ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

CAUTIONARY STATEMENTS

This Form 10KSB/A contains financial projections and other "forward-looking statements," as that term is used in federal securities laws, about the Company's financial condition, results of operations and business. These statements include, among others: statements concerning the potential for revenues and expenses and other matters that are not historical facts. These statements may be made expressly in this Form 10KSB/A. You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates," or similar expressions used in this Form 10KSB/A. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause the Company's actual results to be materially different from any future results expressed or implied by the Company in those statements. The most important facts that could prevent the Company from achieving its stated goals include, but are not limited to, the following:

(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital to continue the business and barriers to raising the additional capital or to obtaining the financing needed to implement its business plans;
(e) failure to commercialize the Company's technology or to make sales;
(f) changes in demand for the Company's products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
(i) insufficient revenues to cover operating costs;
(j) failure to obtain FDA approval for the Company's new medical scanning device, which is still in its prototype stage.

There is no assurance that we will be profitable. We may not be able to develop, manage or market our products and services successfully. We may not be able to attract or retain qualified executives and technology personnel. We may not be able to obtain customers for our products or services. Our products and services may become obsolete. Government regulation may hinder our business. Additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of outstanding warrants and stock options.

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. The Company cautions you not to place undue reliance on the statements, which speak only as of the date of this Form 10KSB/A. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on its behalf may issue. The Company does not undertake any obligation to review or confirm analysts' expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10KSB/A or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes to those statements. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking information that involves risks and uncertainties.

CURRENT OVERVIEW

Our efforts have been to market our refurbished equipment. The sales and revenues from service and parts are either from extended warranty purchases at the time of purchase of the refurbished equipment, or service contracts and time and material revenue realized upon warranty expiration, the majority of which is realized one year from equipment purchase as warranties expire.

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Our sales effort through direct mail, broadcast facsimile and broadcast email to thousands of potential customers throughout the United States generates leads of potential customers desiring to purchase equipment either immediately or in the course of one year. This lead generation through direct mail and broadcast facsimiles and email will continue on a quarterly basis with the goal of increasing the total number of our leads for our sales staff. Management expects that the marketing program will also eventually help stabilize the amount of refurbished equipment sold on a monthly basis, since the carry-over of leads not looking for immediate purchase will overlap with the immediate sales leads. The greater the number of leads generated, whether immediate or long term, the greater the opportunity to eventually create a consistent number of sales.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We monitor our estimates on an on-going basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

We have identified the policies below as critical to our business operations and the understanding of our results of operations.

REVENUE RECOGNITION. We recognize revenue in accordance with the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104"). We recognize revenue upon shipment, provided that evidence of an arrangement exists, title, and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. We record revenue net of estimated product returns, which is based upon our return policy, sales agreements, management estimates of potential future product returns related to current period revenue, current economic trends, changes in customer composition and historical experience. We accrue for warranty costs, sales returns, and other allowances based on our experience. Generally, we extend credit to our customers and do not require collateral. We perform ongoing credit evaluations of our customers and historic credit losses have been within our expectations. We do not ship a product until we have either a purchase agreement or rental agreement signed by the customer with a payment arrangement. This is a critical policy, because we want our accounting to show only sales that are "final" with a payment arrangement. We do not make consignment sales or inventory sales subject to a "buy back" or return arrangement from customers.

PROVISION FOR SALES RETURNS, ALLOWANCES AND BAD DEBTS. The Company maintains a provision for sales allowances, returns and bad debts. Sales returns and allowances result from equipment damaged in delivery or customer dissatisfaction, as provided by agreement. The provision is provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction is estimated based on historical experience.

RESERVE FOR OBSOLETE/EXCESS INVENTORY. Inventories are stated at the lower of cost or market. We regularly review our inventories and, when required, will record a provision for excess and obsolete inventory based on factors that may impact the realizable value of our inventory including, but not limited to, technological changes, market demand, regulatory requirements and significant changes in our cost structure. If ultimate usage varies significantly from expected usage, or other factors arise that are significantly different than those anticipated by management, inventory write-downs or increases in reserves may be required.

The fire in 2002 incinerated our inventory, so we have not had to deal with significant amounts of obsolete inventory since that time. Our procedure is now to maintain only limited inventory, based on our experience in service and repair, necessary for current service and repair contracts or orders anticipated within the following 60 days. We have supply relationships with long term suppliers to provide additional parts on an as needed, prompt basis for the vast

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majority of repair and service parts, so obsolescence is no longer a factor in our business. We have not recorded any material amounts as charges to obsolescence since the fire in 2002 destroyed our warehouse.

Rental income is recognized when earned and expenses are recognized when incurred. The rental periods vary based on customer's needs ranging from 5 days to 6 months. An operating lease agreement is utilized. The rental revenues were insignificant in the twelve month period ended December 31, 2007. Written rental agreements are used in all instances.

OTHER ACCOUNTING FACTORS

The effects of inflation have not had a material impact on our operation, nor are they expected to in the immediate future.

Although we are unaware of any major seasonal aspect that would have a material effect on the financial condition or results of operation, the first quarter of each fiscal year is always a financial concern due to slow collections after the holidays.

The deposits that are shown in the financials are for pending sales of existing products and not any new patented product. These are deposits received from our customers for sales of equipment and services and are only removed as deposits upon completion of the sale. If for whatever reason a customer order is cancelled the deposit would be returned as stated in the terms of sale, minus a restocking fee.

No depositor is a related party of any officer or employee of Imaging3, Inc.

Our terms of deposit typically are 50% down with the balance of the sale price due upon delivery.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2006.

We had revenues in 2007 of $1,323,773 compared to $1,385,940 in 2006, which represented a 5% decrease. The decrease in sales was attributed directly to a decrease in equipment sales for this period. In 2006, our remanufactured equipment sales were $880,500 compared to $782,585 in 2007, representing a decrease in equipment sales of $97,915 or 12%. Our service and parts sales for 2007 were $186,050 as compared to $192,245 in 2006, which is a decrease of $6,195 or 3%.

Our rental revenue has been a little more than 1% of our total revenue in the past 2 years and is recognized over the term of the lease agreement. Rental revenues are only deemed earned as collected. In February 2002, fire destroyed our manufacturing facility and headquarters building along with our entire inventory, all office equipment and internal infrastructure. Rebuilding the company's inventory and entire infrastructure continues to this day. The amount of insurance received from this fire was approximately $2,400,000, which was inadequate to replace inventory and rebuild the necessary assets and infrastructure required to be rebuilt over eight years of prior business. Several employees were let go and offices in San Diego, Arizona, Washington and Florida were closed, which lowered administrative expenses but negatively impacted revenue and income as well. Although the Company has made significant strides, it continues on the path of rebuilding.

Our cost of revenue was $910,125 in 2007 as compared to $676,622 in 2006, an increase of $233,503 or 34%. This increase resulted directly from increased costs for equipment, parts, sales and services. The Company's gross profit margin in 2007 was $413,649 as compared to $709,318 in 2006, a 41% decrease, giving the Company a weaker gross profit margin for the year. This is due to decreased revenue and increased costs in 2007. The Company's total operating expenses decreased from $3,009,268 in 2006 to approximately $2,465,299 in 2007, a decrease of 11% due to decreased general and administrative expense. Miscellaneous expense decreased by $169,552 due primarily to two miscellaneous charges with reference to the payoff of a former partner in 2006. Overall professional fees have increased by $48,724 or 7% due in part to an increase in outside consulting fees. The increase in repairs and maintenance expense of $1,497 was caused primarily by the increase of small tools and supplies for the year. Travel and entertainment expenses increased by $13,846 which was caused primarily by a late surge in December 2007 sales as well as late expenses resulting from the RSNA annual convention in Chicago, Illinois. The taxes account was impacted by other taxes that decreased by $13,826 as evidenced by

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decreased sales to clients in the State of California, which reduced taxes owed to the State Board of Equalization and to the County of Los Angeles. The net overall decrease of $511 in utilities to the Burbank Department of Water and Power was as a result of satisfying most of the debt owed to the City, which mistakenly read only meter rather than two meters. Once the City realized its mistake, it quickly assessed the Company the difference for the period and arranged a workout with an advance for payment of the difference. Our net loss for the fiscal year ending December 31, 2007 was $2,061,255 as compared to $2,121,924 for the fiscal year ending December 31, 2006.

At December 31, 2007 the Company had a balance due to the Chief Executive Officer of the Company amounting to $391,738 for the amount borrowed by the Company. This amount is due on demand, secured and interest free.

From the period of April 2003 to December 31, 2003 the Company was delinquent in paying payroll taxes in the amount of $103,622 including penalties and interest. This was due to the significant costs of maintaining three separate facilities to house management, manufacturing and continuing to carry costs for our destroyed facility. Also cash flow in this period was substantially low due to the devastating impact of the fire in 2002 and our efforts to rebuild operations and continue to bring in revenue. The Company has continued negotiating payment arrangements with the Internal Revenue Service and filed an offer in compromise on August 24, 2004 for $21,000. A hearing to discuss the potential offer in compromise and payments is still pending. Management expected to have this resolved by fiscal year end 2008 with a payment schedule. Since January 1, 2004 the Company has remained current with its payroll taxes and does not expect another delinquency. Even if this assessment has to be paid in full without compromise, we believe we can meet an installment payment arrangement without compromising the Company's operations. After accumulating the required interest as penalties, the amount now owed under this account is $170,213.

The Company filed its tax return for 2000 as an S Corporation and changed its status to a C Corporation effective August 1, 2001. The Company accounts for income taxes under Statements of Financial Accounting Standards No.
109 (SFAS 109). Under SFAS 109, deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. We have recorded insignificant liabilities of $800 per year for income taxes due to adjustments as a result of the conversion from an S corporation to a corporation for tax purposes. The provision for income taxes was recorded for the state minimum tax of $800 imposed on corporations. (See Note 7 in financial statements for year ended December 31, 2007.)

We expect the trend of operating losses by the Company to continue into the future at the current or greater rate as we spend money on product development and marketing. There is no assurance we can achieve significant profitable sales to overcome losses. We do not expect litigation against us to expand as evidenced by the significant drop in activity in this area and do not believe it is an increasing trend. In fact, in 2007, we had only one new litigation case as in 2006, so our feeling is that the trend is away from increasing litigation, although we can give no assurances in relation to future litigation.

We experienced a very destructive fire in 2002 that destroyed our facilities and inventory. Due to the loss of records, inventory, facilities, assets and revenues and the disruption to our business and cash flow in the fire in 2002, several lawsuits resulted creating additional legal expenses (refer to "Legal Proceedings" and Note 12 in the accompanying December 31, 2007 financial statements for further detail). Many of these lawsuits were for equipment orders that could not be filled or serviced to the customer's satisfaction and vendor payables. The interruption in business, the destruction of our inventory and operations, legal expenses and the expenses incurred to rebuild, were sought through litigation with Tower Engineering as described in Note 12 in the accompanying December 31, 2007 financial statements. This claim, however, lost in a Motion for Summary Judgment and allowance was made for it in 2005. Further, the Arbitrator in the Tower matter ruled against us by awarding Tower a judgment for $79,394.93. Cases settled during 2005, 2006 and 2007 are as previously mentioned in this report.

In 2007, the Company spent and recorded $168,811 for research and development of its patented technology, which includes software design, mechanical design and the manufacturing of the prototype. Costs for individuals employed by Imaging3, Inc are absorbed in normal operating expenses and are not separated at this time for simplicity. It is anticipated that expenses in this category will increase slightly during 2008 as the prototype continues to progress.

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LIQUIDITY AND CAPITAL RESOURCES

Our total current assets as of December 31, 2007 decreased to $244,050 from $627,054 as of December 31, 2006, a difference of $383,003 or 61%. This is due in large part to the decrease in inventory from $504,263 in 2006 to $163,753 in 2007. The manner in which inventory is valued also contributed to this decrease.

Our total current liabilities increased to $3,711,359 as of December 31, 2007 from $3,647,304 as of December 31, 2006. This increase is due in large part to accrued litigation expense, which as of December 31, 2007 was $2,262,931, and also to the consulting fees and expenses due to an officer of the Company with a December 31, 2007 net balance of $391,738.

During the year ended December 31, 2007, the Company used $1,192,683 of cash for operating activities, as compared to $1,609,137 during the year ended December 31, 2006. Cash provided by financing activities during the year ended December 31, 2007 was $1,169,624, as compared to $1,623,123 during the year ended December 31, 2006.

GOING CONCERN QUALIFICATION

The Company has incurred significant losses from operations, and such losses are expected to continue. The Company's auditors have included a "Going Concern Qualification" in their report for the year ended December 31, 2007. In addition, the Company has limited working capital. The foregoing raises substantial doubt about the Company's ability to continue as a going concern. Management's plans include seeking additional capital and/or debt financing. There is no guarantee that additional capital and/or debt financing will be available when and to the extent required, or that if available, it will be on terms acceptable to the Company. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The "Going Concern Qualification" may make it substantially more difficult to raise capital.