within 60 days are deemed outstanding for computing the percentage
ownership of the person holding the option, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes below, we believe that the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to applicable community property laws.
Unless otherwise indicated, the address of each beneficial owner listed below is
the address of our principal offices.

                                       46
<PAGE>
<TABLE>
<CAPTION>
<S>                    <C>                                                   <C>                  <C>
                                                                Number of Shares of
                                                                       Common Stock
                                                                 Beneficially Owned       Percentage of
                                                                     as of November    Shares of Common
        Name                                                               30, 2006   Stock Outstanding
        -----------------------------------------------------------------------------------------------
        Michael Friebe (1)                                                   96,500               0.37%
        Donald A. Goer (1)                                                2,165,801               8.07%
        Keith Jacobsen (1)                                                  135,100               0.51%
        Stephen L. Kessler (1)                                               30,000               0.11%
        John P. Matheu (1)                                                   68,500               0.26%
        Scott J. Mestman (1)                                                200,444               0.76%
        Theodore L. Phillips (1)                                             62,500               0.24%
        Richard Simon (1)                                                   143,889               0.54%
        Howard Solovei (1)                                                  236,000               0.89%
        -----------------------------------------------------------------------------------------------
        Officers and Directors as a Group                                 3,138,734              11.75%
</TABLE>

        Other than Donald A. Goer, we know of no other stockholder or group
that owns 5% or more of our common stock.

 (1) Address: c/o Intraop Medical Corporation, 570 Del Rey Avenue, Sunnyvale, CA
94085. Number of shares of common stock beneficially owned as of November 30,
2006 includes the following option and warrant grants:
<TABLE>
<CAPTION>
<S>                                                     <C>                                  <C>
                                           Options Exercisable
                                               On Or Within 60          Warrants Exercisable On Or
                                              Days of November                   Within 60 Days of
        Name                                          30, 2006                   November 30, 2006
        ------------------------------------------------------------------------------------------
        Michael Friebe                                  42,500                               8,000
        Donald A. Goer                                 464,444                              12,000
        Keith Jacobsen                                  37,500                                   0
        Stephen L. Kessler                              22,500                                   0
        John P. Matheu                                  57,500                                   0
        Scott J. Mestman                                44,444
        Theodore L. Phillips                            62,500                                   0
        Richard Simon                                  143,889                                   0
        Howard Solovei                                 230,000                                   0
        ------------------------------------------------------------------------------------------
        Officers and Directors as a
        Group                                        1,105,277                              20,000
</TABLE>

                                       47
<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, 2006:
<TABLE>
<CAPTION>
<S>                                                 <C>                       <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                           1,740,000                 $0.71                   1,857,000
approved by security holders

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

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

                  During the two fiscal years ended September 30, 2005 and
September 30, 2006 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):

         As of September 30, 2004, Donald A. Goer, our Chief Executive Officer
and a director, had made unsecured loans to us with an aggregate outstanding
principal amount of $742,755, plus accrued interest thereon. During the two
years ended September 30, 2006, Dr. Goer made additional loans in the amount of
$645,000 and in August 2005 and December 2005 converted a total of $283,967 of
outstanding principal, plus accrued interest, under those notes into our common
stock. During that same period, we repaid $561,331 of principal, plus accrued
interest thereon. The remaining notes have an interest rate of 9% per annum. As
of September 30, 2006, notes in the principal amount of $542,957, plus accrued
interest thereon, remained outstanding and payable to Dr. Goer.

         As of September 30, 2004, Mary Louise Meurk, Secretary and director
until her resignation on August 8, 2006, had made unsecured loans to us in the
aggregate outstanding principal amount of $164,671, plus accrued interest
thereon. The notes bear interest at 9% per annum. Ms. Meurk made additional
similar loans of $10,000 in the year ended September 30, 2005 which were repaid
in the fiscal year ended September 30, 2006. As of the date of her resignation,
notes in the principal amount of $164,671, plus accrued interest thereon,
remained outstanding.

                                       48
<PAGE>

         As of September 30, 2004, Michael Friebe or firms controlled by Mr.
Friebe, one of our directors, had made unsecured loans to us in the aggregate
principal amount of $100,000, plus accrued interest thereon. During the two
fiscal years ended Septmber 30, 2006, we repaid $50,000 of principal, plus
interest thereon, on those notes, and Dr. Friebe converted $50,000 of principal
of notes into our common stock. The notes had an interest rate of 9% per annum.
As of September 30, 2006, no amounts remained outstanding. We also paid $55,962
of fees to two overseas firms controlled by Dr. Friebe for sales and marketing
consulting in Europe.

         During the two years ended September 30, 2006, John Matheu, a director,
made an unsecured loan to us in the aggregate outstanding principal amount of
$5,000. The note had an interest rate of 9% per annum and was paid in
full. As of September 30, 2006, there were no amounts outstanding to Mr. Matheu.

         During the two years ended September 30, 2006, Dr. Theodore Phillips, a
director, made an unsecured loan to us in the aggregate outstanding principal
amount of $5,000. The note had an interest rate of 9% per annum and was paid in
full. As of September 30, 2006, there were no amounts outstanding to Dr.
Phillips.

                  (Remainder of page intentionally left blank)

                                       49
<PAGE>
<TABLE>
<CAPTION>
<S>             <C>                                                                    <C> <C>
Item 13.        EXHIBITS

         (d)    Exhibits

                Number         Description
                -----          -----------
                2.1            Agreement  and Plan of  Reorganization  dated  February 24, 2004,  by and among  Intraop
                               Medical Corporation and Intraop Medical, Inc. (1)
                2.2            Amendment to Agreement and Plan of  Reorganization  made and entered into as of June 29,
                               2004, by and among Intraop Medical, Inc. and Intraop Medical Corporation (2)
                2.3            Second  Amendment to Agreement  and Plan of  Reorganization  made and entered into as of
                               July 30, 2004, by and among Intraop Medical, Inc. and Intraop Medical Corporation (3)
                2.4            Third  Amendment to  Agreement  and Plan of  Reorganization  made and entered into as of
                               November 15, 2004, by and among Intraop  Medical,  Inc. and Intraop Medical  Corporation
                               (4)
                2.5            Fourth  Amendment to Agreement  and Plan of  Reorganization  made and entered into as of
                               December 20, 2004, by and among Intraop  Medical,  Inc. and Intraop Medical  Corporation
                               (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 Registrant,
                               Bushido Capital Master Fund, L.P., Samir Financial,  L.L.C.,  Gamma Opportunity  Capital
                               Partners, L.P., Regenmacher Holdings Ltd. and ABS SOS-Plus Partners Ltd. (9)
                4.7            Form of 7% Convertible Debenture due October __, 2008 (10)
                4.8            Form of Common Stock Purchase Warrant (10)
                4.9            Form of Short Term Common Stock Purchase Warrant (10)
</TABLE>

                                       50
<PAGE>
<TABLE>
<CAPTION>
<S>             <C>                                                                    <C> <C>
                4.10           Registration  Rights  Agreement dated as of October 25, 2005 by and among the Registrant
                               and Dolphin Offshore Partners (10)
                4.11           Form of 7% Convertible Debenture (12)
                4.12           Registration  Rights  dated as of October 25, 2005 by and among the  Registrant  and the
                               purchasers signatory thereto (12)
                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 (13)
                10.2           Securities  Purchase  Agreement,  dated  as  of  August  31,  2005,  by  and  among  the
                               Registrant,  Bushido  Capital Master Fund,  L.P.,  Samir  Financial,  L.L.C.,  and Gamma
                               Opportunity Capital Partners, L.P. (9)
                10.3           Securities  Purchase Agreement dated as of August 31, 2005, by and among the Registrant,
                               Regenmacher Holdings Ltd. and ABS SOS-Plus Partners Ltd. (9)
                10.4           Form of 10% senior secured Debenture due August 31, 2008. (9)
                10.5           Security  Agreement,  dated  as of  August  31,  2005,  by  and  among  the  Registrant,
                               Regenmacher Holdings Ltd. and ABS SOS-Plus Partners Ltd. (9)
                10.6           Subsidiary Guaranty dated as of August 31, 2005 executed by Intraop Medical
                               Services, Inc. (9)
                10.7           Placement  Agency  Agreement  dated  May 17,  2005 by and  between  the  Registrant  and
                               Stonegate Securities, Inc. (9)
                10.8           Disclosure Schedules (9)
                10.9           Securities  Purchase  Agreement dated as of October 25, 2005 by and among the Registrant
                               and Dolphin Offshore Partners, L.P. (10)
                10.10          Disclosure Schedules (10)
                10.11          Disclosure Schedules (11)
                10.12          Securities  Purchase  Agreement dated as of October 25, 2005 by and among the Registrant
                               and the purchasers identified on the signature pages thereto (12)
                10.13          Disclosure Schedules (12)
                10.14          2005 Equity Incentive Plan (14)
                10.15          Amendment to  Registration  Rights  Agreement  dated January 25, 2006 by and between the
                               Company and the parties named therein. (15)
                10.16          Agreement dated as of January 25, 2006 by and among the Company,  Regenmacher  Holdings,
                               Ltd. and ABS SOS-Plus Partners, Ltd. (15)
                10.17          Agreement  executed  April 7, 2006 by and  between  the  Company  and  Emerging  Markets
                               Consulting, LLC. (16)
                10.18          Amended and Restated Inventory and Receivables Purchase Agreement dated
                               as of April  10,  2006 by and  between  the  Company  and  E.U.  Capital  Venture,  Inc.
                               and E.U.C. Holding. (17)
                10.19          Second   Amendment   to   Registration   Rights   Agreement   dated  as  of  March   31,
                               2006 by and between the Company and the other parties               named therein. (18)
                10.20          First   Amendment  to  Amended  and  Restated   Inventory   and   Receivables   Purchase
                               Agreement  entered  into  as of  May  24,  2006,  by  and  among  the  Registrant,  E.U.
                               Capital Venture, Inc. and E.U.C. Holding. (19)
                10.21          Promissory Note dated July 14, 2006 in the aggregate  principal amount of $25,000 issued
                               by Intraop Medical Corporation to Bushido Capital Master Fund, L.P. (20)
</TABLE>

                                       51
<PAGE>
<TABLE>
<CAPTION>
<S>             <C>                                                                    <C> <C>
                10.22          Promissory Note dated July 17, 2006 in the aggregate  principal amount of $50,000 issued
                               by Intraop Medical Corporation to Donald A. Goer. (20)
                10.23          Second   Amendment  to  Amended  and  Restated   Inventory  and   Receivables   Purchase
                               Agreement  entered  into as of May 24,  2006,  as further  amended  on June 1, 2006,  by
                               and among the Registrant, E.U. Capital Venture, Inc. and       E.U.C. Holding. (21)
                10.24          Third  Amendment to Amended and Restated  Inventory and Receivables  Purchase  Agreement
                               entered  into as of May 24,  2006,  as  further  amended  on June 1, 2006 and August 14,
                               2006,  by and among the  Registrant,  E.U.  Capital  Venture,  Inc. and E.U.C.  Holding.
                               (22)
                14.1           Code of Ethics (*)
                31.1           Rule  13a-14(a)/15d-14(a)  Certification of Donald A. Goer,  Principal Executive Officer
                               (*)
                31.2           Rule  13a-14(a)/15d-14(a)  Certification of Howard Solovei,  Principal Financial Officer
                               (*)
                32.1           Section 1350 Certification of Donald A. Goer, Principal Executive Officer (*)
                32.2           Section 1350 Certification of Howard Solovei, 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 an exhibit to the Company's 8-K Report filed on November 1, 2005.
                (12)           Previously  filed as an exhibit to the  Company's  Form 8-K Report  filed on November 8,
                               2005.
                (13)           Previously  filed as an exhibit  to the  Company's  Form 8-K Report  filed on August 19,
                               2005.
                (14)           Previously  filed as an exhibit to the  Company's  Form 8-K Report  filed on December 7,
                               2005.
</TABLE>

                                       52
<PAGE>
<TABLE>
<CAPTION>
<S>             <C>                                                                    <C> <C>
                (15)           Previously filed as an exhibit to the Company's Form 8-K Report filed on March 16, 2006.
                (16)           Previously filed as an exhibit to the Company's Form 8-K Report filed on April 7, 2006.
                (17)           Previously filed as an exhibit to the Company's Form 8-K Report filed on April 12, 2006.
                (18)           Previously filed as an exhibit to the Company's Form 8-K Report filed on April 18, 2006.
                (19)           Previously filed as an exhibit to the Company's Form 8-K Report filed on June 2, 2006.
                (20)           Previously filed as an exhibit to the Company's Form 8-K Report filed on July 19, 2006.
                (21)           Previously  filed as an exhibit  to the  Company's  Form 8-K Report  filed on August 15,
                               2006.
                (22)           Previously  filed as an exhibit to the Company's  Form 8-K Report filed on September 20,
                               2006.
                (*)            Filed herewith.
</TABLE>

                                       53
<PAGE>

Item 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES

(1) Audit Fees. The aggregate fees billed to us for the years ended September
30, 2006 and September 30, 2005 for professional services rendered by our
principal accountant for the audit of our annual financial statements and review
of financial statements included in our Form 10-KSB were $76,000 and $101,728,
respectively.

(2) Audit-Related Fees. There were no fees billed to us for the years ended
September 30, 2005 and September 30, 2004 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,
2006 and September 30, 2005 for professional services rendered by our principal
accountant for tax compliance, tax advice, and tax planning were $16,813 and $0,
respectively.

(4) All Other Fees. There were $28,072 of fees billed to us for the years ended
September 30, 2006 and September 30, 2005 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, 2006 were
attributed to work performed by our principal accountant's full time, permanent
employees.

                                       54
<PAGE>

                                   SIGNATURES

        In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on this 22nd day of December, 2006.

                                Intraop Medical Corporation

                                By:   /s/ Donald A. Goer
                                      ------------------------------------------
                                      Donald A. Goer,
                                      President and Chief Executive Officer

        In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S>                                                                                                              <C>
Signature                                              Title                                       Date
---------                                              -----                                       ----
/s/ Donald A. Goer                                     Chairman, President, Chief Executive        December 22, 2006
--------------------------------------------------
Donald A. Goer                                         Officer, and Director (Principal
                                                       Executive Officer)

/s/ Howard Solovei                                     Chief Financial Officer (Principal          December 22, 2006
--------------------------------------------------
Howard Solovei                                         Financial Officer and Principal
                                                       Accounting Officer)

/s/ Keith Jacobsen                                     Director                                    December 22, 2006
--------------------------------------------------
Keith Jacobsen

/s/ Michael Friebe                                     Director                                    December 22, 2006
--------------------------------------------------
Michael Friebe

/s/ Stephen L. Kessler                                 Director                                    December 22, 2006
--------------------------------------------------
Stephen L. Kessler

/s/ John P. Matheu                                     Director                                    December 22, 2006
--------------------------------------------------
John P. Matheu

/s/ Theodore L. Phillips, M.D.                         Secretary and Director                      December 22, 2006
--------------------------------------------------
Theodore L. Phillips, M.D.
</TABLE>

                                       55

<PAGE>

                           Intraop Medical Corporation
                   Index to Consolidated Financial Statements
                      For the Year Ended September 30, 2006

<TABLE>
<CAPTION>
<S>                                                                              <C> <C>                   <C>
Report of Independent Registered Public Accounting Firm for Year Ended September 30, 2006                F-2
Consolidated Balance Sheet as of September 30, 2006                                                      F-3
Consolidated Statements of Operations for the Years Ended September 30, 2006 and September
30, 2005                                                                                                 F-4
Consolidated Statement of Stockholder's Deficit for the Years Ended September 30, 2006 and
September 30, 2005                                                                                       F-6
Consolidated Statements of Cash Flows for the Years Ended September 30, 2006 and September
30, 2005                                                                                                 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, as of September 30, 2006, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the fiscal years ending September 30, 2006 and 2005. 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, 2006, and the consolidated results of
its operations and its cash flows for the fiscal years ending September 30, 2006
and 2005 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, 2006, had an
accumulated deficit of $28,014,918. 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/ Pohl, McNabola, Berg & Company, LLP
Pohl, McNabola, Berg & Company, LLP
San Francisco, California
December 1, 2006

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                                 <C>
Intraop Medical Corporation
Consolidated Balance Sheet
--------------------------------------------------------------------------------------------------------------
                                                                                             September 30,
                                                                                                 2006
                                                                                          --------------------
ASSETS
Current assets:
  Cash and cash equivalents                                                                         $ 149,871
  Accounts receivable                                                                               3,602,892
  Inventories, net                                                                                  1,653,874
  Inventories, under product financing arrangement                                                  1,581,738
  Prepaid expenses and other current assets                                                           133,386
                                                                                          --------------------

         Total current assets                                                                       7,121,761

Property and equipment, net                                                                           235,982
Intangible assets, net                                                                                356,360
Deferred financing cost                                                                               840,963
Deposits                                                                                              370,870
                                                                                          --------------------

        Total Assets                                                                              $ 8,925,936
                                                                                          ====================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                                               $ 3,127,016
   Accrued liabilities                                                                              1,257,350
   Capital lease obligations, current portion                                                           2,081
   Notes payable, related parties, current portion                                                    542,957
   Notes payable, other, current portion, net of unamortized debt discounts                         4,820,232
                                                                                          --------------------

         Total current liabilities                                                                  9,749,636


   Capital lease obligations, net of current portion                                                    7,925
   Notes payable, other, net of current portion, unamortized debt discounts
       and beneficial conversion features                                                           3,305,242
                                                                                          --------------------

         Total liabilities                                                                         13,062,803
                                                                                          --------------------

Commitments and contingencies (see note 9)

Stockholders' deficit:
  Common stock, $0.001 par value: 100,000,000 shares authorized;
     26,277,172 shares issued and outstanding                                                          26,277
  Additional paid-in capital                                                                       24,001,774
  Treasury stock, at cost, 600,000 shares at $.25 per share                                         (150,000)
  Accumulated deficit                                                                            (28,014,918)
                                                                                          --------------------

          Total stockholders' deficit                                                             (4,136,867)
                                                                                          --------------------

             Total liabilities and stockholders' deficit                                           $8,925,936
                                                                                          ====================

The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>
                                      F-3
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                                 <C>
Intraop Medical Corporation
Consolidated Statements of Operations
-----------------------------------------------------------------------------------------
                                                         Year ended September 30,

                                                   --------------------------------------
                                                         2006                 2005
                                                   ------------------    ----------------
Revenues:
  Product sales                                          $ 5,521,661         $ 3,460,920
  Leasing                                                    134,127             248,671
  Service                                                    327,166             125,284
                                                   ------------------    ----------------
  Total revenues                                           5,982,954           3,834,875
                                                   ------------------    ----------------

Cost of revenues:
  Product sales (1)                                        4,303,210           2,976,511
  Leasing                                                     38,323             371,506
  Service (1)                                                231,142             168,000
                                                   ------------------    ----------------
  Total cost of revenues                                   4,572,675           3,516,017
                                                   ------------------    ----------------
Gross margin                                               1,410,279             318,858
                                                   ------------------    ----------------

Operating expenses:
  Research and development (1)                               624,284             491,123
  General and administrative (1)                           2,414,219           3,135,032
  Sales and marketing (1)                                    800,842             619,910
                                                   ------------------    ----------------
          Total operating expenses                         3,839,345           4,246,065
                                                   ------------------    ----------------

Loss from operations                                     (2,429,066)         (3,927,207)
Other income                                                (76,877)              23,466
Gain on extinguishment of debt                                33,358             104,645
Interest income                                                7,205                   -
Interest expense                                         (4,694,721)         (1,921,706)
                                                   ------------------    ----------------
Loss before taxes                                        (7,160,101)         (5,720,802)
Provision for income taxes (1)                                     -                   -
                                                   ------------------    ----------------
Net loss                                                $(7,160,101)       $ (5,720,802)
                                                   ==================    ================
Basic and diluted net loss per share
   available to common shareholders                       $   (0.33)           $  (0.36)
                                                   ==================    ================
Weighted average number of shares in calculating
  net loss per share:
  Basic and diluted                                       21,799,599          16,048,182
                                                   ==================    ================

The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>
                                      F-4
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                    <C>                    <C>
Intraop Medical Corporation

Consolidated Statements of Operations (Continued)
------------------------------------------------------------------------------------------------------
                                                                    Year ended September 30,
                                                            ------------------------------------------
                                                                   2006                    2005
                                                            -------------------      -----------------
(1) Includes the following amounts related to share-based
compensation expense of stock options:

Cost of revenues - Product sales                                       $     -                $     -
Cost of revenues - Service                                               5,154                      -
Research and development                                                44,881                      -
General and administrative                                              54,302                      -
Sales and marketing                                                     43,347                      -
Provision for income taxes                                                   -                      -
                                                            -------------------      -----------------
Total                                                               $  147,684                $     -
                                                            ===================      =================

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

                  (Remainder of page intentionally left blank)

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
<S>                  <C> <C>        <C>           <C>        <C>          <C>         <C>            <C>
Intraop Medical Corporation
Consolidated Statements of Stockholders' Deficit
-----------------------------------------------------------------------------------------------------------------
                                                             Additional
                                         Common Stock         Paid-In      Treasury    Accumulated
                                    ----------------------
                                      Shares      Amount      Capital       Stock        Deficit        Total
                                    -----------  ---------  ------------  ----------  -------------  ------------
Balance at September 30, 2004       13,874,692    $13,874    $8,928,781   $(150,000)  $(15,134,015)  $(6,341,360)
   Issuance of common stock for
    reverse merger                   2,351,735      2,353        (2,353)          -              -             -
   Common stock issued for anti-
    dilution                           300,336        300       375,121           -              -       375,421
   Issuance of common stock at
    $0.55 per share as collateral
    for note payable                 1,600,000      1,600        (1,600)          -              -             -
   Cancellation of common stock
    issued at $1.25
       Per share as collateral
        for note payable            (2,400,000)    (2,400)        2,400           -              -             -
   Mandatorily redeemable shares       (97,000)       (97)     (121,153)          -              -      (121,250)
   Stock based compensation            895,000        895     1,280,292           -              -     1,281,187
   Conversion of stockholders
    advances into common stock         625,713        626       437,374           -              -       438,000
   Conversion of notes into
    common stock                     2,726,080      2,726     2,079,309           -              -     2,082,035
   Conversion of notes interest
    payable into common stock          157,211        157       109,914           -              -       110,071

   Relative fair value of warrant
    related to notes                         -          -     2,214,987           -              -     2,214,987
   Convertible debt beneficial
    conversion feature                       -          -     1,418,862           -              -     1,418,862
   Net loss                                                                             (5,720,802)   (5,720,802)
                                    -----------  ---------  ------------  ----------  -------------  ------------

 Balance at September 30, 2005      20,033,767    $20,034   $16,721,934   $(150,000)  $(20,854,817)  $(4,262,849)
                                    ===========  =========  ============  ==========  =============  ============

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

                  (Remainder of page intentionally left blank)

                                      F-6

<PAGE>
<TABLE>
<CAPTION>
<S>                  <C> <C>                     <C>         <C>      <C>          <C>        <C>           <C>
Intraop Medical Corporation
Consolidated Statements of Stockholders' Deficit (Continued)
------------------------------------------------------------------------------------------------------------------------
                                                                       Additional
                                                     Common Stock       Paid-In     Treasury   Accumulated
                                                 --------------------
                                                   Shares     Amount    Capital      Stock       Deficit       Total
                                                 ----------- -------- ------------ ---------- ------------- ------------
Balance at September 30, 2005                    20,033,767  $20,034  $16,721,934  $(150,000) $(20,854,817) $(4,262,849)
Stock based compensation                            200,000      200      306,940          -             -      307,140
Conversion of notes into common stock             1,817,185    1,817      782,149          -             -      783,966
Conversion of notes interest payable into common
 stock                                              150,500      150       80,544          -             -       80,694
Issuance of warrants in connection with debt
 financing                                                -        -    2,076,580          -             -    2,076,580
Issuance of common stock in connection with debt
 financing                                          135,000      135       80,866          -             -       81,001
Issuance of common stock upon exercise of stock
 options                                             30,000       30        2,970          -             -        3,000
Issuance of common stock upon exercise of
 Warrants                                         3,910,720    3,911    1,241,805          -             -    1,245,716
Reevaluation of warrants in connection with
 extension of life                                        -        -       45,945          -             -       45,945
Reevaluation of warrants in connection with
 repricing                                                -        -      119,113          -             -      119,113
Issuance of warrants in connection with
 consultancy services                                     -        -       56,864          -             -       56,864
Convertible debt beneficial conversion feature            -        -    2,486,064          -             -    2,486,064
Net loss                                                  -        -            -          -    (7,160,101)  (7,160,101)
                                                 ----------- -------- ------------ ---------- ------------- ------------

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

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

                  (Remainder of page intentionally left blank)

                                      F-7

<PAGE>
<TABLE>
<CAPTION>
<S>                                                                  <C>                    <C>
Intraop Medical Corporation
Consolidated Statements of Cash Flows
----------------------------------------------------------------------------------------------------------
                                                                        Year ended September 30,
                                                                ------------------------------------------
                                                                       2006                   2005
                                                                -------------------    -------------------
Cash flows from operating activities:
   Net loss                                                          $ (7,160,101)          $ (5,720,802)
   Adjustments to reconcile net loss to net cash
     used for operating activities:
     Depreciation of property and equipment                                 64,011                233,154
     Amortization of intangible assets                                      27,197                223,353
     Amortization of beneficial conversion rights                        1,465,571                 39,413
     Amortization of debt discount                                       1,306,936                 90,456
     Amortization of debt issuance costs                                   243,155                522,500
     Non-cash compensation  for options issued                             142,359                  7,837
     Non-cash compensation for warrants issued                             404,374                 68,245
     Non-cash compensation for common stock issued                         216,001              1,273,351
     Non-cash expense related to issuance
       of anti-dilutive shares of common stock                                   -                375,421
     Non-cash revenue received on leased equipment                        (62,168)              (248,671)
     Non-cash gain on extinguishment of debt                               (5,143)                      -
     Non-cash interest expense                                              38,324                179,536
   Changes in assets and liabilities:
        Accounts receivable                                            (2,673,589)                204,993
        Inventories                                                      (306,655)              (290,215)
        Prepaid expenses and other current assets                         (26,000)               (24,982)
        Other assets                                                     (182,759)               (61,697)
        Accounts payable                                                   499,143                585,614
        Accrued liabilities                                                182,555                631,976
        Foreign exchange translation                                        63,421               (23,466)
                                                                -------------------    -------------------
        Net cash used for operating activities                         (5,763,368)            (1,933,984)
                                                                -------------------    -------------------
Cash flows used for investing activities:
   Acquisition of fixed assets                                           (196,193)               (55,584)
   Acquisition of intangible assets                                       (30,000)               (50,000)
                                                                -------------------    -------------------
        Net cash used for investing activities                           (226,193)              (105,584)
                                                                -------------------    -------------------
Cash flows provided by financing activities:
     Proceeds from note payable, related party                             100,000                565,500
     Proceeds from note payable, other                                   9,184,775              8,247,000
     Payments on note payable, related party                             (393,330)              (238,000)
     Payments on note payable, other                                   (3,704,602)            (5,997,163)
     Debt issuance costs                                                 (339,568)              (613,803)
     Proceeds from issuance of common stock                              1,248,716                      -
                                                                -------------------    -------------------
            Net cash provided by financing activities                    6,095,991              1,963,534
                                                                -------------------    -------------------
Net increase (decrease) in cash and cash equivalents                       106,430               (76,034)
Cash and cash equivalents, at beginning of period                           43,441                119,475
                                                                -------------------    -------------------
Cash and cash equivalents, at end of period                             $  149,871             $   43,441
                                                                ===================    ===================

The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>
                                      F-8

<PAGE>
<TABLE>
<CAPTION>
<S>                                                                         <C>                 <C>
Intraop Medical Corporation
Consolidated Statements of Cash Flows (Continued)
----------------------------------------------------------------------------------------------------------
                                                                             Year ended September 30,
                                                                         ---------------------------------
                                                                              2006              2005
                                                                         ---------------    --------------
Supplemental disclosure of cash flow information:
   Cash paid for interest                                                   $ 1,018,255         $ 954,466
   Income taxes paid                                                                  -                 -

Supplemental disclosure of non-cash investing
  and financing activities:
  Inventory reclassified to leased equipment                                    $     -           $ 1,137
  Leased equipment reclassified to inventory                                    631,114                 -
  Property and equipment, at book value, converted to inventory                  10,906             6,616
  Purchase of intangible under vendor payment agreement                         312,500                 -
  Property and equipment acquired under capital leases                                             11,743
  Proceeds of notes payable deposited with vendors                                    -         1,065,000
  Accounts payable, interest payable and royalty payable converted
     to notes payable                                                                 -           529,559
  Stockholder advances and interest payable converted
     to common stock                                                                  -           438,000
  Promissory notes and interest payable converted
     to common stock                                                            864,660         2,192,106
  Adjustment to common stock and additional paid in capital
    due to anti-dilutive issuance of 300,336 shares of common stock                   -           375,421
  Intangible assets purchased under vendor payment arrangements                 312,500                 -


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

                  (Remainder of page intentionally left blank)

                                      F-9

<PAGE>

                    INTRAOP MEDICAL CORPORATION NOTES TO THE
                        CONSOLIDATED FINANCIAL STATEMENTS

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

Formation and Business of the Company:

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

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

History:

On March 9, 2005, the Company acquired all the outstanding shares of Intraop
Medical, Inc., a privately-held Delaware corporation (incorporated on March,
1993) in exchange for an aggregate of 14,175,028 restricted shares of its common
stock. The merger transaction was a tax-free exchange of stock. All of the
outstanding common and preferred stock of Intraop Medical, Inc. was exchanged on
a one-for-one basis with the Company's common stock, and the Company assumed all
obligations under outstanding options, warrants and convertible securities of
Intraop Medical, Inc. The acquisition has been accounted for as a reverse merger
(recapitalization) with Intraop Medical, Inc. deemed to be the accounting
acquirer. Accordingly, the historical financial statements presented herein are
those of Intraop Medical, Inc., as adjusted to give effect to any difference in
the par value of the issuer's and the accounting acquirer's stock with an offset
to capital in excess of par value, and those of Intraop Medical Corporation (the
legal acquirer) since the merger. The retained earnings of the accounting
acquirer have been carried forward after the acquisition and Intraop Medical,
Inc.'s basis of assets and liabilities were carried over in the
recapitalization. Operations prior to the business combination are those of the
accounting acquirer. Further pursuant to the Merger, certain holders of
convertible notes representing $295,000 of principal and $100,000 of principal
due related parties under Intraop Medical Inc.'s Promissory Note program,
converted their notes to common stock upon completion of the Merger at a price
of $1.25 per share.

Further pursuant to the Merger, the Company issued 795,000 shares of common
stock to certain service providers in exchange for services related to the
Merger. These shares were valued at $1.53 per share, the price of the Company's
common stock on March 9, 2005, the date of the Merger and were recorded as an
expense on the Company's books.

                                      F-10

<PAGE>

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

In April 2005, the Company received notices from stockholders representing an
aggregate of 97,000 shares of common stock who had previously voted against the
Merger that they wished to redeem their shares in accordance with certain
dissenter's rights provisions. An accrual for the estimated redemption value of
$121,250 and a corresponding offset to common stock and additional paid in
capital was recorded and subsequently paid to the dissenting stockholders.

Basis of Consolidation:

The consolidated financial statements include the accounts of Intraop Medical
Corporation and its wholly owned subsidiaries, Intraop Medical Services, Inc.
and IMS Louisville, LLC. All significant intercompany 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 $7,160,101 and $5,720,802 for the years
ended September 30, 2006 and 2005, 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, 2006, has an accumulated deficit of
$28,014,918. These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern. In view of the matters
described above, recoverability of a major portion of the recorded asset amounts
shown in the accompanying consolidated balance sheet is dependent upon the
Company's ability to generate sufficient sales volume to cover its operating
expenses and to raise sufficient capital to meet its payment obligations.
Management is taking action to address these matters, which include:

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

     o    Developing  new markets  (primarily  Europe) and  expanding  its sales
          efforts.

     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, 2006, the Company obtained capital through the issuance
of convertible debentures. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence. The successful
outcome of future activities cannot be determined at this time and there is no
assurance that if achieved, the Company will have sufficient funds to execute
its intended business plan or generate positive operating results.

Cash and Cash Equivalents:

The Company considers all highly liquid investments purchased with an original
maturity of three months or less at the time of purchase to be cash equivalents.
As of September 30, 2006, the Company maintains its cash and cash equivalents
with a major bank.

                                      F-11

<PAGE>

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

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are stated at the amount the Company expects to
collect. The Company recognizes an allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. Management considers the following factors when determining the
collectibility of specific customer accounts: customer credit-worthiness, past
transaction history with the customer, current economic industry trends, and
changes in customer payment terms. If the financial condition of the Company's
customers were to deteriorate, adversely affecting their ability to make
payments, an allowance would be required. Based on management's assessment, the
Company provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that remain outstanding
after the Company has used reasonable collection efforts are written off through
a charge to the valuation allowance and a credit to accounts receivable. At
September 30, 2006, the Company has not recorded an allowance.

Inventories:

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

Property and Equipment:

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

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

               Description                                    Useful Life
               -----------                                    -----------
         Equipment                                            5 years
         Computer equipment                                   3 years
         Furniture and fixtures                               5 years

Concentration of Credit Risk:

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

Credit risk with respect to account receivables is concentrated due to the
limited number of transactions recorded in any particular period. Three
customers represent 33.0%, 32.2% and 28.6% of accounts receivable at September
30, 2006. The Company reviews the credit quality of its customers but does not
require collateral or other security to support customer receivables. Five
customers accounted for 22.4%, 19.6%, 17.2%, 16.9% and 14.7% of net revenue for
the year ended September 30, 2006. Two customers accounted for 54.0% and 33.8%
of net revenue for the year ended September 30, 2005.

                                      F-12

<PAGE>

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

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 assets' 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, 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.

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. Revenue is generated from machine sales, leasing of machines,
installations, and maintenance. Machine sales and installation revenue are
recognized upon installation for sales to end users, provided there are no
uncertainties regarding acceptance, persuasive evidence of an arrangement exist,
any remaining obligations are inconsequential or perfunctory and collection of
the resulting receivable is deemed probable. Revenues from machine sales to
distributors are recognized upon shipment since these arrangements do not
include an installation element or right of return privileges. 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.

                                      F-13

<PAGE>

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

The Company recognized revenue on service contracts with five and two
institutions for the service of Mobetrons at the customer site during the years
ended September 30, 2006 and September 30, 2005, respectively. The customers
paid for a one-year service contract for which they receive warranty-level labor
and either full coverage or a credit for a certain contracted dollar amount for
service-related parts. On contracts with credit for service-related parts, the
Company recorded a liability for parts equal to the amount of the parts credit
contracted for by the customer with the remainder of the contract price recorded
as labor related service contract liability. On full coverage contract, the
Company recorded the contract price as service contract liability.

Lease Revenue and Leasing Transactions:

Revenue for the years ended September 30, 2006 and September 30, 2005 is partly
comprised of revenue recognized on a Mobetron system delivered to our customer
in Eindhoven, Holland in November 2003. At inception, as an equipment supplier,
the Company received proceeds in the amount of $1,230,685 as the sale price of
the equipment from a third party leasing company, who in turn leased the
equipment to the hospital pursuant to a seventy month lease. The Company has no
material obligations under the lease and the lease remains an unconditional
obligation of the hospital, as lessee, to make payments to the leasing company,
as lessor, for the leasing company's own account.

However, as an inducement to the hospital to enter into the lease, the Company
agreed in a contract with the hospital that, should the hospital decide, upon
sixty days prior notice to the Company, to prepay the lease with the leasing
company (a one-time option), at the end of the 18th month of its lease on May
31, 2005, the Company would reimburse the hospital for the cost of the
hospital's exercise of the prepayment option to the leasing company. Following
the reimbursement by the Company to the hospital for the prepayment amount,
title to the equipment would revert to the Company.

Because of the potential reimbursement to the hospital at the end of month
eighteen of the lease, the Company retained substantial risk of ownership in the
leased property, and the transaction has therefore been accounted for in
accordance with SFAS 13, "Accounting for Leases", specifically paragraphs 19,
21, and 22.

Accordingly, the Company recorded the entire $1,230,685 of proceeds received
from the leasing company as an obligation for leased equipment, a liability on
its balance sheet and accounted for the lease as borrowing. In accordance with
APB Opinion 21, "Interest on Receivables and Payables" paragraphs 13 and 14, the
Company determined an interest rate for the obligation of 14.5% based on other
debt arrangements entered into by the Company at dates closest to the inception
of the obligation for leased equipment. Further, although the Company is not
entitled to the cash rental payments, the Company recognized rental revenue
totaling $134,127 and $248,671 for the years ended September 30, 2006 and
September 30, 2005 respectively. A portion of each month's rental revenue was
recorded as interest and included in cost of revenue with the remainder recorded
as a reduction in obligation for leased equipment.

Accordingly, the Company recorded $1,016,238, the amount that the Company would
otherwise have been the Company's cost of revenue for the transaction, as leased
equipment, an asset on its balance sheet. The asset was depreciated on a
straight line basis over the period of the Company's reimbursement obligation to
the hospital down to a value equal to the estimated residual value of the
equipment at the end of the obligation. The depreciation expense is included in
cost of revenue.

                                      F-14

<PAGE>

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

Prior to May 31, 2005, the hospital notified the Company that it intended to
exercise its prepayment option, however the Company agreed to extend its
reimbursement option from May 31, 2005 until January 1, 2006 and agreed to a new
reimbursement amount. Pursuant to the reimbursement option extension, the
Company continued to recognize revenue and expense on this transaction,
including continued straight line depreciation down to a new asset residual
value of $631,114 which was reached on September 30, 2005, based on extended
usage, as described above. In January 2006, the hospital exercised its
prepayment option by paying certain sums to the third party leasing company. As
per prior agreement, the Company is obligated to reimburse the hospital for
$1,013,022, the amount paid to the leasing company. The previously recorded
leased asset with residual value of $631,114 was reclassified and integrated
into inventory in January, 2006. The previously recorded lease obligation was
adjusted to $1,013,022 and reclassified to accounts payable and a gain on
extinguishment of debt for $28,214 was recognized on the transaction.

Research and Development Costs:

Costs incurred for research and development, which include direct expenses and
an allocation of research related overhead expenses, are expensed as incurred.
The Company has not incurred significant costs for software development related
to its Mobetron product.

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 reduced (abated). In accordance with
generally accepted accounting principles, the Company records monthly rent
expense equal to the total of the payments due over the lease term, divided by
the number of months of the lease term. The difference between rent expense
recorded and the amount paid is credited or charged to "Deferred rent."

Warranty Claims:

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

Deferred Financing Costs:

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

Intangible Assets:

Intangible assets consist primarily of amounts paid for manufacturing and design
rights related to the Mobetron and a medical device approval license. These
manufacturing and design rights related to the Mobetron are amortized on a
straight-line basis over their estimated useful lives of five years. The medical
device approval license has an indefinite life and therefore is not subject to
amortization.

                                      F-15

<PAGE>

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

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 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 carry forwards. Deferred tax expense
or benefit is recognized as a result of timing differences between the
recognition of assets and liabilities for book and tax purposes during the year.

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized for deductible temporary differences and operating loss, and tax
credit 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.

Advertising Costs:

Advertising and sales promotion costs are expensed as incurred. Advertising
expense totaled $91,393 for 2006 and $103,478 for 2005.


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                                      F-16

<PAGE>

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

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,
2005, 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>    <C>    <C>    <C>    <C>
                                                               Year ended September 30,
                                                       ------------------------------------------
                                                              2006                   2005
                                                       -------------------    -------------------
Numerator
Net loss available to common
stockholders                                                 $(7,160,101)           $(5,720,802)

Denominator
Weighted average common shares outstanding                     21,799,599            15,951,182
Dissenter shares pending redemption                                     -                97,000
                                                       -------------------    -------------------
Total shares, basic                                            21,799,599            16,048,182
                                                       ===================    ===================
Net loss per common share:
  Basic and diluted                                             $  (0.33)             $   (0.36)
                                                       ===================    ===================

The potential dilutive shares, which are excluded from the determination of
basic and diluted net loss per share as their effect is anti-dilutive, are as
follows:
                                                                       Year ended September 30,
                                                                   ---------------------------------
                                                                        2006              2005
                                                                   ---------------    --------------
Debentures convertible to common stock                                 16,000,000         6,250,000
Options to purchase common stock                                        1,740,000         1,127,500
Warrants to purchase common stock                                      17,371,428        10,985,674
                                                                   ---------------    --------------
Potential equivalent shares excluded                                   35,111,428        18,363,174
                                                                   ===============    ==============
</TABLE>

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                                      F-17

<PAGE>

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

Stock-Based Compensation:

Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"),
which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including stock
options and restricted stock based on their fair values. SFAS 123(R) supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), which the Company previously followed in accounting for
stock-based awards. In March 2005, the SEC issued Staff Accounting Bulletin No.
107 ("SAB 107") to provide guidance on SFAS 123(R). The Company has applied SAB
107 in its adoption of SFAS 123(R). See Note 7 for a detailed discussion of SFAS
123(R).

On November 10, 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. FAS 123(R)-3 Transition Election Related to Accounting
for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt
the "short-cut" method provided in the FASB Staff Position for calculating the
tax effects of share-based compensation pursuant to SFAS 123(R). The "short-cut"
method includes simplified methods to establish the beginning balance of the
additional paid-in capital pool ("APIC pool") related to the tax effects of
share-based compensation, and to determine the subsequent impact on the APIC
pool and the Consolidated Statements of Cash Flows of the tax effects of
share-based compensation awards that are outstanding upon adoption of SFAS
123(R).

Accounting for Convertible Debt Securities:

The Company has issued convertible debt securities with non-detachable
conversion features. The Company accounts 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 a
contingent benefit conversion option, the Company records the intrinsic value,
which is to be measured using the commitment date fair value of the underlying
stock.

In June 2005, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 05-04, The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock. Under EITF 05-04, liquidated damages clauses may qualify as
freestanding financial instruments for treatment as a derivative liability.
Furthermore, EITF 05-04 addresses the question of whether a registration rights
agreement should be combined as a unit with the underlying financial instruments
and be evaluated as a single instrument. EITF 05-04 does not reach a consensus
on this question and allows for treatment as a combined unit (Views A and B) as
well as separate freestanding financial instruments (View C). On September 15,
2005, the FASB staff postponed further discussion of EITF 05-04. As of September
30, 2006, the FASB has still not rescheduled EITF 05-04 for discussion.

In conjunction with the issuance of the Company's senior and convertible
debentures and the related warrants and registration rights, the Company adopted
View C of EITF 05-04. Accordingly, the registration rights agreements, the
warrants associated with the senior and convertible debentures, the debentures
themselves, as well as certain features of the debentures were evaluated as
stand alone financial instruments. This treatment resulted in classification of
the warrants and certain features of the debentures as equity while the
registration rights agreements and other features of the debentures were treated
as derivative liabilities. Derivative liability treatment requires adjusting the

                                      F-18

<PAGE>

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

carrying value of the instrument to its fair value at each balance sheet date
and recognizes any change since the prior balance sheet date as a component of
other income/(expense). The recorded value of such derivative liabilities can
fluctuate significantly based on fluctuations of the market value of the
underlying securities of the Company, as well as on the volatility of the
Company's stock price during the term used for observation and the term
remaining for the underlying financial instruments. The Company believes that
should the FASB staff reach a consensus on EITF 05-04 and select combined unit
treatment (View A or B), the debt features of the debentures and associated
warrants previously classified as equity will have to be evaluated as a combined
unit with the registration rights agreements. This combination will result in
these instruments being treated as derivative liabilities requiring periodic
reevaluation of fair value with potentially significant fluctuation in fair
value from period to period. Accordingly, this consensus could have a
significant effect on the Company's financial statements.

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, 2006 and 2005, 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, 2005 to conform to the presentation
of the consolidated financial statements for the year ended September 30, 2006.
There was no effect on previously reported net loss.


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                                      F-19

<PAGE>

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

Recent Accounting Pronouncements:

In February 2006, the FASB issued FASB Staff Position No FAS 123(R)-4
Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event. ("FSP FAS 123(R)-4"). FSP FAS 123(R)-4 addresses the classification of
options and similar instruments issued as employee compensation that allow for
cash settlement upon the occurrence of a contingent event and amends paragraphs
32 and A229 of FASB Statement No. 123 (R). Companies are required to apply FSP
FAS 123(R)-4 upon initial adoption of Statement 123(R). Effective January 1,
2006, the Company adopted FSP FAS 123(R)-4, and does not believe the impact to
be significant to the Company's consolidated financial position, results of
operations or cash flows.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments--an amendment of FASB Statements No. 133 and 140.
Companies are required to apply Statement 155 as of the first annual reporting
period that begins after September 15, 2006. The Company does not believe
adoption of SFAS No. 155 will have a material effect on its consolidated
financial position, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets--an amendment of FASB Statement No. 140. Companies are required
to apply Statement 156 as of the first annual reporting period that begins after
September 15, 2006. The Company does not believe adoption of SFAS No. 156 will
have a material effect on its consolidated financial position, results of
operations or cash flows.

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109.,Companies are required to
apply FIN 48 as of the first annual reporting period that begins after December
15, 2006. The Company does not believe adoption of FIN 48 will have a material
effect on its consolidated financial position, results of operations or cash
flows.

In September 2006, the FASB issued FAS No. 13-2, Accounting for a Change or
Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated
by a Leveraged Lease Transaction. Companies are required to apply Statement 13-2
as of the first annual reporting period that begins after December 15, 2006. The
Company does not believe adoption of FAS No. 13-2 will have a material effect on
its consolidated financial position, results of operations or cash flows.

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

                                      F-20

<PAGE>

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

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

On September 29, 2006, the FASB issued SFAS No.158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires an entity to
recognize in its statement of financial position the over funded or under funded
status of a defined benefit postretirement plan measured as the difference
between the fair value of plan assets and the benefit obligation. An entity will
be required to recognize as a component of other comprehensive income, net of
tax, the actuarial gains and losses and the prior service costs and credits that
arise pursuant to FASB Statements No. 87, Employers' Accounting for Pensions and
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
Furthermore, SFAS No. 158 requires that an entity use a plan measurement date
that is the same as its fiscal year-end. An entity will be required to disclose
additional information in the notes to financial statements about certain
effects on net periodic benefit cost in the upcoming fiscal year that arise from
delayed recognition of the actuarial gains and losses and the prior service
costs and credits. The requirement to recognize the funded status of a defined
benefit postretirement plan and the related disclosure requirements is effective
for fiscal years ending after December 15, 2006. The requirement to change the
measurement date to the year-end reporting date is for fiscal years ending after
December 15, 2008. The Company does not anticipate this statement will have any
impact on its consolidated financial position, results of operations or cash
flows.

NOTE 2 - MAJOR CUSTOMERS AND VENDORS

Three customers represent 33%, 32.2% and 28.6% of accounts receivable at
September 30, 2006. Five customers accounted for 22.4%, 19.6%, 17.2%, 16.9% and
14.7% of net revenue for the year ended September 30, 2006. Two customers
accounted for 54.0% and 33.8% of net revenue for the year ended September 30,
2005.

Three suppliers represented 41%, 23.8% and 17.4% of accounts payable at
September 30, 2006. Purchases from these suppliers during the year ended
September 30, 2006 totaled approximately $1,013,022, $2,563,328 and zero.
Purchases from these suppliers during the year ended September 30, 2005 totaled
approximately zero, $1,687,774 and $168,307 respectively.

                                      F-21

<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS

Inventory:

Inventory consists of the following:

                                                     September 30,
                                                         2006
                                                  --------------------
Finished goods                                             $        -
Work-in-progress                                            1,045,589
Purchased parts and raw material, net of reserves
 of $10,159                                                   608,285
                                                  --------------------
                                                           $1,653,874
                                                  ====================

Inventories, under product financing arrangement:

Inventories under product financing arrangements consist of the following:

                                                     September 30,
                                                         2006
                                                  --------------------
Finished goods                                             $        -
Work-in-progress                                            1,428,813
Purchased parts and raw material                              152,925
                                                  --------------------
                                                           $1,581,738
                                                  ====================

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

Property and Equipment and Leased Equipment:

Property and Equipment and Leased Equipment consist of the following:

                                                     September 30,
                                                         2006
                                                  --------------------
Equipment                                                    $262,721
Computer equipment                                            116,997
Furniture & fixtures                                           64,306
Leasehold improvements                                          5,707
                                                              449,731
                                                  --------------------
Less accumulated depreciation                                 213,749
                                                  --------------------
                                                             $235,982
                                                  ====================

                                      F-22

<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, 2006. Related
accumulated depreciation and amortization of this asset was $2,544 as of
September 30, 2006.

Intangible Assets:

Intangible Assets consist of the following:

                                                             September 30,
                                                                  2006
                                                              -----------
Mobetron related manufacturing and design rights              $  366,900
Less accumulated amortization                                    (40,540)
                                                              -----------
Mobetron related manufacturing and design rights, net            326,360
Medical device approval license not subject to amortization       30,000
                                                              -----------
Intangible assets, net                                        $  356,360
                                                              ===========

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

Deferred financing cost:

            Debt issuance cost                                $1,286,906
            Less accumulated amortization                       (445,943)
                                                              ----------
            Deferred financing cost, net                      $  840,963
                                                              ==========

Amortization expense for intangible assets and deferred financing costs totaled
approximately $452,802 and $232,474 for the years ended September 30, 2006 and
2005, respectively. Amortization expense for the next five fiscal years is
estimated as follows:

                    Year Ending
                   September 30,          Amount
                 ------------------     ----------
                       2007             $  501,589
                       2008                470,347
                       2009                 80,220
                       2010                 68,500
                       2011                 46,667
                                        ----------
                                        $1,167,323
                                        ==========

                                      F-23

<PAGE>

NOTE 3 - BALANCE SHEET COMPONENTS (CONTINUED)

 Accrued Liabilities:

 A summary is as follows:

                                                 September 30,
                                                      2006
                                                  ------------
            Accrued liabilities:
            Contract advances                     $   416,500
            Accrued interest payable                  311,224
            Accrued warranty                          157,558
            Deferred revenue                          127,213
            Accrued personal paid leave               100,641
            Accrued sales tax payable                  64,972
            Accrued royalty payable                    50,000
            Other accrued liabilities                  29,242
                                                  -----------
                                                  $ 1,257,350
                                                  ===========

Warranty:

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

The following table summarizes the activity related to the product warranty
liability, which was included in accrued liabilities on the Company's
consolidated balance sheets, at September 30, 2006.

            Warranty accrual at September 30, 2005       $ 168,555

            Accrual for warranties during the year         146,538
            Actual product warranty expenditures          (157,535)
                                                         ---------

            Warranty accrual at September 30, 2006       $ 157,558
                                                         =========

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                                      F-24

<PAGE>

NOTE 4 - BORROWINGS

Outstanding notes payable were as follows:
                                                           September 30,
                                                                2006
                                                           -------------
        Notes payable, related parties, current            $     542,957
                                                           =============

        Convertible debentures                             $   6,400,000
        Product financing arrangement                          4,391,604
        Senior secured debentures                              1,666,667
        Other notes                                              358,660

        Less debt discounts due to warrants                   (2,291,516)
        Less beneficial conversion features                   (2,399,941)
                                                           -------------
        Notes payable, net of debt discounts and
          beneficial conversion features                       8,125,474
        Less current portion                                  (4,820,232)
                                                           -------------
           Notes payable, other, net of current portion,
             unamortized debt discounts and beneficial
             conversion features                           $   3,305,242
                                                           =============

         Future maturities of long-term and short term debt are as follows as of
         September 30, 2006:

                                   2007                    $   5,626,554
                                   2008                        3,533,333
                                   2009                        4,200,000
                                   2010                               --
                                   2011                               --
                                                           -------------
                                                           $  13,359,888
                                                           =============

Notes payable, related parties:

Notes payable to related parties of $542,957 at September 30, 2006, is related
to a note issued to one officer of the Company. The note is due on demand and
bear interest at 9% per annum. During the year ended September 30, 2006,
$183,967 of principal of notes and $66,033 of interest were converted to 431,034
shares of common stock at $0.58 per share. Additionally, during the year ended
September 30, 2006, the Company received note proceeds of $100,000 from related
parties and repaid $393,330 of principal to related parties.


                                      F-25
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

Convertible debentures

In August 2005, the Company sold $2,500,000 of convertible debentures to certain
investors. The debentures are convertible into the Company's common stock at
$0.40 per share at the option of the debenture holders and bear interest at 7%
per annum, payable quarterly. The debentures have a term of three years with
principal due in full at maturity. As a further inducement, the Company granted
the holders of the debentures warrants to purchase 3.125 million shares of the
Company's common stock, which expired September 30, 2006, and warrants to
purchase 3.125 million shares of the Company's common stock, expiring August 31,
2010. Both sets of warrants are exercisable at $0.40 per share

In October 2005, the Company sold an additional $2,500,000 of convertible
debentures to certain investors. The debentures are convertible into Company
common stock at $0.40 per share at the option of the note holders and bear
interest at 7% per annum, payable quarterly. The debentures have a term of three
years with principal due in full at maturity. As a further inducement, the
Company granted the holders of the convertible debentures short-term warrants to
purchase 3.125 million shares of its common stock, expiring November 2006, and
warrants to purchase 3.125 million shares of its common stock, expiring October
2010. Both sets of warrants are exercisable at $0.40 per share.
In November 2005, the Company sold an additional $2,000,000 of convertible
debentures to certain investors. The debentures are convertible to Company
common stock at $0.40 per share at the option of the note holders and bear
interest at 7% per annum, payable quarterly. The debentures have a term of three
years with principal due in full at maturity. As a further inducement, the
Company granted the holders of the convertible debentures short-term warrants to
purchase 2.5 million shares of its common stock expiring December 4, 2006 and
warrants to purchase 2.5 million shares of its common stock expiring November 4,
2010. Both sets of warrants are exercisable at $0.40 per share.

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

     o    the  payment  of a  dividend  in the  form of  common  stock  or other
          equivalent  equity  security,  or the  occurrence  of a  stock  split,
          reverse stock split, or  reclassification  of common stock.  Upon such
          event,  the conversion  price of the debentures and the exercise price
          of the  warrants  would  be  adjusted  by a  percentage  equal  to the
          percentage of the Company outstanding common shares prior to the event
          over the Company outstanding common shares and other equivalent equity
          securities after the event.

     o    the re-pricing, sale, or right to re-price or buy the Company's common
          stock or  equivalent  instrument  at a price less than the  conversion
          price. Upon such event, the conversion price of the debentures and the
          exercise  price of the warrants  would be adjusted to the price of the
          Company common stocks or other equivalent equity  securities  involved
          in the triggering event.

     o    the making of distribution  of cash,  evidence of  indebtedness,  cash
          other or other  assets,  or rights  to any  equity  securities  to the
          holders of the Company's common stock. Upon such event, the conversion
          price of the  debentures  and the exercise price of the warrants would
          be  adjusted by a  percentage  equal to the  percentage  change in the
          Company common stock price resulting from this event.

                                      F-26
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

     o    the occurrence of a transaction for the merger, sale, tender offer, or
          recapitalization of the Company. Upon such event, the conversion price
          of the  debentures  and the exercise  price of the  warrants  would be
          adjusted to allow the holders of the convertible debentures to receive
          upon conversion,  the same consideration received by the holder of the
          Company common stocks at the time of the triggering event.

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

     o    a  registration  statement  was not filed on or prior to September 30,
          2005 and November 24, 2005,  respectively,  or o the Company  fails to
          file with the Commission a request for acceleration in accordance with
          Rule 461  promulgated  under the Securities  Act,  within five trading
          days of the date that the Company is notified by the Commission that a
          registration  statement  will not be  "reviewed,"  or not  subject  to
          further review, or

     o    prior  to  its  effectiveness  date,  the  Company  fails  to  file  a
          pre-effective  amendment and otherwise  respond in writing to comments
          made by the  Commission  in  respect  of such  registration  statement
          within 10  calendar  days after the  receipt of  comments by or notice
          from the  Commission  that such  amendment  is required in order for a
          registration statement to be declared effective, or

     o    a  registration  statement  filed  or  required  to be  filed,  is not
          declared effective by the Commission by December 29, 2005 and February
          22, 2006, respectively, or

     o    after  December  29,  2005 and  February  22,  2006,  respectively,  a
          registration  statement  ceases for any reason to remain  continuously
          effective as to all registrable securities for which it is required to
          be  effective,  or the  investors  are not  permitted  to utilize  the
          prospectus  therein  to  resell  such  registrable  securities  for 10
          consecutive calendar days but no more than an aggregate of 15 calendar
          days during any 12-month period.

The amount of monthly liquidated damages equals 2.0% of the aggregate purchase
price paid by the investors for any registrable securities held by the
investors. Seven day late payment of the damages is subject to interest at an
annual rate of 18%. At September 30, 2006 the Company determined the maximum
potential liquidated damages to be approximately, $1,853,720.

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

                                      F-27
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

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

     o    Although entered into contemporaneously,  the debentures, warrants and
          registration   rights  agreements  are  nevertheless   separate  legal
          agreements.

     o    Payment of liquidated damages penalties under the registration  rights
          agreements  does not alter the  investors'  rights  under  either  the
          warrant or debenture  agreements.  The  debentures  and warrants  have
          values which are based on their interest rate and the relation between
          their  conversion  price  or  exercise  price  and  the  value  of the
          Company's  common stock.  This value is independent of any payment for
          liquidated damages under the registration rights agreements,  which is
          based on how long the shares remain unregistered.

     o    The  various  agreements  do not  relate  to the same  risk.  The risk
          inherent in the  debentures  relates to the  Company  ability to repay
          these instruments as and when they come due or to the extent converted
          into common  stock,  to the price of the Company's  common stock.  The
          warrants  similarly  bear risk  related  to the  value of the  Company
          common stock.  The liquidated  damages penalty under the  registration
          rights  agreements  relates  to the  risk  of  the  Company  filing  a
          registration statement and having it declared effective.

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

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

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

                                      F-28
<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

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

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

The value of the beneficial conversion features, $3,904,926, was limited to the
relative fair value of the debentures and will be amortized to interest over the
life of the debentures.

Only the debt acceleration provision upon default features of the convertible
debentures did not qualify for a scope exception under SFAS133. Accordingly,
they were required by SFAS 133 to be accounted for separately from the debt
instrument and recorded as derivative financial instruments. At issuance of the
convertible debentures on August 31, 2005, October 31, 2005 and November 4,
2005, the derivative features of the convertible debentures had no initial fair
value as the Company estimated the probability of occurrence of these features
to be nil or extremely low. In subsequent periods, the carrying value of the
derivative financial instrument related to the derivative features of the
convertible debentures will be adjusted to its fair value at each balance sheet
date and any change since the prior balance sheet date will be recognized as a
component of other income / (expense).

As of September 30, 2006, the Company assigned no value to the derivative
features of the convertible debentures, as the Company believes the probability
of occurrence of a default under the debentures to be nil or extremely low.

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

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


               (Remainder of this page intentionally left blank.)

                                      F-29
<PAGE>



NOTE 4 - BORROWINGS (CONTINUED)

The relative fair value of the warrants, the debentures conversion feature and
the debentures derivative features were recorded as a note discount and will be
amortized to interest over the life of the debentures. During the year ended
September 30, 2006, $600,000 of convertible debentures and $14,660 of related
interest were converted to 1,500,000 and 36,651 shares of common stock at $0.40
per share, respectively.
From July to August 2006, the Company temporarily repriced the exercise price of
convertible debentures short term warrants to purchase 6 million shares of its
common stock from $0.40 to $0.30 per share for a 15 day period. The relative
fair value attributable to the short term warrants repricing was recorded as a
note discount and will be amortized to interest over the life of the debentures.
At September 30, 2006 the outstanding principal balance of the convertible
debentures was $6,400,000 and the unamortized note discount was as follows:

Relative fair value of warrants allocated to note discount
Convertible debentures - August 2005                          $ 1,081,138
Convertible debentures - October 2005                             995,963
Convertible debentures - November 2005                            748,267
Convertible debentures - Repricing 2006                           119,113
                                                           ---------------

Total relative fair value of warrants allocated to note
 discount                                                       2,944,481
Less accumulated amortization                                 (1,094,514)
                                                           ---------------

Note discount related to warrants, net                        $ 1,849,967
                                                           ===============

Relative fair value of beneficial conversion features
 allocated to note discount
Convertible debentures - August 2005                          $ 1,418,862
Convertible debentures - October 2005                           1,487,797
Convertible debentures - November 2005                            998,267
                                                           ---------------

Total relative fair value of beneficial conversion
 features allocated to note discount                            3,904,926
Less accumulated amortization                                 (1,504,985)
                                                           ---------------

Note discount related to beneficial conversion
  features, net                                               $ 2,399,941
                                                           ===============

Product financing arrangement:

In August 2005, the Company entered into a $3,000,000 revolving combined
inventory financing and international factoring agreement (the "Revolving Line")
with a financial institution. Under the terms of the agreement, the Company
agreed to pay interest at the rate of 12% per annum on inventory financings and
24% per annum on factoring related borrowings under the line. The loan is
secured by a lien on the financed inventory and receivables. As a further
inducement, the Company also agreed to grant the financial institution a
warrant, which included piggyback registration rights, for 576,923 shares of its
common stock at an exercise price of $0.52 per share. The warrant has a two year
term. The fair value attributable to the warrant of $120,608 was recorded as a
note discount and will be amortized to interest over a one year period. On April
10, 2006, the Company entered into an amendment to the Revolving Line to clarify
and amend certain terms and conditions pursuant to which the Company can obtain
financing under the Revolving Line. Under the amendment to the Revolving Line
(the "Product Financing Arrangement"), ownership of the inventory financed is
transferred to the lending financial institution. From time to time, the Company
may repurchase financed inventory from the lender at a price equal to the
original transfer price plus interest.

                                      F-30

<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

 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
warrants to purchase 192,307 shares of its common stock at an exercise price of
$0.52 per share with an expiration date of May 31, 2008 and a fair value of
$66,708 to the financial institution. Additionally, the Company agreed to extend
by one year to August 15, 2006, the expiration date of 576,923 warrants
previously issued to the financial institution representing a fair value of
$45,945. The fair value attributable to the warrant and to the expiration date
extension was recorded as a note discount and will be amortized to interest over
a one year period. On September 14, 2006, the Company entered into an amendment
to the Product Financing Arrangement, increasing the debt facility available
under the Product Financing Arrangement to $4,500,000 until November 14, 2006
when it will revert to $4,000,000. At September 30, 2006 the outstanding
principal balance under this agreement was $4,391,604 and the unamortized note
discount was $75,102.

Senior secured debentures

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

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

     o    the  payment  of a  dividend  in the  form of  common  stock  or other
          equivalent  equity  security,  or the  occurrence  of a  stock  split,
          reverse stock split, or  reclassification  of common stock.  Upon such
          event,  the  exercise  price of the  warrants  would be  adjusted by a
          percentage equal to the percentage of the Company  outstanding  common
          shares prior to the event over the Company  outstanding  common shares
          and other equivalent equity securities after the event.

     o    the re-pricing, sale, or right to re-price or buy the Company's common
          stock or  equivalent  instrument  at a price less than the  conversion
          price.  Upon such event,  the exercise  price of the warrants would be
          adjusted to the price of the Company common stocks or other equivalent
          equity securities involved in the triggering event.

     o    the making of distribution  of cash,  evidence of  indebtedness,  cash
          other or other  assets,  or rights  to any  equity  securities  to the
          holders of the Company's  common stock.  Upon such event, the exercise
          price of the warrants  would be adjusted by a percentage  equal to the
          percentage  change in the Company  common stock price  resulting  from
          this event.

     o    the  occurrence  of a  defined  event  of  default  under  the  senior
          debentures,  upon which event the exercise price of the warrants would
          be reduced to one cent per share.

     o    the occurrence of a transaction for the merger, sale, tender offer, or
          recapitalization  of the Company.  Upon such event, the exercise price
          of the warrants would be adjusted to allow the holders of the warrants
          to receive upon  conversion,  the same  consideration  received by the
          holder of the  Company  common  stocks  at the time of the  triggering
          event.

                                      F-31

<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

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

     o    a  registration  statement  was not filed on or prior to September 30,
          2005, or

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

     o    prior  to  its  effectiveness  date,  the  Company  fails  to  file  a
          pre-effective  amendment and otherwise  respond in writing to comments
          made by the  Commission  in  respect  of such  registration  statement
          within 10  calendar  days after the  receipt of  comments by or notice
          from the  Commission  that such  amendment  is required in order for a
          registration statement to be declared effective, or

     o    a registration statement filed or required to be filed is not declared
          effective by the Commission by December 29, 2005, or

     o    after December 29, 2005 a registration statement ceases for any reason
          to remain continuously  effective as to all registrable securities for
          which  it is  required  to be  effective,  or the  investors  are  not
          permitted to utilize the prospectus therein to resell such registrable
          securities  for 10  consecutive  calendar  days  but no  more  than an
          aggregate of 15 calendar days during any 12-month period.

The amount of monthly liquidated damages equals 2.0% of the aggregate purchase
price paid by the investors for any registrable securities held by the
investors. Late payment beyond seven days is subject to interest at an annual
rate of 18%. At September 30, 2006, the Company determined the maximum potential
liquidated damages to be approximately, $600,410.

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

     o    Although entered into contemporaneously,  the debentures, warrants and
          registration   rights  agreements  are  nevertheless   separate  legal
          agreements.

     o    Payment of the liquidated  damages  penalties  under the  registration
          rights agreement does not alter the investors' rights under either the
          warrant or debenture  agreements.  The  debentures  and warrants  have
          values which are based on their interest rate and the relation between
          their  conversion  price  or  exercise  price  and  the  value  of the
          Company's  common stock.  This value is independent of any payment for
          liquidated damages under the registration  rights agreement,  which is
          based on how long the shares remain unregistered.

                                      F-32

<PAGE>

NOTE 4 - BORROWINGS (CONTINUED)

o        The two agreements do not relate to the same risk. The risk inherent in
         the debentures relates to the Company ability to repay these
         instruments as and when they come due or to the extent converted into
         common stock, to the price of the Company's common stock. The warrants
         similarly bear risk related to the value of the Company common stock.
         The liquidated damages penalty under the registration rights agreement
         relates to the risk of the Company filing a registration statement and
         having it declared effective.

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

At issuance of the senior debentures on August 31, 2005, the Company assigned no
initial fair value to the registration rights agreement. In subsequent periods,
the carrying value of the derivative financial instrument related to the
registration rights agreement will be adjusted to its fair value at each balance
sheet date and any change since the prior balance sheet date will be recognized
as a component of other income/(expense).
The estimated fair value of the registration rights agreement was determined
using the discounted value of the expected future cash flows. At September 30,
2005, the Company was not able to have a registration statement declared
effective by the SEC as required by the registration rights agreement. However,
in January 2006, the Company obtained an amendment to the registration rights
agreement to extend the required filing date of the Company's initial
registration statement to January 27, 2006, a deadline that the Company met, and
to extend the required effectiveness date of that same initial registration
statement to March 31, 2006, a deadline the Company did not meet, and to waive
all amounts potentially due under the liquidated damages clause which would have
been due and payable but for the waiver. On April 18, 2006 the Company obtained
a further amendment to the registration rights agreement to further extend the
required effectiveness date of its initial registration statement to May 15,
2006, a deadline the Company met. On June 19, 2006, the Company met the
requirements to have an effective registration statement for all shares required
to be registered pursuant to the registrations right agreement. The Company
believes that, in the future, it will be able to meet the registration
requirements of the registration rights agreement and that in the event it
cannot, and assuming the Company is making reasonable efforts to file and have a
registration statement declared effective, the holders of the debentures will
waive the liquidated damages required under the registration rights agreement.
As a result, at September 30, 2006, the Company assigned no value to the
potential liquidated damages.

The relative fair value of the warrants was determined using the Black-Scholes
option-pricing model and was recorded as a note discount and will be amortized
to interest over the life of the debentures. At September 30, 2006 the
outstanding principal balance under the senior secured debentures was $1,666,667
and the unamortized note discount was $359,410.

Other notes:

The Company has a twelve month payment arrangement with a vendor in the amount
of $312,500 related to the acquisition of certain Mobetron design rights. The
payment arrangement bears interest of 10% per annum. At September 30, 2006, the
principal balance outstanding under this payment arrangement was $193,990.

The Company has a note payable to a former director in the amount of $164,670.
This note is due on demand and bears interest at 9% per annum.

                                      F-33

<PAGE>

NOTE 5 - CAPITAL LEASE

Capital lease

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

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

        Capital lease for equipment                      $  10,006

        Less current portion                                (2,081)
                                                        ----------

        Capital lease obligations, net of
                current portion                          $   7,925
                                                        ==========

NOTE 6 - COMMON STOCK

Shares Reserved for Future Issuance:

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

                                             September 30,
                                                  2006
                                              -----------
            2005 Equity Incentive Plan         3,597,000
            Common stock warrants             17,371,428
                                              -----------
            Total                             20,968,428
                                              ===========

Treasury Stock:

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

Conversion of notes payable, related parties into Common Stock:

During the year ended September 30, 2006, one holder of the Company's notes
payable to related parties elected to convert an aggregate of $183,967 of
principal amount of the notes and $66,033 of related interest into 317,185 and
113,849 shares of the Company's common stock, respectively.

Issuance of Common Stock as consideration for amending the registration rights
agreements:

On March 16, 2006, the Company issued an aggregate of 135,000 shares of its
common stock having a market value of $81,000, a component of non cash interest
expense, to the holders of the Company's convertible and senior debentures in
consideration for amending the registration rights agreements. The amendment to
the registration rights agreements waived all liquidated damages currently owed
by the Company to the holders of the Company's convertible and senior debentures
and extended the required effectiveness date of the initial registration
statement to March 31, 2006. (see Note 4).


                                      F-34

<PAGE>

NOTE 6 - COMMON STOCK (CONTINUED)

Issuance of Common Stock as consideration for services:

On April 7, 2006, the Company entered into an agreement with Emerging Markets
Consulting, LLC ("EMC"). Pursuant to the agreement, the Company issued to EMC
100,000 shares of common stock having a market value of $70,000, a component of
general and administrative expense. Upon the first day of the second six-month
term of the agreement, should the Company not cancel the agreement; the Company
will issue to EMC an additional 100,000 shares of common stock.

On June 13, 2006, the Company issued 100,000 shares of common stock having a
market value of $65,000, a component of general and administrative expense, to
The Investor Relations Group, Inc. pursuant to an agreement entered into on
August 15, 2005.

Conversion of convertible debentures into Common Stock:

During the year ended September 30, 2006, holders of the Company's convertible
debentures elected to convert an aggregate of $600,000 of principal amount of
the debentures and $14,660 of related interest into 1,500,000 and 36,651 shares
of the Company's common stock, respectively.

Issuance of Common Stock upon exercise of warrants:

During the year ended September 30, 2006, the Company received proceeds of
$1,245,716 upon the exercise by certain investors of warrants to purchase
3,910,720 shares of its common stock.

Issuance of Common Stock upon exercise of options:

During the year ended September 30, 2006, the Company received proceeds of
$3,000 upon the exercise by certain investors of warrants to purchase 30,000
shares of its common stock.


               (Remainder of this page intentionally left blank.)

                                      F-35

<PAGE>

NOTE 7 - STOCK OPTIONS

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

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

Effective January 1, 2006, the Company adopted SFAS 123(R) using the modified
prospective transition method, which requires the measurement and recognition of
compensation expense for all share-based payment awards made to the Company's
employees and directors including stock options under the New Plan. The
Company's financial statements as of September 30, 2006, and for the year ended
September 30, 2006 reflect the effect of SFAS 123(R). In accordance with the
modified prospective transition method, the Company's financial statements for
prior periods have not been restated to reflect, and do not include, the impact
of SFAS 123(R). Share-based compensation expense recognized is based on the
value of the portion of share-based payment awards that is ultimately expected
to vest. Share-based compensation expense recognized in the Company's
Consolidated Statements of Operations during the year ended September 30, 2006
included compensation expense for share-based payment awards granted prior to,
but not yet vested, as of December 31, 2005 based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS 123 and
compensation expense for the share-based payment awards granted subsequent to
December 31, 2005 based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS
123(R), the Company elected to attribute the value of share-based compensation
to expense using the straight-line attribution. Share-based compensation expense
related to stock options was $147,684 for the year ended September 30, 2006.
During the year ended September 30, 2005, there was no share-based compensation
expense related to stock options recognized under the intrinsic value method in
accordance with APB 25.

Upon adoption of SFAS 123(R), the Company elected to value its share-based
payment awards granted after January 1, 2006 using the Black-Scholes
option-pricing model, which was previously used for its pro-forma information
required under SFAS 123. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. The Black-Scholes model requires the input of
certain assumptions. The Company's options have characteristics significantly
different from those of traded options, and changes in the assumptions can
materially affect the fair value estimates.

                                       F-36

<PAGE>



NOTE 7 - STOCK OPTIONS (CONTINUED)

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

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

        Expected term (in years)         4 to 10
        Risk-free interest rate     4.41% to 5.11%
        Expected volatility        103.4% to 131.4%
        Expected dividend yield           0%
        Weighted average fair
           value at grant date           $0.57

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, 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on 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 this page intentionally left blank.)

                                      F-37
<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

The effect of recording share-based compensation expense for the year ended
September 30, 2006 is as follows:
<TABLE>
<CAPTION>
<S>                                                                                 <C>
                                                                                Year Ended
                                                                              September 30,
                                                                                   2006
        ------------------------------------------------------------------- -------------------
        Stock-based compensation expense related to employee stock                  $  147,684
        options and employee stock purchases
        Tax benefit                                                                          -
                                                                            -------------------
        Net decrease in net earnings                                                $  147,684
                                                                            ===================
        Effect on:
        Cash flows from operating activities                                                 -
        Cash flows from financing activities                                                 -

        Effect on:
        Net earnings per share -- Basic                                                 $     -
                                                                            ===================
        Net earnings per share -- Diluted                                               $     -
                                                                            ===================
</TABLE>

For the year ended September 30, 2006, total share-based compensation expense
recognized in earnings before taxes was $147,684 and the total related
recognized tax benefit was zero. Total share-based compensation expense
capitalized as part of inventories for the year ended September 30, 2006 was
$24,975. Total share-based compensation expense applied to warranty reserve for
the year ended September 30, 2006 was $4,806.


                 (Remainder of page intentionally left blank.)

                                      F-38

<PAGE>

NOTE 7 - STOCK OPTIONS (CONTINUED)

Activity under the New Plan is presented below:
                                                           Weighted
                                                            Average
                                               Weighted    Remaining   Aggregate
                        Shares                 Average    Contractual  Intrinsic
                        Available  Number of    Exercise     Term        Value
                       for Grant     Shares      Price    (in years)      (1)
                       ----------  ----------  ---------  -----------  ---------
Balance at September
 30, 2005                 899,500   1,127,500      $0.77         5.15
Granted                  (656,000)    656,000       0.58         9.21
Authorized              1,600,000           -
Cancelled or expired       13,500     (13,500)      0.93
Exercised                       -     (30,000)      0.10
                       ----------  ----------  ---------  -----------  ---------
Balance at September
 30, 2006               1,857,000   1,740,000      $0.71         6.13         $-
                       ----------  ----------  ---------  -----------  ---------
Exercisable at
September 30, 2006                  1,476,846      $0.72         5.61         $-
                       ==========  ==========  =========  ===========  =========

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value,
based on the Company's closing stock price of $0.34 as of September 30, 2006,
which would have been received by the option holders had all option holders
exercised their options as of that date.

The total pre-tax intrinsic value of options exercised was $12,000 during the
year ended September 30, 2006.

Total options under the Plan at September 30, 2005, comprised the following:

                 Options           Weighted         Options
               Outstanding          Average       Exercisable
  Option          as of            Remaining         as of
 Exercise   September 30, 2005    Contractual   September 30,
  Price                           Life (Years)        2005
----------  ------------------  --------------  ---------------
   $0.100              30,000            0.12           30,000
    0.500              97,000            2.87           97,000
    0.550             300,000            2.20          300,000
    0.800             386,500            6.53          386,250
    0.880             120,000            5.55          120,000
    1.250             164,000            8.63           98,583
    1.375              30,000            8.51           15,000
            ------------------                  ---------------

  Total             1,127,500                        1,046,833
            ==================                  ===============


                                      F-39

<PAGE>



NOTE 7 - STOCK OPTIONS (CONTINUED)

Total options under the New Plan at September 30, 2006, comprised the following:
<TABLE>
<CAPTION>
<S>             <C>                   <C>                     <C>                   <C>
                            Options Weighted Options
                         Outstanding Average Exercisable
                          Option as of Remaining as of
               Exercise           September 30,          Contractual Life         September 30,
                Price                 2006                    (Years)                  2006
            ---------------    --------------------      ------------------    --------------------
                $0.500                97,000                  1.87                  97,000
                 0.540                50,500                  9.36                  40,875
                 0.550               300,000                  1.20                 300,000
                 0.580               602,000                  9.19                 380,194
                 0.700                 3,500                  9.36                     777
                 0.800               377,000                  5.55                 377,000
                 0.880               120,000                  4.55                 120,000
                 1.250               160,000                  7.64                 136,000
                 1.375                30,000                  7.51                  25,000
                               --------------------                            --------------------
                Total              1,740,000                                     1,476,846
                               ====================                            ====================
</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. The following table
illustrates the pro forma information regarding the effect on net earnings and
net earnings per share if the Company had accounted for the share-based employee
compensation under the fair value method of accounting:
<TABLE>
<CAPTION>
<S>                                                         <C>               <C>
                                                                       Year ended
                                                                     September 30,
                                                                 2006              2005
                                                           ----------------- -----------------
        Net loss available to common stockholders,
          as reported                                       $ (7,160,101)     $ (5,720,802)
        Compensation recognized under APB 25                           -                 -
        Compensation recognized under SFAS 123                  (347,029)          (47,637)
                                                           ----------------- -----------------
        Pro-forma net loss available to common
          stockholders                                      $ (7,507,130)     $ (5,768,439)
                                                           ================= =================
                   Net loss per share:
                     Basic and diluted - as reported        $      (0.33)     $      (0.36)
                                                           ================= =================
                     Basic and diluted - pro-forma          $      (0.34)     $      (0.36)
                                                           ================= =================
</TABLE>

As of September 30, 2006, there was $61,026 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the New Plan. This unrecognized compensation expense is expected to be
recognized over a weighted-average period of 1.87 years.


                                      F-40
<PAGE>

NOTE 8 - WARRANTS

The following warrants are each exercisable into one share of common stock:
<TABLE>
<CAPTION>
<S>                   <C> <C>                           <C>                 <C>                <C>
                                                                         Weighted             Aggregate
                                              Number of Shares        Average Price             Price
                                             -------------------     -----------------     ----------------
 Balance at September 30, 2004                          863,091             $    1.49          $ 1,287,500
 Warrants granted                                    10,222,583                  0.42            4,250,200
 Warrants exercised                                           -                     -                    -
 Warrants cancelled                                           -                     -                    -
 Warrants repriced                                    (119,100)                (1.25)            (148,875)
 Warrants repriced                                      119,100                  0.70               83,370
 Warrants expired                                     (100,000)                (2.00)            (200,000)
                                             -------------------     -----------------     ----------------

 Balance at September 30, 2005                                                   0.48            5,272,195
                                                     10,985,674
 Warrants granted                                    12,329,807                  0.41            5,015,000
 Warrants exercised                                 (3,910,720)                  0.40          (1,564,288)
 Warrants cancelled                                           -                     -                    -
 Warrants expired                                   (2,033,333)                (0.55)          (1,108,333)
                                             -------------------     -----------------     ----------------
 Balance at September 30, 2006                       17,371,428                $ 0.44          $ 7,614,574
                                             ===================     =================     ================
</TABLE>

The common stock warrants are comprised of the following:

                     Warrants          Weighted
                    Outstanding         Average
Exercise Price        as of            Remaining
                  September 30,       Contractual
                        2005          Life (Years)
---------------  -----------------  ---------------
        $0.400          9,537,500             3.64
         0.520            576,923             1.88
         0.700            119,100             4.92
         1.250            583,060             1.85
         1.375             69,091             1.42
         2.500            100,000             0.50

                 -----------------
     Total             10,985,674
                 =================


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

                 -----------------
     Total             17,371,428
                 =================

                                      F-41

<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

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

                     Fiscal Year
                  Ending September
                         30,                  Number
                 --------------------     ----------------
                        2007                    3,443,998
                        2008                      813,330
                        2009                      150,000
                        2010                    6,451,600
                        2011                    6,512,500
                                          ================
                                               17,371,428
                                          ================

On July 1, 2005, the Company agreed to extend by one year the expiration date of
244,000 warrants issued to holders of certain notes which were past due as
consideration for their continued forbearance. On August 31, 2005, the Company
further agreed to modify 119,100 of these 244,000 warrants by reducing the
exercise price of the warrants from $1.25 to $0.70 per share and extending the
expiration date to August 31, 2010 as additional consideration for agreements by
some of these noteholders to convert their note balances into the Company's
common stock at $0.70 per share on August 31, 2005. The remaining balances of
the non-converting notes were repaid on or about August 31, 2005. As a result of
the modifications, the Company recorded as warrant expense $42,696, the
difference between the fair value of the warrants immediately preceding and
immediately after the modifications using the Black-Scholes method.

On August 31, 2005, the Company issued to the holders of its 7% convertible
debentures short-term warrants to purchase 3.125 million shares of its common
stock, expiring September 30, 2006, and warrants to purchase 3.125 million
shares of its common stock, expiring August 31, 2010. All warrants are
exercisable at $0.40 per share. The debentures are deemed "conventional
convertible debt instruments" in accordance with EITF 05-02 and EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock, with respect to (i) contingencies related to
the exercise of the conversion option and (ii) convertible preferred stock with
a mandatory redemption date. The Company determined that the relative fair value
of the debentures and the warrants was $1,418,862 and $1,081,138, respectively.
The fair value of the warrants was recorded as a note discount and will be
amortized to interest over the life of the 7% convertible debentures.

On August 31, 2005, the Company issued five year warrants for 2.5 million shares
of its common stock at an exercise price of $0.40 per share with an expiration
date of August 31, 2010 to the holders of its 10% senior secured debentures (see
Note 4). The Company determined that the relative fair value of the debentures
and the warrants was $1,361,266 and $638,734, respectively. The fair value of
the warrants was recorded as a note discount and will be amortized to interest
over the life of the 10% senior secured debentures.

In August 2005, the Company issued a warrant to purchase 576,923 shares of its
common stock at an exercise price of $0.52 per share under the Revolving Line
(see Note 4). The fair value attributable to the warrant of $120,608 was
recorded as a note discount and will be amortized to interest over a one year
period. At September 30, 2006 the note discount was fully amortized.

                                      F-42

<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

During the year ended September 30, 2005, the Company issued a five year warrant
to purchase 787,500 shares of common stock at an exercise price of $0.40 per
share for services rendered by a financial advisor in connection with sales of
the 7% convertible debentures and 10% senior secured debentures (see Note 4).
The fair value of these warrants of $288,450 was capitalized as debt issuance
cost and amortized over the term of the debentures. At September 30, 2006 the
unamortized debt issuance cost was $174,823.

During year ended September 30, 2006, the Company issued to the holders of its
convertible debentures short-term warrants to purchase 5.625 million shares of
its common stock, with expiration dates between November 25, 2006 and December
4, 2006 and warrants to purchase 5.625 million shares of its common stock, with
expiration dates between October 25, 2010 and November 4, 2010. Both sets of
warrants are exercisable at $0.40 per share. The Company determined that the
relative fair value of the warrants was $1,744,230. The relative fair value of
the warrants was recorded as a note discount and will be amortized to interest
over the life of the convertible debentures. At September 30, 2006 the
unamortized note discount was $1,127,596.

During year ended September 30, 2006, the Company issued five year warrants to
purchase 787,500 shares of common stock at an exercise price of $0.40 per share
for services rendered by a financial advisor in connection with sales of the 7%
convertible debentures (see Note 4). The fair value of these warrants of
$255,085 was capitalized as debt issuance cost and amortized over the term of
the debentures. At September 30, 2006 the unamortized debt issuance cost was
$177,142.

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. Upon the first day of the second six-month term of the
agreement, should the Company not cancel the agreement, the Company will issue
to EMC an additional five-year warrant to purchase 100,000 shares of stock. The
fair value of these warrants of $42,011 was recorded as marketing expense in the
year ended September 30, 2006.

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
warrants to purchase 192,307 shares of its common stock at an exercise price of
$0.52 per share with an expiration date of May 31, 2008 and a fair value of
$66,708 to the financial institution. Additionally, the Company agreed to extend
by one year to August 15, 2008, the expiration date of 576,923 warrants
previously issued to the financial institution representing a fair value of
$45,945. The fair value attributable to the warrant and to the expiration date
extension was recorded as a note discount and will be amortized to interest over
a one year period. At September 30, 2006 the unamortized note discount was
$75,102.

From July to August 2006, the Company temporarily repriced the exercise price of
short term warrants to purchase 6 million shares of its common stock issued to
holders of the Company convertible debentures from $0.40 to $0.30 per share for
a 15 days period. The relative fair value attributable to the short term
warrants re-pricing was determined to be $119,113 and was recorded as a note
discount and will be amortized to interest over the life of the debentures. At
September 30, 2006 the unamortized note discount was $114,532.

                                      F-43

<PAGE>

NOTE 8 - WARRANTS (CONTINUED)

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

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

Expected life (in years)                          1.08 to 5
Risk-free interest rate                        4.26% to 4.92%
Expected volatility                           77.39% to 134.40%
Expected dividend yield                               -

NOTE 9 - EMPLOYEE BENEFIT PLAN

The Company maintains a 401(k) defined contribution plan that covers
substantially all of its employees. Participants may elect to contribute up to a
maximum of 15% of their annual compensation (subject to a maximum limit imposed
by federal tax law). The Company, at its discretion, may make annual matching
contributions to the plan. The Company has made no matching contributions to the
plan through September 30, 2006.


NOTE 10 - 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
year ended September 30, 2006 and 2005 was $ 220,713 and $100,110 respectively.
The terms of the facility lease provide for rental payments on a graduated
scale. The Company recognizes rent expense on a straight-line basis over the
lease period, and has accrued for rent expense incurred but not paid.

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

                                        Capital           Operating
        Year Ended September 30,        Leases             Leases
        ------------------------     -------------     ---------------
                 2007                   $ 2,579           $ 233,796
                 2008                     2,579             237,625
                 2009                     2,579             244,754
                 2010                     2,579             233,838
                 2011                       432                   -
                 2012                         -                   -
                                     -------------     ---------------

        Total minimum lease payments     10,748            $950,013
                                                       ===============
        Less: amount representing
                interest                  (742)
                                     -------------

        Present value of minimum
         lease payments                  10,006
        Less: current portion
                                        (2,081)
                                     -------------

        Obligations under capital
        lease, net of current portion   $ 7,925
                                     =============


                                      F-44
<PAGE>



NOTE 11 - INCOME TAX

The Company has no taxable income and it has recognized a full valuation
allowance for its future tax benefit related to net operating loss
carryforwards. Accordingly, there is no income tax benefit for federal and state
income taxes is required for 2006 and 2005.

A reconciliation of the statutory federal rate and the Company's effective tax
rate for the year ended September 30, 2006 and 2005 is as follows:

                                        Year Ended September 30,
                                   -----------------------------------
                                          2006             2005
                                   -----------------------------------
U.S. federal taxes (benefit)
         at statutory rate                       34.0%           34.0%
State                                             0.0%            0.0%
Permanent Differences                            -1.0%            0.0%
Other                                             0.0%            0.0%
Valuation allowance                             -33.0%          -34.0%
                                   -----------------------------------
Total                                             0.0%            0.0%
                                   ===================================

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

                                        September 30,   September 30,
                                            2006            2005
                                        --------------  --------------
Deferred tax assets:
 Net operation loss carryforwards -
  benefit                                  $9,368,741     $  7,045,342
 Inventory obsolescence reserve                 4,038                -
 Warranty expense                              62,623                -
 Deferred compensation                              -                -
 Accrued vacation                              40,000                -
 Deferred revenue                                   -                -
 Other                                        240,670                -
                                        --------------  --------------
   Total deferred tax assets                9,716,072        7,045,342
                                        --------------  --------------

Deferred tax liabilities:
 Difference between book and tax
  depreciation                               (157,690)               -
 Other                                              -                -
                                        --------------  --------------
   Total deferred tax liabilities            (157,690)               -
                                        --------------  --------------

Net deferred tax assets before valuation
 allowance                                  9,558,382        7,045,342
Valuation allowance                        (9,558,382)      (7,045,342)
                                        --------------  --------------
Net deferred tax assets                    $        -     $          -
                                        ==============  ==============

                                      F-45

<PAGE>

NOTE 11 - INCOME TAX (CONTINUED)

Net operating loss carryforwards of approximately $23,297,000 and $15,853,000
for federal and state are available as of September 30, 2006 respectively, to be
applied against future taxable income. The net operating loss carryforwards
expire in tax years 2007 through 2026 for federal purposes.

Utilization of the net operating loss carry forwards and credits may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.


NOTE 12 - 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,
                                    -------------------------------------
                                         2006                 2005
                                    ----------------    -----------------
         Europe                         $ 4,595,802          $ 2,362,962
         Asia                             1,013,607                    -
         United States                      373,545            1,471,913
                                    ----------------    -----------------
         Total Revenue                  $ 5,982,954           $3,834,875
                                    ================    =================

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, 2006.

        United States                       $ 588,306
        Europe                                  4,036
                                   -------------------
        Total                               $ 592,342
                                   ===================



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                                      F-46

<PAGE>

NOTE 13 - SUBSEQUENT EVENTS

The following subsequent events occurred between the end of fiscal year ended
September 30, 2006 and December 22, 2006.

In October 2006, the Company entered into a stand-alone, $700,000 revolving
inventory agreement (the "Inventory Financing Arrangement") with a financial
institution and drew down the entire $700,000 available under the line. Under
the terms of the agreement, the Company agreed to pay interest at the rate of
12% per annum on inventory financings under the line. Ownership of the inventory
financed is transferred to the lending financial institution. From time to time,
the Company may repurchase financed inventory from the lender at a price equal
to the original transfer price plus interest. As a further inducement, the
Company also agreed to grant the financial institution a warrant, which included
piggyback registration rights, for 50,000 shares of its common stock at an
exercise price of $0.50 per share. The warrant has a three year term.

In November 2006, the Company issued 100,000 shares of common stock and 100,000
warrants to an investor relations firm as part of a renewal of the Company's
prior investor relations agreement with that firm. The warrants have an exercise
price of $1.15 per share and a term of five years from the date of issuance.

In December 2006, the Company entered into an unsecured promissory note with an
individual for $50,000. The note bears interest at 9% per annum and is payable
in full on December 31, 2006.

The Company repaid $4,369,225 of principal due under its notes payable due to
third parties and received $1,753,736 of loan proceeds under the Product
Financing Arrangement.

                                      F-47