ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENTS

This Form 10-Q may contain "forward-looking statements," as that term is used in federal securities laws, about Imaging3, Inc.'s financial condition, results of operations and business. These statements include, among others:

o statements concerning the potential benefits that Imaging3, Inc. ("Imaging3," "we," "us," "our," or the "Company") may experience from its business activities and certain transactions it contemplates or has completed; and

o statements of Imaging3's expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. These statements may be made expressly in this Form 10-Q. You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates," "opines," or similar expressions used in this Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause Imaging3's actual results to be materially different from any future results expressed or implied by Imaging3 in those statements. The most important facts that could prevent Imaging3 from achieving its stated goals include, but are not limited to, the following:

(a) volatility or decline of Imaging3's stock price;

(b) potential fluctuation in quarterly results;

(c) failure of Imaging3 to earn revenues or profits;

(d) inadequate capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;

(e) failure to commercialize Imaging3's technology or to make sales;

(f) changes in demand for Imaging3'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 Imaging3 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

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business, we may not be able to obtain the required approvals from the United States Food and Drug Administration for our products and services, 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, and other risks inherent in our businesses.

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Imaging3 cautions you not to place undue reliance on the statements, which speak only as of the date of this Form 10-Q. 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 Imaging3 or persons acting on its behalf may issue. Imaging3 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 10-Q, or to reflect the occurrence of unanticipated events.

CURRENT OVERVIEW

Though our efforts have been to market our refurbished equipment, the sales and revenues from service and parts are increasing 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.

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

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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 which are "final" with a payment arrangement. We do not make consignment sales, nor 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 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 five days to six months. An operating lease agreement is utilized. The rental revenues were insignificant in the three month period ended September 30, 2008. 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.

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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 NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2007

We had revenues during the nine months ended September 30, 2008 of $1,407,424 compared to $992,427 for nine months ended September 30, 2007, which represents a 41% increase. This increase in revenue is due in part to the Company's focus on sales as well as pending sales from the previous period as well as from its normal aggressive marketing campaign for this period. During the nine months ended September 30, 2008, our equipment sales were $1,058,768 compared to $590,658 for the nine months ended September 30, 2007, representing an increase in equipment sales of $468,110 in 2008. Our service and parts sales for the nine months ended September 30, 2008 were $371,556 compared to $385,098 for the nine months ended September 30, 2008, a slight decrease.

Our cost of revenue was $558,327 for the nine months ended September 30, 2008 compared to $589,767 for the nine months ended September 30, 2007, which represents a decrease of $31,440 or 5%. This decrease is due in large part to decreased equipment prices for the same period. We had an increase in gross profit margin during the nine months ended September 30, 2008 of $849,097 compared to $402,660 for the same period in 2007. Our operating expenses did not vary substantially from $1,748,763 for the nine months ended September 30, 2007 compared to $1,644,838 for the nine months ended September 30, 2008. Our loss from operations during the nine months ended September 30, 2008 decreased to $795,741 as compared to $1,346,103 during the nine months ended September 30, 2007, a 69% decrease. This decrease is attributable to our overall increase in revenue for this same period. Our net loss was $505,231 for the nine months ended September 30, 2008 compared to $1,360,005 for the nine months ended September 30, 2007, a 62% decrease, which is attributable to an increased revenue stream and lower cost of goods sold for the period.

During the nine month period ended September 30, 2008, the litigation concerning Tom's River, which has been on going since 2006, was settled for $38,016. No other litigations were incurred or resolved during the three month period ended September 30, 2008.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash position was $1,863 at September 30, 2008 compared to $15,877 at September 30, 2007.

As of September 30, 2008, the Company had current assets of $484,460, non-current assets of $59,735, and current liabilities of $3,134,831. The current liabilities for the same period in 2007 were $3,809,468. The decrease in liabilities resulted from a decrease in accrued liabilities and accounts payable.

Net cash used for operating activities amounted to $1,311,177 for the nine months ended September 30, 2008, compared to $899,833 for the nine months ended September 30, 2007. The increase in 2008 as compared to 2007 resulted from accrued expenses and accounts payable.

Net cash provided by financing activities amounted to $1,333,738 and $890,358 for the nine months ended September 30, 2008, and 2007, respectively. The increase in 2008 compared to 2007 resulted from the issuance of a Private Placement Memorandum and the selling of shares of stock during the nine months ended September 30, 2008 as well as increased equipment sales.

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The Company does not have sufficient capital to meet its current cash needs, which include the costs of compliance with the continuing reporting requirements of the Securities Exchange Act of 1934 under section 15(d) if this Registration Statement becomes effective. The Company intends to seek additional capital and long term debt financing to attempt to overcome its working capital deficit. The Company will need between $50,000 and $100,000 annually to maintain its reporting obligations. Financing options are available to the Company either via a private placement memorandum or through the public sale of stock. It is anticipated that the Company can raise sufficient capital to complete the development of its prototype and to sustain monthly operations. There is no assurance, however, that the available funds will ultimately prove to be adequate and that its needs for additional financing are likely to persist.

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" might make it substantially more difficult to raise capital.