**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**




(Mark
      One)




x Annual
      Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934




For
      the
      fiscal year end **March
      31, 2006**




o Transition
      Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of 1934




For
      the
      transition period from _____ to _____




**COMMISSION
      FILE NUMBER** **033-24138-D**




**IMAGENETIX,
      INC.**


(Name
      of
      small business issuer in its charter)




**NEVADA**
            
            **87-043772**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)




**10845
                Rancho Bernardo Road, Suite 105****San
                Diego, California**
            
            **92127**(Address
                of principal executive offices)
            
            (Zip
                Code)




Issuer's
      telephone number **(858)
      674-8455**




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




Securities
      registered under Section 12(g) of the Exchange Act:




**COMMON
      STOCK, $0.001 PAR VALUE PER SHARE.** ****




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




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 registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. **Yes** x **No**o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant's knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-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
      12b-2 of the Exchange Act) Yes o No x




Revenues
      for the fiscal year ended March 31, 2006 were **:
      $7,649,941.**




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold as of **June
      26, 2006**  **was**  **$6,423,210** . ****




State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date. **As
      of June 28, 2006 the issuer had 10,721,400**  **shares
      of Common Stock outstanding.**




Transitional
      Small Business Disclosure Format (Check one): Yes o No x












**Annual
      Report on Form 10-KSB**


**For
      the Year Ended March 31, 2006**




**TABLE
      OF CONTENTS**




PagePART
                  IITEM
                  1.
              Description
                  of Business
              3ITEM
                  2.
              Description
                  of Property
              10ITEM
                  3.
              Legal
                  Proceedings
              10ITEM
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              10PART
                  IIITEM
                  5.
              Market
                  for Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity Securities
              11ITEM
                  6.
              Management's
                  Discussion and Analysis or Plan of Operation
              11ITEM
                  7.
              Financial
                  Statements
              18ITEM
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              18ITEM
                  8A.
              Controls
                  and Procedures
              19ITEM
                  8B.
              Other
                  Information
              20PART
                  IIIITEM
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance With
                  Section
                  16(a) of the Exchange Act
              20ITEM
                  10.
              Executive
                  Compensation
              22ITEM
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              23ITEM
                  12.
              Certain
                  Relationships and Related Transactions
              24ITEM
                  13.
              Exhibits
              24ITEM
                  14.
              Principal
                  Accountant Fees and Services
              26




2




**DISCLOSURE
      REGARDING FORWARD-LOOKING STATEMENTS**




Certain
      statements contained in this Annual Report on Form 10-KSB constitute
      "forward-looking statements". These statements, identified by words such as
      “plan”, "anticipate", "believe", "estimate", "should," "expect" and similar
      expressions, include our expectations and objectives regarding our future
      financial position, operating results and business strategy. These statements
      reflect the current views of management with respect to future events and are
      subject to risks, uncertainties and other factors that may cause our actual
      results, performance or achievements, or industry results, to be materially
      different from those described in the forward-looking statements. Such risks
      and
      uncertainties include those set forth under the caption "Management's Discussion
      and Analysis or Plan of Operation" and elsewhere in this Form 10-KSB. We advise
      you to carefully review the reports and documents we file from time to time
      with
      the Securities and Exchange Commission (“SEC”), particularly our quarterly
      reports on Form 10-QSB and our current reports on Form 8-K.




As
      used
      in this annual report, the terms "we", "us", "our", and “Imagenetix” mean
      Imagenetix, Inc., unless otherwise indicated.




**PART
      I**




**ITEM
      1.     DESCRIPTION OF
      BUSINESS.**




**The
      Company**




We
      were
      organized as a Nevada corporation in March 1988 under the name Capital Growth,
      Inc. and completed an initial public offering of our securities in 1989.
      Imagenetix, Inc. was incorporated in Colorado in July 1996 under the name
      Internet International Business Management, Inc. and changed its name to
      Imagenetix, Inc. in April 1999. In October 2000 we merged with Imagenetix,
      Inc.
      Under the terms of the merger, we issued 6,550,000 shares of our common stock
      and 3,315,000 common stock purchase warrants and stock options to the Imagenetix
      security holders to acquire all 6,550,000 shares of Imagenetix Inc.'s
      outstanding common stock, along with all of its stock options and common stock
      purchase warrants. After the merger we had 8,550,000 shares of common stock
      and
      3,708,750 common stock purchase warrants and stock options outstanding. Our
      principal executive offices are located at 10845 Rancho Bernardo Road, Suite
      105, San Diego, California 92127, and our telephone number is (858) 674-8455.
      Our home page can be located on the World Wide Web at http://www.imagenetix.net .





We
      develop, formulate and market on a private label basis over-the-counter,
      natural-based nutritional supplements and skin care products. Our products
      are
      proprietary, often supported by scientific studies which we request and are
      offered through multiple channels of distribution, including direct marketing
      companies, also known as network marketing or multi-level marketing companies,
      and chain store retailers. Our primary product is Celadrin® which we have
      historically offered as a part of product formulations which we sold on a
      private label basis to our customers. Recently, however, we have begun offering
      Celadrin® as an ingredient which our customers may use in their own products.





A
      key
      part of our marketing strategy is our ability to provide to customers that
      distribute our products a "turnkey" approach to the marketing and distribution
      of our products. This turnkey approach provides our customers with all the
      services necessary to market our products, including developing specific product
      formulations, providing supporting scientific studies regarding the
      effectiveness of the product and arranging for the manufacture and marketing
      of
      the product.





We
      have
      developed and sold over 60 products and formulations to businesses and
      organizations that market these products through multiple channels of
      distribution, including direct marketing companies, mass marketing companies,
      medical, health and nutritional professionals, medical newsletters and direct
      response radio and television. We have also begun to offer Celadrin® products
      through customers that in turn offer their products containing Celadrin® to mass
      market retailers.




3





**Our
      Business**





We
      develop, formulate and market on a private label basis over-the-counter,
      natural-based nutritional supplements and skin care products. Our products
      are
      proprietary, often supported by scientific studies which we request and are
      offered through multiple channels of distribution including direct marketing
      companies, mass marketing companies, medical, health and nutritional
      professionals, medical newsletters and direct response radio and television.





A
      key
      part of our marketing strategy is our ability to provide to customers that
      distribute our products a "turnkey" approach to the marketing and distribution
      of our products. Our "turnkey" approach provides:





• Specific
      product formulations requested by our customers;





•
      Scientific studies to support claims made for our products;





•
      Assistance in complying with U.S. laws and regulations;





• Assistance
      in obtaining foreign country regulatory approval for sale of our products;





•  Marketing
      materials and marketing assistance to support product sales; and





•  Manufacture
      of products with delivery directly to the customer.





Following
      development of a new product, and on behalf of our customers, we:





• Conduct
      and complete any scientific studies necessary for regulatory compliance;





• Arrange
      for the manufacture of finished products to our specifications; and





•
Develop
      marketing tools and plans to promote product sales, including labels and
      graphic designs, promotional brochures and providing speakers to promote the
      products.





Our
      management and key personnel have many years experience in developing and
      selling nutritional products to domestic and international marketers, including
      direct marketers, health food stores and mass market merchandisers.





We
      currently sell over 60 products and formulations to businesses and organizations
      that market these products through multiple channels of distribution, including
      direct marketing companies, mass marketing companies, medical, health and
      nutritional professionals, medical newsletters and direct response radio and
      television. Our four largest customers, accounted for 31%, 13%, 13% and 13%,
      respectively, of our net sales for the year ended March 31, 2005 and our four
      largest customers, accounted for 22%, 16%, 13% and 11% for the year ended March
      31, 2006.





**Our
      Strategy**





We
      are a
      developer, formulator and supplier of natural-based products, designed to
      enhance human and animal health. We develop, formulate and private label
      over-the-counter topical creams, nutritional and skin care products marketed
      globally through multiple channels of distribution. Our strategy involves:





• Continuing
      to develop innovative and proprietary nutritional and skin care products;





• Continuing
      to offer "turnkey" services, including product development, regulatory
      compliance, manufacturing
      and marketing services, to assist our customers in quickly bringing new products to market;




4




• Marketing
      our products internationally by assisting our customers in registering their
      products for sale
      in
      foreign countries.





To
      date,
      we have completed the registration of over 25 products in foreign countries,
      including Japan, Australia, Norway, Venezuela, Germany, India and Canada. Most
      of the products registered contain our proprietary Celadrin® compound.





**Industry
      Overview**





The
      dietary supplement industry is highly diversified and intensely competitive.
      It
      includes companies that manufacture, distribute and sell products that are
      generally intended to supplement our daily diets with nutrients that may enhance
      the body's performance and well-being. Dietary supplements include vitamins,
      minerals, herbs, botanicals, amino acids and compounds. Specific statutory
      provisions governing the dietary supplement industry were codified in the
      Dietary Supplement Health and Education Act. This act provides new statutory
      protections for dietary supplements and allows for statements that inform
      consumers of the effect dietary supplements have upon the structure or functions
      of the body.





We
      expect
      that the following factors will contribute to the ongoing growth of the domestic
      nutritional supplement industry:





• The
      aging
      of the American population, which is likely to cause increased consumption
      of nutritional
      supplements;





• New
      product introductions in response to new research supporting the positive health
      effects of certain
      nutrients;





•
The
      nationwide trend toward preventative medicine resulting from rising health
      care
      costs;





•
      Increased consumer interest in alternative health products such as herb-based
      nutritional supplements;





•
A
      heightened awareness of the connection between diet and health.





Nutritional
      supplements are sold primarily through:





•
Mass
      market retailers, including mass merchandisers, drug stores, supermarkets and
      discount stores;





•
Health
      food stores;





•
Mail
      order companies; and





•
Direct
      sales organizations, including network marketing companies .





**Products**





We
      offer
      a variety of specialized proprietary nutritional formulations, over-the-counter
      topical creams, and skin care products. Since beginning operations in February
      1999, we have developed and sold over 60 products and formulations to businesses
      and organizations that market these private labeled products through multiple
      channels of distribution, including direct selling, sales to mass market
      retailers, direct response radio, nutritional newsletters and medical care
      professionals. Our product formulations may be developed by our customers,
      co-developed by us and our customers or developed exclusively by us for the
      customer.





Our
      leading product is Celadrin®, a nutritional supplement compound comprised of a
      complex of fatty acid esters which plays a role in human and animal joint health
      and scientifically supported by our clinical studies. For the year ended March
      31, 2006, approximately 84% of our revenue, was generated from the sale of
      various formulations containing Celadrin®. Historically, we have offered
      Celadrin® as part of a formulated branded or private label product. However,
      starting in June 2004, we began to offer Celadrin® as a branded ingredient to be
      used by our customers in their own product formulations.




5




A
      number
      of safety and efficacy studies have been conducted on Celadrin®'s principal
      composition, cetylated fatty acids. Studies have been presented at international
      scientific conferences, with two studies having been published in the Journal
      of
      Rheumatology and one study published in the Journal of Strength and Conditioning
      Research. We are continuing research to determine Celadrin®'s effects on the
      body, including any role it may play in providing support for the normal
      functioning of muscles and joints. We produce a wide range of formulas using
      the
      Celadrin® compounds and market these formulations through multiple distribution
      channels. Many of our customers resell Celadrin® and other formulated products
      under their own labels and trade names. We do not own or have any ownership
      interest in the labels or trade names under which these products are sold.
      Using
      multiple manufacturing processes to produce Celadrin®, we offer the product to
      our customers in soft gel capsule, tablet, two-piece capsules and topical cream
      forms.





In
      January 2005 our Celadrin® compound was approved by the government of India as a
      prescription drug for treating joint pain. Previously, in August 2002 we entered
      into an exclusive purchase and supply agreement with Cymbiotics to distribute
      Celadrin® to hospitals and clinics in India and certain other countries. The
      agreement expired on December 31, 2005 and was replaced by a letter agreement
      in
      February 2006.





In
      June
      2004 we entered into an agreement with Proprietary Nutritionals Inc. to globally
      promote and market our Celadrin® compound on a non-exclusive basis throughout
      the world, except India and China. The agreement includes a marketing and
      branding program supported by media and other advertising.





In
      January 2005 we entered into a two-year spokesperson agreement with Tony and
      Alicia Gwynn whereby they will actively promote Celadrin â .
      Tony
      Gwynn is known for his achievements as a major league baseball player for the
      San Diego Padres and an eight time National League batting champion.





We
      use
      paid consultants who are medical doctors, scientific research consultants,
      independent scientific researchers and laboratories and universities to assist
      us in the development and testing of our products. We believe Celadrin® will
      continue to be our principal compound. We intend to expand the number of
      customers who use this compound in formulas and to develop other formulas for
      new customers.





In
      addition to Celadrin®, which we sell in many formulations including an oral
      product, a cream, and as a pet product, we have also developed other natural
      based products designed to address specific health issues, including compounds
      and formulations involving a proprietary blend of fruit and vegetable extracts
      which represented approximately 16% of our sales for the year ended March 31,
      2006.





We
      also
      are at the early stage of developing therapies for the treatment of inflammatory
      conditions, such as periodontal disease. We have conducted in-vivo and in-vitro
      efficacy and safety studies on our drug compound for the treatment of gum
      disease including periodontitis.





**Raw
      Materials and Manufacturing**





We
      develop and formulate proprietary, natural based, nutritional supplements,
      over-the-counter topical creams and skin care products but do not manufacture
      any of these products. We currently purchase ingredients from suppliers for
      delivery to manufacturers chosen by us. We have an agreement with our sole
      supplier of Celadrin® to purchase sufficient quantities of the compound to meet
      our anticipated needs through January 2012. We believe this agreement can be
      extended although we can give no such assurance. All other ingredients can
      be
      obtained from a number of suppliers, although the loss of any supplier could
      adversely affect our business.





We
      use a
      number of manufacturers to combine ingredients furnished by our suppliers into
      our nutritional and skin care products. By outsourcing product manufacture,
      we
      eliminate the capital required to manufacture our own products and increase
      the
      flexibility of our manufacturing resources. We have written confidentiality
      and
      exclusivity agreements with key manufacturers and believe suitable replacement
      manufacturers are available. However, the loss of a manufacturer could adversely
      affect our business.




6




**Marketing
      and Distribution.**





Since
      inception, we have marketed our products to clients in multiple channels of
      distribution with initial emphasis placed upon direct selling companies. Our
      marketing strategy consists of:





• Continuing
      to offer our proprietary products to existing customers while seeking new
      customers, emphasizing
      those engaged in the direct selling and mass marketing of nutraceutical
      supplements and
      other
      nutraceutical products;





• Continuing
      to assist our customers in designing new nutritional, topical, and skin care
      products using
      our
      formulations;





•  Continuing
      to design marketing materials, provide marketing spokespersons and offering
      other value
      added services to assist customers in expanding their sales of our product;





•  Developing
      and offering new products to direct marketing and mass marketing companies;





•  Offering
      products for distribution through medical and nutritional oriented
      professionals;





•  Offering
      products for distribution through direct response radio and television.





We
      will
      continue to offer our customers a turn key approach to their product needs.
      This
      approach emphasizes providing the customer with the support necessary to allow
      them to sell our products, including providing the scientific studies required
      by U.S. and foreign regulators, tailoring our product formulations specifically
      for each customer, obtaining approvals in foreign countries for our customers
      to
      market there, providing full marketing support for the products, including
      product information, product descriptions and speakers to discuss products
      at
      customer conventions and seminars and arranging for manufacture and shipment
      of
      the products according to customer instructions. We currently sell to ten direct
      selling distribution companies and national distributors.





Approximate
      sales by principal geographic area (as a percentage of sales) for fiscal years
      ended March 31 were as follows:




2006
              
              2005Domestic
                  sales
              
              
              96.6
              %
              
              98.0
              %Foreign
                  sales:India
              
              
              1.8
              
              
              1.2Canada
              
              
              0.7
              
              
              0.5Australia
              
              
              0.6
              
              
              0.2United
                  Kingdom
              
              
              -
              
              
              0.1Korea
              
              
              0.1
              
              
              -Taiwan
              
              
              0.2
              
              
              -Total
                  foreign sales
              
              
              3.4
              
              
              2.0Total
                  sales
              
              
              100.0
              %
              
              100.0
              %




All
        of
        our operating assets are located within the United States. While sales to
        certain geographic areas generally vary from year to year, we do not expect
        that
        changes in the geographic composition of sales will have a material adverse
        effect on operations .
  7
  **Competition**
 
 The
        nutritional supplement and skin care industries are large and intensely
        competitive. We compete generally with companies that manufacture and market
        competitive nutritional products in each of our product lines, including
        companies such as Twin Labs, Weider Nutrition, IVC Industries and Perrigo.
        We
        also compete with companies that supply nutritional products to direct
        distribution companies, such as Leiner Health, Natural Alternatives and
        Vitatech. We also compete with companies that develop and sell skin care
        products, such as West Coast Cosmetics, CA Botana and Cosmetic Products
        International.
 
 Competitive
        factors in the nutritional supplement and skin care markets include product
        effectiveness, scientific validation, proprietary formulations, price, quality
        of products, reliability of product delivery and marketing services offered
        to
        customers. We believe we compete favorably with respect to each of these
        factors. Nevertheless, most of our competitors have longer operating histories,
        wider product offerings, greater name recognition and financial resources
        than
        do we. However, we believe our turnkey approach of offering our customers
        significant regulatory and marketing support, as well as unique, scientifically
        validated products, improves our competitive position.
 
 **Government
        Regulation**
 
 In
        both
        the United States and foreign markets, we are subject to extensive laws and
        governmental regulations at the federal, state and local levels. For example,
        we
        are subject, directly or indirectly, to regulations pertaining to:
 
 • Dietary
        ingredients;
 
 •
The
        manufacturing, packaging, labeling, promotion, distribution, importation,
        sale
        and storage of our
        products;
 
 • Product
        claims, labeling and advertising (including direct claims and advertising
        by us
        as well as claims
        in
        labeling and advertising by others, for which we may be held responsible);
 
 •  Transfer
        pricing and similar regulations that affect the level of foreign taxable
        income
        and customs duties;
        and
 
 •  Taxation,
        which in some instances may impose an obligation on us to collect taxes and
        maintain appropriate
        records.
 
 The
        dietary ingredients, manufacturing, packaging, storing, labeling, advertising,
        promotion, distribution and sale of our products are subject to regulation
        by
        one or more governmental agencies, including the Food and Drug Administration,
        the Federal Trade Commission, the Consumer Product Safety Commission, the
        Department of Agriculture, the Department of Customs, the Patent and Trademark
        Office, and the Environmental Protection Agency. Our activities are, or may
        be,
        regulated by various agencies of the states, localities and foreign countries
        in
        which our products are manufactured, distributed and/or sold. The FDA, in
        particular, regulates the ingredients, manufacture, packaging, storage,
        labeling, promotion, distribution and sale of foods, dietary supplements
        and
        over-the-counter drugs, such as those we distribute. We and our suppliers
        are
        required by FDA regulations to meet relevant current good manufacturing practice
        guidelines for the preparation, packing and storage of foods and drugs. The
        FDA
        has also published proposed rules for the establishment of good manufacturing
        practices for dietary supplements, but it has not yet issued a proposal rule.
        The FDA conducts unannounced inspections of companies that manufacture,
        distribute and sell dietary supplements, issues warning letters for rule
        violations found during these inspections and refers matters to the U.S.
        Attorney and Justice Department for prosecution under the Federal Food, Drug
        and
        Cosmetic Act. There can be no assurance that the FDA will not question our
        labeling or other operations in the future.
 
 The
        Dietary Supplement Health and Education Act revised the provisions governing
        dietary ingredients and labeling of dietary supplements. The legislation
        created
        a new statutory class of "dietary supplements." This new class includes
        vitamins, minerals, herbs, botanicals, other dietary substances to supplement
        the daily diet, and concentrates, metabolites, constituents, extracts and
        combinations thereof. The legislation requires no federal pre-market approval
        for the sale of dietary ingredients that were on the market before October
        15,
        1994. Since cetylated fatty acids, the primary ingredient in Celadrin®, was on
        the market prior to October 15, 1994, we have not been required to provide
        the
        FDA with any proof as to safety or efficacy of Celadrin®. Dietary ingredients
        first marketed after October 15, 1994 may not be distributed or marketed
        in
        interstate commerce unless:
  8
 
 • The
        manufacturer has proof that the dietary ingredient has been present in the
        food
        supply as an article
        used for food and in a form in which the food has not been chemically altered,
        or
 
 • The
        manufacturer supplies the FDA with proof to the FDA's satisfaction of the
        dietary ingredient's safety.
 
 Manufacturers
        and distributors of dietary supplements may include statements of nutritional
        support, including structure and function claims, on labels and in advertising
        if:
 
 • The
        claims are corroborated by "competent and reliable scientific evidence"
        consistent with FTC standards
        for advertising review;
 
 • The
        claims for labels and labeling are filed in a certified notice with the FDA
        no
        later than 30 days after
        first market use of the claims;
 
 •  The
        manufacturer retains substantiation that the claims are truthful and
        non-misleading;
 
 •  Each
        claim on labels and in labeling is cross-referenced by an asterisk to a
        mandatory FDA disclaimer.
 
 The
        majority of the products marketed, or proposed to be marketed, by us are
        classified as dietary supplements. In September 1997, the FDA issued regulations
        governing the labeling and marketing of dietary supplement products. The
        regulations cover:
 
 • The
        identification of dietary supplements and their nutrition and ingredient
        labeling;
 
 •
The
        terminology to be used for nutrient content claims, health claims and statements
        of nutritional support,
        including structure and function claims;
 
 • Labeling
        requirements for dietary supplements for which "high potency" and "antioxidant"
        claims are
        made;
 
 •  Notification
        procedures for statements of nutritional support, including structure and
        function claims,
        on dietary supplement labels and in their labeling;
 
 •  Pre-market
        notification procedures for new dietary ingredients in dietary supplements.
 
 Dietary
        supplements are subject to federal laws dealing with drugs and regulations
        imposed by the FDA. Those laws regulate, among other things, health claims,
        ingredient labeling and nutrition content claims characterizing the level
        of
        nutrient in the product. They also prohibit the use of any health claim for
        dietary supplements, unless the health claim is supported by significant
        scientific agreement and is pre-approved by the FDA. A federal court has
        ruled
        that the FDA must authorize health claims presented to the agency in health
        claims petitions unless they are inherently misleading and must rely on
        disclaimers to eliminate any potentially misleading connotation conveyed
        by a
        claim. The court also held that even claims not supported by significant
        scientific agreement must be allowed if disclaimers can correct misleading
        connotations.
 
 Prior
        to
        permitting sales of our products in foreign markets, we may be required to
        obtain an approval, license or certification from the country's ministry
        of
        health or comparable agency. The approval process generally would require
        us to
        present each product and product ingredient to appropriate regulators and,
        in
        some instances, arrange for testing of products by local technicians for
        ingredient analysis. These approvals may be conditioned on reformulation
        of our
        products or may be unavailable with respect to certain products or certain
        ingredients. We must also comply with product labeling and packaging regulations
        that vary from country to country.
  9
  The
        Federal Trade Commission, which exercises jurisdiction over the marketing
        practices and advertising of products similar to those we offer, has in the
        past
        several years instituted enforcement actions against several dietary supplement
        companies for deceptive marketing and advertising practices. These enforcement
        actions have frequently resulted in consent orders and agreements. In certain
        instances, these actions have resulted in the imposition of monetary redress
        requirements. Importantly, the commission requires that "competent and reliable
        scientific evidence" corroborate each claim of health benefit made in
        advertising before the advertising is first made. A failure to have that
        evidence on hand at the time an advertisement is first made violates federal
        law. While we have not been the subject to enforcement action for the
        advertising of its products, there can be no assurance that this agency will
        not
        question our advertising or other operations in the future.
 
 We
        believe we are in compliance with all material government regulations which
        apply to our products. However, we are unable to predict the nature of any
        future laws, regulations, interpretations or applications, nor can we predict
        what effect additional governmental regulations or administrative orders,
        when
        and if promulgated, would have on our business in the future. These future
        changes could, however, require the reformulation or elimination of certain
        products; imposition of additional record keeping and documentation
        requirements; imposition of new federal reporting and application requirements;
        modified methods of importing, manufacturing, storing or distributing certain
        products; and expanded or different labeling and substantiation requirements
        for
        certain products and ingredients. Any or all of these requirements could
        harm
        our business.
 
 **Trademarks
        and Patents**
 
 We
        received a trademark for "Celadrin" in February 2002.
 
 In
        March
        2003 we filed a patent application for Genepril, seeking approval of claims
        for
        the prevention and treatment of various types of arthritis and other
        inflammatory joint diseases, as well as periodontal, psoriasis, lupus and
        cardiovascular conditions. In June 2005 we received notification that the
        application has been approved and that a patent will be issued. Subsequent
        to
        the notification, we requested additional claims be added to the application.
        Accordingly, the patent office is continuing its review of our application.
        There can be no assurance that others may not develop compounds superior
        to
        Genepril.
 
 **Employees**
 
 At
        March
        31, 2006, we had 8 full-time employees, including our executive officers.
  **ITEM
        2.**  **DESCRIPTION
        OF PROPERTY.**
  We
        conduct our corporate functions and manufacturing, product development, sales
        and marketing activities in San Diego, California. We rent 5,426 square feet
        of
        office space at 10845 Rancho Bernardo Road, Suite 105, San Diego, California
        92127 under a seven-year lease ending December 2012 for a monthly rent ranging
        from $10,309 for the first year increasing annually to $12,673 for the seventh
        year. The average monthly rent for the seven-year period is $11,212. This
        space
        is intended to meet our needs for the foreseeable future.
  **ITEM
        3.     LEGAL PROCEEDINGS.**
  In
        June
        2005, we filed a lawsuit in the Superior Court of the State of California-
        County of San Diego, case number GIC8448564, against ABCO Laboratories, Inc.,
        a
        vendor of ours. We requested the court to award damages for a breach of a
        written contractors agreement, breach of implied warranty of merchantability
        ,
        intentional interference with a contractual relationship and unfair competition.
        In April 2006, we settled the action by agreeing to pay a total of $125,000
        to
        ABCO for inventory it was holding and, during the year ended March 31, 2006,
        recorded a $50,000 charge to cover the legal costs of the action.
  **ITEM
        4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY
        HOLDERS.**
  None.
  10
  **PART
        II**
  **ITEM
        5.     MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER
        MATTERS AND SMALL BUSINESS ISSUER PRUCHASES OF EQUITY
        SECURITIES.**
  Our
        Common Stock is traded in the over-the-counter market and is quoted on the
        NASD
        OTC Bulletin Board system maintained by the National Association of Securities
        Dealers, Inc. Prices reported represent prices between dealers, do not include
        markups, markdowns or commissions and do not necessarily represent actual
        transactions. The market for our shares has been sporadic and at times very
        limited.
 
 The
        following table sets forth the high and low closing price for the Common
        Stock
        for the fiscal years ended March 31, 2006 and 2005.




**Closing
                  Price****High**
              
              **Low**Fiscal
                  Year Ended March 31, 2006First
                  Quarter
              
              $
              2.40
              
              $
              1.80Second
                  Quarter
              
              $
              2.75
              
              $
              2.00Third
                  Quarter
              
              $
              2.90
              
              $
              2.30Fourth
                  Quarter
              
              $
              2.25
              
              $
              1.14Fiscal
                  Year Ended March 31, 2005First
                  Quarter
              
              $
              1.40
              
              $
              0.85Second
                  Quarter
              
              $
              1.34
              
              $
              0.86Third
                  Quarter
              
              $
              1.65
              
              $
              1.15Fourth
                  Quarter
              
              $
              2.15
              
              $
              1.45




We
        had
        approximately 325 shareholders of record as of June 16, 2006. Because most
        of
        our common stock is held by brokers and other institutions on behalf of
        stockholders, we are unable to estimate the total number of beneficial owners
        represented by these record holders. We have never paid a cash dividend on
        our
        common stock and do not expect to pay one in the foreseeable
        future.
 
 **Recent
        Sale of Unregistered Securities**
 
 None.
  **ITEM
        6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION.**
  **Overview**
  We
        develop, formulate and market on a private label basis over-the-counter,
        natural-based nutritional supplements and skin care products. Our products
        are
        proprietary, often supported by scientific studies which we request and are
        offered through multiple channels of distribution, including direct marketing
        companies, also known as network marketing or multi-level marketing companies,
        and chain store retailers. Our primary product is Celadrin® which we have
        historically offered as a part of product formulations which we sold on a
        private label basis to our customers. Recently, however, we have begun offering
        Celadrin® as an ingredient which our customers may use in their own products.
 
 A
        key
        part of our marketing strategy is our ability to provide to customers that
        distribute our products a "turnkey" approach to the marketing and distribution
        of our products. This turnkey approach provides our customers with all the
        services necessary to market our products, including developing specific
        product
        formulations, providing supporting scientific studies regarding the
        effectiveness of the product and arranging for the manufacture and marketing
        of
        the product.
 
 We
        have
        developed and sold over 60 products and formulations to businesses and
        organizations that market these products through multiple channels of
        distribution, including direct marketing companies, mass marketing companies,
        medical, health and nutritional professionals, medical newsletters and direct
        response radio and television. We have also begun to offer Celadrin® products
        through customers that in turn offer their products containing Celadrin® to mass
        market retailers.
  11
  Management's
        discussion and analysis of results of operations and financial condition
        are
        based upon the Company's financial statements. These statements have been
        prepared in accordance with accounting principles generally accepted in the
        United States of America. These principles require management to make certain
        estimates, judgments and assumptions that affect the reported amounts of
        assets,
        liabilities, revenues and expenses, and related disclosure of contingent
        assets
        and liabilities. On an on-going basis, we evaluate our estimates based on
        historical experience and various other assumptions that are believed to
        be
        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. Actual results may differ from these
        estimates under different assumptions or conditions .
 
 **Critical
        Accounting Policies and Estimates**
 
 We
        have
        identified eight accounting principles that we believe are key to an
        understanding of our financial statements. These important accounting policies
        require management's most difficult, subjective judgments .
 
 *1.
        Cash and Cash Equivalents.*
 For
        purposes of the financial statements, the Company considers all highly liquid
        debt investments purchased with a maturity of three months or less to be
        cash
        equivalents.
 
 *2.
        Accounts receivable* .
 Accounts
        receivable are carried at the expected net realizable value. The allowance
        for
        doubtful accounts is based on management’s assessment of the collectibility of
        specific customer accounts and the aging of the accounts receivable. If there
        were a deterioration of a major customer’s creditworthiness, or actual defaults
        were higher than historical experience, our estimates of the recoverability
        of
        amounts due to us could be overstated, which could have a negative impact
        on
        operations.
 
 *3.
        Inventory*
 Inventory
        is carried at the lower of cost or market. Cost is determined by the first-in
        first-out method.
 
 *4.
        Property and Equipment*
 Property
        and equipment are stated at cost. Expenditures for major renewals and
        betterments that extend the useful lives of property and equipment are
        capitalized, upon being placed in service. Expenditures for maintenance and
        repairs are charged to expense as incurred. Depreciation is computed over
        the
        estimated useful life of three to seven years, except leasehold improvements
        which are depreciated over the lessor of the remaining lease life or the
        life of
        the asset, using the straight-line method. The Company follows the provisions
        of
        the Financial Accounting Standards Board ("FASB") Statement of Financial
        Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment of
        Long-lived Assets." Long-lived assets and certain identifiable intangibles
        to be
        held and used by the Company are reviewed for impairment whenever events
        or
        changes in circumstances indicate that the carrying amount of an asset may
        not
        be recoverable. The Company continuously evaluates the recoverability of
        its
        long-lived assets based on estimated future cash flows and the estimated
        fair
        value of such long-lived assets, and provides for
        impairment if such undiscounted cash flows are insufficient to recover the
        carrying amount of the long-lived asset.
  *5.
        Trademarks and Patents*
 Patents
        and trademarks are carried at cost less accumulated amortization and are
        amortized over their estimated useful lives of from 8 to 17 years for patents
        and 10 years for trademarks. The carrying value of patents and trademarks
        is
        periodically reviewed and impairments, if any, are recognized when the expected
        future benefit to be derived from individual intangible assets is less than
        its
        carrying value determined based on the provisions of SFAS No. 144 as discussed
        above.
  12
  6.
*Stock
        Based Compensation*
 The
        Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
        for
        Stock Issued to Employees," and related Interpretations in accounting for
        all
        stock option plans. Under APB Opinion 25, compensation cost has been recognized
        for stock options granted to employees when the option price is less than
        the
        market price of the underlying common stock on the date of grant.
 
 Through
        December 31, 2005, SFAS No. 123, "Accounting for Stock-Based Compensation,"
        and
        SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
        Disclosure," required the Company to provide pro forma information regarding
        net
        income as if compensation cost for the Company's stock option plans had been
        determined in accordance with the fair value based method prescribed in SFAS
        No.
        123. To provide the required pro forma information, the Company estimated
        the
        fair value of each stock option at the grant date by using the Black-Scholes
        option-pricing model. SFAS No. 148 also provides for alternative methods
        of
        transition for a voluntary change to the fair value based method of accounting
        for stock-based employee compensation. The Company has elected to continue
        to
        account for stock-based compensation under APB No. 25.
 
 The
        Company applies SFAS No. 123 in valuing options granted to consultants and
        estimates the fair value of such options using the Black-Scholes option-pricing
        model. The fair value is recorded as consulting expense as services are
        provided. Options granted to consultants for which vesting is contingent
        based
        on future performance are measured at their then current fair value at each
        period end, until vested.
 
 *7.
        Revenue Recognition*
 Revenue
        is recognized when the product is shipped. The Company evaluates whether
        an
        allowance for estimated returns
        is required based on historical returns. The Company has not had significant
        returns and accordingly, has not established an estimated allowance for returns
        at March 31, 2006.
 
 *8.
        Income Taxes*
 The
        Company accounts for income taxes in accordance with Statement of Financial
        Accounting Standards No. 109, “Accounting for Income Taxes.” This statement
        requires an asset and liability approach for accounting for income
        taxes.
  **Selected
        Financial Information**
  **Results
        of Operations**
  *Year
        Ended March 31, 2006 Compared to Year Ended March 31, 2005*


Year
                  EndedIncrease3/31/06
              
              3/31/05
              
              (Decrease)
              
              
              %Statements
                  of OperationsNet sales
              
              $
              7,649,941
              
              $
              7,574,194
              
              $
              75,747
              
              
              
              1.0
              %Cost of goods sold
              
              
              4,134,645
              
              
              4,293,880
              
              
              (159,235
              )
              
              
              -3.7
              %% of net sales
              
              
              54
              %
              
              57
              %
              
              -3
              %
              
              
              -4.7
              %Gross profit
              
              
              3,515,296
              
              
              3,280,314
              
              
              234,982
              
              
              
              7.2
              %% of net sales
              
              
              46
              %
              
              43
              %
              
              3
              %
              
              
              6.1
              %Operating
                  expensesGeneral and administrative
              
              
              2,995,917
              
              
              1,145,102
              
              
              1,850,815
              
              
              
              161.6
              %Payroll expense
              
              
              674,344
              
              
              579,043
              
              
              95,301
              
              
              
              16.5
              %Consulting expense
              
              
              1,072,391
              
              
              516,729
              
              
              555,662
              
              
              
              107.5
              %Total
                  operating expenses
              
              
              4,742,652
              
              
              2,240,874
              
              
              2,501,778
              
              
              
              111.6
              %Interest
                  expense
              
              
              (25,728
              )
              
              (23,572
              )
              
              2,156
              
              
              
              9.1
              %Other
                  income
              
              
              35,906
              
              
              5,523
              
              
              30,383
              
              
              
              NMProvision
                  for taxes
              
              
              623,800
              
              
              (267,455
              )
              
              (850,255
              )
              
              
              -317.9
              %Net
                  income
              
              
              (593,378
              )
              
              753,936
              
              
              (1,388,314
              )
              
              
              -184.1
              %Net
                  income per share basic
              
              
              (0.06
              )
              
              0.08
              
              
              (0.14
              )
              
              
              -174.7
              %Net
                  income per share diluted
              
              
              (0.06
              )
              
              0.08
              
              
              (0.14
              )
              
              
              -174.7
              %




13


Net
        Sales
  Net
        sales
        for the year ended March 31, 2006 increased $75,747, 1%, to $7,649,941 compared
        to $7,574,194 for the year ended March 31, 2005. We began selling
        Celadrin â as an
        ingredient into the mass market during 2004, and since, products containing
        Celadrin â have
        been placed in over 10,000 stores throughout the country, including Wal-Mart,
        Albertsons, and GNC Health Stores. We anticipate that the level of
        Celadrin â sales
        will continue to increase.
  Cost
        of Goods Sold
  Cost
        of
        goods sold as a percentage of net sales decreased from 57% for the year ended
        March 31, 2005 to 54% for the year ended March 31, 2006. This decrease was
        primarily due to the higher selling margins associated with the sales of
        Celadrin â products. We were able to purchase Celadrin â at a
        reduced price due to early payments against our quarterly purchase commitment.
  General
        and Administrative
  General
        and administrative expenses increased by $1,850,815, a 162% increase, to
        $2,995,917 for the year ended March 31, 2006 from $1,145,102 for the year
        ended
        March 31, 2005. The primary reasons for the increase were approximately
        $1,055,000 related to the issuance and extension of stock options and the
        issuance of warrants, approximately $286,000 increase in commissions associated
        with a media campaign to brand Celadrin â ,
        approximately $258,000 write off of costs on the initial airing of the Puricell
        infomercial, approximately $166,000 increase in costs associated with clinical
        research, and approximately $66,000 increase in travel costs. We anticipate
        a
        reduction in future general and administrative expense as a result of a decrease
        in commission expense and infomercial costs discussed above.
  Payroll
        Expense
  Payroll
        expense increased to $674,344 for the year ended March 31, 2006, an increase
        of
        16.5% or $95,301, compared to $579,043 for the year ended March 31, 2005.
        This
        increase was a result of additional personnel hired to support the increased
        selling and clinical research activities.
  Consulting
        Expenses
  Consulting
        expenses increased to $1,072,391 for the year ended March 31, 2006, an increase
        of 107.5% or $555,662, compared to $516,729 for the year ended March 31,
        2005.
        This increase was a result of an approximate $117,000 increase in clinical
        research and selling activities, an approximate $155,000 increase in accounting
        expenses inclusive of the costs of changing twice to new auditing firms,
        an
        approximate $127,000 increase in litigation expenses, and an approximate
        $80,000
        increase in public relation expenses. We anticipate a reduction in consulting
        expenses as a result of more efficient audits and the reduction of legal
        expenses.
  Provision
        for Income Taxes
  As
        a
        result of the loss during the year ended March 31, 2006, we reflected an
        income
        tax benefit of $623,800 compared to income tax expense of $267,455 for the
        year
        ended March 31, 2005. Since we have used up our federal and state tax loss
        carry-forwards, we anticipate income tax expense to increase in the future
        relative to income before taxes.
  14
  **Capital
        Resources**


Year
                  EndedIncrease3/31/06
              
              3/31/05
              
              (Decrease)Working
                  CapitalCurrent
                  assets
              
              $
              5,293,199
              
              $
              5,546,470
              
              $
              (287,471
              )Current
                  liabilities
              
              
              870,104
              
              
              1,600,221
              
              
              (730,117
              )Working capital
              
              $
              4,423,095
              
              $
              3,946,249
              
              $
              442,646Long-term
                  debt
              
              $
              68,873
              
              $
              -
              
              $
              68,873Stockholders'
                  equity
              
              $
              4,955,097
              
              $
              4,172,290
              
              $
              741,807Statements
                  of Cash Flows Select InformationNet
                  cash provided (used) by:Operating activities
              
              $
              3,758
              
              $
              (107,858
              )
              $
              111,616Investing activities
              
              $
              (290,172
              )
              $
              (86,660
              )
              $
              (203,512
              )Financing activities
              
              $
              62,944
              
              $
              1,771,627
              
              $
              (1,708,683
              )Balance
                  Sheet Select InformationCash and cash equivalents
              
              $
              1,808,016
              
              $
              2,031,486
              
              $
              (223,470
              )Accounts receivable
              
              $
              811,198
              
              $
              2,064,089
              
              $
              (1,252,891
              )Inventory
              
              $
              1,741,468
              
              $
              1,382,495
              
              $
              358,973Accounts payable and accrued expenses
              
              $
              792,410
              
              $
              862,046
              
              $
              (69,636
              )




**Liquidity**
  We
        have
        historically financed our operations internally and through debt and equity
        financings. At March 31, 2006, we had cash holdings of $1,808,016, a decrease
        of
        $223,470 compared to March 31, 2005. Our net working capital position at
        March
        31, 2006, was $4,423 ,095
        compared to $3,946,249 as of March 31, 2005. We believe that our cash position
        is sufficient to fund our operating activities for at least the next 12 months.
 
 **New
        Accounting Pronouncements**
 
 In
        May
        2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"
        ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20
        "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
        Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides
        guidance on the accounting for and reporting of accounting changes and error
        corrections. It establishes retrospective application, or the latest practicable
        date, as the required method for reporting a change in accounting principle
        and
        the reporting of a correction of an error. SFAS 154 is effective for accounting
        changes and a correction of errors made in fiscal years beginning after December
        15, 2005 and is required to be adopted by us in the first quarter of fiscal
        2007. We are currently evaluating the effect that the adoption of SFAS 154
        will
        have on our consolidated results of operations and financial
        condition.
  15
  **Risk
        Factors**
  You
        should consider the following discussion of risks as well as other information
        regarding our common stock. The risks and uncertainties described below are
        not
        the only ones. Additional risks and uncertainties not presently known to
        us or
        that we currently deem immaterial also may impair our business operations.
        If
        any of the following risks actually occur, our business could be harmed.
 
 **There
        Is Only One Supplier for Celadrin®. If We Are Unable to Purchase Celadrin® from
        This Supplier, Our Business Would Be Harmed.**
 
 There
        is
        only one supplier for Celadrin®, which we use in approximately 67% of our
        products and which represented approximately 84% of our sales for the year
        ended
        March 31, 2006. We will rely upon Celadrin® to expand our product lines and
        revenue in the future. If our Celadrin® supplier goes out of business or elects
        for any reason not to supply us with Celadrin®, we would have to find another
        Celadrin® supplier or suffer a significant reduction in our
        revenue.
  **We
        Rely upon a Limited Number of Customers the Loss of Which Would Reduce Our
        Revenue and Any Earnings.**
 
 Our
        four
        largest customers accounted for 31%, 13%, 13% and 13% of our sales for the
        year
        ended March 31, 2005 and our four largest customers accounted for 22%, 16%,
        13%
        and 11% of our sales for the year ended March 31, 2006. The loss of any of
        these
        customers could significantly reduce our revenue and adversely affect our
        cash
        flow and earnings, if any.
 
 **We
        Rely upon Other Outside Suppliers to Produce Our Products Which Could Delay
        Our
        Product Deliveries.**
 
 All
        of
        our products are produced by outside manufacturers who process ingredients
        provided to them by our suppliers and with whom we have contracts. Our profit
        margins and our ability to deliver products on a timely basis are dependent
        upon
        these manufacturers and suppliers. Should any of these manufacturers or
        suppliers fail to provide us with product, we would be required to obtain
        new
        manufacturers and suppliers, which would be costly and time consuming and
        could
        delay our product deliveries.
 
 **Product
        Liability Claims Against Us Could Be Costly.**
 
 Some
        of
        our nutritional supplements contain newly-introduced ingredients or combinations
        of ingredients, and we have little long-term health information about
        individuals consuming those ingredients. If any of these products were thought
        or proved to be harmful, we could be subject to litigation. Although we carry
        product liability insurance in the face amount of $1,000,000 per occurrence
        and
        $2,000,000 in the aggregate and require our suppliers and manufacturers to
        include us as insured parties on their product liability insurance policies,
        our
        coverage may not be adequate to protect us from potential product liability
        claims and costs of defense.
 
 **We
        Are Subject to Intense Competition from Other Nutritional Supplement Marketers
        Which Could Reduce Our Revenue and Profit Margins.**
 
 Competition
        in the nutritional supplement market is intense. We compete with numerous
        companies that have longer operating histories, more products and greater
        name
        recognition and financial resources than we do. In order to compete, we could
        be
        forced to lower our product prices, which would reduce our revenue and profit
        margins.
 
 **We
        Are Highly Regulated, Which Increases Our Costs of Doing Business.**
 
 We
        are
        subject to laws and regulations which cover:
 
 • the
        formulation, manufacturing, packaging, labeling, distribution, importation,
        sale
        and storage of our
        products;
 
 •
the
        health and safety of food and drugs;
 
 16
 •
trade
        practice and direct selling laws; and
 
 •
product
        claims and advertising by us; or for which we may be held
        responsible.
 
 Compliance
        with these laws and regulations is time consuming and expensive. Moreover,
        new
        regulations could be adopted that would severely restrict the products we
        sell
        or our ability to continue our business.
 
 **There
        Are Limitations on the Liability of Our Officers and Directors Which May
        Restrict Our Stockholders from Bringing Claims.**
 
 Our
        Bylaws substantially limit the liability of our officers and directors to
        us and
        our stockholders for negligence and breach of fiduciary or other duties to
        us.
        This limitation may prevent stockholders from bringing claims against our
        officers and directors in the future.
 
 **Shares
        of Our Common Stock Which Are Eligible for Sale by Our Stockholders May Decrease
        the Price of Our Common Stock.**
 
 We
        have
        10,721,400 common shares outstanding, all of which are freely tradeable or
        saleable under Rule 144. We also have outstanding common stock warrants and
        stock opitons exercisable into up to 5,236,100 shares of common stock which
        could become free trading if exercised. If our stockholders sell substantial
        amounts of our common stock, the market price of our common stock could
        decrease.
 
 **There
        is a Limited but Potentially Volatile Trading Market in Our Common Stock,
        Which
        May Adversely Affect Our Stock Price.**
 
 Our
        common stock trades on the Electronic Bulletin Board. The Bulletin Board
        tends
        to be highly illiquid, in part because there is no national quotation system
        by
        which potential investors can track the market price of shares except through
        information received or generated by a limited number of broker-dealers that
        make a market in particular stocks. There is a greater chance of market
        volatility for securities that trade on the Bulletin Board as opposed to
        a
        national exchange or quotation system. This volatility may be caused by a
        variety of factors, including:
 
 • The
        lack
        of readily available price quotations;
 
 •
The
        absence of consistent administrative supervision of "bid" and "ask" quotations;
 
 •
Lower
        trading volume; and
 
 •
Market
        conditions.
 
 There
        could be wide fluctuations in the market price of our common stock. These
        fluctuations may have an extremely negative effect on the market price of
        our
        securities and may prevent you from obtaining a market price equal to your
        purchase price when you attempt to sell our securities in the open market.
        In
        these situations, you may be required to either sell our securities at a
        market
        price which is lower than your purchase price, or to hold our securities
        for a
        longer period of time than you planned.
 
 **Because
        Our Common Stock May Be Classified as "Penny Stock," Trading in it Could
        Be
        Limited, and Our Stock Price Could Decline.**
 
 In
        the
        future, our common stock may fall under the definition of "penny stock" if
        our
        net tangible assets decline below $2,500,000. In such event, trading in our
        common stock would be limited because broker-dealers will be required to
        provide
        their customers with disclosure documents prior to allowing them to participate
        in transactions involving our common stock. These disclosure requirements
        are
        burdensome to broker-dealers and may discourage them from allowing their
        customers to participate in transactions involving our common stock.
  17
 "Penny
        stocks" are equity securities with a market price below $5.00 per share,
        other
        than a security that is registered on a national exchange or included for
        quotation on the Nasdaq system, unless, as in our case, the issuer has net
        tangible assets of more than $2,000,000 and has been in continuous operation
        for
        greater than three years. Issuers who have been in operation for less than
        three
        years must have net tangible assets of at least $5,000,000.
 
 Rules
        promulgated by the Securities and Exchange Commission under Section 15(g)
        of the
        Exchange Act require broker-dealers engaging in transactions in penny stocks,
        to
        first provide to their customers a series of disclosures and documents,
        including:
 
 • A
        standardized risk disclosure document identifying the risks inherent in
        investment in penny stocks;
 
 •
All
        compensation received by the broker-dealer in connection with the transaction;
 
 •
Current
        quotation prices and other relevant market data; and
 
 •
Monthly
        account statements reflecting the fair market value of the securities. In
        addition, these rules
        require that a broker-dealer obtain financial and other information from
        a
        customer, determine that
        transactions in penny stocks are suitable for such customer and deliver a
        written statement to such
        customer setting forth the basis for this determination.
 
  **ITEM
        7.     FINANCIAL STATEMENTS.**
  The
        financial statements required by this item begin on page F-1 with the index
        to
        consolidated financial statements.
  **ITEM
        8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND**  **FINANCIAL
        DISCLOSURE.**
  On
        March
        31, 2005, Pritchett, Siler & Hardy, P.C. (“Pritchett”) was dismissed as our
        independent accountants. On March 31, 2005 our board of directors decided
        to
        engage Mayer Hoffman McCann, P.C. to serve as our independent accountants
        and
        approved the change of independent accountants. The report of Pritchett on
        our
        consolidated financial statements for the fiscal year ended March 31, 2004
        contained no adverse opinion or disclaimer of opinion, and was not qualified
        or
        modified as to audit scope or accounting principles.
  During
        our fiscal year ended March 31, 2004, we had no disagreements with Pritchett
        on
        any matter of accounting principles or practices, financial statement
        disclosure, or auditing scope or procedure, which disagreements, if not resolved
        to the satisfaction of Pritchett, would have caused Pritchett to make reference
        to the subject matter of the disagreement in connection with its report on
        our
        financial statements for such year and interim periods. During our fiscal
        year
        ended March 31, 2004, there were no "reportable events," as defined in Item
        304(a)(3) of Regulation S-B. We reported the change in accountants on Form
        8-K
        on April 6, 2005. The Form 8-K contained a letter from Pritchett, addressed
        to
        the SEC, stating that it agreed with the statements concerning Pritchett
        in such
        Form 8-K.
  On
        January 9, 2006, we notified Mayer Hoffman McCann P.C. ("MHM"), that they
        were
        being dismissed effective January 6, 2006, as the Company's independent
        registered accounting firm. MHM's report on the consolidated financial
        statements of the Company and its subsidiaries for the fiscal year ended
        March
        31, 2005, did not contain any adverse opinion or disclaimer of opinion, nor
        was
        it qualified or modified as to uncertainty, audit scope, or accounting
        principles.
 
 On
        January 6, 2006, the Board of Directors of the Company, upon the recommendation
        of its Audit Committee, elected to engage HJ Associates & Consultants, LLP
        (“HJ Associates”) to serve as the Company's independent registered accounting
        firm.
 
 On
        January 10, 2006, the Company was informed that it had been accepted as a
        client
        of HJ Associates.
 
 Since
        March 31, 2005, (the date we retained MHM as principal accountants) and for
        the
        subsequent interim period through January 6, 2006, there were no disagreements
        between the Company and MHM on any matter of accounting principles or practices,
        financial statement disclosure, or auditing scope or procedure, which
        disagreements, if not resolved to MHM's satisfaction, would have caused them
        to
        make reference to the subject matter of the disagreement in their report
        on the
        financial statements for such year. We reported the change in accountants
        on
        Form 8-K on January 11, 2006. The Form 8-K contained a letter from MHM,
        addressed to the SEC, stating that it agreed with the statements concerning
        MHM
        in such Form 8-K.
  18
 As
        previously disclosed in the Company’s Form 10-KSB for the year ended March 31,
        2005, MHM did not report on our internal control structure as
        follows:
  As
        of
        March 31, 2005, management carried out an assessment under the supervision
        of and with the participation of our principal executive officer (who also
        served as our principal financial officer), of the effectiveness of the design
        and operation of our disclosure controls and procedures. As of the date of
        that
        assessment, the principal executive officer concluded that certain of our
        disclosure controls and procedures were performed externally and, therefore,
        our
        internal controls were not deemed effective. We did not have an inside certified
        public accountant to provide effective oversight and review of financial
        transactions. As a result, management had identified the following internal
        control deficiencies which, when accumulated, represented a material weakness
        at
        March 31, 2005:
  ·
            Lack
                of an inside certified public accountant; 
 ·
            Preparation
                of periodic income tax provisions; 
 ·
            Review
                and recording of equity transactions, including warrant and option
                valuations; 
 ·
            Certain
                end of period financial reconciliations;
                and 
 ·
            Financial
                statement preparation and disclosures.  We
        retained an external expert who reviewed all significant account balances
        and
        transactions reflected in the financial statements contained in this report
        and
        otherwise analyzed the transactions underlying our financial statements to
        verify the accuracy of the financial statements contained in this report.
        In
        addition, we have recruited a chief financial officer who will establish,
        design
        and implement systems and procedures over our internal control over financial
        reporting as well as add internal control expertise. Accordingly, management
        believes that the financial statements included in this report fairly present,
        in all material respects, our financial condition, results of operations,
        and
        cash flows.
 
 The
        Company authorized MHM to respond fully to the inquiries of HJ Associates
        concerning the subject matter of the reportable event and has provided MHM
        with
        a copy of the foregoing disclosures.
  Subsequent
        to January 6, 2006, the Company restated the quarterly reports for the six
        and
        nine months ended September 30 and December 31, 2005. We determined that
        the
        extension of the expiration date on warrants to certain shareholders should
        have
        been accounted for as a dividend to the warrant holders rather than as an
        expense. MHM believed that the extension of the warrants was the settlement
        of a
        new perceived claim and, therefore, should be reflected as an
        expense.
 During
        the Company's two fiscal years ended March 31, 2005, and the subsequent interim
        period through January 6, 2006, the Company did not consult HJ Associates
        with
        respect to the application of accounting principles to a specific transaction,
        either completed or contemplated, or the type of audit opinion that might
        be
        rendered on the Company's consolidated financial statements, or any other
        matters of reportable events as set forth in Items 304(a)(2)(i) and (ii)
        of
        Regulation S-B.
  **ITEM
        8A.     CONTROLS AND PROCEDURES.**
  **Evaluation
        of Disclosure Controls and Procedures**
  As
        a
        result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as
        Imagenetix, Inc. that file periodic reports under the Securities Exchange
        Act of
        1934 (the “Act”) are required to include in those reports certain information
        concerning the issuer’s controls and procedures for complying with the
        disclosure requirements of the federal securities laws pursuant to Exchange
        Act
        Rules 13a-15(b) and 15d-15(b). These disclosure controls and procedures
        include, without limitation, controls and procedures designed to ensure that
        information required to be disclosed by an issuer in the reports it files
        or
        submits under the Act, is communicated to the issuer’s management, including its
        principal executive officer and principal financial officer, or persons
        performing similar functions, as appropriate to allow timely decisions regarding
        required disclosure. A control system can provide only reasonable, not absolute,
        assurance that the objectives of the control system are met.
  Under
        the
        supervision and with the participation of our management, including our
        principal executive officer and principal financial officer, we conducted
        an
        evaluation of the design and operation of our disclosure controls and
        procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)
        promulgated under the Act, within 90 days prior to the filing date of this
        report. Based on that evaluation, our principal executive officer and our
        principal financial officer concluded that the design and operation of our
        disclosure controls and procedures were effective in timely alerting them
        to
        material information required to be included in the Company's periodic reports
        filed with the SEC under the Act. The design of any system of controls is
        based
        in part upon certain assumptions about the likelihood of future events, and
        there can be no assurance that any design will succeed in achieving its stated
        goals under all potential future conditions, regardless of how remote.
 
 19
 **Change
        in Internal Controls.**
 
 There
        have been no significant changes made in the internal controls and there
        were no
        other factors that could significantly effect our internal controls during
        the
        fourth quarter of the fiscal year covered by this report.
  **ITEM
        8B.**  **OTHER
        INFORMATION.**
  None.
  **PART
        III**
   **ITEM
        9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
        CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.**
  The
        following table and biographical summaries set forth information, including
        principal occupations and business experience, about our directors and the
        executive officer at March 31, 2006:




**Name**
              
              **Age******
              
              **Position**William
                  P. Spencer
              
              
              53
              
              Chief
                Executive Officer, President and DirectorDebra
                  L. Spencer
              
              
              54
              
              Secretary,
                Treasurer and DirectorLowell
                  W. Giffhorn
              
              
              59
              
              Chief
                Financial OfficerDerek
                  C. Boosey
              
              
              63
              
              Vice
                President—InternationalJeffrey
                  G. McGonegal
              
              
              54
              
              DirectorRobert
                  Burg
              
              
              49
              
              DirectorBarry
                  S. King
              
              
              60
              
              Director




**Biographical
        Information**
  *William
        P. Spencer* has
        served as a director and has been our president since January 1999. From
        January 1986 to December 1996 he served as chief operating officer,
        chief financial officer and executive vice-president of Natural Alternatives
        International, Inc., a company engaged in the formulation and production of
        encapsulated vitamins and nutrients. He was president of NAI from
        December 1996 to October 1998 and was a director from
        January 1986 to October 1998. From 1976 to 1988 he was a regional vice
        president for San Diego Trust and Savings Bank. Mr. Spencer earned a B.S.
        degree in finance and an MBA degree from San Diego State University.
 
 *Debra
        L. Spencer* has
        served as a director and has been our secretary since March 1999 and served
        as
        our treasurer from March 1999 to July 2005. Her responsibilities also include
        product label copy and graphic design in compliance with FDA regulations
        as well
        as developing marketing materials for our private label products. From 1970
        to
        1981 she was an Executive Assistant to the Vice President of a local San
        Diego
        bank. She was a homemaker from 1981 to 1987. From 1987 to 1993 she served
        as
        vice president, secretary and treasurer for Vitamin Direct, Inc., a
        consumer mail order vitamin company.
 
 *Derek
        C. Boosey* has
        served as our vice-president — international
        since September 1999. From 1994 to September 1999, he was new business
        manager for National Alternatives International, Inc., and from 1990 to
        1994 was director of marketing for Atheletics Canada. From 1984 to 1990,
        Mr. Boosey was a technical advisor to the Korean Ministry of Sports and a
        sports and marketing consultant for MKC International. He earned degrees
        in
        physical education from Keele University (England) and Opu University (England)
        and is the Senior Olympics world record holder in the triple jump in the
        age 55
        to 60 class.
  20
 *Barry
        S. King*  joined
        our Board in 2003. He was the Director of Marketing for the United States
        Olympic Committee from 1987 to 2002. Since 2002, Mr. King has been the Vice
        President and General Manager of Triactive America. Mr. King graduated with
        a B.A. degree from the University of Colorado in 1969.
 
 *Lowell
        W. Giffhorn* has
        served as our Chief Financial Officer since July 2005. Since October 2005,
        Mr.
        Giffhorn also has served as the Chief Financial Officer and, since December
        2005, has served on the board of directors of Omni U.S.A., Inc., a publicly
        held
        company that provides computer software to the pharmaceutical and life science
        industries. F rom
        May
        1997 to June 2005, Mr. Giffhorn was the Chief Financial Officer of Patriot
        Scientific Corp., a publicly held semiconductor and intellectual property
        company. From June 1992 to August 1996 and from September 1987 to June 1990
        he
        was the CFO of Sym-Tek Systems, Inc. and Vice President of Finance for its
        successor, Sym-Tek Inc., a supplier of capital equipment to the semiconductor
        industry. Mr. Giffhorn obtained a M.B.A. degree from National University
        in 1975
        and he obtained a B.S. in Accountancy from the University of Illinois in
        1969.
        Mr. Giffhorn is also a director and chairman of the audit committee of DND
        Technologies, Inc., a publicly held company. Mr. Giffhorn devotes approximately
        50% of his time to our affairs.
  *Jeffrey
        G. McGonegal* joined
        our board in 2005. Since June 2003, Mr. McGonegal has served as Chief Financial
        Officer of AspenBio Pharma, Inc., a publicly traded emerging biotechnology
        company engaged in the discovery, development, manufacture, and licensing
        or
        marketing of products primarily for animal healthcare. Mr. McGonegal also
        serves
        as Senior Vice President — Finance of Advanced Nutraceuticals, Inc., a publicly
        held company engaged in manufacturing and marketing of vitamins and nutritional
        supplements and Cambridge Holdings, Ltd., a small publicly held real estate
        company. Since 1997, Mr. McGonegal has served as Managing Director of McGonegal
        and Co., a company engaged in providing accounting and business consulting
        services. From 1974 to 1997, Mr. McGonegal was an accountant with BDO Seidman
        LLP. While at BDO Seidman LLP, Mr. McGonegal served as managing partner of
        the
        Denver, Colorado office. Mr. McGonegal is also a member of the board of
        directors of Applied Medical Devices, Inc. and The Rockies Venture Club,
        Inc. He
        received a B.A. degree in accounting from Florida State University.
  *Robert
        Burg* joined
        our board in 2005. Since 1998, Mr. Burg has been the owner of The Burg Group,
        a
        business development company based in the sports industry. From 1992 to 1998,
        Mr. Burg held several executive level positions, including President from
        1995
        to 1998, with Royal Grip, Inc., a publicly traded company that designed and
        distributed golf club grips and athletic headware. He received a B.A. degree
        in
        Business from the Great Western States University in 1977.
 
 William
        P. Spencer and Debra L. Spencer are married to each other.
  **Committees
        of the Board Of Directors**
 Our
        Board
        has a standing Audit Committee. The entire Board serves as the Compensation
        Committee.
  ***Audit
        Committee.*** **** The
        Audit
        Committee is responsible for: (1) selection and oversight of our independent
        accountant; (2) establishing procedures for the receipt, retention and treatment
        of complaints regarding accounting, internal controls and auditing matters;
        (3)
        establishing procedures for the confidential, anonymous submission of concerns
        regarding accounting and auditing matters; (4) engaging outside advisors;
        and,
        (5) funding for the outside auditors and any outside advisors engagement
        by the
        audit committee. The Audit Committee, which met two times during 2006, is
        composed of one employee director and one other director, who was determined
        by
        the Board to be an independent director. During 2006, the Audit Committee
        consisted of Mr. McGonegal (Chairman) and Mr. Spencer.
  The
        Board
        of Directors has determined that Mr. McGonegal is an audit committee
        financial expert as defined in Item 401 of Regulation S-B promulgated by
        the
        Securities and Exchange Commission. The Board's conclusions regarding the
        qualifications of Mr. McGonegal as an audit committee financial expert were
        based on his service as a chief financial officer of a public company, his
        prior
        practice as an audit partner for a national certified public accounting firm
        and
        his degrees in accounting and business administration.
  21
 **Code
        of Ethics**
  Imagenetix
        has set forth its policy on ethical behavior in a document called "Code of
        Business Conduct and Ethics." This policy applies to the members of our Board
        of
        Directors and all employees, including (but not limited to) our principal
        executive officer, principal financial officer, principal accounting officer
        or
        controller and persons performing similar functions. This policy comprises
        written standards that are reasonably designed to deter wrongdoing and to
        promote the behavior described in Item 406 of Regulation S-B promulgated by
        the Securities and Exchange Commission. No waivers of the Code were granted
        in
        2006.
  **Compliance
        with Section 16(a) of the Securities Exchange Act**
  Due
        to
        our status as a Section 15(d) reporting company, our executive officers,
        directors, and persons who beneficially own more than 10% of a registered
        class
        of our equity securities are not required to file with the SEC reports of
        ownership and changes in ownership of Imagenetix's equity securities pursuant
        to
        Section 16(a) of the Securities Exchange Act of 1934.
  **ITEM
        10.**  **EXECUTIVE
        COMPENSATION.**
  There
        is
        shown below information concering the compensation of our chief executive
        officer and the most highly compensated executive officers whose salaries
        and
        bonus exceeded $100,000 (each a “Named Officer”) for the fiscal years ended
        March 31, 2006, 2005, and 2004.


**SUMMARY
        COMPENSATION TABLE**




Annual
                  Cash Compensation
              
              Long-Term
                  CompensationName
                  and
              
              Fiscal
              
              
              
              
              
              
              
              All
                  OtherPrincipal
                  Position
              
              Year
              
              Salary
              
              Bonus
              
              (#
                  of Shares)
              
              CompensationWilliam
                  P. Spencer
              
              
              2006
              
              $
              165,969
              
              $
              -
              
              
              60,000
              
              
              NonePresident and CEO
              
              
              2005
              
              $
              95,417
              
              $
              70,000
              
              
              None
              
              
              None2004
              
              $
              90,000
              
              
              Nil
              
              
              None
              
              
              None




**Aggregated
        Option Exercise and Fiscal Year-End Option Values**
 
 There
        were no exercises of stock options for the fiscal year ended March 31, 2006
        by
        any of the officers reflected in the Summary Compensation Table shown above.
        Shown below is information on fiscal year-end values under the Company's
        Stock
        Option Plan to the officers reflected in the Summary Compensation Table shown
        above.




Number
                  of Unexercised
              
              Value
                  of UnexercisedShares
              
              
              
              Options
                  Held At
              
              In-The-Money
                  Options AtAcquired
                  on
              
              Value
              
              March
                  31, 2006
              
              March
                  31, 2006Name
              
              Exercise
                  (#)
              
              Realized
              
              Exercisable
              
              Unexercisable
              
              Exercisable
              
              UnexercisableWilliam
                  P. Spencer
              
              -
              
              -
              
              210,000
              
              -
              
              $
                  32,500
              
              $
                  -




The
        fair
        market value of the unexercised in-the-money options at March 31, 2006 was
        determined by subtracting the option exercise price from the last sale price
        as
        reported on the over the counter bulletin board on March 31, 2006, $1.26.
        The
        Company has not awarded stock appreciation rights to any of its employees.
        The
        Company has no long-term incentive plans.
  **Compensation
        of Directors**
 
 We
        have
        agreements with Mr. McGonegal to pay him $10,000 annually (which includes
        amounts due him for his services as audit committee chair) and Mr. Burg $7,500
        annually. We paid Mr. McGonegal $5,750 and Mr. Burg $4,500 as Director's
        fees
        during the year ended March 31, 2006. We reimburse our directors for any
        travel
        related expenses incurred in performing their duties as directors. In addition,
        we granted stock options to Mr. Spencer for 60,000 shares, Ms. Spencer for
        18,000 shares, Mr. King for 9,000 shares, Mr. Burg for 50,000 shares and
        Mr.
        McGonegal for 50,000 shares.
  22
 **Employment
        Contracts**
 
 The
        Company does not have employment contracts with any of its executive
        officers.
  **ITEM
        11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
        AND MANAGEMENT AND**  **RELATED
        STOCKHOLDER MATTERS.**
  The
        following table sets forth certain information concerning our common stock
        ownership as of June 16, 2006, by (1) each person who is known by us to be
        the
        beneficial owner of more than five percent of our common stock; (2) each
        of our
        executive officers and directors; and (3) all of our directors and executive
        officers as a group. The address of each such stockholder is in care of us
        at
        10845 Rancho Bernardo Road, Suite 105, San Diego, California 92127.




**Name
                  of Beneficial Owner**
              
              **Amount
                  of Benefical**
              
              **Percent
                  of****Ownership
                  (1)(2)**
              
              **Ownership**William
                  P.and Debra L. Spencer (3)
              
              
              2,993,000
              
              
              27.3
              %Gary
                  J. McAdam (4)
              
              
              2,741,483
              
              
              22.8
              %James
                  Scibelli (5)
              
              
              1,069,750
              
              
              9.4
              %Barry
                  S. King (6)
              
              
              19,000
              
              
              *Robert
                  Burg (7)
              
              
              50,000
              
              
              *Jeffrey
                  G. McGonegal (7)
              
              
              50,000
              
              
              *Lowell
                  W. Giffhorn (8)
              
              
              23,500
              
              
              *Derek
                  C. Boosey (9)
              
              
              195,000
              
              
              1.8
              %All
                  officers and directors as a group (6 persons) (10)
              
              
              3,330,500
              
              
              29.6
              %


* Represents
      less than 1%


(1)
        Reflects amounts as to which the beneficial owner has sole voting power and
        sole
        investment power.
 
 (2)
        Includes stock options and common stock purchase warrants exercisable within
        60
        days from the date hereof.
 
 (3)  Comprised
        of 2,740,000 shares and 253,000 stock options. William P. and Debra Spencer
        are husband
        and wife and are deemed to share beneficial ownership of these shares and
        options.
 
 (4)  Comprised
        of 1,435,557 shares and 1,305,926 common stock purchase warrants, all of
        which
        are owned
        by
        entities controlled by Mr. McAdam.
 
 (5)  Includes
        370,000 shares and 699,750 common stock purchase warrants, all of which are
        owned by entities
        controlled by Mr. Scibelli.
 
 (6)
        Comprised of 19,000 stock options.
 
 (7)
        Comprised of 50,000 stock options.
 
 (8)
        Comprised of 8,500 shares and 15,000 stock options.
 
 (9)
        Comprised of 50,000 shares and 145,000 stock options.
  (10)
        Comprised of 2,798,500 shares and 532,000 stock options.
  23
  **Equity
        Compensation Plan Information**


**Number
                  of securities****remaining
                  available****Number
                  of securities**
              
              
              
              **for
                  issuance under****to
                  be issued upon**
              
              **Weighted
                  average**
              
              **equity
                  compensaton****exercise
                  of**
              
              **exercise
                  price of**
              
              **plans
                  (excluding****outstanding
                  options,**
              
              **outstanding
                  options,**
              
              **securities
                  reflected in****warrants
                  and rights**
              
              **warrants
                  and rights**
              
              **column
                  (a))****Plan
                  Category**
              
              **(a)**
              
              **(b)**
              
              **(c)**Equity
                  compensationplans
                  approved bysecurity
                  holders
              
              
              1,129,000
              
              $
              1.74
              
              
              586,000Equity
                  compensationplans
                  not approvedby
                  security holders
              
              
              4,107,100
              
              $
              1.28
              
              
              -Total
              
              
              5,236,100
              
              $
              1.38
              
              
              586,000




Common
        shares issuable on the exercise of common stock warrants have not been approved
        by the security holders and, accordingly, have been segregated in the above
        table.
  **ITEM
        12.     CERTAIN RELATIONSHIPS AND RELATED
        TRANSACTIONS.**
  In
        October 2001 we entered into a line of credit agreement with Messrs. McAdam
        and
        Scibelli, two of our principal stockholders, under which they agreed to advance
        us up to $1,000,000 for working capital secured by our accounts receivables,
        inventory, property and equipment, and bearing interest at 12% per annum.
        As
        additional consideration for the line of credit, we issued to them a total
        of
        250,000 Class E warrants exercisable at $.70 each until October 2007. During
        the
        year ended March 31, 2006, we paid off the line of credit.
 
 In
        July
        2002 we entered into an exclusive supply and distribution agreement with
        ChiRx,
        Inc., a company in which Mr. McAdam is an officer and director and in which
        a
        family trust is a principal stockholder, and pursuant to which we granted
        ChiRx
        the exclusive right to market our CeldrinTM products through chiropractors
        worldwide for five years at prices set forth in a schedule to the agreement.
        GJM
        Trading Partners, Ltd., an entity controlled by Mr. McAdam, holds exclusive
        rights to market some of our products through certain e-commerce and
        chiropractic distribution channels.
 
 In
        January 2005 we entered into a consulting agreement with Business Partners
        Operations, LLC., a company in which Gary McAdam, one of our principal
        stockholders, is an officer and principal stockholder. Under the agreement,
        Mr.
        McAdam provides us with business services and advice in the areas of finance
        and
        marketing strategies. The agreement called for us to pay a monthly fee of
        $7,500, which was modified to $3,500 per month effective October 2005, and
        can
        be terminated by either party with a 30 day notice.
 
 We
        believe that the above transactions were fair, reasonable and upon terms
        at
        least as favorable to us as those we might have obtained from unaffiliated
        third
        parties
  **ITEM
        13.****EXHIBITS.**
  (a)
            The
                following documents are filed as a part of this Report: 
 1.
            Financial
                Statements. The following consolidated financial statements and Report
                of Independent
        Registered Certified Public Accounting Firm are included in Part II of this
        Report:
 
 Report
        of
        HJ Associates & Consultants LLP, Independent Registered Public Accounting
        Firm
 
 24
 Report
        of
        Mayer Hoffman McCann, P.C., Independent Registered Public Accounting Firm
 
 Consolidated
        Balance Sheets- As of March 31, 2006 and 2005
 
 Consolidated
        Statements of Operation- Years Ended March 31, 2006 and 2005
 
 Consolidated
        Statement of Stockholders' Equity- Years Ended March 31, 2006
 and
        2005
 
 Consolidated
        Statements of Cash Flows- Years Ended March 31, 2006 and 2005
 
 Notes
        to
        Consolidated Financial Statements
 
 2.
            Exhibits.
                The following Exhibits are filed as part of, or incorporated by reference
                into, this
        Report:
  
  **Exhibit
                  No.**
              
              **Title**3.01
              
              Articles
                  of Incorporation of the Registrant(1)3.02
              
              Bylaws
                  of the Registrant(1)3.03
              
              Amendment
                  to Articles of Incorporation (Name change)(2)10.01
              
              Celadrin®
                  Supply Agreement with Organic Technologies(2)10.02
              
              Agreement
                  with Natrol(2)10.03
              
              Supply
                  and Distribution Agreement with The Enrich Corporation
                  (Unicity)(2)10.04
              
              Office
                  Lease(2)10.05
              
              Security
                  Agreement(2)10.06
              
              Exchange
                  Agreement dated March 23, 1999(1)10.09
              
              Line
                  of Credit Agreement(2)10.10
              
              Modification
                  to Enrich (Unicity) Agreement(2)10.11
              
              Exclusive
                  Supply and Distribution Agreement (Sanavive)(3)10.11
              (a)
              Agreement
                  with Newport Bioceuticals, LLC(2)10.12
              
              Exclusive
                  Supply and Distribution Agreement (Newport
                  Bioceuticals)(3)10.13
              
              Exclusive
                  Supply and Distribution Agreement (ChiRx, Inc.)(3)10.14
              
              American
                  China Techonolgy Systems, LLC Agreement(4)
  25
 10.16
              
              Cymbiotics
                  Distribution Agreement (5)10.17
              
              Proprietary
                  Nutritionals Inc. Agreement (5)10.18
              
              Tony
                  Gwynn Spokesperson Agreement (5)10.19
              
              Business
                  Partners Operations Agreement (5)10.20
              
              Office
                  Lease Agreement with Bernardo Gateway Partners10.21
              
              Patent
                  License with University of Minnesota10.22
              
              Patent
                    License with EHP Products, Inc.14
              
              Code
                  of Ethics (4)31.1
              
              302
                  Certification of William P. Spencer31.2
              
              302
                  Certification of Lowell W. Giffhorn32.1
              
              906
                  Certification of William P. Spencer32.2
              
              906
                  Certification of Lowell W. Giffhorn
 
 (1)  Incorporated by reference to our Registration Statement on Form
        SB-1, file number 333-87535, filed on September 22, 1999.
  (2)
         Incorporated by reference to our Registration Statement on Form SB-2, File
        Number 333-71756, declared
        effective on July 26, 2002 and post-effective amendment No. 1 thereto
        declared effective on August
        25, 2003.
 
 (3)  Incorporated by reference to our Annual Report on Form 10-KSB for the year
        ended
        March 31, 2003.
 
 (4)  Incorporated
        by reference to our Annual Report on Form 10-KSB for the year ended March
        31, 2005.
 
 (5)  Incorporated by reference to our Registration Statement on Form
        SB-2, File Number 333-123159, declared
        effective on March 18, 2005.
  **ITEM
        14.**  **PRINCIPAL
        ACCOUNTANT FEES AND SERVICES.**
  The
        following is a summary of the fees billed to Imagenetix by its principal
        accountants for the fiscal years ended March 31, 2006 and
        2005:




HJ
                  Associates &
              
              Mayer
                  Hoffman
              
              Pritchett,
                  Siler &
              
              Mayer
                  Hoffman
              
              Pritchett,
                  Siler &Consultants
                  LLP
              
              McCann
                  P.C.
              
              Hardy,
                  P. C.
              
              McCann
                  P.C.
              
              Hardy,
                  P. C.Fee
                  category
              
              2006
              
              2006
              
              2006
              
              2005
              
              2005Audit
                  fees
              
              $
              44,772
              
              $
              29,151
              
              $
              -
              
              $
              90,000
              
              $
              23,212Audit-related
                  fees
              
              $
              -
              
              $
              5,821
              
              $
              3,730
              
              $
              -
              
              $
              600Tax
                  fees
              
              $
              1,600
              
              $
              9,450
              
              $
              -
              
              $
              6,500
              
              $
              1,125All
                  other fees
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Total
                  fees
              
              $
              46,372
              
              $
              44,422
              
              $
              3,730
              
              $
              96,500
              
              $
              24,937




26


Audit
      fees. Consists of fees for professional services rendered by our principal
      accountants for the audit of our annual financial statements and the review
      of
      financial statements included in our Forms 10-QSB or services that are normally
      provided by our principal accountants in connection with statutory and
      regulatory filings or engagements.


Audit-related
        fees. Consists of fees for assurance and related services by our principal
        accountants that are reasonably related to the performance of the audit or
        review of our financial statements and are not reported under "Audit fees."
 
 Tax
        fees.
        Consists of fees for professional services rendered by our principal accountants
        for tax compliance, tax advice and tax planning.
 
 All
        other
        fees. Consists of fees for products and services provided by our principal
        accountants, other than the services reported under "Audit fees," "Audit-related
        fees" and "Tax fees" above. The fees disclosed in this category include due
        diligence, preparation of pro forma financial statements as a discussion
        piece
        for a Board member, and preparation of letters in connection with the filing
        of
        Current Reports on Form 8-K.
 
 **Pre-Approval
        Policies and Procedures**
 
 All
        services provided by our independent registered public accounting firm, HJ
        Associates & Consultants LLP (“HJ”), are subject to pre-approval by our
        Audit Committee. The Audit Committee has authorized each of its members to
        approve services by HJ in the event there is a need for such approval prior
        to
        the next full Audit Committee meeting. The Audit Committee has also adopted
        policies and procedures that are detailed as to the particular service and
        that
        do not include delegation of the Audit Committee’s responsibilities to
        management under which management may engage HJ to render audit or non-audit
        services. Any interim approval given by an Audit Committee member and any
        such
        engagement by management must be reported to the Audit Committee no later
        than
        its next scheduled meeting. Before granting any approval, the Audit Committee
        (or a committee member if applicable) gives due consideration to whether
        approval of the proposed service will have a detrimental impact on HJ’s
        independence. The full Audit Committee pre-approved all services provided
        by HJ
        in fiscal 2006.
 
 Based
        upon the Audit Committee's discussion with management and the independent
        auditors and the Audit Committee review of the representations of management
        and
        the report of the independent accountants to the Audit Committee, the Audit
        Committee recommended that the Board of Directors include our audited financial
        statements in our Annual Report on Form 10-KSB for the year ended March 31,
        2006
        filed with the Securities and Exchange Commission.
  27
 **Index
        to Consolidated Financial Statements**
  Reports
                    of Independent Registered Public Accounting Firms
                F-2-F-3Consolidated
                    Balance Sheets, March 31, 2006 and 2005
                F-4Consolidated
                    Statements of Operation, for the years ended March 31, 2006 and
                    2005
                F-5Consolidated
                    Statement of Stockholders' Equity, for the years ended March
                    31, 2006 and
                    2005
                F-6Consolidated
                    Statements of Cash Flows, for the years ended March 31, 2006
                    and
                    2005
                F-7Notes
                    to Consolidated Financial Statements
                F-8-F-24
  F-1
  **Report
        of Independent Registered Public Accounting Firm**
 
 To
        the
        Board of Directors
 Imagenetix,
        Inc.
 San
        Diego, California
 
 We
        have
        audited the accompanying consolidated balance sheet of Imagenetix, Inc. as
        of
        March 31, 2006, and the related consolidated statements of operations,
        stockholders’ equity (deficit) and cash flows for the year ended March 31, 2006.
        These consolidated financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audit.
 
 We
        conducted our audit 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 consolidated financial statements are free of
        material misstatement. An audit includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the consolidated financial statements.
        An audit also includes assessing the accounting principles used and significant
        estimates made by management, as well as evaluating the overall consolidated
        financial statement presentation. We believe that our audit provides 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 Imagenetix,
        Inc. as of March 31, 2006, and the results of their operations and their
        cash
        flows for the year ended March 31, 2006, in conformity with United
        States generally accepted accounting principles .
  HJ
        Associates & Consultants, LLP
 Salt
        Lake
        City, Utah
 June
        15,
        2006
  F-2
  REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Board of Directors
 **IMAGENETIX,
        INC.**
 San
        Diego, California
 
 We
        have
        audited the accompanying consolidated balance sheet of Imagenetix, Inc. as
        of
        March 31, 2005, and the related consolidated statements of income, stockholders’
equity, and cash flows for the year then ended. These financial statements
        are
        the responsibility of the Company’s management. Our responsibility is to express
        an opinion on these financial statements based on our audit.
 
 We
        conducted our audit 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. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the 2005 financial statements referred to above present fairly,
        in all
        material respects, the financial position of Imagenetix, Inc. as of March
        31,
        2005, and the results of its operations and its cash flows for the year then
        ended, in conformity with U.S. generally accepted accounting principles.
  Mayer
        Hoffman McCann P.C
 San
        Diego, CA
 July
        5,
        2005
  F-3
  **Imagenetix,
                  Inc.****Consolidated
                  Balance Sheets**March
                  31,
              
              **2006**
              
              2005**ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              **1,808,016**
              
              $
              2,031,486Accounts
                  receivable, net
              
              
              **811,198**
              
              
              2,064,089Inventories,
                  net
              
              
              **1,741,468**
              
              
              1,382,495Prepaid
                  expenses
              
              
              **220,747**
              
              
              26,700Income
                  tax receivalbe
              
              
              **617,570**
              
              
              -Deferred
                  tax asset
              
              
              **94,200**
              
              
              41,700Total
                  current assets
              
              
              **5,293,199**
              
              
              5,546,470**Property
                  and equipment,**net
              
              
              **97,574**
              
              
              42,987**Other
                  assets**
              
              
              **503,301**
              
              
              183,054$
              **5,894,074**
              
              $
              5,772,511**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              **740,461**
              
              $
              841,801Accrued
                  liabilities
              
              
              **51,949**
              
              
              20,245Customer
                  deposits
              
              
              **48,485**
              
              
              75,391Income
                  tax payable
              
              
              **-**
              
              
              437,784Short
                  term license payable
              
              
              **29,209**
              
              
              -Line
                  of credit with related party
              
              
              **-**
              
              
              225,000Total
                  current liabilities
              
              
              **870,104**
              
              
              1,600,221**Long
                  term license payable**
              
              
              **68,873**
              
              
              -**Stockholders'
                  equity**Preferred
                  stock, $.001 par value; 5,000,000 sharesauthorized: none outstanding
              
              
              **-**
              
              
              -Common
                  stock, $.001par value; 50,000,000 sharesauthorized: 10,721,400 and 10,404,652 issued andoutstanding at March 31, 2006 and 2005, respectively
              
              
              **10,721**
              
              
              10,405Capital
                  in excess of par value
              
              
              **10,342,395**
              
              
              4,267,707Accumulated
                  deficit
              
              
              **(5,398,019**
              **)**
              
              (105,822
              )Total
                  stockholders' equity
              
              
              **4,955,097**
              
              
              4,172,290$
              **5,894,074**
              
              $
              5,772,511*See
                  accompanying reports of independent registered public accounting
                  firms,
                  summary of accounting policies *and
                  notes to consolidated financial
                  statements.**


F-4


**Imagenetix,
                  Inc.****Consolidated
                  Statements of Operation***Years
                  Ended March 31,*
              
              **2006**
              
              2005Net
                  sales
              
              **$**
              **7,649,941**
              
              $
              7,574,194Cost
                  of sales
              
              
              **4,134,645**
              
              
              4,293,880Gross
                  profit
              
              
              **3,515,296**
              
              
              3,280,314Operating
                  expenses:General
                  and administrative
              
              
              **2,995,917**
              
              
              1,145,102Payroll
                  expense
              
              
              **674,344**
              
              
              579,043Consulting
                  expense
              
              
              **1,072,391**
              
              
              516,729Operating
                  expenses
              
              
              **4,742,652**
              
              
              2,240,874Operating
                  income (loss)
              
              
              **(1,227,356**
              **)**
              
              1,039,440Other
                  income (expense):Other
                  income
              
              
              **35,906**
              
              
              5,523Interest
                  expense (Note 6)
              
              
              **(25,728**
              **)**
              
              (23,572
              )Other
                  income (expense)
              
              
              **10,178**
              
              
              (18,049
              )Income
                  (loss) before income taxes
              
              
              **(1,217,178**
              **)**
              
              1,021,391Provision
                  for (benefits from) taxes (Note 10)
              
              
              **(623,800**
              **)**
              
              267,455Net
                  income (loss)
              
              **$**
              **(593,378**
              **)**
              $
              753,936Basic
                  income (loss) per share
              
              **$**
              **(0.06**
              **)**
              $
              0.08Diluted
                  income (loss) per share
              
              **$**
              **(0.06**
              **)**
              $
              0.08*See
                  accompanying reports of independent registered public accounting
                  firms,
                  summary of accounting *polices
                  and notes to consolidated financial
                  statements.**




F-5


**Imagenetix,
                  Inc.****Consolidated
                  Statements of Stockholders'
                  Equity***Years
                  Ended March 31, 2006 and 2005*Common
                  Stock
              
              Capital
                  in excess
              
              Retained
                  Earnings
              
              Stockholders'Shares
              
              Amount
              
              of
                  Par Value
              
              (Deficit)
              
              EquityBalance,
                  April 1, 2004
              
              
              8,722,152
              
              $
              8,722
              
              $
              2,440,720
              
              $
              (859,758
              )
              $
              1,589,684Issuance
                  of common stock at $1.20per share
              
              
              1,672,500
              
              
              1,673
              
              
              2,005,327
              
              
              -
              
              
              2,007,000Stock
                  offering costs
              
              
              
              
              
              
              
              
              (442,542
              )
              
              -
              
              
              (442,542
              )Exercise
                  of stock options****at $0.88 per share
              
              
              10,000
              
              
              10
              
              
              8,790
              
              
              -
              
              
              8,800Value
                  of warrants and options issued
              
              
              -
              
              
              -
              
              
              255,412
              
              
              -
              
              
              255,412Net
                  income for the year endedMarch 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              753,936
              
              
              753,936Balance,
                  March 31, 2005
              
              
              10,404,652
              
              $
              10,405
              
              $
              4,267,707
              
              $
              (105,822
              )
              $
              4,172,290Issuance
                  of common stock for servicesat $1.95 per share
              
              
              45,000
              
              
              45
              
              
              87,705
              
              
              -
              
              
              87,750Exercise
                  of warrants at $1.00 to****$2.00 per share
              
              
              271,748
              
              
              271
              
              
              312,477
              
              
              -
              
              
              312,748Value
                  of warrants and options issuedand extended
              
              
              -
              
              
              -
              
              
              5,674,506
              
              
              -
              
              
              5,674,506Non-cash
                  dividend issued to certainwarrant holders
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,698,819
              )
              
              (4,698,819
              )Net
                  (loss) for the year endedMarch 31, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              (593,378
              )
              
              (593,378
              )Balance,
                  March 31, 2006
              
              
              10,721,400
              
              $
              10,721
              
              $
              10,342,395
              
              $
              (5,398,019
              )
              $
              4,955,097*See
                  accompanying reports of independent registered public accounting
                  firms,
                  summary of accounting policies and notes to *consolidated
                  finacial
                  statements.**




F-6


**Imagenetix,
                  Inc.****Consolidated
                  Statements of Cash Flows***Years
                  Ended May 31,*
              
              
              
              **2006**
              
              2005**Operating
                  activities:**Net
                  income (loss)
              
              
              
              
              $
              **(593,378**
              **)**
              $
              753,936Adjustments
                  to reconcile net income (loss)to cash provided by operating activities:Amortization and depreciation
              
              
              
              
              
              **61,001**
              
              
              27,647Provision for doubtful accounts
              
              
              
              
              
              **17,930**
              
              
              (106,677
              )Provision for inventory obsolescence
              
              
              
              
              
              **123,794**
              
              
              (36,887
              )Non cash expense related to issuance of warrantsand stock options
              
              
              
              
              
              **975,687**
              
              
              57,043Stock issued for services
              
              
              
              
              
              **87,750**
              
              
              -Change in deferred taxes
              
              
              
              
              
              **(358,200**
              **)**
              
              (66,200
              )Changes in assets and liabilities:(Increase) decrease in accounts receivable
              
              
              
              
              
              **1,234,961**
              
              
              (1,153,580
              )(Increase) decrease in employee receivable
              
              
              
              
              
              **1,544**
              
              
              (5,000
              )(Increase) decrease in inventory
              
              
              
              
              
              **(482,767**
              **)**
              
              (359,556
              )(Increase) decrease in other assets
              
              
              
              
              
              **87,332**
              
              
              (3,751
              )Increase (decrease) in accounts payable
              
              
              
              
              
              **(101,340**
              **)**
              
              485,408Increase (decrease) in accrued liabilities
              
              
              
              
              
              **31,704**
              
              
              (20,195
              )Increase (decrease) in customer deposits
              
              
              
              
              
              **(26,906**
              **)**
              
              (13,701
              )Increase (decrease) in income taxes payable
              
              
              
              
              
              **(1,055,354**
              **)**
              
              333,655Net
                  cash provided by (used in) operating activities
              
              
              
              
              
              **3,758**
              
              
              (107,858
              )**Investing
                  activities:**Acquisition
                  of office equipment and leasehold improvements
              
              
              
              
              
              **(100,193**
              **)**
              
              (3,000
              )Trademarks,
                  patents and infomercial
              
              
              
              
              
              **(189,979**
              **)**
              
              (83,660
              )Net
                  cash used in investing activities
              
              
              
              
              
              **(290,172**
              **)**
              
              (86,660
              )**Financing
                  activities:**Proceeds
                  from issuance of common stock
              
              
              
              
              
              **-**
              
              
              2,007,000Stock
                  offering costs
              
              
              
              
              
              **-**
              
              
              (244,173
              )Payments
                  on notes payable to related party
              
              
              
              
              
              **(225,000**
              **)**
              
              -Proceeds
                  from exercise of stock options and warrants
              
              
              
              
              
              **312,748**
              
              
              8,800Payments
                  on patent license financed
              
              
              
              
              
              **(24,804**
              **)**
              
              -Net
                  cash provided by financing activities
              
              
              
              
              
              **62,944**
              
              
              1,771,627**Net
                  increase (decrease) in cash**
              
              
              
              
              
              **(223,470**
              **)**
              
              1,577,109**Cash
                  and cash equivalents**,
                  beginning of year
              
              
              
              
              
              **2,031,486**
              
              
              454,377**Cash
                  and cash equivalents,**end of year
              
              
              
              
              $
              **1,808,016**
              
              $
              2,031,486**Supplemental
                  Disclosure of Cash Flow Information:**Cash
                  paid during the period for:Interest
              
              
              
              
              $
              **25,728**
              
              $
              27,000Income taxes
              
              
              
              
              $
              **789,754**
              
              $
              -**Non
                  Cash Investing and Financing Activities:**Patent license financed
              
              
              
              
              $
              **122,886**
              
              $
              -Non-cash dividend issued to certain warrant holders
              
              
              
              
              $
              **4,698,819**
              
              $
              -*See
                  accompanying reports of independent registered public accounting
                  firms,
                  summary of accounting policies *and
                  notes to consolidated financial
                  statements.**




F-7




**IMAGENETIX,
      INC.**


Notes
        to
        the Consolidated Financial Statements
 March
        31,
        2006 and 2005
 
 NOTE
        1 -  SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES
 
 Organization
 
 The
        accompanying consolidated financial statements represent the accounts of
        Imagenetix, Inc. [“Parent”] organized under the laws of the State of Nevada on
        March 28, 1988; and its subsidiary Imagenetix, Inc [“Subsidiary”] organized
        under the laws of the state of Colorado on July 26, 1996 and its subsidiary
        Imagenetix [“Imagenetix CA”] organized under the laws of the State of California
        on January 7, 1999, [“The Company”]. The Company is engaged in the business of
        developing and marketing nutritional supplements and skin care products
        primarily in domestic markets.
 
 On
        March
        23, 1999, Subsidiary completed an exchange agreement with Imagenetix CA wherein
        Subsidiary issued 3,900,000 shares of its common stock in exchange for all
        of
        the outstanding common stock of Imagenetix CA. The Acquisition was accounted
        for
        as a recapitalization of Imagenetix CA as the shareholders of the Imagenetix
        CA
        controlled the combined entity after the acquisition. There was no adjustment
        to
        the carrying values of the assets or liabilities of the Subsidiary or Imagenetix
        CA as a result of the recapitalization.
 
 During
        October 2000, the Subsidiary entered into a definitive merger agreement and
        plan
        of reorganization with Parent. The transaction was accounted for as a
        recapitalization of the Subsidiary, wherein the Subsidiary became a wholly
        owned
        subsidiary of the Parent. After giving effect to the preceding transaction,
        the
        parent had 8,550,000 shares of common stock, 3,183,750 warrants, and 525,000
        options outstanding. In connection with the reverse acquisition, the Parent
        changed its name to Imagenetix, Inc.
 
 The
        Company has, at the present time, not paid any dividends, and any dividends
        that
        may be paid in the future will depend upon the financial requirements of
        the
        Company and other relevant factors.
 
 Consolidation
 
 All
        significant intercompany transactions between the Parent, Subsidiary, and
        Imagenetix CA have been eliminated in consolidation.
 
 Reclassifications
 
 Certain
        items included in the year ended March 31, 2005 financial statements have
        been
        reclassified to conform to the current year presentation.
  F-8
 **IMAGENETIX,
        INC.**
 Notes
        to
        the Consolidated Financial Statements
 March
        31,
        2006 and 2005
 
 Accounting
        Estimates
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles in the United States of America requires management
        to
        make estimates and assumptions that effect the reported amounts of assets
        and
        liabilities, the disclosures of contingent assets and liabilities at the
        date of
        the financial statements, and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those estimated
        by
        management.
 
 Cash
        and Cash Equivalents
 
 For
        purposes of the financial statements, the Company considers all highly liquid
        debt investments purchased with a maturity of three months or less to be
        cash
        equivalents. At various times throughout the year, the Company has exceeded
        federally insured limits.
 
 Accounts
        receivable
 
 Accounts
        receivable are carried at the expected net realizable value. The allowance
        for
        doubtful accounts is based on management’s assessment of the collectibility of
        specific customer accounts and the aging of the accounts receivable. If there
        were a deterioration of a major customer’s creditworthiness, or actual defaults
        were higher than historical experience, our estimates of the recoverability
        of
        amounts due to us could be overstated, which could have a negative impact
        on
        operations.
 
 Inventory
 
 Inventory
        is carried at the lower of cost or market. Cost is determined by the first-in
        first-out method.
 
 Property
        and Equipment
 
 Property
                  and equipment are stated at cost. Expenditures for major renewals
                  and
                  betterments that extend the useful lives of property and equipment
                  are
                  capitalized, upon being placed in service. Expenditures for maintenance
                  and repairs are charged to expense as incurred. Depreciation is
                  computed
                  over the estimated useful life of three to seven years, except
                  leasehold
                  improvements which are depreciated over the lessor of the remaining
                  lease
                  life or the life of the asset, using the straight-line method.
                  The Company
                  follows the provisions of the Financial Accounting Standards Board
                  ("FASB") Statement of Financial Accounting Standards ("SFAS") No.
                  144,
                  "Accounting for the Impairment of Long-lived Assets." Long-lived
                  assets
                  and certain identifiable intangibles to be held and used by the
                  Company
                  are reviewed for impairment whenever events or changes in circumstances
                  indicate that the carrying amount of an asset may not be recoverable.
                  The
                  Company continuously evaluates the recoverability of its long-lived
                  assets
                  based on estimated future cash flows and the estimated fair value
                  of such
                  long-lived assets, and provides for impairment if such undiscounted
                  cash flows are insufficient to recover the carrying amount of the
                  long-lived asset.
 
 F-9
 **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
 Trademarks
        and Patents
 
 Patents
        and trademarks are carried at cost less accumulated amortization and are
        amortized over their estimated useful lives of from 8 to 17 years for patents
        and 10 years for trademarks. The carrying value of patents and trademarks
        is
        periodically reviewed and impairments, if any, are recognized when the expected
        future benefit to be derived from individual intangible assets is less than
        its
        carrying value determined based on the provisions of SFAS No. 144 as discussed
        above.
 
 Stock
        Based Compensation
 
 The
        Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
        for
        Stock Issued to Employees," and related Interpretations in accounting for
        all
        stock option plans. Under APB Opinion 25, compensation cost has been recognized
        for stock options granted to employees when the option price is less than
        the
        market price of the underlying common stock on the date of grant.
 
 Through
        December 31, 2005, SFAS No. 123, "Accounting for Stock-Based Compensation,"
        and
        SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
        Disclosure," required the Company to provide pro forma information regarding
        net
        income as if compensation cost for the Company's stock option plans had been
        determined in accordance with the fair value based method prescribed in SFAS
        No.
        123. To provide the required pro forma information, the Company estimated
        the
        fair value of each stock option at the grant date by using the Black-Scholes
        option-pricing model. SFAS No. 148 also provides for alternative methods
        of
        transition for a voluntary change to the fair value based method of accounting
        for stock-based employee compensation. The Company has elected to continue
        to
        account for stock-based compensation under APB No. 25.
 
 On
        December 31, 2005, our Board of Directors accelerated the vesting of 309,000
        unvested stock options held by our employees with exercise prices ranging
        from
        $1.39 to $1.68 per share. The options would have otherwise vested over various
        periods through September 2008. Our Board of Directors determined that the
        acceleration of the vesting of the stock options described above was in the
        best
        interests of the company to enhance the incentive of the affected options
        and to
        provide us with greater flexibility for future grants of share-based incentives
        as SFAS 123(R) became effective. We adopted SFAS 123(R) as of April 1,
        2006.
  F-10
 
 **IMAGENETIX,
            INC.**
 Notes
            to
            the Consolidated Financial Statements
 March
            31,
            2006 and 2005
 Under
        the
        accounting provisions of SFAS No. 123, the Company's net loss per share would
        have been increased by the pro forma amounts indicated below:


Year
                  Ended March 31,2006
              
              2005Net
                  income (loss), as reported
              
              $
              (593,378
              )
              $
              753,936Stock-based
                  employee compensation,net of tax effects, included in reported net loss
              
              
              217,200
              
              
              -Stock-based
                  employee compensation,net of tax effects
              
              
              (770,365
              )
              
              -Proforma
                  net income (loss)
              
              $
              (1,146,543
              )
              $
              753,936Net
                  income (loss) per share:Basic-
                  as reported
              
              $
              (0.06
              )
              $
              0.08Basic-
                  proforma
              
              $
              (0.11
              )
              $
              0.08Diluted-
                  as reported
              
              $
              (0.06
              )
              $
              0.08Diluted-
                  proforma
              
              $
              (0.11
              )
              $
              0.08




For
        purposes of computing the pro forma disclosures required by SFAS No. 123,
        the
        fair value of each option granted to employees and directors is estimated
        using
        the Black-Scholes option-pricing model with the following weighted-average
        assumptions used for the year ended March 31, 2006: dividend yield of zero
        percent; expected volatility of from 90% to 94%; risk-free interest rates
        of
        3.64% to 4.02%, and expected lives of from 2 to 5 years.
 
 The
        Company applies SFAS No. 123 in valuing options granted to consultants and
        estimates the fair value of such options using the Black-Scholes option-pricing
        model. The fair value is recorded as consulting expense as services are
        provided. Options granted to consultants for which vesting is contingent
        based
        on future performance are measured at their then current fair value at each
        period end, until vested.
 
 Revenue
        Recognition
 
 Revenue
        is recognized when the product is shipped. The Company evaluates whether
        an
        allowance for estimated returns is required based on historical returns.
        The Company
        has not had significant returns and accordingly, has not established an
        estimated allowance for returns at March 31, 2006 or 2005.
 
 Income
        Taxes
 
 The
        Company accounts for income taxes in accordance with Statement of Financial
        Accounting Standards No. 109, “Accounting for Income Taxes.” This statement
        requires an asset and liability approach for accounting for income taxes
        (See
        Note 10).
 
 F-11
 
 **IMAGENETIX,
        INC.**
 Notes
        to
        the Consolidated Financial Statements
 March
        31,
        2006 and 2005
 
 Earnings
        Per Share
 
 The
        computation of earnings per share is based on the weighted average number
        of
        shares outstanding during the period presented in accordance with Statement
        of
        Financial Accounting Standards No. 128, “Earnings Per Share” (See Note
        11).
 
 Recently
        Enacted Accounting Standards
 
 In
        May
        2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"
        ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20
        "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
        Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides
        guidance on the accounting for and reporting of accounting changes and error
        corrections. It establishes retrospective application, or the latest practicable
        date, as the required method for reporting a change in accounting principle
        and
        the reporting of a correction of an error. SFAS 154 is effective for accounting
        changes and a correction of errors made in fiscal years beginning after December
        15, 2005 and is required to be adopted by us in the first quarter of fiscal
        2007. We are currently evaluating the effect that the adoption of SFAS 154
        will
        have on our consolidated results of operations and financial
        condition.
 
 NOTE
        2
– ACCOUNTS
        RECEIVABLE
 
 Accounts
        receivable are carried at the expected realizable value. Accounts receivable
        consisted of the following:




March
                  31,2006
              
              2005Accounts
                  receivable - trade
              
              
              
              
              $
              861,198
              
              $
              2,096,159Allowance
                  for doubtful accounts
              
              
              
              
              
              (50,000
              )
              
              (32,070
              )Accounts receivable, net
              
              
              
              
              $
              811,198
              
              $
              2,064,089


NOTE
        3
– INVENTORY
 
 Inventory
        consists of the following at:




March
                  31,2006
              
              2005Raw
                  materials
              
              $
              1,554,417
              
              $
              1,250,049Finished
                  products
              
              
              168,228
              
              
              57,120Boxes,
                  labels, tubes & bottles
              
              
              215,291
              
              
              148,0001,937,936
              
              
              1,455,169Reserve
                  for obsolescence
              
              
              (196,468
              )
              
              (72,674
              )$
              1,741,468
              
              $
              1,382,495
  F-12
 **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
 
 NOTE
          4
– PROPERTY
          AND EQUIPMENT
 
 The
          following is a summary of equipment, at cost, less accumulated
          depreciation:
 March
                    31,2006
                
                2005Office
                    equipment
                
                $
                40,922
                
                $
                45,807Lease-hold
                    improvements
                
                
                87,708
                
                
                113,598Leased
                    equipment
                
                
                12,341
                
                
                12,341140,971
                
                
                171,746Less
                    accumulated depreciation
                
                
                43,397
                
                
                128,759$
                97,574
                
                $
                42,987
  Depreciation
          expense for the year ended March 31, 2006 and 2005 was $45,606 and $24,652,
          respectively.
 
 NOTE
          5
– OTHER
          ASSETS
 
 The
          following is a summary of intangible assets which are included in “Other Assets”
on the face of the balance sheet:
  March
                    31,2006
                
                2005Trademarks
                
                $
                13,032
                
                $
                11,736Deposit
                    on infomercial
                
                
                -
                
                
                79,240Promotional
                
                
                18,750
                
                
                43,750Patent
                
                
                161,353
                
                
                28,468Deferred
                    tax asset
                
                
                330,200
                
                
                24,500Globestar
                
                
                -
                
                
                3,674523,335
                
                
                191,368Less
                    accumulated amortization
                
                
                20,034
                
                
                8,314$
                503,301
                
                $
                183,054
  For
          the
          year ended March 31, 2006 and 2005 amortization expense was $15,395 and
          $2,995,
          respectively.
 
 F-13
  **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
 
 NOTE
          6
– LINE
          OF
          CREDIT - RELATED PARTY
 
 In
          October 2001, the Company entered into a line of credit agreement with
          two
          principal shareholders. The shareholders agreed to provide a line of credit
          in
          the amount of $1,000,000. The balance on the line of credit accrued interest
          at
          a rate of 12%
          per
          annum. The line of credit was for working capital needs and was secured
          with the
          Company’s assets. The line of credit expired on September 30, 2002. The Company
          verbally negotiated extension of terms on the line of credit. The verbal
          agreement changed the terms on the line of credit to a month to month
          basis.
 
 As
          of
          March 31, 2006, the line of credit had been paid in full. During the years
          ended
          March 31, 2006 and 2005 the Company recorded interest expense of approximately
          $16,000 and $27,000, respectively, related to the line of credit.
 
 NOTE
          7
– LICENSE
          AND ROYALTY PAYABLE
  In
          May,
          2005, the Company entered into an agreement with EHP Products, Inc. acquiring
          a
          non-exclusive world-wide license to make, use and sell products relating
          to
          Cetyl Myristoleate covered under U.S. Patent No. 5,569,676. The agreement
          provides for payments of $3,000 per month from May, 2005 through April,
          2009, at
          which time EHP Products, Inc. has agreed to convey ownership in the product
          to
          the Company.
 
 As
          of
          March 31, 2006 the following obligations were outstanding related to this
          license:
  As
                    of March 31,2006
                
                2005Patent
                    License and Royalty Payable
                
                $
                98,082
                
                $
                -Less
                    current portion
                
                
                29,209
                
                
                -Long
                    term license payable
                
                $
                68,873
                
                $
                -
  NOTE
          8
– LEASES
          OBLIGATIONS
 
 Operating
          Lease
 
 The
          Company has entered into a seven-year building lease for its office commencing
          in January 2006 and expiring in December 2012. Lease expense for the years
          ended
          March 31, 2006 and 2005 amounted to $219,336 and $197,090, respectively.
          The
          following is a schedule of minimum annual rental payments for the next
          five
          years.
  F-14
 
 **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
  Years
                    ending March 31,2007
                
                $
                132,9862008
                
                
                134,6082009
                
                
                135,5792010
                
                
                138,3632011
                
                
                143,206Thereafter
                
                
                262,274Total
                    minimum lease  payments
                
                $
                947,016
  NOTE
          9
– COMMITMENTS
          AND CONTINGINCIES
 
 Contingencies
 
 The
          Company is involved in litigation from time to time in the normal course
          of
          business. Management believes there are no such claims, which would have
          a
          material effect on the financial position of the Company.
 
 Other
          agreements
 
 The
          Company routinely enters into contracts and agreements with suppliers,
          manufacturers, consultants, product marketing, and sales representatives
          in the
          normal course of doing business. These agreements can be either short or
          long
          term and are normally limited to specific products and marketing opportunities.
          The Company is committed to purchase a minimum of $1,680,000 each year
          through
          2012 of the major ingredient in its current products. However, we have
          entered
          into a waiver, which can be exercised solely at our option, which, if necessary,
          will eliminate $840,000 of the purchase commitment for the twelve months
          ending
          December 31, 2006.
 
 In
          June
          2004, the Company entered into a marketing and promotion agreement which
          contained certain milestones which, if met, require the Company to issue
          warrants exercisable into up to 125,000 shares of common stock with an
          exercise
          price equal to 150% of the market price on the date the milestone is met.
          The
          Company issued 50,000 shares of common stock during the year ended March
          31,
          2005, as the result of two of the milestones being met. The warrants were
          valued
          using the Black-Sholes pricing model and resulted in additional expense
          of
          approximately $57,000 as of March 31, 2005. The Company issued 25,000 shares
          of
          common stock during the year ended March 31, 2006, as a result of the third
          milestone being met. The warrant was valued using the Black-Sholes pricing
          model
          and resulted in additional expense of approximately $39,000 for the year
          ended
          March 31, 2006.
  F-15
  **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
 
 NOTE
          10
–    CAPITAL
          STOCK
 
 Preferred
          Stock
 
 The
          Company has authorized 5,000,000 shares of preferred stock, $.001 par value,
          with such rights, preferences and designations and to be issued in such
          series
          as determined
          by the Board of Directors. No shares are issued and outstanding at March
          31,
          2006.
 
 Common
          Stock
 
 The
          Company has authorized 50,000,000 shares of common stock at $.001 par value.
          At
          March 31, 2006, the Company had 10,721,400 shares of common stock issued
          and
          outstanding.
 
 During
          the year ended March 31, 2006, the Company issued 271,748 shares of common
          stock
          for proceeds of $312,748. The shares were issued upon shareholders exercising
          warrants with exercise prices ranging from $1.00 to $2.00 per
          share.
 
 Also,
          during the year ended March 31, 2006, the Company issued 45,000 shares
          of common
          stock to three individuals in exchange for services they provided to the
          company. The services performed were valued based on the price of the common
          stock on the date of issuance, $1.95 per share or $87,750 in the aggregate.
          This
          amount was reflected as non-cash expense during the year ended March 31,
          2006.
 
 During
          the year ended March 31, 2005, the Company issued 10,000 shares of common
          stock
          upon the exercise of warrants to purchase common stock at $0.88 per
          share.
 
 During
          the year ended March 31, 2005, the Company sold 1,672,500 shares of common
          stock
          for total proceeds of $2,007,000. Stock offering costs of $442,542 were
          recorded
          as part of the sale. The stock offering costs include the fair value, as
          determined by the Black-Scholes pricing model, of warrants issued to the
          private
          placement agent. Per the agreement, the private placement agent received
          10% of
          the total shares issued in the form of a warrant with an exercise price
          equal to
          the share price of the issuance. The warrants were valued at approximately
          $198,000.
 
 Stock
          Bonus Plan
 
 During
          the year ended March 31, 2000, the board of directors of the Company adopted
          a
          stock bonus plan. The plan provides for the granting of awards of up to
          724,500
          shares of common stock to officers, directors, consultants and employees.
          Awards
          under the plan will be granted as determined by the board of directors.
          At
          present, 499,500 shares have been granted under the plan.
  F-16
  **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
 
 Warrants
 
 A
          summary
          of the status of the warrants granted under various agreements at March
          31, 2006
          and 2005, and changes during the years then ended is presented
          below:
  WarrantsWeightedAverageExerciseShares
                
                PriceOutstanding,
                    April 1, 2004
                
                
                4,011,598
                
                $
                1.18Granted
                
                
                217,250
                
                
                1.51Cancelled
                
                
                -
                
                
                -Exercised
                
                
                -
                
                
                -Outstanding,
                    March 31, 2005
                
                
                4,228,848
                
                
                1.25Granted
                
                
                150,000
                
                
                1.96Cancelled
                
                
                -
                
                
                -Exercised
                
                
                (271,748
                )
                
                1.20Outstanding,
                    March 31, 2006
                
                
                4,107,100
                
                
                1.28Exercisable,
                    March 31, 2005
                
                
                4,228,848
                
                $
                1.25Exercisable,
                    March 31, 2006
                
                
                4,107,100
                
                $
                1.28Weighted
                    average fair value of warrantsgranted
                    during the year ended March 31, 2006
                
                
                150,000
                
                $
                1.46
  The
          Company estimates the fair value of each warrant at the issuance date by
          using
          the Black-Scholes option-pricing model with the following weighted-average
          assumptions used for the year ended March 31, 2006: dividend yield of zero
          percent; expected volatility of 90% to 94%, risk-free interest rates of
          3.64% to
          3.83%; and expected lives of 5 years.
 
 In
          addition, during the year ended March 31, 2006, the Company extended the
          expiration date on warrants exercisable for up to 2,757,782 shares of common
          stock to October 23, 2007. These warrants were issued in 2000 and 2001
          as part
          of an equity unit sale. By the terms of the warrants, the Company was to
          use its
          best efforts to maintain a registration statement under which the holders
          could
          resell the common shares on the exercise of the warrants. Since the Company
          failed to maintain a timely registration statement, it decided to extend
          the
          expiration date of the warrants. Due to this modification, the Company
          recorded
          a non-cash dividend of $4,698,819 for the year ended March 31, 2006. The
          Company
          estimated the fair value of the dividend at the modification date by using
          the
          Black-Scholes pricing model with the following weighted average assumptions:
          dividend yield of zero percent; expected volatility of 90%; risk free interest
          rate of 3.64%; and expected lives of 25 months.
 
 F-17
 **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
 
 A
          summary
          of the status of the warrants granted under the various agreements at March
          31,
          2006, are presented in the table below:
  Outstanding
                
                ExercisableWeightedAverage
                
                Weighted
                
                
                
                WeightedRange
                    of
                
                
                
                Remaining
                
                Average
                
                
                
                AverageExercise
                
                Number
                
                Contractual
                
                Exercise
                
                Number
                
                ExercisePrices
                
                Outstanding
                
                Life
                
                Price
                
                Exercisable
                
                Price***Warrants***$
                0.70-1.00
                
                
                1,344,853
                
                
                1.56
                
                $
                0.94
                
                
                1,344,853
                
                $
                0.94$
                1.10-1.95
                
                
                1,977,250
                
                
                1.92
                
                $
                1.19
                
                
                1,977,250
                
                $
                1.19$
                2.00
                
                
                710,000
                
                
                1.56
                
                $
                2.00
                
                
                710,000
                
                $
                2.00$
                2.33-3.45
                
                
                74,997
                
                
                4.17
                
                $
                2.85
                
                
                74,997
                
                $
                2.854,107,100
                
                
                
                
                
                
                
                
                4,107,100
  Warrants
          to purchase 1,316,598 shares at $1.00 per share, 750,000 shares at $2.00
          per
          share and 125,000 shares at $1.75 per share are redeemable at $.01 per
          warrant
          at the option of the Company if there is an effective registration of the
          securities and the closing bid or selling price of the Company’s common stock
          for 10 consecutive trading days equal three times the exercise price of
          the
          warrants.
 
 Stock
          Option Plan
 
  In
          August 2000 we adopted a Stock Option Plan, which we refer to as the
          "Plan," which provides for the grant of stock options intended to qualify
          as
          "incentive stock options" and "nonqualified stock options" (collectively
          "stock
          options") within the meaning of Section 422 of the United States Internal
          Revenue Code of 1986 (the "Code"). Stock options may be issued to any of
          our
          officers, directors, key employees or consultants.
   Under
          the
          Plan, we have reserved 1.5 million shares underlying stock options for
          issuance, of which 1,139,000 options have been granted to executive officers,
          employees and consultants at prices ranging from $.86 to $2.00 per share.
          The
          Plan is administered by the full Board of Directors, who determine which
          individuals shall received stock options, the time period during which
          the stock
          options may be exercised, the number of shares of common stock that may
          be
          purchased under each stock option and the stock option price.
   The
          per
          share exercise price of incentive stock options may not be less than the
          fair
          market value of the common stock on the date the option is granted. The
          aggregate fair market value (determined as of the date the stock option
          is
          granted) of the common stock that any person may purchase under an incentive
          stock option in any calendar year pursuant to the exercise of incentive
          stock
          options will not exceed $100,000.
          No person who owns, directly or indirectly, at the time of the granting
          of an
          incentive stock option, more than 10% of the total combined voting power
          of all
          classes of our stock is eligible to receive incentive stock options under
          the
          Plan unless the stock option price is at least 110% of the fair market
          value of
          the common stock subject to the stock option on the date of grant.
  F-18
 **IMAGENETIX,
            INC.**
 Notes
            to
            the Consolidated Financial Statements
 March
            31,
            2006 and 2005
 No
          incentive stock options may be transferred by an optionee other than by
          will or
          the laws of descent and distribution, and, during the lifetime of an optionee,
          the stock option may only be exercisable by the optionee. Except as otherwise
          determined by the Board of Directors, stock options may be exercised only
          if the
          stock option holder remains continuously associated with us from the date
          of
          grant to the date of exercise. The exercise date of a stock option granted
          under
          the Plan may not be later than ten years from the date of grant. Any stock
          options that expire unexercised or that terminate upon an optionee's ceasing
          to
          be employed by us will become available once again for issuance. Shares
          issued
          upon exercise of a stock option will rank equally with other shares then
          outstanding. No stock options will be granted by us at an exercise price
          less
          than 85% of the fair market value of the stock underlying the option on
          the date
          the option is granted. During the years ended March 31, 2005 and 2006,
          there
          were options granted to purchase up to 20,000 and 469,000 shares of common
          stock, respectively. During the years ended March 31, 2005 and 2006, there
          were
          options exercised to purchase 20,000 and 0 shares of common stock, respectively.
  A
          summary
          of the status of the options granted under the Company’s 2000 stock option plan
          and other agreements at March 31, 2006 and 2005, and changes during the
          years
          then ended is presented below:
  F-19
 
 **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
  OptionsWeightedAverageExerciseShares
                
                PriceOutstanding,
                    April 1, 2004
                
                
                650,000
                
                $
                1.44Granted
                
                
                20,000
                
                
                0.88Cancelled
                
                
                -
                
                
                -Exercised
                
                
                (10,000
                )
                
                0.88Outstanding,
                    March 31, 2005
                
                
                660,000
                
                
                1.44Granted
                
                
                469,000
                
                
                2.18Cancelled
                
                
                -
                
                
                -Exercised
                
                
                -
                
                
                -Outstanding,
                    March 31, 2006
                
                
                1,129,000
                
                
                1.74Exercisable,
                    March 31, 2005
                
                
                660,000
                
                $
                1.44Exercisable,
                    March 31, 2006
                
                
                1,129,000
                
                $
                1.74Weighted
                    average fair value of optionsgranted
                    during the year ended March 31, 2006
                
                
                469,000
                
                $
                1.55
  A
          summary
          of the status of the options granted under the stock option plan and other
          agreements at March 31, 2006, are presented in the table
          below:
  Outstanding
                
                ExercisableWeightedAverage
                
                Weighted
                
                
                
                WeightedRange
                    of
                
                
                
                Remaining
                
                Average
                
                
                
                AverageExercise
                
                Number
                
                Contractual
                
                Exercise
                
                Number
                
                ExercisePrices
                
                Outstanding
                
                Life
                
                Price
                
                Exercisable
                
                Price***Options***$
                0.86-1.00
                
                
                360,000
                
                
                1.56
                
                $
                0.96
                
                
                360,000
                
                $
                0.96$
                1.95
                
                
                249,000
                
                
                4.25
                
                $
                1.95
                
                
                249,000
                
                $
                1.95$
                2.00
                
                
                300,000
                
                
                4.39
                
                $
                2.00
                
                
                300,000
                
                $
                2.00$
                2.35-2.50
                
                
                220,000
                
                
                4.49
                
                $
                2.43
                
                
                220,000
                
                $
                2.431,129,000
                
                
                
                
                
                
                
                
                1,129,000
  F-20
  **IMAGENETIX,
        INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
 
 NOTE
          11
–    
          INCOME TAXES
 
 The
          Company accounts for income taxes in accordance with Statement of Financial
          Accounting Standards No. 109. SFAS No. 109 requires the Company to provide
          a net
          deferred tax asset or liability equal to the expected future tax benefit
          or
          expense of temporary reporting differences between book and tax accounting
          and
          any available operating loss or tax credit carryforwards. The Company has
          no
          federal or state net operating loss carryovers at March 31, 2006.
 
 At
          March
          31, 2006 and 2005, the total of all deferred tax assets was approximately
          $424,400 and $66,200, respectively. There are no deferred tax liabilities
          for
          either year. The amount of and ultimate realization of the benefits from
          the
          deferred tax assets for income tax purposes is dependent, in part, upon
          the tax
          laws in effect, the Company’s future earnings, and other future events, the
          effects of which cannot be determined.
 
 The
          temporary differences gave rise to the following deferred tax asset
          (liability):
  March
                    31,2006
                
                2005Excess
                    of financial accountingover
                    tax depreciation
                
                $
                6,000
                
                $
                24,500State
                  income tax
                  benefits
                
                
                (11,300
                )
                
                -Allowance
                    for obsolete inventory
                
                
                78,300
                
                
                29,000Allowance
                    for bad debts
                
                
                19,900
                
                
                12,700Valuation
                    of stock options and warrants
                
                
                324,200
                
                
                -Vacation
                    accrual
                
                
                7,300
                
                
                -Net
                    deferred tax asset
                
                $
                424,400
                
                $
                66,200
  The
          reconciliation of income tax from continuing operations computed at the
          U.S.
          federal statutory tax rate to the Company’s effective rate is as follows for the
          year ended:
  F-21
  **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
  *March
                    31,*
                
                2006
                
                2005Federal
                    income tax expense computed at the Federal statutory rate
                
                $
                (413,800
                )
                $
                347,273State
                    income tax expense net of Federal benefit
                
                
                (76,000
                )
                
                23,140Other-
                    permanent differences
                
                
                (29,200
                )
                
                66,200Change
                    in valuation allowance
                
                
                -
                
                
                (169,158
                )Other
                
                
                (104,800
                )
                
                -Income
                    tax expense (benefit)
                
                $
                (623,800
                )
                $
                267,455
  The
          components of federal income tax (benefit) expense from continuing operations
          consisted of the following for the year ended:
  March
                    31,2006
                
                2005Current
                    income tax expense:Federal
                
                
                
                
                $
                (177,000
                )
                $
                296,099State
                
                
                
                
                
                (88,600
                )
                
                37,556Net
                    current tax expense
                
                
                
                
                $
                (265,600
                )
                $
                333,655Deferred
                    tax expense (benefit) resulted from:Excess
                    of financial accounting overtax depreciation
                
                
                
                
                $
                18,500
                
                $
                (4,300
                )State
                    income tax benefits
                
                
                
                
                
                11,300
                
                
                -Valuation
                    of stock options and warrants
                
                
                
                
                
                (324,200
                )
                
                -Net
                    operating loss
                
                
                
                
                
                -
                
                
                42,583Valuation
                    allowance
                
                
                
                
                
                -
                
                
                (169,158
                )Allowance
                    for obsolete inventory
                
                
                
                
                
                (49,300
                )
                
                17,936Vacation
                    accrual
                
                
                
                
                
                (7,300
                )Allowance
                    for bad debts
                
                
                
                
                
                (7,200
                )
                
                46,739Net
                    deferred tax expense (benefit)
                
                
                
                
                $
                (358,200
                )
                $
                (66,200
                )$
                (623,800
                )
                $
                267,455
  Deferred
          income tax expense (benefit) results primarily from the reversal of temporary
          timing differences between tax and financial statement income.
 
 F-22
 
 **IMAGENETIX,
          INC.**
 Notes
          to
          the Consolidated Financial Statements
 March
          31,
          2006 and 2005
 
 NOTE
          12
–    EARNINGS
          PER SHARE
 
 The
          following data show the amounts used in computing earnings per share of
          common
          stock for the period presented:
  For
                    the Year EndedMarch
                    31,2006
                
                2005Income
                    (loss) available to commonshareholders
                    (Numerator)
                
                $
                (593,378
                )
                $
                753,936Weighted
                    average number of commonshares
                    outstanding used in basic incomeper
                    share during the period(Denominator)
                
                
                10,611,358
                
                
                9,104,912Weighted
                    average number of commonshares
                    outstanding used in diluted incomeper
                    share during the period(Denominator)
                
                
                10,611,358
                
                
                9,808,251
  At
        March
        31, 2006, the Company had options to purchase 1,129,000 shares of common
        stock
        at a prices ranging from $0.86 to $2.00 per share and warrants to purchase
        4,107,100 shares of common stock at prices ranging from $0.70 to $3.45 per
        share
        that were not included in the computation of earnings per share because their
        effects are anti-dilutive due to a loss being recognized for the year then
        ended.
 
 At
        March
        31, 2005, the Company had options to purchase 300,000 shares of common stock
        at
        a price of $2.00 per share and warrants to purchase 925,000 shares of common
        stock at prices ranging from $1.75 to $2.78 per share that were not included
        in
        the computation of earnings per share because their effects are
        anti-dilutive.
 
 NOTE
        13
–    RELATED
        PARTY TRANSACTIONS
 
 Line
        of credit
 
 Two
        shareholders of the Company agreed to provide the Company with a $1,000,000
        line
        of credit. The balance of the line of credit accrued interest at a rate of
        12%
        per annum and expired in September 2002. As of March 31, 2006, the line of
        credit had been paid in full. During the years ended March 31, 2006 and 2005,
        the Company expensed approximately $16,000 and $27,000, respectively, in
        interest related to the line of credit.
  F-23
  **IMAGENETIX,
        INC.**
 Notes
        to
        the Consolidated Financial Statements
 March
        31,
        2006 and 2005
 
 NOTE
        14
–   
        CONCENTRATIONS
 
 Sales
 
 During
        the year ended March 31, 2006, the Company had four significant customers
        which
        accounted for 22%, 16%, 13%, and 11% of sales.
 
 During
        the year ended March 31, 2005, the Company had four significant customers
        which
        accounted for 31%, 13%, 13% and 13% of sales.
 
 Supplier
 
 The
        Company also has a single source and exclusive supplier arrangement with
        the
        supplier of a specific raw material, which is used as part of products which
        accounts for approximately 84% of the Company’s sales. The interruption of raw
        materials provided by this supplier or the loss of a significant customer
        would
        adversely affect the Company’s business and financial condition.
 
 During
        the year ended March 31, 2006, the Company had two significant vendors which
        accounted for 36% and 13% of cost of sales.
 
 During
        the year ended March 31, 2005, the Company had three significant vendors
        which
        accounted for 36%, 11%, and 11% of cost of sales.
 
 Accounts
        Receivable
 
 At
        March
        31, 2006, the Company had three customers which accounted for 22%, 20%, and
        14%
        of the Company’s accounts receivable balances.
  At
        March
        31, 2005, the Company had three customers which accounted for 56%, 15%, and
        10%
        of the Company’s accounts receivable balances.
  F-24
  **SIGNATURES**
   In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
 
 IMAGENETIX,
        INC.
 a
        Nevada
        corporation
 
 By :
        /s/
        WILLIAM P. SPENCER
 William P. Spencer
 Chief Executive Officer
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated:
 Signature
              
              Title
              
              Date/s/
                  WILLIAM P. SPENCER
              
              Chief
                  Executive Officer,
              
              June
                  28, 2006William P. Spencer
              
              President
                  and Director/s/DEBRA
                  L. SPENCER
              
              Secretary,
                  Treasurer, and Director
              
              June
                  28, 2006Debra
                  L. Spencer/s/
                  BARRY S. KING
              
              Director
              
              June
                  28, 2006Barry S. King/s/
                  JEFFREY G. MC GONEGAL
              
              Director
              
              June
                  28, 2006Jeffrey McGonegal/s/
                  ROBERT BURG
              
              Director
              
              June
                  28, 2006Robert Burg/s/
                  LOWELL W. GIFFHORN
              
              Chief
                  Financial Officer (Principal
              
              June
                  28, 2006Lowell W. Giffhorn
              
              Accounting
                  Officer)